The Texas Supreme Court recently issued an important decision on a groundwater rights question that had gone unanswered for more than a century. In Edwards Aquifer Authority v. Day, [1] the Court held that Texas property owners have an actual ownership interest in the groundwater beneath their property. While this holding does not directly address oil & gas issues, it may well affect the industry because petroleum production activities are frequently water-intensive. This is especially true in fracking work, which can require millions of gallons of water in the course of a few days.
For more than 100 years, Texas water rights have been governed by the “rule of capture,” which allows a landowner to produce as much water as it can, even if doing so diminishes the reservoir under a neighbor’s property. [2] The capture rule, though, is tempered by the many legislatively-enacted water regulations in the state, which allow the government to regulate and permit groundwater use. [3] These water rights are principally overseen by Groundwater Conservation Districts (GCDs).
The Day case involved two farmers who owned 350 acres south of San Antonio. They applied to the Edwards Aquifer Authority for a permit allowing them to take 700 acre-feet of water annually for irrigation. The Authority denied this request, and granted them a permit allowing only 14-acre feet per year. The farmers sued, alleging that denial of their permit for 700 acre-feet constituted a taking of their property without compensation. The case was heavily briefed, attracting about two dozen amicus briefs and resulting in a 50-page opinion.
Whether the farmers had a takings claim depended on whether they owned the water in place underneath their land. Remarkably, the Texas Supreme Court had never ruled on that issue. Nonetheless, the Court agreed with the farmers, holding that land ownership includes an interest in groundwater “in place,” and that if that water is taken for public use, the landowner may have a government takings claim. [4] Not surprisingly, the case is being heralded by property rights advocates as a victory for landowners.
Interestingly, to reach its decision, the court turned to well-established Texas oil & gas law, noting that for decades the rule has been that petroleum underneath a property is owned in place. [5] The Court found “no reason to treat groundwater differently.” [6]
The Court recognized that there is a tension between the rule of capture and the idea of ownership in place. Indeed, one could argue that the two doctrines contradict one another, as the rule of capture allows a person to remove a resource from under a neighbor’s property, even though the neighbor has an ownership interest in that resource. But the Court was willing to let the tension stand, just as it does in the oil & gas context. “Notwithstanding the fact that oil and gas beneath the surface are subject both to capture and administrative regulation, the fundamental rule of absolute ownership of the minerals in place is not affected in our state.” [7]
It will take time to see exactly how this ruling will affect water used in oil & gas operations. It may have minimal effect in situations where a petroleum producer is merely utilizing water under his existing lease. In that situation, the mineral owner is the dominate estate and the owner of the mineral rights may use the groundwater in any amount reasonably necessary to carry out operations under a lease. But two situations where Day may have an effect come to mind. First, those landowners that sell water to a producer operating on a different property would now seem to have more flexibility to do so. If a government authority were to deny a landowner the right to sell the water to the producer, the landowner might have a takings claim. Second, oil & gas companies producing groundwater even from underneath their own lease need to be mindful that their operations may be draining a reservoir from a neighboring property owner that now has an ownership claim on the water under its land. Of course, as discussed above, the rule of capture still applies, but the Texas Supreme Court has made clear that the doctrine does not allow for wasteful capture, nor does it trump state regulations regulating water use. [8]
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[1] 398 S.W.3d 814 (Tex. 2012)
[2] Id. at 823.
[3] Id. at 828.
[4] Id. at 817.
[5] Id. at 828-29.
[6] Id. at 823.
[7] Id. at 828-29 (punctuation and citation omitted).
[8] Id. at 830-31.
