Articles Posted in Oil and Gas Law

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 Texas Supreme Court recently decided a case involving the enforceability of verbal representations. In the case of Roxo Energy Co. v. Baxsto, LLC, No. 23-0564, 2025 WL 134581 (Tex. May 9, 2025) (per curiam).

Baxsto and Roxo engaged in discussions regarding Baxsto’s leasing its minerals to Roxo. Later these discussions evolved into Baxsto selling its minerals in Howard and Borden Counties to Roxo. That sale was closed. Later, Baxsto claimed that Roxo made the following false representations in these negotiations: 1) that Roxo would give Baxsto the most favorable deal of any owner in the area if it would lease quickly; 2) that Roxo planned to make its money on the lease by drilling and developing the land itself and did not intend to resell the mineral interests and 3) that Roxo would not record the memorandum of lease before it paid Baxsto a $5,000 per acre bonus.

Roxo ended up selling the lease, paid another mineral owner an $11,000 per acre bonus, and recorded the memorandum before paying the bonus to Baxsto. Baxsto alleged that these representations were false, and because it relied on them, it was locked into an unproductive lease, and it received lower than market value for its mineral interests.

The Fifth Circuit Court of Appeals decided an interesting case involving recoupment of overpaid oil and gas royalties. In DDR Weinert, Ltd. v. Ovintiv USA, Inc., No. 23-50479, 2025 WL 636315 (5th Cir. Feb. 27, 2025), a family named Richter owned four tracts in Karnes County, Texas. They sold those tracts to DDR.

Ovintiv (formerly Encana), the operator of the wells on the property, discovered that the Richters had been overpaid approximately $608,000.00 in royalties since 2016. Ovintiv notified DDR that it would be recouping the overpayment through deductions to DDR’s royalties, even though the overpayment was made to the prior mineral owner. Naturally, DDR filed suit.

Equitable recoupment is a commonly accepted remedy in the oil and gas industry. The Court stated that the criteria for equitable recoupment are: (1) an overpayment was made, and

In Scout Energy Management, LLC v. Taylor Properties, 704 S.W.3d 544 (2024), the Texas Supreme Court addressed a case where the Plaintiff claimed that two leases had terminated because a shut in royalty payment was made late.

The leases in question had a pretty standard shut in royalty clause that allowed a payment of $50.00 per well per year to maintain the leases when there was neither sale nor use of produced gas. Production on the only well ceased in September 2017. Scout’s predecessor, ConocoPhillips, made shut in royalty payments for each lease to the Lessor in September 2017. Then in October 2017, Scout made second shut in royalty payments to the Lessor on both leases.

Scout next made shut in royalty payments to the Lessor in December 2018. The Lessor sued and requested declaratory judgment that the leases had terminated.

In Premcor Pipeline Co. v. Wingate, No. 09-22-00117-CV (Tex. Civ. App. Apr. 11, 2024), the Court considered a dispute regarding Premcor’s use of Wingate’s roads and bridges to service its pipelines. Wingate filed suit for injunctive relief and for a declaratory judgment to limit Premcor’s access to a fixed width adjacent to the pipelines. The pipeline easements did not set a width for the easements and did not contain any limitation on the use of the land crossed by the pipelines.

The trial court issued an injunction restraining Premcor from using any of Wingate’s property located more than ten feet on either side of the centerline of the route of its pipelines.

The Beaumont Court of Appeals reversed and held that because the grants of Premcor’s easements were not limited to a fixed width, the trial court’s supplying a width based on extrinsic evidence was erroneous. The Court of Appeals held that the grant of a general easement without a fixed width does not render the easement ambiguous, and that the easements had to be interpreted as a matter of law without considering extrinsic evidence that would contradict, vary, or add to the terms of the unambiguous easements. The Court noted that Premcor’s use was limited to what was reasonably necessary.

A somewhat unsettled question in Texas law is just who owns the water that is produced in some wells along with the oil and gas. Produced water has usually been considered a waste product, and the operator/lessee had to pay to have it hauled away. However, some operators are selling the produced water to a company that recycles it and then sells it for use in fracking. That means produced water may become a valuable commodity and so the question of who owns it becomes critical.

In Cactus Water Servs., LLC v. COG Operating, LLC, 676 S.W.3d 733 (Tex. Civ. App.—El Paso 2023), pet. granted, the El Paso Court of Appeals addressed this question. COG Operating LLC (“COG”) was operating a lease in which water was produced. The surface owner, believing he owned the water, sold the rights to the produced water to Cactus Water Services LLC (“Cactus”). When Cactus served notice on COG that Cactus owned the water, COG sued Cactus.

The Court of Appeals declared that COG owned the produced water that was part of COG’s product stream. The petition for review filed by Cactus in the Supreme Court was granted. It will be interesting to see how the Texas Supreme Court rules on this question.

In 2022, in a case decided by the Corpus Christi Court of Appeals, the issue was who owns the right to use underground salt caverns: the mineral owner or the surface owner? In this case, Myers-Woodward, LLC v. Underground Services Markham, LLC and United Brine Pipeline Co., ___ S.W.3d ___, 2022 WL 2163857 (Tex.Civ.App.—Corpus Christi–Edinburgh 2022), pet. granted (Aug. 30, 2024), the Court also considered how a salt royalty should be calculated.

Underground Services Markham, LLC (“USM”) owns the minerals as well as a right of ingress/egress to mine the salt. Myers owns the surface and a 1/8 royalty in the minerals. The underground caverns were created by a salt extraction process by USM. USM is currently using the salt caverns to store hydrocarbons.

The Court of Appeals held that: 1) the surface owner owns the subsurface caverns; 2) since the deed to USM specified the caverns’ use, USM could not use the caverns to store hydrocarbons; and 3) the royalty due Myers is 1/8 of the value of salt production at the wellhead. The Court specifically declined to follow an earlier case by the Beaumont Court of Appeals, Mapco, Inc. v. Carter, 808 S.W.2d 262, 278 (Tex.Civ.App.-Beaumont 1991), rev’d in part on other grounds, 817 S.W.2d 686 (Tex. 1991) that held that the salt (i.e., mineral) owner owns and is entitled to compensation for the use of an underground storage cavern.

Whether a royalty granted or reserved in a deed is a “fixed” or “floating” royalty has resulted in a lot of litigation in Texas. The Corpus Christi Court of Appeals considered the issue again in Hahn v. ConocoPhillips Co., ___ S.W.3d ___, 2022 WL 17351596 (Tex.Civ.App.—Corpus Christi 2022, pet. granted).

The Plaintiff sold land to a third party and reserved a 1/8 royalty nonparticipating royalty interest (fixed royalty language). Years later, the third party leased to the Defendant, ConocoPhillips. The Plaintiff then signed a ratification of that lease to allow pooling. In addition, the Plaintiff and third party signed a stipulation of interest in which the Plaintiff agreed he owned a 1/8 of royalty (floating royalty language).

The question is: does the stipulation of interest change the original fixed royalty into a floating royalty? If the royalty is floating, the Plaintiff’s interest would be decreased by the 25% royalty in the lease between the third party and ConocoPhillips. The trial court found for ConocoPhillips and the third party. The Court of Appeals reversed and held that the stipulation of interest should not be considered, and that the Plaintiff owned a 1/8 fixed royalty. ConocoPhillips has appealed the case to the Texas, on the grounds that: 1) the stipulation changed the royalty from fixed to floating, and 2) when the Plaintiff ratified the third-party lease, he was ratifying the whole lease (including the 25% royalty) and not just the pooling clause in the lease.

In a recent case, the Texas Supreme Court considered whether interest on late royalty payments was supposed to be simple or compound interest.

In Samson Exploration, LLC v. Bordages, 662 S.W.3d 501, 2024 (Tex. June 7, 2024), the Plaintiff’s oil and gas leases had a late charge provision that provided for interest on unpaid royalties at a rate of 18% and said the charge was due and payable on the last day of each month. When Samson paid previously unpaid royalties to the Plaintiff, it included simple interest. The Plaintiff claimed that the interest should be compounded.

The Court looked at cases and laws in other states and said that there is a modern-day general rule that compound interest will not be imposed absent clear and specific contractual or statutory authorization. The Court stated that compound interest is disfavored, and that interest on late royalties should not be compounded absent an express, clear, and specific provision for compound interest. The Court went on to say that language such as “per annum”, “annually”, or “monthly”, by themselves, are insufficient to sustain the assessment of compound interest.