Cactus Water Servs. v. COG Operating, LLC

• Docket Number: 08-22-00037-CV
• Decision Date: 28 July 2023
• Parties: CACTUS WATER SERVICES, LLC, Appellant, v. COG OPERATING, LLC, Appellee.
• Court: Texas Court of Appeals

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CACTUS WATER SERVICES, LLC, Appellant, v. COG OPERATING, LLC, Appellee.

No. 08-22-00037-CV

Court of Appeals of Texas, Eighth District, El Paso

July 28, 2023

Appeal from the 143rd District Court of Reeves County, Texas Cause No. 20-03-23456-CVR

Before Rodriguez, C.J., Palafox, and Soto, JJ.

OPINION

YVONNE T. RODRIGUEZ, CHIEF JUSTICE

This case decides who owns produced water arising from a hydraulic fracturing operation: COG Operating, LLC (the existing mineral lessee) or Cactus Water Services, LLC (who later entered a produced water lease agreement with the surface owners). On cross-motions for summary judgment, the trial court decided the ownership question in COG's favor. Cactus appeals, contending the trial court's judgment lacks support in the contractual language of the operator's mineral lease and is unsupported by Texas jurisprudence, statutes, or regulations. We affirm.

I. BACKGROUND

COG is the mineral lessee under four leases, executed in 2005, 2010 and 2014, and covering approximately 37,000 acres in Reeves County, Texas ("the Leased Lands"), with two surface owners.^[1] Under these leases, COG has the exclusive right to explore for and produce oil and gas on the Leased Lands:

• 2005 and 2010 Collier Leases: "Lessor[s] . . . have GRANTED, DEMISED, LEASED and LET, and by these presents do GRANT, DEMISE, LEASE and LET exclusively unto the said Lessee, its successors and assigns, for the sole and only purpose of investigating, exploring, prospecting, drilling, mining and operating for oil and gas and other hydrocarbons, and of laying pipelines and of building tanks, power stations and structures thereon, to produce, save, take care of, store and treat products produced hereunder, and then to transport those products from the land in Reeves County, Texas [covered by the lease][.]"

• 2014 Collier Lease: "Lessor . . . hereby exclusively grants, leases and lets unto Lessee for the purpose of investigating, exploring, prospecting, drilling and producing oil and gas, from the [land covered by the lease]."

• 2010 Balmorhea Lease: "Lessor . . . hereby grants, leases and lets exclusively unto Lessee for the purpose of investigating, exploring, prospecting, drilling and mining for and producing oil, gas, and other hydrocarbons, conducting exploration, geologic and geophysical surveys by seismographs, core test, gravity and magnetic methods, injecting gas, water and other fluids, and air into subsurface strata, laying pipe lines, building roads, tanks, power stations, telephone lines and other structures thereon, to produce, save, take care of, treat, transport and own said products, the [land covered by the lease]."

COG's operations in the Leased Lands center around a region in the Delaware Basin with dense shale and poor permeability. Given those conditions, COG's operations have focused on drilling and completing horizontal wells-i.e., hydraulic fracturing, or "fracing."

Fracing involves "pumping fluid down a well at high pressure so that it is forced out into the formation," which "creates cracks in the rock that propagate along the azimuth of natural fault lines in an elongated elliptical pattern in opposite directions from the well." Coastal Oil &Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1, 6 (Tex. 2008). The fluid contains proppants that keep those cracks open and allow oil and gas to flow to the wellbore. Id. at 6-7. However, what travels to the wellbore involves other substances too, both hydrocarbon and not. The composition of that fluid depends on the location, but here, those substances include sodium, calcium, potassium, strontium, barium, iron, carbon dioxide, and brine, or water molecules mixed with hydrogen sulfide and chloride.

Once the stream reaches the surface, it is treated by equipment that separates out the oil and gas. What remains is referred to as produced water-a liquid containing chloride, sodium, calcium, potassium, strontium, barium, iron, hydrogen sulfide, carbon dioxide, trace amounts of oil, and water. Because fracing requires so much water per well, it also generates huge amounts of produced water, particularly in the Permian Basin. See Andrew J. Kondash et al., The Intensification of the Water Footprint of Hydraulic Fracturing, Science Advances (2018), https://www.science.org/doi/epdf/10.1126/sciadv.aar5982 (noting the median water usage of a Permian Basin well is 42,500 cubic meters). For example, since COG entered the mineral leases, its operations have resulted in nearly 52,000,000 barrels of produced water. And because produced water presents a danger to the surrounding environment, including "usable-quality water," it must be carefully handled and disposed. 16 TEX. ADMIN. CODE § 3.13(a)(1)(R.R. Comm. of Tex., Casing, Cementing, Drilling, Well Control and Completion Requirements). That process is highly regulated in Texas and includes penalties for improper disposal. See id. § 3.8. While the handling, treatment, and disposal of produced water have long been costly expenditures for operators, recent water treatment technologies have made the reuse of such waste possible, creating a new industry in which treated wastewater can be sold back to operators for drilling. Christopher M. Matthews, The Next Big Bet in Fracking: Water, THE WALL STREET JOURNAL (Aug. 22, 2018), https://www.wsj.com/articles/the-next-big-bet-in-fracking-water-1534930200.

Since COG began operations on the Leased Lands, it has disposed of its oil and gas waste, including produced water. To aid that process, COG has both surface use compensation agreements (SUCA) and right-of-way agreements (ROW Agreements) with the surface owners to facilitate its use of the surface estate when it transports product and waste from its wells. The SUCA gives COG the right to:

[C]onstruct, operate and maintain tank battery sites . . . for the gathering, storing, and transporting of oil, gas, other petroleum products, water, and/or any other liquids, gases or substances which can be transported through a pipeline. Said site is to include tanks, pipelines, pipeline connections and other fixtures and appurtenances reasonably necessary or convenient to Operator's use and Operations of the lands as a tank batter[y] site.

It also provides that "'[f]resh water lines, produced water lines and flow lines may be laid on the surface of the Lands.'" The ROW Agreements also grant COG the right to lay pipelines for the "transportation of oil, gas, petroleum, produced water and any other oilfield related liquids or gases[.]" COG's production facilities can store roughly 24-hours' worth of produced water before it must be sent offsite; otherwise, production must stop. COG has incurred significant costs in handling and disposing its produced water from the Leased Lands, paying over $20.5M to its liquid-waste disposal contractor from December 2018 through March 2021.^[2]

COG's leases notwithstanding, in 2019 and 2020, the surface owners transferred to Cactus all the surface estates' water rights on the Leased Lands. The leases give Cactus ownership and the right to sell all water "produced from oil and gas wells and formations on or under the [covered properties]." "Water" is defined as:

[A]ny and all water contained in and produced from geologic formations under the Subject Property through any wellbores drilled for the production of oil, gas, and natural gas liquids (collectively, 'hydrocarbons'), whether economically productive or not, regardless of salinity. 'Water' excludes all water originating from shallow geological intervals that do not and have never produced oil, other hydrocarbon liquids, and/or natural gas anywhere in the Permian Basin. 'Water' also excludes water purposely and directly produced from the Ogallala, Pecos Valley Alluvium, Edwards Trinity, Dockum Aquifers or any other freshwater aquifers.

Cactus informed COG of its produced water leases in early March 2020. COG then sued, seeking a declaratory judgment that it has the sole right to the produced water by virtue of its mineral leases, SUCAs, and at common law. Cactus counterclaimed, asserting its right of ownership over the produced water under its own leases. But unlike the produced water leases, none of the mineral leases define the term "water." The 2005 and 2010 leases do, however, specifically limit COG's use of water on the Leased Lands:

[COG] shall have no right to use water which is on or under the above described land, except it may itself drill a water well and then use the water from that well in its conduct of the drilling operations that actually are conducted on land covered by this lease.

Similarly, the 2014 lease states, "No water from any source from said land shall be used for any purpose without written consent of Lessor." Thus, COG and Cactus dispute whether the mineral leases conveyed produced water to COG. If so, the surface owners' later transfer of produced water to Cactus is void.

Both parties moved for summary judgment, and the trial court granted summary judgment in COG's favor. After the parties nonsuited their remaining claims, the trial court entered a final judgment declaring that COG owns, by virtue of its mineral leases, the oil, gas, and other products contained in the commercial oil and gas bearing formations that are produced from the COG wells on the properties; that COG has the right to exclusive possession, custody, control, and disposition of the product stream produced from the wells under the mineral leases so long as the leases remain in effect; and that Cactus has no rights in or to the product stream from COG's wells so long as the mineral leases remain in effect. Cactus appealed.

II. STANDARD OF REVIEW

We review a trial court's granting of summary judgment de novo. Lujan v. Navistar, Inc., 555 S.W.3d...