Cactus Water Services v. COG Operating: Decision potentially invites further litigation over produced water

Andrew M. Stakelum 
Erich J. Almonte
King & Spalding
Houston

On June 27, the Texas Supreme Court issued its much-anticipated opinion addressing ownership of produced water, deciding in favor of the mineral estate albeit on arguably narrow grounds.  The Court’s opinion is significant both for what it addresses and, as stated in the concurring opinion, what it specifically does not address. 

In Cactus Water Services LLC v. COG Operating LLC, the Texas Supreme Court attempts to strike the latest decision to balance rights among the surface and mineral estates regarding the contentious issue of groundwater rights. While the Court’s opinion is supported by all eight Justices that participated, Justice Busby issued a concurring opinion joined by two other Justices that may in time overshadow the Court’s opinion. In short, the Court held that the right to explore for and produce “oil and gas” or “oil, gas, and other hydrocarbons”—absent an express preservation of the produced water—also conveys produced water that is produced incidental to oil and gas production.  The concurrence, however, states that the opinion leaves undecided for another day who owns non-hydrocarbon minerals within the produced water and how the surface estate should be compensated if the mineral lessee makes some other beneficial reuse of the produced water.

The facts are relatively straightforward. COG held various mineral leases granting it the right to explore for and produce “oil and gas” or “oil, gas, and other hydrocarbons.” Cactus Water later obtained “produced water lease agreements” from the surface estate purporting to convey “all right, title and interest in and to” “water from oil and gas producing formations and flowback water produced from oil and gas operations” on the lands covered by COG’s leases. Cactus Water thereafter asserted an entitlement to produced water from COG’s oil wells. Litigation ensued.

In affirming the decisions from the trial court and the Court of Appeals for the Eighth District, the Texas Supreme Court recognized the long-standing principle that “the hydrocarbon producer’s possession and control over the disposition of liquid-waste byproduct is necessarily incidental to, and therefore encompassed, in a conveyance of oil-and-gas rights.” “[T]he right of the lessee to explore for and produce oil and gas embraces not only what was expressly granted but also what was ‘necessarily implied in the lease as necessarily incidental thereto.”

The Court reasoned that it was incumbent on “the surface estate owners to expressly reserve property rights in that incidentally produced liquid-waste byproduct if they intended to retain ownership.” The Court then bluntly concluded that changes in technology and potential utility of produced water cannot alter the parties’ intent at the time the grant of rights was previously conveyed.

The Court, however, took care to frame its holding on the facts before it. While new technologies may allow for produced water to be used in subsequent fracturing operations or other beneficial purposes, “the record before the court [demonstrates that] COG does not reuse produced water from its operations for any purpose either on or off lease or receive any compensation for its use elsewhere.”

The Court further framed this dispute as the ownership of entrained water molecules in hydrocarbons, not the ownership of any non-hydrocarbon minerals included in the produced water. (“We express no view regarding ownership of any nonhydrocarbon minerals included in liquid-waste byproduct, as no such substances are in dispute here.”)

Unresolved issues

This framing, which may have facilitated the unanimous decision, also provides the basis for Justice Busby in his concurring opinion to describe the Court’s opinion as a “narrow one” that, in his view, leaves unresolved several important issues. The concurrence and its phraseology “produced groundwater” and “groundwater produced with hydrocarbons” is a marked departure from the opinion’s use of the term “produced water” and its statement that “produced water is not groundwater.”

Justice Busby emphasizes that the Court’s holding merely represents the default rule and that parties are free to contract differently. He also emphasizes that the leases at issue did not convey ownership of “oil, gas, and other minerals” and were limited to “oil and gas” or “oil, gas, and other hydrocarbons[,]” noting that production of other minerals incidental to oil and gas production does not transfer ownership of the unleased minerals to the lessee.  Lastly, Justice Busby posits the question of how the mineral lessee will now address the financial ramifications of the now “leased” “produced groundwater.”  Specifically, he asks whether royalties will now be owed on the “produced groundwater[,]” and “[i[f not, how should the parties account for any profit or loss realized from beneficial reuse or disposal of the water?” 

The concurring opinion concludes with the plain statement that “[t]hese questions and more remain to be answered in future cases as a result of the Court’s holding today. Our opinion should not be read to settle them.” 

Cactus Water will not be the final word on ownership of produced water. While the concurring opinion is not binding on the lower courts, these courts may be reluctant to apply Cactus Water beyond its facts. We anticipate this decision may result in increased disputes between the mineral and surface estates regarding ownership of non-hydrocarbon minerals and compensation for any reuse of produced water with major implications for oil and gas lessees. The risk of increased disputes is compounded by technological advances that allow for greater reuse of produced water and even recovery of other minerals.

In the absence of the hoped for clarity on this issue by the Cactus Water Court, these disputes are likely to turn on the specific lease language and the extent to which any operator is making any beneficial reuse of the produced water.  

Authors

Andrew M. Stakelum is an energy disputes partner in King & Spalding’s Houston office. His focus on the energy industry includes the oil and gas, renewables, and refining sectors. He can be reached at [email protected].

Erich J. Almonte, a partner in the Houston office of King & Spalding, represents energy industry clients in high-stakes commercial disputes and torts in the areas of construction and engineering, decommissioning, oil and gas royalties, environmental justice, and personal injury and property damage matters. He can be reached at [email protected].