In a recent Texas Supreme Court ruling, the ownership of produced water—a byproduct of oil and gas extraction—was put to the test. The case, Cactus Water Services, LLC v. COG Operating, LLC, addressed a dispute between COG Operating and Cactus Water Services over 52 million barrels of produced water from the Collier family’s 37,000-acre lease in Reeves County, Texas, within the Permian Basin. The court’s decision clarifies who holds rights to produced water and how these rights can impact landowners, operators, and water services companies alike.
⚖️ Case Background: Who Owns the Water?
The Collier family leased their land to COG Operating, which drilled 72 horizontal wells generating a significant amount of produced water. Historically, oil and gas operators are responsible for managing and disposing of this wastewater. The Colliers entered into produced water lease agreements (PWLAs) with Cactus Water Services, granting them rights to the produced water that COG had disposed of elsewhere. However, COG Operating sued Cactus, arguing that it owned the produced water.
At the core of the dispute was this critical question: Who owns produced water? Texas law has long held that surface owners have rights to water, but produced water—generated during oil and gas extraction—complicated this doctrine. The court’s decision would settle the issue.
The Court’s Decision: Produced Water Belongs to the Operator
In a landmark ruling, the Texas Supreme Court sided with COG Operating. The Court ruled that produced water is an inherent byproduct of oil and gas production, and unless explicitly reserved in the lease agreement, it is part of the rights granted to the operator. Therefore, COG Operating was deemed to be the rightful owner of the produced water.
The Court clarified that, while surface owners typically own the water on their land, produced water—which is generated as a byproduct during the extraction of oil and gas—falls under the mineral estate and belongs to the operator. This decision establishes a default rule in Texas law: unless a lease explicitly reserves rights to the produced water, it is considered part of the oil and gas rights and thus controlled by the operator.
💧 Why Did Cactus Want the Produced Water?
So, why did Cactus Water Services want to purchase the produced water? Traditionally, produced water has been regarded as a waste product of oil and gas operations. However, the value of produced water is increasing, particularly as fresh water resources become scarcer and more expensive in areas like the Permian Basin. Cactus Water Services sought to purchase the produced water to treat and recycle it for use in hydraulic fracturing (fracking). By recycling produced water, oil and gas operators can save money on purchasing fresh water and help meet environmental regulations concerning water usage.
In addition, Cactus may have been looking ahead to the potential extraction of minerals like lithium from the produced water. While the concentration of lithium in the Permian Basin is relatively low, advances in extraction technology could make lithium recovery from produced water an economically viable process in the future.
🏭 COG’s Position: Retaining Control Over Disposal
COG Operating, however, wanted to retain control over the produced water to manage its disposal and reuse. The operator argued that produced water is part of the oil and gas extraction process, and thus it should fall under the rights granted to them in the lease.
By keeping the rights to the produced water, COG could manage how and where it is disposed of, or recycled, without being restricted by a third party. COG’s decision to fight for control over the produced water likely stemmed from the costs and logistics involved in water management. Additionally, retaining control could allow COG to profit from the treated water, whether by recycling it for fracking or by selling it to other operators.
The Impact on Landmen: Key Takeaways
The court’s decision in Cactus Water Services v. COG Operating carries several important implications for landmen, particularly when negotiating oil and gas leases:
- Clarity on Water Rights: The ruling establishes that produced water, unless explicitly reserved in a lease, is part of the mineral estate and belongs to the operator. Landmen must be diligent in understanding produced water rights if the issue is raised by the mineral owner.
- Emerging Value of Water Resources: As water recycling becomes a more prominent industry trend, landmen must be prepared to handle water management clauses in their leases. This case reinforces the potential value of produced water and its growing importance in oil and gas operations.
- Environmental Considerations: The rising interest in sustainable water practices means that landmen should consider how produced water management could play a role in long-term negotiations. As regulations tighten, operators may be increasingly willing to enter into water recycling agreements.
- Lithium and Mineral Extraction: While lithium extraction from produced water was not a central issue in this case, the future potential of extracting minerals from produced water adds another layer of complexity. Landmen working in lithium-rich regions, like the Permian Basin, will need to stay informed about this evolving area.
🔮 Looking Ahead
The Texas Supreme Court’s decision in Cactus Water Services, LLC v. COG Operating, LLC provides much-needed clarity on who owns produced water, but also sets the stage for ongoing questions about how this valuable resource will be managed in the future. With the potential for water recycling, disposal revenue, and lithium extraction, landmen will need to stay ahead of these trends and ensure that water rights are carefully addressed in lease negotiations.
As this legal landscape continues to evolve, it’s essential for landmen to be proactive and strategic in navigating water management and ownership rights in the context of oil and gas leases.