Oil companies want to sell their wastewater. The Texas Supreme Court decided who gets the profits.

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Texas is awash in billions of gallons of produced water, the wastewater brought to the surface in oil and gas drilling and fracking.

Most produced water is injected into disposal wells. But since these wells were linked to earthquakes, companies are seeking alternatives. The race is on to turn produced water from a waste stream into a valuable product. These new enterprises are raising thorny legal questions about produced water and who owns it.

On Friday, the Texas Supreme Court ruled in Cactus Water Services v. COG Operating. The Court’s ruling in favor of COG stated that the drilling company that holds the oil and gas lease, not the surface owner, owns the produced water. The ruling, signed by Justice John Devine, said that produced water is oil and gas waste and therefore part of the mineral rights estate, not the surface estate.

The justices wrote that if a landowner wants ownership of the produced water, that must be agreed to directly in leases.

“[P]roduced water is not water,” the court wrote. “While produced water contains molecules of water, both from injected fluid and subsurface formations, the solution itself is waste—a horse of an entirely different color.”

“It’s a really new issue of whether produced water has any value,” said John McFarland, an oil and gas and mineral rights attorney at Graves, Dougherty, Hearon & Moody in Austin. “It’s been considered a waste and costs a huge amount of money to get rid of.”

McFarland said the ruling was “not surprising” and a “practical” outcome for how to handle ownership of produced water.

Untangling Who Owns Produced Water

Oil and gas drillers inject a mixture of water, proppants like sand and chemicals into wells to dislodge the hydrocarbons underground. This process also forces water out from subterranean deposits. This water, along with the injected fluids, returns to the surface as produced water that typically contains arsenic, heavy metals and salts.

Texas is conducting pilot projects using treated produced water to grow crops. Produced water could also be mined for critical minerals and rare earth elements, including lithium. The company Element3 announced last year it had successfully extracted lithium from produced water in the Permian Basin.

At the heart of the Cactus v. COG case is a dispute whether produced water falls under surface rights or mineral rights. The right to extract oil and gas is known as a mineral right, which is distinct from the ownership rights of the surface. The mineral rights owner signs leases with oil and gas companies to extract hydrocarbons from the property. In exchange, the drillers pay royalties to the mineral rights owner.

In Texas, groundwater is the property of the surface owner. This is known as the rule of capture. Cactus v. COG asks whether produced water is an oil and gas waste—included in the mineral lease—or groundwater, which is the property of the surface owner.

The Collier family leased 37,000 acres of land in the Permian Basin’s Reeves County to Midland-based COG Operating LLC. The company drilled 72 horizontal oil and gas wells that generated more than 52 millions barrels of produced water. COG spent over $21 million to dispose of the produced waters. The produced water included “a hazardous brew” of potassium, strontium, barium, iron, carbon dioxide, hydrogen sulfide and chloride, according to court records.

Then the Colliers signed “produced water lease agreements” with Houston-based Cactus Water Services, giving Cactus rights to the water from oil and gas producing formations, which up to that point COG had disposed of off-site. The Colliers and Cactus saw the produced water could generate a new revenue stream. But COG sued Cactus in 2020, arguing that it owns the produced water.

The trial court ruled in favor of COG. The appeals court followed suit, with one dissenting justice. The case then made its way to the Texas Supreme Court, which heard oral arguments on March 18.

Numerous oil and gas companies and trade associations submitted briefs in support of COG’s position. The Texas Oil and Gas Association wrote that ruling in favor of Cactus would “upend the State of Texas’s regulatory regime for oil and gas waste and threaten the continued operations of oil and gas producers in the State.”

Meanwhile, associations representing landowners and mineral rights owners submitted briefs in support of Cactus. “COG does not own the water that remains after the oil, gas and other hydrocarbons that are the subject of the mineral lease have been extracted,” wrote the Texas Land & Mineral Owners Association. “What remains is produced water, and groundwater represents most of its volume.”

The Supreme Court ruled in favor of COG on June 27, upholding the lower courts’ rulings.

“The decision is a definitive win for operators, and a reminder to landowners that clear and express language matters when negotiating oil and gas leases,” wrote Raleigh Hart, an associate at the Fort Worth law firm of Harris, Finley & Bogle.

McFarland, the Austin oil and gas attorney, said that companies like COG have been concerned about potential liability if another company used the produced water. Gov. Greg Abbott recently signed into law House Bill 49, which shields companies that sell produced water from liability.

McFarland said Friday’s ruling still leaves some questions unanswered. Among them: Who owns lithium in the produced water, because oil and gas leases do not cover other minerals.

“The court didn’t address that,” McFarland said. “It’s going to eventually create issues down the line. The mineral owner at some point is going to insist on some kind of way to recover the value of that lithium.”

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