The El Paso Court of Appeals, in the recent case of Cactus Water Services LLC v. COG Operating LLC, was faced with the issue of who owns the water produced by a hydraulic fracturing operation: the oil and gas company operating the well or the surface owner and the company the surface owner leased its water rights to?
The operator, COG, was the lessee of several mineral leases in Reeves County on which it was drilling and completing horizontal wells, which require fracing. As most of you know, the fracing process involves large amounts of water. In addition, in most shale plays, the amount of produced water is also huge. As the Court notes, the median water used per well in the Permian Basin is 42,500 cubic meters of water. That water, plus water produced along with oil and gas once a well is online, is generally considered to be “produced water”.
Produced water has historically been treated as a waste product and its disposal has been highly regulated in Texas, at great cost to operators. However, new technologies are beginning to be implemented in the oil patch that allow wastewater to be treated to make it usable and sold back to operators. Suddenly, what was a waste product is becoming a valuable commodity, especially in water starved Texas.
In this particular case, the operator had right-of-way agreements with the surface owner which granted it the right to lay pipelines for the “transportation of oil, gas, petroleum, produced water and any other oilfield related liquids or gases”. The operator also had signed surface use compensation agreements with the surface owner which gave the operator the right of “… gathering, storing, and transporting of oil, gas, other petroleum products, water, and/or any other liquids, gases or substances which can be transported through a pipeline.”(Emphasis added).
The surface owners conveyed their water rights to Cactus Water Services LLC, the defendant in this case. Cactus informed the operator that it was asserting ownership of produced water. The operator filed this lawsuit to determine the parties’ rights to the produced water.
The trial court entered judgment for the operator and the El Paso Court of Appeals affirmed that judgment. The appellate court noted that the weight of authority characterized produced water as a waste product which both belonged to and was the responsibility of the lease operator. At least one of the leases prohibited the operator from using groundwater or surface water, however, the appellate court distinguished produced water from ground or surface water on the leased premises. Finally, the appellate court noted that the operator and surface owner could have allocated ownership of produced water in the lease but did not do so.
This case will almost certainly be appealed to the Texas Supreme Court. My prediction is that the Supreme Court will affirm the decision of the Court of Appeals, given the historical treatment of produced water and the language of the written agreements between the parties. Please note that an experienced oil and gas attorney, when drafting an oil and gas lease or a surface use agreement for a client, will specifically address the issue of the ownership of produced water. Given the new technologies that create reusable water from wastewater, and given the potential substantial income from the resale of that treated water, there is an income stream here that the mineral owner or surface owner should be allowed to participate in.