Texas Oil and Gas Attorney Blog
In the recent case of Cactus Water Services LLC v. COG Operating LLC, the Texas Supreme Court addressed the question of who owns produced water resulting from oil and gas production.
Produced water, consisting of salt water mixed with oil, drilling fluids and fracking fluids, has long been considered to be waste. Operators customarily hire a company to haul it away and dispose of it. Disposal of produced water is highly regulated by the state and is often a major expense for operators. However, new technologies have resulted in the cleaning and reconditioning of this former waste product. While the resulting water is not potable, it is sufficiently clean to use in other ways, such as for fracking, which uses a lot of water. As a result, produced water, instead of being a liability, is becoming a valuable commodity.
This case involved the question of just who owns the produced water: the surface owner, or the mineral owner and operator/lessee. COG Operating LLC (“COG”) operated four leases covering 37,000 acres in Reeves County. The leases grant COG the exclusive right to explore for, produce, and keep “oil and gas” or “oil, gas, and other hydrocarbons”. The leases were silent regarding waste. Wells on those leases were fracked, using large quantities of water. Some of the injected fluid returned to the surface, and consisted of water, hydrocarbons and various other substances such as potassium, strontium, barium, iron, carbon dioxide, hydrogen sulfide, and chloride. The kinds of substances in the returning fluid depend on the fracking chemicals used and the geology of the formation being produced.
The surface owner meanwhile entered into produced water lease agreements with Cactus Water Services LLC (“Cactus”) which conveyed to Cactus title to all produced water. Oddly, Cactus had no permits to haul, dispose of or treat produced water. Its only assets were the produced water lease agreements. Cactus notified COG of its right to the water under the agreements, and COG filed suit requesting a declaratory judgement that COG had the exclusive right to the produced water.
The Texas Supreme Court found that “produced water is, and was at the time of the conveyance, oil-and-gas waste. While the leases do not mention or define “waste” or “produced water,” this textual silence is not unexpected. The production of liquid waste is an inevitable and unavoidable byproduct of oil-and-gas operations; one cannot occur without the other. Accordingly, it goes without saying that granting the right to produce hydrocarbons necessarily contemplates and encompasses the right to produce and manage the resulting waste”. The Court also notes that “(t)he absence of any provisions for transferring possession and custody of produced water to the surface owner confirms the conclusion that the leases conveyed exclusive possession, custody, control, and disposition of produced water as part of the hydrocarbon production rights”.
The Court held that “a deed or lease using typical language to convey oil-and-gas rights, though not expressly addressing produced water, includes that substance as part of the conveyance whether the parties knew of its prospective value or not. That being so, if the surface owner actually wants to retain ownership of constituent water incidentally and necessarily produced with hydrocarbons, the reservation or exception from the mineral conveyance must be express and cannot be implied”.
This case has clear lessons for the mineral owner/lessor. Specifically, as the technology to clean and recondition produced water advances, produced water will become a valuable commodity. The oil and gas lease can and should address ownership of this resource or should at least provide that if the operator plans to sell the produced water to a company that will clean and recondition it, the mineral owner/lessor should receive part of the compensation from that sale.