05.25.2022

This article is from the McGinnis Lochridge Oil & Gas newsletter, Producer’s Edge – Vol. 4, Issue 1. Read the full newsletter here

Oil and gas exploration involves a lot of water.  A recent study commissioned by the Texas Water Development Board predicts that the oil and gas industry’s demand for water in exploration, development, and extraction operations will continue rising through at least the year 2030. 

Water has always been of significant concern in oil and gas operations, and traditionally presented fertile ground for conflict.  But as demand for water supply and water disposal have relentlessly increased, competing interests around water have bred new grounds for disputes.

Conventional plays required some water for drilling and completing wells. But even greater volumes were consumed in secondary recovery and enhanced oil recovery operations that utilize water to extract oil that would otherwise be unrecoverable. Water disposal and its related costs often determined the productive lives of wells and fields.

Of course, the advent of horizontal drilling and hydraulic fracturing in unconventional shale plays have increasingly elevated two issues – how to supply the massive volumes of water needed to complete wells, and how to adequately manage the generated flowback wastewater.

In response, the oil and gas industry has continued to rapidly evolve, and each evolution presents new and previously unimagined analytical challenges. Will Rogers famously said: “Even if you’re on the right track, you’ll get run over if you just sit there.”

In this brief article, we highlight a few major areas of emerging issues surrounding water in oil and gas operations, from the acquisition of the water, to its use, re-use and disposal.

GROUNDWATER

In Texas, groundwater is generally considered a part of the surface estate.  As with other aspects of the surface estate, a mineral lessee generally enjoys an implied right to use the groundwater, including for secondary recovery purposes.

The implied right of use, however, is not without its limitations.  For instance, it is limited to operations that are both reasonable and necessary to develop and produce the minerals.  Thus, landowners may claim that the lessee’s use was unreasonable, or exceeded that reasonably necessary, potentially resulting in claims such as negligence, trespass, or breach of contract.  As illustrated one recent case, sometimes even the owner of a severed surface interest may have a viable cause of action for breach of lease provisions pertaining to the surface estate.  Henry v. Smith, 2021 Tex. App. LEXIS 9508 (Ft. Worth, 2021 no pet. h.),

Another critical limitation on the implied use rights is that they do not include the right to use the groundwater to benefit lands other than the leased premises. See, e.g., Robinson v. Robbins Petro. Corp., 501 S.W.2d 865 (Tex. 1973).  In other words, even if a lessee has assembled a significant acreage position in an area, that lessee, absent landowner consent, may not be able to use water from a water well on one tract to benefit other tracts. 

An example of these limitations in play is Sun Oil Co. v. Whitaker, in which a surface owner contested a mineral lessee’s use of underground fresh water from wells it intended to drill on the landowner’s surface tract for waterflood operations. The surface owner complained that the underlying groundwater formation was closed and would not replenish itself, and that the lessee’s use for waterflood operations would unreasonably deplete the water supply.  The surface owner argued that the mineral lessee should be required to source water from off the leased premises. 

The Texas Supreme Court, in a 5-4 opinion, entered final judgment granting the mineral lessee’s request for injunctive relief.  The Court rejected the idea that the mineral lessee should be required to accommodate the surface owner by acquiring water from other tracts of land.  In doing so, the Court expressly limited the accommodation doctrine to “situations in which there are reasonable alternative methods that may be employed by the lessee on the leased premises to accomplish the purpose of [the] lease.”

On the other hand, in at least one case a landowner claimed that the accommodation doctrine required the lessee to produce and purchase water from the lessor’s property. In the 2018 case Harrison v. Rosetta Res. Operating, LP, 564 S.W.3d 68, 70 (Tex. App.—El Paso 2018, no pet.), a lessor who also owned the surface settled a prior disputed with a mineral lessee by entering into a settlement agreement that, among other things, required the lessee to buy 120,000 barrels of water from the lessor. 

That prior lessee later sold the lease to Rosetta, and Rosetta began purchasing water from an adjacent property owner.  The surface owner sued Rosetta, arguing that Rosetta violated an alleged local custom called the “West Texas Rule.” The surface owner described that alleged custom as a creature of the accommodation doctrine, requiring lessees to buy water from the surface owner.  The surface owner claimed that, by not purchasing his water, Rosetta damaged his surface estate by making his existing water well and frac pit useless.

The court rejected these claims, stating that “categorizing a refusal to buy goods produced from the land as ‘interference’ with the land for purposes of the accommodation doctrine would stretch the doctrine beyond recognition.” 

GROUNDWATER MINING

Given the restrictions on the implied use rights outlined above, lessees needing large volumes of water across multiple leases will often enter into a groundwater lease with the surface owner, or purchase water from a third party. 

For this reason, a service industry has formed in some regions, where companies focus on groundwater mining, producing large quantities of water for sale to operators in the area for use in secondary recovery or fracturing operations.  Such arrangements often include a groundwater lease with the surface owner. 

OWNERSHIP OF PRODUCED WATER

Oil and gas exploration and production often results in high volumes of waste water. Two types of waste water associated with an oil and gas well include: (1) flowback water and (2) produced water. Flowback water is basically all of the water and fracing fluids, mixed with drill cuttings and drilling muds, that were used in drilling and completing the well.  After completion operations, a large percentage of those volumes of water will return to the surface, and must be disposed of.

Produced water, on the other hand, is water found naturally in oil and gas reservoirs. Produced water is produced from the well along with oil and gas.  Depending on geological factors, produced water rates often increase over the life of a well as the reservoir is depleted.

In 2012, the Texas Supreme Court held that the surface owner has a vested property right in the groundwater below their property.  Edwards Aquifer Auth. v. Day, 369 S.W.3d 814, 831 (Tex. 2012). Recent articles have debated whether groundwater is or is not different than produced water.

Either way, effective September 1, 2019, House Bill 3246 amended Tex. Nat. Res. Code §122.002 to include a paragraph reading:

when fluid oil and gas waste is produced and used by or transferred to a person who takes possession of that waste for the purpose of treating the waste for a subsequent beneficial use, the waste is considered to be the property of the person who takes possession of it for the purpose of treating the waste for subsequent beneficial use until the person transfers the waste or treated waste to another person for disposal or use.

According to some commentators, the legislation effectively transferred ownership of subsurface water produced in oilfield operations from the surface owner to the producer. That bill has been the subject of some criticism on constitutional grounds.  However, as of the date of this article no reported decisions have discussed this bill. 

SUBSURFACE SALT WATER

The implied right to use the surface generally extends to subsurface salt water as well.  Overall, the mineral estate’s use of subsurface salt water in operations presents fewer issues than use of fresh water. If the water is too saline or impure, it is not particularly valuable to either estate and, in fact, the incidental production and improper, negligent handling of salt water can result in claims.

Moreover, since the chemistry of frac water is important to effective formation stimulation, excessively saline water with the wrong chemical components is not usable, though efforts at water filtration and recycling are being developed to address these (as well as regional supply and cost) issues.

WATER DISPOSAL

Saltwater disposal has become a profitable segment of the oil and gas industry. The ability to handle and dispose of salt water and other oil and gas wastewater is now critical to the business of oil and gas.

However, it is also sometimes seen as problematic from the public policy standpoint. In addition to routine concerns about inadvertent or negligent injection of oil and gas wastewater into unintended formations—formations that are productive of oil and gas or, of more concern, productive of domestic water supplies—there has been some public association of high injection volumes with induced seismic activity.

Moreover, disposal operations (and oil and gas waste management generally), if improperly undertaken by a mineral owner, can result in claims by the surface owner based upon the obligations to use the surface estate reasonably and non-negligently. Induced seismicity has implications both in the realm of excessive or negligent use claims and public nuisance.

Wastewater disposal by a mineral owner is subject to essentially the same analysis as groundwater and the doctrine of reasonable use generally. Surface disposal of salt water may be seen as unreasonable in any given case and, in any event, is seldom a viable, permanent solution. Moreover, surface storage and disposal is generally subject to a host of regulations of state and federal agencies, including the U.S. Fish and Wildlife Service. Disposal by injection is the more common and accepted route.

At least one Texas court expressly held that disposal of salt water in nonproductive formations on the property is not an unreasonable use of the surface estate. See TDC Eng’g, Inc. v. Dunlap, 686 S.W.2d 346 (Tex. Civ. App.—Eastland 1985, writ ref’d n.r.e.).

Again, while the surface estate owns the subsurface formation mass, the mineral lessee owns a right to make reasonable use of the surface estate, and (absent limitation in the grant or lease) this should include use of open pore space in the subsurface for injection and disposal of produced water. Again, the right to dispose of produced water from lease production would not extend to the allow the injection and disposal of waste water derived from other lands. The surface owner’s consent is required to conduct saltwater injection for disposal of water not generated by operations on the land.

ACCOMMODATION DOCTRINE

Groundwater serves a critical role in oil and gas production. Oil and gas lessees and their water supply chain contractors should determine whether, and to what extent, groundwater operations must accommodate existing surface uses.

In the 2012 case of Edwards Aquifer Authority v. Day, the Texas Supreme Court discussed similarities between minerals and groundwater and held that the ownership of groundwater is similar to the ownership of minerals, in that they are both owned in place.  369 S.W.3d 814, 832 (Tex. 2012).  Left unanswered in Day, however, was the extent to which other oil and gas doctrines, such as the accommodation doctrine, are applicable to groundwater operations.

In the 2016 case, Coyote Lake Ranch, LLC v. City of Lubbock, the Texas Supreme Court addressed whether the accommodation doctrine also applies between a landowner and the owner of an interest in the severed groundwater estate.

While the facts of that case are interesting, they are beyond the scope of this brief article.  In sum, however, the Texas Supreme Court concluded that the accommodation doctrine has been soundly applied in a wide variety of contexts in the oil and gas industry.  The Court also noted that there are numerous similarities in the nature of the mineral and groundwater estates, as well as in their conflicts with surface estates.  As a result, the Court extended the accommodation doctrine to groundwater interests.

CONCLUSION

We routinely represent clients in the oil and gas industry in matters relating to the production, purchase, use, and disposal of water.  These matters can become very complex, but we strive to cut through the noise to find the heart of the analysis.  We are careful to align our strategy and approach with our clients’ overall business goals and budget.  In disputes, that often means pushing to find practical resolutions that retain value and avoid litigation.  But, when necessary, we are prepared to carry out aggressive strategies in the courthouse, and we routinely appear in courtrooms across the State of Texas.  This experience helps guide our transactional representations as well, as it gives us insight to assess potential pitfalls or problem areas, and close deals smoothly.  If you or someone you know is in need of assistance in these areas, please do not hesitate to reach out to Austin or Kevin.

ABOUT THE AUTHORS

Austin Brister is a partner in our Oil and Gas group. Before lawsuits are filed, Austin helps oil and gas companies analyze complicated issues, and strives to develop creative and practical business solutions. But, when necessary, Austin works hard to implement aggressive, goal-focused strategies in the courthouse. Austin frequently assists clients in resolving problems involving title disputes, injunctive relief, joint operating agreements, accounting issues, royalty disputes, lease termination disputes, surface use and trespass issues, purchase and sale issues, lease saving operations, and a host of other oil and gas issues..

Kevin Beiter represents clients as both a trial lawyer and transactional lawyer. With a background in petroleum geology, he has operated and participated in oil and gas exploration and development projects across North America. As a transactional lawyer, he has represented owners and operators with documentation, due diligence, and business counseling for acquisitions and divestitures and for exploration and operation. As a trial lawyer, he has represented plaintiffs and defendants, both majors and independents, in energy and environmental disputes.

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