Water: The Hot Commodity in the Permian and Elsewhere

Gray Reed
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Gray Reed & McGraw

It’s still true, “Whiskey’s for drinkin’, water’s for fightin’.” Gray Reed lawyers Brock Niezgoda and Stephen Cooney spoke to TIPRO’s summer conference on the use, control and ownership of water in oil and gas operations. Here is their PowerPoint.

The takeaways:

Groundwater

Groundwater is privately owned by the owner of the surface estate. As with oil and gas, it is subject to the rule of capture. Landowners’ requests that the rule be modified in favor of the “rule of reasonable use” have been rejected by the Texas Supreme Court.

There are, of course, limitations: Water can’t be captured and used maliciously with the purpose of injuring a neighbor or in a manner that amounts to wanton and willful waste of the resource, and water can’t be negligently pumped to cause subsidence of neighboring land.

See the Rule Capture explained (kind of)!

The big news in the developing relationship between the surface estate and the water estate was Coyote Lake Ranch LLC v. City of Lubbock, in which the Supreme Court made clear:

  • The water estate is the dominant estate, and
  • The accommodation doctrine applies to the severed groundwater estate.

For more insight into Coyote Ranch, see Stephen’s article for Gray Reed’s clients and our blog post.

There are 98 groundwater conservation districts in Texas, each with its own governance structure, covering 174 counties and nearly 70% of the land area of the state. They are political subdivisions of the state authorized by Chapter 36 of the Texas Water Code and have statutory requirements for management of groundwater resources.

Practice tip: These districts are run by “locals”, many of whom are your lessors and surface owners. Act on this advice as you see fit. At the very least, before beginning operations understand your district’s management plan and its attitude toward the relationship between water and mineral development.

Produced water

As oil and gas production continues to increase, the volumes of produced water will increase. (Many wells produce far more barrels of water than of oil.) Rising transportation and disposal costs and political pressure on water use is causing more producers to look for ways to recycle or reuse produced water.

Questions around ownership of produced water have slowed the growth of the water recycling industry. Amended Section 122.002 of the Texas Natural Resources Code becomes effective on September 1st. Under this statute (to simplify in the event you are bored or in a hurry, which is no substitute for reading it yourself): produced water and other waste (frac fluid for example) used by or transferred to a person who takes possession of that waste for the purpose of treating it for a subsequent beneficial use is considered to be the property of the person to whom it is transferred.

Despite this legislative achievement for operators and produced water recyclers, expect landowners to challenge the statute as an unconstitutional taking of their rights to the groundwater that constitutes a portion of produced water, particularly as groundwater becomes more valuable.

The good news is that statutory provisions can be trumped by contract, such as a surface use agreement, provisions in the oil and gas lease, or some other binding agreement.

Operators should be proactive in addressing water ownership issues. A simple contract negotiation at the front-end could save future headaches as disputes over groundwater escalate.

And when negotiating leases and surface use agreements take the time to ascertain who owns groundwater rights.

A fitting musical interlude

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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