Opinion
No. 08-22-00037-CV
07-28-2023
CACTUS WATER SERVICES, LLC, Appellant, v. COG OPERATING, LLC, Appellee.
Joshua Katz, Austin, Civil - Amicus Curiae for Texas Farm Bereau. Christopher Hogan, Civil - Amicus Curiae for Texas Oil & Gas Association. Katherine Petroski, Macey Reasoner Stokes, Benjamin Gonsoulin, Houston, John A. ‘Jad’ Davis, Ryan Clinton, Austin, for Appellee. Roger Townsend, Houston, Dana Livingston, Austin, Marvin Jones, Amarillo, for Appellant. Charles Hosey, Civil - Amicus Curiae for National Association of Royalty Owners-Texas, Inc.
Joshua Katz, Austin, Civil - Amicus Curiae for Texas Farm Bereau.
Christopher Hogan, Civil - Amicus Curiae for Texas Oil & Gas Association.
Katherine Petroski, Macey Reasoner Stokes, Benjamin Gonsoulin, Houston, John A. ‘Jad’ Davis, Ryan Clinton, Austin, for Appellee.
Roger Townsend, Houston, Dana Livingston, Austin, Marvin Jones, Amarillo, for Appellant.
Charles Hosey, Civil - Amicus Curiae for National Association of Royalty Owners-Texas, Inc.
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. Under these leases, COG has the exclusive right to explore for and produce oil and gas on the Leased Lands:
Cactus urges an additional fifteen leases convey an interest in some portion of Section 34, Block 51, Township 8 Abstract 5880, T&P R.R. Co. Survey, but those leases were apparently not included in Cactus's definition of "Leased Premises" in its live pleading in the trial court. We do not consider them to be part of the Leased Premises for purposes of this appeal.
• 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.
Before December 2018, COG disposed of this waste directly and through other third-party facilities, though the record does not include the cost for that work.
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 79, 84 (Tex. 2018). When parties bring cross-motions for summary judgment, each party's burden is to establish it is entitled to judgment as a matter of law. Miles v. Tex. Cent. R.R. & Infr., Inc. , 647 S.W.3d 613, 619 (Tex. 2022). When one party's motion is granted and the other is denied, on review we " ‘determine all questions presented’ and ‘render the judgment that the trial court should have rendered.’ " Id. (quoting City of Garland v. Dall. Morning News , 22 S.W.3d 351, 356 (Tex. 2000) ).
Declaratory judgments are reviewed under the same standards as other judgments, looking to the procedure used in the trial court to resolve the issue, and applying the standard of review applicable to that procedure. Browne v. Ortiz , 657 S.W.3d 704, 708 (Tex. App.—El Paso 2022, no pet.). In this case, because the summary judgment included declaratory portions, we also review the declaratory portions of the judgment de novo. See Sanchez v. Barragan , 624 S.W.3d 832, 838 (Tex. App.—El Paso 2021, no pet.). III. ANALYSIS
Cactus argues the trial court's ruling on summary judgment has no support in the mineral leases, nor in Texas's jurisprudence, statutes, or regulations. COG responds that consistent with the relevant statutory and regulatory landscape, the mineral leases necessarily convey the oil and gas product stream, which includes the produced water.
We begin with the mineral leases. "When interpreting a written contract, the prime directive is to ascertain the parties’ intent as expressed in the instrument." URI, Inc. v. Kleberg Cnty. , 543 S.W.3d 755, 757 (Tex. 2018). When, as here, several instruments pertain to the same transaction, those instruments may be read together to determine the parties’ intent, even if the parties executed the instruments at different times. Fort Worth Indep. Sch. Dist. v. City of Fort Worth , 22 S.W.3d 831, 840 (Tex. 2000). While our "focus is on the words the parties chose to memorialize their agreement," we recognize "language is nuanced, and meaning is often context driven." URI, Inc. , 543 S.W.3d at 757. To that end, Texas courts have long construed words in the context in which they are used. Id. at 764. That includes "the commercial or other setting in which the contract was negotiated and other objectively determinable factors that give a context to the transaction," as "[s]etting can be critical to understanding contract language[.]" Id. at 768 (citations omitted). Though surrounding facts and circumstances "cannot be used to augment, alter, or contradict the terms of an unambiguous contract," they can "inform the meaning of language." Id. at 758. "Understanding the context in which an agreement was made is essential in determining the parties’ intent as expressed in the agreement , but it is the parties’ expressed intent that the court must determine." Anglo-Dutch Petroleum In'l, Inc. v. Greenberg Peden, P.C. , 352 S.W.3d 445, 451 (Tex. 2011). Our approach is "holistic" and aimed at determining intent from all words and parts of the contract. Greer v. Shook , 503 S.W.3d 571, 582 (Tex. App.—El Paso 2016, pet. denied). Ultimately, our goal is to objectively determine what the parties intended by construing the contract "from a utilitarian standpoint bearing in mind the particular business activity sought to be served." Reilly v. Rangers Mgmt., Inc. , 727 S.W.2d 527, 530 (Tex. 1987).
Cactus contends that the mineral leases grant the right to "oil, gas and other hydrocarbons," or the right to "oil and gas," which does not encompass all produced water from the oil-and-gas bearing formations. Cactus also contends that because the mineral leases limit COG's use of surface water, the leases do not allow COG to sell produced water to third parties for off-premises use. Its argument hinges on the chemical composition of water: Because water is not a hydrocarbon, Cactus argues that water was not conveyed as part of the mineral estate. Thus, Cactus urges the produced water was later conveyed through produced water leases it entered with the surface owners.
COG argues the leases must be construed to effectuate the parties’ general intent to convey oil and gas in their natural form. Because produced water is part of the single, combined product stream that arises from its wells, COG contends it owns the produced water as a waste byproduct. COG also claims ownership through its development rights under its mineral leases, which include the right to dispose of the waste generated by its wells.
The parties’ disagreement as to whether produced water is part of the mineral estate essentially depends on whether "produced water" is, as a matter of law, water or if it is waste. Because the terms "water" or "produced water" are not defined in the mineral leases, we look to state statutory and regulatory definitions for relevant context. See Endeavor Energy Res., L.P. v. Discovery Operating, Inc. , 554 S.W.3d 586, 595 (Tex. 2018) ("Although mineral leases are contracts, they are subject to legal and regulatory restrictions."); URI, Inc. , 543 S.W.3d at 764 (recognizing the context in which words are used may encompass the circumstances present when the contract was entered).
The Texas Natural Resources Code, Texas Water Code, and the Railroad Commission Rules each define "oil and gas waste":
‘[O]il and gas waste’ means waste that arises out of or incidental to the drilling for or producing of oil or gas ... includ[ing] salt water, brine, sludge, drilling mud, and other liquid, semiliquid, or solid waste material[.] TEX. NAT. RES. CODE ANN. § 91.1011.
‘Fluid oil and gas waste’ means waste containing salt or other mineralized substances, brine, hydraulic fracturing fluid, flowback water, produced water, or other fluid that arises out of or is incidental to the drilling for or production of oil or gas. Id. § 122.001(2).
‘Oil and gas waste’ means waste arising out of or incidental to drilling for or producing of oil, gas, or geothermal resources .... The term includes but is not limited to salt water, brine, sludge, drilling mud, and other liquid or semi-liquid waste material. TEX. WATER CODE ANN. § 27.002(6).
Oil and gas wastes—Materials to be disposed of or reclaimed which have been generated in connection with activities associated with the exploration, development, and production of oil or gas or geothermal resources .... The term ‘oil and gas wastes’ includes but is not limited to, saltwater, other mineralized water, sludge, spent drilling fluids, cuttings, waste oil, spent completion fluids, and other liquid, semiliquid, or solid waste material. 16 TEX. ADMIN. CODE § 3.8(a)(26) (R.R. Comm. of Tex., Water Protection).
The Texas Water Code and Railroad Commission Rules also define water as follows:
‘Fresh water’ means water having bacteriological, physical, and chemical properties which make it suitable and feasible for beneficial use for any lawful purpose. TEX. WATER CODE ANN. § 27.002(8).
‘Groundwater’ means water percolating below the surface of the earth. Id. § 35.0029(5).
Surface or subsurface water—Groundwater, percolating or otherwise .... 16 TEX. ADMIN. CODE § 3.8(a)(29) (R.R. Comm. of Tex., Water Protection).
This framework draws a clear distinction between produced water and groundwater. "[W]hen the legislature uses certain language in one part of the statute and different language in another, the [C]ourt assumes different meanings were intended." Ineos USA, LLC v. Elmgren , 505 S.W.3d 555, 564 (Tex. 2016) (quoting DeWitt v. Harris Cnty. , 904 S.W.2d 650, 653 (Tex. 1995) ) (alterations in original). The relevant legal definitions of oil and gas waste include produced water. And because the Legislature defines produced water as oil and gas waste, it cannot also be groundwater. Indeed, the definitions of oil and gas waste echo what COG's petroleum engineering expert points out: the term "produced water" is essentially a misnomer, as it bears little resemblance to water given the "numerous constituents" it contains other than water. Instead, produced water is more accurately classified as a waste byproduct of oil and gas production. The same legal and regulatory framework also contains provisions to protect groundwater from oil and gas waste and require proper disposal of that waste. For example, the Railroad Commission Rules state no one "may cause or allow pollution of surface or subsurface water in the state" and require a permit for any disposal of oil and gas wastes. 16 TEX. ADMIN. CODE §§ 3.8(b), (d)(1). The rules place liability for improper disposal squarely on the operator. See id. §§ 3.8(d)(5)(B) ("No generator, carrier, receiver, or any other person may improperly dispose of oil and gas wastes or cause or allow the improper disposal of oil and gas wastes."), (h) ("Violations of this section may subject a person to penalties and remedies specified in the Texas Natural Resources Code, Title 3, and any other statutes administered by the commission."). This distinction underscores the understanding of produced water as oil and gas waste—something that operators must keep from contaminating usable quality water—rather than water. See id. § 3.13(a)(1).
Cf. Tex. Nat. Res. Code Ann. § 85.001(a)(4) (" ‘Product’ and ‘product of oil or gas’ mean a commodity or thing made or manufactured from oil or gas and derivatives or by-products of oil or gas, including refined crude oil, crude tops, topped crude, processed crude petroleum, residue from crude petroleum, cracking stock, uncracked fuel oil, treated crude oil, fuel oil, residuum, gas oil, naphtha, distillate, gasoline, kerosene, benzine, wash oil, waste oil, lubricating oil, casinghead gas, casinghead gasoline, blended gasoline, and blends or mixtures of oil, or gas, or any derivatives or by-products of them.").
Characterizing produced water as oil and gas waste, rather than groundwater, also conforms with industry practice. Indeed, produced water has long been treated as a liability, not an asset, both throughout the fracing industry and in the context of COG's operations on the Leased Lands. Here, since COG began drilling on the Leased Lands, the surface owners never tried to claim ownership over the produced water before entering the produced water lease with Cactus. The mineral leases were likewise executed before the parties perceived produced water as a substance with value. However, "[t]he knowledge of the parties of the value, or even the existence of the substance at the time the conveyance was executed" is "irrelevant to its inclusion or exclusion from a grant of minerals." Moser v. U.S. Steel Corp. , 676 S.W.2d 99, 102 (Tex. 1984). To read the mineral leases as reserving produced water—something that exists separate from oil and gas only after processing and treatment—for the surface estate would give the surface estate (and thus Cactus) "the benefit of costs and risks [COG] voluntarily undertook." Bowden v. Phillips Petroleum Co. , 247 S.W.3d 690, 706 (Tex. 2008).
Indeed, the Legislature recognized in its 2019 amendment to Section 122.002 of the Natural Resources Code that produced water is typically conveyed as part of the mineral estate:
Unless otherwise expressly provided by an oil or gas lease, a surface use agreement, a contract, a bill of sale, or another legally binding document ... 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[.]
Section 122.002 clarifies that whoever takes possession of the fluid oil and gas waste—including produced water—to treat it for "subsequent beneficial use" owns it. This amendment was adopted after the mineral leases were signed, so it does not assign ownership rights here. But Section 122.002 codifies the understanding that under Texas law, produced water is oil and gas waste byproduct, not regarded as "water" as Cactus claims.
The mineral leases were negotiated against this backdrop—with a legal framework distinguishing oil and gas waste from groundwater, making clear that produced water is categorized within the former, and placing the burden of its safe disposal on operators, and according to years of the common industry practice in which operators have processed, transported, and disposed of oil and gas waste. Reading the mineral leases in the context in which they were made "elucidates the meaning of the words employed[.]" See URI, Inc. , 543 S.W.3d at 765. Here, that context clarifies that the grant of "oil, gas and other hydrocarbons" or "oil and gas" includes the rights and duties associated with disposing of its waste, including produced water, which cannot be extracted separate from the oil and gas. See Turner v. Big Lake Oil Co. , 128 Tex. 155, 96 S.W.2d 221, 226 (1936) ("One of the by-products of oil production is salt water[.]"). Nothing in the mineral leases indicates that the parties intended to upend the definitions of these terms or common practices. Indeed, they could have—through an express reservation. TEX. NAT. RES. CODE ANN. § 122.002 ; see Sharp v. Fowler , 151 Tex. 490, 252 S.W.2d 153, 154 (1952) ("A reservation of minerals to be effective must be by clear language. Courts do not favor reservations by implication."). But here there is none: Though the mineral leases restrict COG's use of "water" on the Leased Lands, that has no bearing on COG's right to the oil and gas waste byproduct from its wells.
This is also why the dissent's reliance on Robinson v. Robbins Petroleum Corp., Inc. , 501 S.W.2d 865 (Tex. 1973) is inapposite. Robinson determined ownership rights under a mineral lease specifically excepting use of water from the lessor's wells in which saltwater was extracted from a former oil well—not waste produced from an oil and gas well. Id. at 867–68 ; Robinson v. Robbins Petroleum Corp., Inc. , 487 S.W.2d 794, 796 (Tex. App.—Tyler 1972), rev'd , 501 S.W.2d 865 (Tex. 1973).
In sum, nothing in the mineral leases suggests the parties intended to assign rights at a molecular level, following both extraction from the well and post-production processing. Nor do the mineral leases indicate an intent to reserve oil and gas waste produced through COG's drilling operations. Reading the mineral leases in the context in which they were executed confirms COG has the exclusive right to the oil and gas product stream, including the produced water. The subsequent leases purporting to convey produced water rights to Cactus were thus ineffective.
Because we determine the mineral leases conveyed produced water to COG, we need not address Cactus’ issue asking whether the SUCA and ROW Agreements independently transfer ownership of produced water to COG (an argument COG does not assert).
We do not read Chalker Energy Partners III, LLC v. Le Norman Operating LLC , 595 S.W.3d 668, 677 (Tex. 2020) as supporting the dissent's proposition "A party's actions in ‘allowing’ a party to carry out its statutory, regulatory, or contractual duties with respect to waste does not necessarily reflect a waiver of ownership rights, as doing so is not unequivocally inconsistent with such ownership."
IV. CONCLUSION
Having overruled each of Cactus's issues on appeal, we affirm.
Palafox, J. Dissenting
DISSENTING OPINION
GINA M. PALAFOX, Justice
Water—unsevered by express conveyance or reservation—has long been held a part of the surface estate. Robinson v. Robbins Petroleum Corp. , 501 S.W.2d 865, 867 (Tex. 1973) ("[T]he water itself is an incident of surface ownership in the absence of specific conveyancing language to the contrary."). But it is also long recognized that the surface estate must accommodate the reasonable use of the water as is necessary to effectuate the purpose of an oil and gas lease. See Sun Oil Co. v. Whitaker , 483 S.W.2d 808, 811 (Tex. 1972). These principles of oil and gas jurisprudence are fundamental. Yet, by its decision, the majority reaches a result that upends this balancing of competing rights and responsibilities. Here, the Court holds that water produced from an oil and gas well is owned not by the surface estate but rather by the oil-and-gas lessee. This result bears out even though no conveyance is expressed by the terms of the oil and gas leases. Standing apart from the majority, I disagree. Based on the express language of the leases, I would interpret the granting language as conveying oil, gas, and hydrocarbons produced from the Leased Land, but not the water incidentally recovered from the subsurface, from which oil and gas has been removed. Because the majority concludes otherwise, I respectfully dissent.
I. OIL, GAS, AND GROUNDWATER
The parties agree that COG was conveyed the mineral estate of the Leased Lands based on the subject oil-and-gas leases. By the granting clause of the four oil and gas leases, COG is conveyed "oil and gas and other hydrocarbons," or, more narrowly, only "oil and gas," as stated in the more recent leases. The parties here place no importance on that wording variation. Over time, and by assignment, Cactus later acquired an interest in the produced water of the surface estate. At present, the conflict centers on whether the oil-and-gas leases at issue conveyed to COG all the water produced from their oil-and-gas wells, or whether Cactus maintains ownership of all produced water that remains after COG's reasonable use.
A. Principles of Lease Construction
The proper construction of an unambiguous lease is a question of law determined de novo. Samson Explor., LLC v. T.S. Reed Props., Inc. , 521 S.W.3d 766, 787 (Tex. 2017). "An unambiguous contract—one whose meaning is certain and definite—will be enforced as written." Blue Stone Nat. Res. II, LLC v. Randle , 620 S.W.3d 380, 387 (Tex. 2021). Here, although the parties differ in their interpretation of the oil and gas leases, neither of them assert the leases are ambiguous. Also, ambiguity does not arise merely because the parties assert differing interpretations. N. Shore Energy, LLC v. Harkins , 501 S.W.3d 598, 602 (Tex. 2016).
The rules and principles generally applied in contract interpretation are also used to construe oil-and-gas leases. Endeavor Energy Res., LP v. Discovery Operating, Inc. , 554 S.W.3d 586, 595 (Tex. 2018). Unless a lease is ambiguous, our primary duty is "to ascertain the intent of the parties from all of the language within the four corners" of the lease. See Wenske v. Ealy , 521 S.W.3d 791, 794 (Tex. 2017). "This analysis begins with the [lease's] express language." Murphy Explor. & Prod. Co.—USA v. Adams , 560 S.W.3d 105, 108 (Tex. 2018). "We give the lease's language its plain, grammatical meaning unless doing so would clearly defeat the parties’ intentions." Apache Deepwater, LLC v. Double Eagle Dev., LLC , 557 S.W.3d 650, 654 (Tex. App.—El Paso 2017, pet. denied) (citing Fox v. Thoreson , 398 S.W.2d 88, 92 (Tex. 1966) ). "We presume the parties intended every clause to have some effect, so we ‘examine the entire lease and attempt to harmonize all its parts, even if different parts appear contradictory or inconsistent.’ " Endeavor Energy , 554 S.W.3d at 595 (quoting Anadarko Petrol. Corp. v. Thompson , 94 S.W.3d 550, 554 (Tex. 2002) ). Texas has long recognized a strong public policy favoring the freedom to contract, and we are compelled to "respect and enforce" the parties’ agreements. See id. , 554 S.W.3d at 595. "Absent compelling reasons, courts must respect and enforce the terms of a contract the parties have freely and voluntarily entered[.]" Shields Ltd. P'ship v. Bradberry , 526 S.W.3d 471, 481 (Tex. 2017). Along these lines, parties have the right to contract as they see fit so long as their agreement does not violate the law or public policy. Id. at 481.
Having laid this legal framework, I turn to how I would interpret the leases at issue.
B. Analysis
1. The Leases
In my view, the majority's reading of the parties’ disagreement as "whether ‘produced water’ is, as a matter of law, water or if it is waste," mistakenly presumes the leases transferred ownership of produced water to COG. I believe the ultimate issue is whether the entire "product stream" (of which produced water is only a part), is conveyed by a granting clause that merely conveys "oil and gas." And even though COG's claim encompasses the entire "oil and gas product stream," Cactus's competing claim seeks the produced water remaining only after conveyed substances have already been removed. To resolve these claims, I would start with the leases’ granting clauses.
Even the use of the term "product stream" presupposes that everything coming from the well is a product. For lack of a better term, I will refer to the totality of substances that come from the well bore as the "product stream," but in my view, water is not a product under the oil and gas leases.
Textually, neither water (in any form) nor oil and gas waste, for that matter, is mentioned in any of the lease language. For example, the term, "produced water," does not appear anywhere in the four oil and gas leases. Other than certain limitations on its use and provisions prohibiting contamination of both the surface and the subsurface, "water" is also not mentioned in the leases. Likewise, the term "waste" also does not appear in the lease terms. Keeping the language in mind, the Supreme Court of Texas has long addressed the proper interpretation of lease terms.
One of a property owner's core rights is the right to transfer property—in the case of real property, a legal unit of ownership called an "estate." See Evanston Inc. Co. v. Legacy of Life, Inc. , 370 S.W.3d 377, 383 (Tex. 2012) (listing core rights in a property owner's bundle of rights); City of Baytown v. Schrock , 645 S.W.3d 174, 179 (Tex. 2022) (the right to privately own real property is a fundamental right); Averyt v. Grande, Inc. , 717 S.W.2d 891, 894 (Tex. 1986) (an estate is "a legal unit of ownership in the physical land"). "[A] landowner may sever the mineral and surface estates and convey them separately." Coyote Lake Ranch, LLC v. City of Lubbock , 498 S.W.3d 53, 60 (Tex. 2016). And with respect to water, the surface estate owner, who owns all groundwater in place beneath the surface of the land, can sever and convey an interest in the groundwater similar to such severing of a mineral interest. See Edwards Aquifer Auth. v. Day , 369 S.W.3d 814, 831 (Tex. 2012) ; see also Coyote Lake Ranch , 498 S.W.3d at 63.
The severance of a mineral estate is typically accomplished by granting or reserving "oil, gas and other minerals." Moser v. U.S. Steel Corp. , 676 S.W.2d 99, 101 (Tex. 1984). And here, the leases’ granting clauses are narrowly stated, merely including "oil and gas," or, "oil, gas, and other hydrocarbons." This language contrasts with the commonly used phrase of "oil, gas, and other minerals." The narrowing of the substances being conveyed certainly may be a response to cases interpreting lease language. In Moser , for example, the Supreme Court of Texas confirmed that only certain substances are impliedly conveyed or reserved by the use of the phrase, "other minerals." Id. Moser confirmed that water remains a part of the surface estate and is not conveyed by the terms, "oil, gas and other minerals." Id. (citing Sun Oil , 483 S.W.2d at 811 ).
In that context, as expressed by lease language, water is not "a thing of like kind to oil and gas." Fleming Found. v. Texaco, Inc. , 337 S.W.2d 846, 852 (Tex. App.—Amarillo 1960, writ ref'd n.r.e.). It follows, then, that a grant of "oil, gas and other minerals" does not include a conveyance of water. To be sure, unless water (or subsurface water) is expressly reserved or conveyed, it remains an unsevered part of the surface estate. Sun Oil Co. , 483 S.W.2d at 811 ; Pfluger v. Clack , 897 S.W.2d 956, 959 (Tex. App.—Eastland 1995, writ denied) ; Fleming Foundation , 337 S.W.2d at 852. Based on these authorities, I would conclude the oil and gas leases at issue here do not expressly convey water in any form. But even so, as Sun Oil clarified, the mineral estate owner may use the water to the extent reasonably necessary for the production of its minerals. Sun Oil , 483 S.W.2d at 810 ("Sun has the implied right to free use of so much of the water in question as may be reasonably necessary to produce the oil from its oil wells.").
Here, this conclusion—that water was not included with the oil-and-gas estate—harmonizes the granting clause of the leases with further restrictions included by other language. That is, paragraph 18 of the Collier leases limits COG's use of water "on or under" the Leased Lands to drilling a water well for use in its operations. If all of the subsurface water had been granted to COG, there would be no need to include such limiting provision. See Endeavor Energy , 554 S.W.3d at 595.
In addition to looking at the leases, the majority cites the ancillary surface use and right-of-way agreements between COG and the surface owners, which COG argues give it the "right" to dispose of all produced water. COG contends these ancillary agreements support its argument that the parties intended to transfer the oil and gas waste to COG. But the stated purpose of these agreements is to establish guidelines and payments for use of the surface and to grant use of the surface, respectively. Unlike the majority, I would hold that neither the surface use agreements nor the right-of-way agreements support a transfer of ownership of produced water.
Also inapplicable here are the cases COG cites for the proposition that the right to develop includes the right to dispose of produced water. See Brown v. Lundell , 162 Tex. 84, 344 S.W.2d 863, 867 (1961), Turner v. Big Lake Oil Co. , 128 Tex. 155, 96 S.W.2d 221 (1936), and TDC Eng'g, Inc. v. Dunlap , 686 S.W.2d 346, 349 (Tex. App.—Eastland 1985, writ ref'd n.r.e.). These cases deal with the right to use the leased premises to dispose of salt water and do not grant ownership of the water to the mineral lessee. Contrary to COG's representation, any "core principle" underlying these cases has to do with the producer's obligation to responsibly dispose of salt water, not the producer's ownership of it. See Brown , 344 S.W.2d at 864 ; Turner , 96 S.W.2d at 221 ; TDC Eng'g , 686 S.W.2d at 347.
In fact, the parties’ recognition of water and "produced water" as being distinct substances from oil and gas—listing water along with oil and gas in the substances that may be gathered, stored, and transported under the ancillary agreements—indicates the parties recognized that water and "produced water" were separate substances from the oil and gas specifically granted by the leases themselves. Certainly, the parties could have included additional substances in the granting clause (as such were included in the ancillary agreements), if they had intended the additional substances that were allowed to be gathered, stored, transported, and even disposed of, were also meant to be conveyed to COG. See CKB & Assocs., Inc. v. Moore McCormack Petro., Inc. , 734 S.W.2d 653, 655-56 (Tex. 1987) ; In re Estate of Anderegg , 360 S.W.3d 677 (Tex. App.—El Paso 2012, no pet.) ; In re Choice! Energy, L.P. , 325 S.W.3d 805, 809 (Tex. App.—Houston [14th Dist.] 2010, no pet.) ; OXY USA, Inc. v. Sw. Energy Prod. Co. , 161 S.W.3d 277, 285 (Tex. App.—Corpus Christi 2005, pet. denied).
Additionally, I am not persuaded by COG's argument that the parties generally intended to convey anything and everything that came through the wellbore with the conveyed oil and gas. This "general intent" test has been applied when it is "not clear exactly what the term ‘minerals’ encompasses," and it supplies a presumption "that the parties intended the conveyance of only those substances which would allow them the full enjoyment of their respective estates." Schwarz v. State , 703 S.W.2d 187, 189 (Tex. 1986). The Supreme Court recognized this test as "merely a device for construing ambiguous conveyances." Id. Importantly, it also cautioned that, "[i]f there is an express conveyance of a specific substance, or some other controlling rule of construction indicating a different intent, we are not bound to follow [the] presumption." Id. ; see also Wilderness Cove, Ltd. v. Cold Spring Granite Co. , 62 S.W.3d 844, 848-49 (Tex. App.—Austin 2001, no pet.) ("In examining a deed containing a specific conveyance of a mineral interest, courts must strive to give effect to the intentions expressed in the document itself."). Here, specific substances were conveyed—oil and gas—yet another substance—water, which is a substance that must be specifically conveyed—was not likewise included in the operative language. I would conclude the "general intent" test does not apply.
2. The characterization of produced water
In my view, the majority's characterization of produced water as mere oil-and-gas waste does not automatically cause that substance to fall within the scope of the granting clause. Simply because water is produced from an oil-and-gas well does not necessarily change its character.
At times, the terms "produced water" and "salt water" have been used interchangeably. See Ambassador Oil Corp. v. Robertson , 384 S.W.2d 752, 760 (Tex. App.—Austin 1964, writ ref'd n.r.e.) (attorney and deponent used "produced water," "salt water," and "water" interchangeably, and the court did not distinguish between the two, referring to the substance as "salt water"); Exxon Corp. v. Train , 554 F.2d 1310, 1313 (5th Cir. 1977) (referring to "brine" parenthetically as "produced water"); American Petroleum Institute v. E.P.A. , 661 F.2d 340, 343 (5th Cir. 1981) (referring to "produced water" as "unsavory mineral water").
For example, the Supreme Court of Texas has previously addressed the ownership of saltwater produced from a mineral lessee's well. See Robinson , 501 S.W.2d at 866. In Robinson , the owner of the mineral estate used one of its non-producing oil wells to produce saltwater for the purpose of repressurizing the oil-bearing formation. Id. ; see also Robinson v. Robbins Petrol. Corp., Inc. , 487 S.W.2d 794, 796 (Tex. App.—Tyler 1972), rev'd , 501 S.W.2d 865 (Tex. 1973). The surface owner sued for damages, claiming the saltwater as his own. Robinson , 501 S.W.2d at 866. The mineral lessee countered that salt water produced from a well should be treated differently from fresh water, which had been held to be part of the surface estate. Id. at 867 (quoting Sun Oil Co. , 483 S.W.2d 808 (Tex. 1972) ). The Supreme Court used language applicable to the case at hand, stating as follows:
We are not attracted to a rule that would classify water according to a mineral
contained in solution. Water is never absolutely pure unless it is treated in a laboratory. It is the water with which these parties are concerned and not the dissolved salt.... [T]he water itself is an incident of surface ownership in the absence of specific conveyancing language to the contrary. And in our case the saline content has no consequence upon ownership.
Id. (emphasis added) (internal citation omitted).
Robinson makes it clear that not just freshwater, but even deeper, mineralized water produced from a well, belongs to the surface estate and is only transferred through a specific conveyance. Id. Based on Robinson , I see no distinction between subsurface water and produced water. Rather, if a mineral producer seeks to separate its portion of the product stream from a wellhead, the producer may do that (and I suspect it already does). That is, a producer is entitled to recover minerals granted under the lease from the product stream itself. But water by any name, even when mixed with other substances, still remains as water. The Supreme Court of Texas has not distinguished between different types of groundwater indicating that some water does not belong to the surface estate. And it has never indicated that a specific reservation is required to maintain water ownership rights, as the majority suggests the landowners should have done in this case. Following established Texas precedents, I would conclude that absent a specific conveyance of the groundwater estate, a portion of the product stream remained a part of the surface estate.
Subject to lease terms otherwise limiting the use of water, I believe the Court should have concluded that the accommodation doctrine applied such that COG was permitted a reasonable use of the produced water, but not its ownership. The accommodation doctrine balances the rights between the dominant and subservient estates, providing that the mineral estate owner has an implied right to use so much of the surface as is reasonably necessary to develop and produce its minerals, though it "must exercise that right with due regard for the landowner's rights." Coyote Lake Ranch , 498 S.W.3d at 55. In the absence of any lease language governing the ownership of produced water, I believe the accommodation doctrine applies under the circumstances. As an owner of the mineral estate, COG has the right to use the produced water as is reasonably necessary for its production of oil and gas, but it has no ownership rights to that estate. See id. ; Lightning Oil Co. v. Anadarko E&P Onshore, LLC , 520 S.W.3d 39, 50 (Tex. 2017).
3. The surrounding facts and circumstances
None of the leases define the terms "water" or "produced water." The majority concludes that ancillary agreements, regulatory definitions, and industry practices may all be consulted to determine the parties’ intent regarding produced water and the scope of the mineral conveyance. Contrary to URI's directive, the majority considers surrounding facts and circumstances to make the leases’ " ‘say what [they] unambiguously do[ ] not say’ " and " ‘to show that the parties probably meant ... something other than what their agreement[s] stated.’ " See URI, Inc. v. Kleberg County , 543 S.W.3d 755, 757 (Tex. 2018). By doing so, the Court concludes the mineral leases transferred not only the oil and gas produced from the land, but also the entire product stream. I disagree.
a. The timing of the "statutory framework"
Contrary to well-established authority, the majority classifies produced water as waste, not as water. Citing to statutory and regulatory definitions for "relevant context," the majority claims the Texas Legislature drew a "clear distinction" between produced water and groundwater. However, only the definition of fluid oil and gas waste found in § 122.001(2) of the Texas Natural Resources Code includes produced water in a list but does not otherwise define it. See TEX. NAT. RES. CODE ANN. § 122.001(2). Still, the majority recognizes that § 122.002 is not controlling being that it was adopted only after the signing of these oil and gas leases. Similarly, however, § 122.001 was added at the same time by the same legislative act. See id. §§ 122.001, .002. Certainly, then, this legislative "framework" provides no point of reference upon which the parties seemingly based their agreement.
b. The "regulatory framework"
The majority also determines that an operator's statutory duty to protect groundwater provides support for the proposition that the surface owner intended to surrender its ownership rights merely because the operator was legally bound to dispose of waste. I disagree.
The mineral lessee's duty to properly dispose of waste is typically dictated through three sources—contracts, statutes, and regulations. Until passage of § 122.002 of the Natural Resources Code —which the majority concedes does not apply and is inapplicable when a contract so provides—no statute conveyed ownership based merely on a duty to properly dispose of oil and gas waste. Further, the Railroad Commission's governance over such disposal also provides no authority to effectuate a transfer of property rights. See Nale v. Carroll , 155 Tex. 555, 289 S.W.2d 743, 745 (1956).
Here, I disagree that the regulatory framework plays any role in determining the ownership of produced water under these leases. I would conclude the regulatory framework did not convey title of the produced water to COG.
c. Industry practices
Finally, the majority also attributes an industry practice of operators processing, transporting, and disposing of oil and gas waste as a basis for lease interpretation. COG argues, and the majority agrees, that the development rights granted by the leases evidence an intent to transfer ownership of the produced water along with the oil and gas waste.
Without stating so, the majority's holding seems to treat this circumstance as one wherein the landowner has waived its rights to any water included in the produced oil and gas waste. But waiver requires an "intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right." Paxton v. City of Dallas , 509 S.W.3d 247, 262 (Tex. 2017). A party's actions in "allowing" a party to carry out its statutory, regulatory, or contractual duties with respect to waste does not necessarily reflect a waiver of ownership rights, as doing so is not unequivocally inconsistent with such ownership. See Chalker Energy Partners III, LLC v. Le Norman Operating LLC , 595 S.W.3d 668, 677 (Tex. 2020).
Here, the majority rewards COG for the "costs and risks" it undertook in disposing of oil and gas waste. It claims the parties only recently perceived such waste as having independent value. But none of this analysis is applicable here. Without doubt, water was not conveyed by the scope of the granting clauses of the leases at issue here, unlike the uranium transferred by the "other minerals" language included in the lease in Moser. See Moser v. U.S. Steel Corp. , 676 S.W.2d 99 (Tex. 1984). Here, the parties’ knowledge of the potential value of produced water was not irrelevant because of the holding in Moser. Rather, that knowledge is irrelevant because water, as a substance, was not expressly severed from the surface estate. And unlike the producer in Bowden , who undertook "costs and risks" to add value to its production by separating the components of the conveyed natural gas, COG did not voluntarily undertake anything—COG was both contractually and statutorily required to dispose of or otherwise deal with produced water in a manner that would not harm the surface estate or the environment generally. See Bowden v. Phillips Petro. Co. , 247 S.W.3d 690, 706 (Tex. 2008).
II. CONCLUSION
In sum, I disagree with the majority's consideration of surrounding facts and circumstances to interpret whether the leases conveyed produced water. Particularly in the oil-and-gas field, parties depend on courts "for continuity and predictability in the law," relying on principles pronounced by the Supreme Court of Texas. Wenske v. Ealy , 521 S.W.3d 791, 798 (Tex. 2017). Based on long established principles, I would conclude the oil and gas leases contain no express conveyance of water to COG. Instead, I would conclude the surface estate's water rights were conveyed to Cactus by the assignment of rights to produced water. Because the majority concludes otherwise, I respectfully dissent.