In Cactus Water Services LLC v. COG Operating, LLC., a divided Texas court of appeals answered the question this way: The oil and gas producer prevails over the purchaser of the surface owner’s right to own and sell produced water.

The majority discussed the composition of produced water. To be scientific, it’s got a bunch of nasty s$%^ in it that needs to be gotten rid of. But recent water treatment technologies have made what was once a cost for operators into a new industry in which treated wastewater can be sold back to operators.

The contracts

Along with its rights under oil and gas leases, COG has agreements with surface owners giving it the right to gather, store and transport oil and gas waste, lay lines on the surface for freshwater and produced water, and lay pipelines for transportation of oil and gas, produced water and other oilfield-related liquids or gases. Under the leases COG is not allowed to sell produced water to third parties for off-premises use.

The surface owners granted Cactus Water the right to own and sell all water produced from oil and gas wells on the property, defining water as all water produced from geologic formations.

COG sued for declaratory judgment that it has the sole right to the produced water by virtue of its leases and surface use agreements and common law. Cactus Water counterclaimed that it had ownership of produced water under its own agreements.

The court

The regulatory scheme governing handling and disposing of produced water includes these provisions:

• Texas Natural Resources Code 91.1011: oil and gas waste includes salt water and other liquids.
• TNRC 122.001(2): Fluid oil and gas waste is water containing salt or other mineralized substances from hydraulic fracturing, including flowback water, produce water, etc.
• Water Code 27.002(6): Oil and gas waste includes saltwater, brine and other liquid or semiliquid waste material.
• 16 Texas Administrative Code 3.8(a)(26): Oil and gas waste includes saltwater, other rmineralized water and other liquid waste material.
• Water Code 27.002(8): Freshwater means water having properties that make it suitable for beneficial use.
• Water Code 35.0029(5): Groundwater is water percolating below the surface.
• 16 TAC 3.8(a)(29) Surface or subsurface water is groundwater, percolating or otherwise.

The majority concluded that in the regulatory lexicon, produced water cannot be groundwater. There is a clear distinction in the law between the two. And industry practice characterizes produced water as oil and gas waste rather than groundwater.

Given the legal framework, produced water is categorized within the former and places the burden of safe disposal on operators. For years operators have had the rights and duties associated with processing, transporting, and disposing of oil and gas waste, including produced water.

COG’s leases were executed before the parties saw produced water as having value. The majority concluded that parties’ knowledge of the value or even the existence of a substance at the time a conveyance ia executed is irrelevant to its inclusion or exclusion from a grant of minerals.

The dissent thought otherwise:

1. Water recovered from operations was not conveyed by the leases’ granting language. It is well settled that groundwater is part of the surface estate that can be severed and conveyed similar to the mineral estate.

• Characterizing produced water as waste does not automatically make it subject to the granting clause in the leases. Under case law, even deep, mineralized water produced from a well belongs to the surface estate and is only transferred by specific conveyance.  “Water by any name, even mixed with other substances, still remains water.”

• The Texas Supreme Court “has not distinguished between different types of groundwater indicating that some water does not belong to the surface estate.”

• The regulatory framework and industry practice should have nothing to do with ownership of produced water. Just because an operator has a duty dispose of this waste does not mean it has ownership.

Stay tuned. This debate is not over.

Your musical interlude.

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