Angela Staples
An increasingly odd operating issue (that has only been an issue in the last few years) may be in front of the Texas Supreme Court next year… if they agree to hear it. The controversy swirling up focuses on one question: who has the right to own and control produced water? Yes, you read correctly. There is now an ownership argument bubbling up regarding who gets the right to take and dispose of produced water, which has historically been a financial drain on operators. The case, Cactus Water Services, LLC v. COG Operating, LLC, was decided by a split El Paso Court of Appeals in the spring, and Cactus has given notice that it will be filing a Petition for Review with the high court in October of this year.
COG, the operator of the leases covering the property, has been drilling and frac’ing wells in the Delaware Basin for several years. As most know, frac’ing involves pumping huge amounts of fluid into the wellbore. It doesn’t require a deep dive to understand that, along with the hydrocarbons, a huge amount of fluid will be recovered as it flows alongside the hydrocarbons up the wellbore with other byproducts. When it reaches the surface, the entirety of the stream is treated to separate out the oil and gas. The fluid that is separated from the oil and gas is called “produced water.”
As the El Paso Court noted, “produced water presents a danger to the surrounding environment, including ‘usable-quality water,’ [therefore] it must be carefully handled and disposed.[1] That process is highly regulated in Texas and includes penalties for improper disposal.[2]” Operators know that the requirements imposed upon them by Texas Statutes and Railroad Commission Rules require them to spend large amounts of money to safely dispose of the produced water. So why, you may ask, have some surface owners (who indisputably own the groundwater in, on, and under their lands) changed horses midstream and begun to argue that they wanted to take on a tidal wave of expenses? Technology! Advances in recycling water for reuse have created a groundswell of interest in owning produced water for the purpose of resale. Now, a party can take an operator’s water (for a fee paid by the operator) and instead of disposing of the water, treat it and sell it to another operator (or the same one) for drilling. Nice double dip.
In the case at hand, Cactus took a “Produced Water Lease” (in 2019) from the surface owners. When COG learned of the lease, it sued, asking the court to declare that it had “the sole right to the produced water by virtue of its mineral leases, SUCAs, and at common law.” Cactus argued that COG’s leases did not lease “water” and therefore, COG had no authority to take the produced water off-lease without Cactus’ consent.
The bridge to be crossed is the determination of whether produced water is “water” or “waste.” After reviewing case law, statutory text, and industry practice, the El Paso court determined that produced water was oil and gas waste as a matter of law. They went on to note that:
Indeed, produced water has long been treated as a liability, not an asset, both throughout the frac’ing industry and in the context of COG’s operations on the Leased Lands. Here, since COG began drilling on the Leased Lands, the surface owners never tried to claim ownership over the produced water before entering the produced water lease with Cactus.
Indeed, something certainly smells fishy. The El Paso Court appeared to agree that Cactus was trying to draw water to their own mill when they found that “[t]o read the mineral leases as reserving produced water—something that exists separate from oil and gas only after processing and treatment—for the surface estate would give the surface estate (and thus Cactus) ‘the benefit of costs and risks [COG] voluntarily undertook.’” (citing Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 706 (Tex. 2008)).
We await Cactus’ petition to be filed, and the Supreme Court’s denial or grant of review, to guide us through this fog. As muddy as the water may seem, the matter will soon spill onto the doorstep of our highest court to wade through. Until then, operators should be cautioned to continue treading these troubled waters and avoid swimming darkly through thoughts of ripple effects.
[1] 16 TEX. ADMIN. CODE § 3.13(a)(1)(R.R. Comm. of Tex., Casing, Cementing, Drilling, Well Control and Completion Requirements).
[2] See id. § 3.8.