The Texas Supreme Court provided much-needed clarity on mineral interests and so-called “produced water” in its June 27 decision in Cactus Water Services LLC v. COG Operating LLC. The court found that produced water — which is extracted alongside oil and gas — is waste, for which the mineral interest lessee bears the burden of disposal and the potential benefit of recycling.
Yetter Coleman LLP associate Bonnie Cantwell Fraase and partner Timothy S. McConn wrote a Law360 article analyzing the decision, which will have a significant impact on the oil and gas industry in Texas.
“Produced water is big business in Texas, and the court’s opinion is consequential,” they write. “Several industry implications deserve immediate attention — including the stability that will come with clearer rules, the possible environmental benefits that may follow and the questions that remain concerning royalties.”
Key takeaways from the article include:
- Default rules bring stability. Cactus v. COG provides a clear legal framework that benefits economic activity and also safeguards an operator’s investment in produced water recycling.
- Recycling comes at a cost — but with future promise. While treating produced water is currently more expensive than disposal, companies do see economic opportunities in water recycling and are increasing investments.
- Environmental benefits may abound. Recycling produced water can have considerable environmental benefits as it reduces the need for freshwater, preserving it for drinking and agriculture. “Operators should take care in the disposal of treated water, just as they would for raw produced water,” Fraase and McConn write. “This is especially true in light of rising scrutiny over treated water’s potential impact on freshwater sources.”
- The court did not rule on royalties. The appellate panel did not provide guidance on the issue of royalties owed on produced water, as the question was not presented. Fraase and McConn advise lessors and lessees to be mindful of language in leases and deeds, writing, “They should consider and negotiate this term, in light of the current costs and potential future benefits of water treatment.”
A PDF of the full Law360 article on Cactus v. COG is available here.
Fraase is a commercial litigator with a preference for high-stakes matters and complex issues. Her clients operate in the energy, entertainment and telecom industries, among others.
McConn focuses on disputes related to pipeline operations, environmental issues and contractual disputes in the energy industry. He advises plaintiffs and defendants over contracts, leases, royalties, title disputes and other oil and gas matters.