Water management

Court Holds That Mineral Lessee Owns Produced Water in Oil and Gas Operations

The Court of Appeals for the Eighth District of Texas ruled that the mineral lessee under an oil and gas lease owns the water extracted, not the surface property owner.

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On 28 July, the Court of Appeals for the Eighth District of Texas (El Paso) issued its opinion in Cactus Water Services, LLC v. COG Operating, LLC , holding that the mineral lessee under an oil and gas lease owns the water extracted simultaneously with oil and gas during production operations. The court’s decision is the first step, albeit a significant one, toward clarity on an issue that has divided the midstream industry and cast doubt as to the viability and enforceability of certain produced water contracts that provided for the transfer of title in and to produced water from a producer of hydrocarbons to a provider of midstream services.

Case Background
COG Operating is the operator and mineral lessee under four leases executed in 2005, 2010, and 2014, covering approximately 37,000 acres in Reeves County, Texas. The lessors retained rights over the surface land. Since beginning operations, COG had disposed of its oil and gas waste, including 52 million bbl of produced water, at a cost of over $20.5 million. COG also executed surface use compensation agreements (SUCAs) and right-of-way agreements with the surface owners to facilitate its use of the surface estate in conjunction with the transport of hydrocarbons and associated waste from COG’s wells.

In 2019 and 2020, however, the surface owners transferred all the surface estates’ water rights in the Leased Lands to Cactus Water Services. These water leases gave Cactus ownership and the right to sell all water “produced from oil and gas wells and formations on or under the [covered properties].” In early March 2020, Cactus informed COG of the produced water leases. COG then sued, seeking a declaratory judgment that COG has the sole right to the produced water by virtue of its mineral leases, SUCAs, and at common law. Cactus counterclaimed, asserting ownership over the produced water under the produced water leases, which, if upheld, would effectively negate any claim of COG that it owned the produced water by virtue of the underlying mineral leases.

The parties cross-moved for summary judgment. The trial court granted summary judgment in COG’s favor. The parties voluntarily dismissed their remaining clams, and the trial court entered a final judgment that, by virtue of its mineral leases, COG owns and has the exclusive right to possess, control, and dispose of the produced water and that Cactus no rights in the COG product stream from COG’s wells, including the produced water. Cactus appealed.

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