Although historically viewed as a waste, produced water that comes to the surface as part of the oil and gas production stream now potentially has value. Produced water can be recycled and reused as part of hydraulic fracturing operations in other wells. Minerals, like lithium, are often found in the produced water. In fact, lithium removal from oil and gas drilling produced water is advertised as a service to industry participants in Pennsylvania. Just as oil and gas have long been pillars of national security, access to quantities of lithium has been identified as being critical to United States economic and domestic security because lithium is being increasingly used for things like batteries. This raises a fundamental question. Who owns the produced water that is part of the oil and gas stream and has the right to economically profit from the produced water? The recent decision of the Texas Court of Appeals in Cactus Water Services, LLC v. COG Operating, LLC, 676 S.W.3d 733 (Tex. App.--El Paso 2023) provides some interesting context for this inquiry.
In Cactus Water Services, the Texas Court of Appeals succinctly framed the issue, writing that “[t]his case decides who owns produced water arising from a hydraulic fracturing operation: COG Operating, LLC (the existing mineral lessee) or Cactus Water Services, LLC (who later entered a produced water lease agreement with the surface owners).” Id. at 734. COG Operating, LLC (“COG”) was the lessee under four oil and gas leases (the “COG Leases”) that were obtained from a pair of surface owners and covered approximately 37,000 acres in west Texas. The COG Leases granted COG the right to explore for and produce oil, gas and hydrocarbons. Id. at 735. COG utilized hydraulic fracturing processes to develop the COG Leases for oil and gas development. Id. Produced water came to the surface as part of the oil and gas stream. COG entered into surface use agreements with the surface owners to provide for infrastructure on the surface to store and dispose of the produced water. Id. at 736.
While COG held interests to the properties under oil and gas leases, the surface owners leased all of their interest in the water in the properties to Cactus Water Services, LLC (“Cactus”). Id. at 737. Cactus informed COG of Cactus’s claimed water rights in the properties and COG filed suit, seeking a judicial declaration that COG had the sole right to the produced water from oil and gas operations. Id. Cactus asserted its own claims against COG. In the trial court, COG prevailed and Cactus appealed. COG prevailed again the Texas Court of Appeals, but a strong dissenting opinion suggests that there is more than meets the eye regarding produced water ownership.
The Cactus Water Services majority opinion appeared to view COG’s ownership claims to the produced water as being straightforward and based on Texas statutes, regulations and industry practice. Id. at 739-41. The Court reasoned that the produced water coming to the surface with oil and gas production was different than groundwater and was instead part of the oil and gas product stream, the rights to which had been granted to COG Leases. Id. at 739-41. As part of this, the majority observed that the produced water was more akin to a waste. Id. at 739. The Cactus Water Services majority summarized its conclusion that:
In sum, nothing in the mineral leases suggests the parties intended to assign rights at a molecular level, following both extraction from the well and post-production processing. Nor do the mineral leases indicate an intent to reserve oil and gas waste produced through COG's drilling operations. Reading the mineral leases in the context in which they were executed confirms COG has the exclusive right to the oil and gas product stream, including the produced water.
Id. at 741. Unsurprisingly, the dissent had a different view, closely examining the fundamental question about whether water had been part of the rights granted in the COG Leases.
The dissent began by noting that “[w]ater—unsevered by express conveyance or reservation—has long been held a part of the surface estate.” Id. at 741 (Palfox,J. dissenting). The dissent further observed that “. . . the surface estate must accommodate the reasonable use of the water as is necessary to effectuate the purpose of an oil and gas lease.” Id. (Palfox,J. dissenting). With this background, and citing to Texas precedent, the dissent observed that “as expressed by lease language, water is not “a thing of like kind to oil and gas. It follows, then, that a grant of ‘oil, gas and other minerals’ does not include a conveyance of water.” Id. at 744 (Palfox,J. dissenting) (internal citations omitted).
The dissent rejected the majority’s differentiation of water based on its chemical composition. Citing to the “accommodation doctrine”, the Cactus Water Services dissent concluded that “[i]n the absence of any lease language governing the ownership of produced water, I believe the accommodation doctrine applies under the circumstances. As an owner of the mineral estate, COG has the right to use the produced water as is reasonably necessary for its production of oil and gas, but it has no ownership rights to that estate.” Id. at 746 (Palfox,J. dissenting). In addition, the dissenting opinion disagreed with the majority’s conclusions associated with statutes, regulations and industry practice. Id.
While Cactus Water Services addresses Texas law, it raises interesting points that will likely need to be decided in Pennsylvania, and in other regional jurisdictions. Like in Texas, it is well-established in Pennsylvania that oil and gas can be severed from the surface of property. And, unless the water in a property has been specifically conveyed, it belongs to the surface owner in Pennsylvania:
Defendants' first assignment of error was to the court's charge that: ‘It is the law that water that is in the earth, and finds its way through the soil by percolating or seeping, and has not a defined flow in a stream either underground or above the ground, is absolutely the property of the man who owns the land in which that water is found. He has the same right to it as he has to anything else in the ground.
Brown v. Kistler, 42 A. 885 (Pa. 1899) (per curiam). Likewise, the “accommodation doctrine” in Pennsylvania suggests that an oil and gas owner can bring water and other minerals to the surface as part of oil and gas development operations. See, Chartiers Block Coal Co. v. Mellon, 25 A. 597 (Pa. 1893). But, like in Cactus Water Services, the analysis may differ if the oil and gas operator is using the produced water for its own economic benefit, separate and apart from the oil and gas production stream.
If an oil and gas owner is selling produced water, or minerals like lithium in that produced water, questions arise about whether the oil and gas operator owned those substances and was entitled to sell those substances and profit from them, because the interests of surface owners and potentially mineral owners could also be involved. Adding more complexity is whether a royalty would be due to the oil and gas owner based on the value received from the sale of produced water and/or the minerals in the produced water even though the oil and gas owner may have no ownership of the water or minerals. As technology improves and economic uses of produced water and its constituents increase, it is likely that questions of ownership and rights to profit from the produced water and minerals will increase.
Perhaps greater clarity on these issues, at least in Texas, will come from the Cactus Water Services case. Cactus has petitioned the Texas Supreme Court to review the decision and it is unknown if the Texas high court will take that case. While a decision by the Texas Supreme Court would not be binding on state courts in the Appalachian basin, a thorough analysis of the competing viewpoints from the Texas Court of Appeals may provide some guidance for framing these issues closer to home.
*Aubrie McEwen (University of Pittsburgh School of Law - 2024) assisted in the research for this post.
