Foreshadowing a grim future for family weddings and funerals, Bell and Petsch v. Petch is a property dispute over five tracts of land in Gillespie County, Texas, in which siblings are the combatants. The events are less important than the takeaway: To win an adverse possession claim, the claimant must establish all six of the elements.

Adverse possession, the requirements

  1. actual and visible possession of the disputed property that is
  2. adverse and hostile to the claims of the owner of record title;
  3. open and notorious;
  4. peaceable;
  5. exclusive; and
  6. involves continued cultivation, use or enjoyment throughout the statutory period.

The events

The four “Disputed Tracts” are 160, 166, 11 and 17 acres each. A fifth, 118 acres, involved a conveyance by Jeannine (Bell) of her undivided half interest to Darrell (Petsch).

1975: Grandma Thekla dies and devises to Darrell an undivided half interest in the Disputed Tracts, subject to a life estate in Emil.

1976: Jeannine, at the ripe old age of 12, conveys the 118 acres to Darrell by deed.

1976: Grandad Emil conveys the 160, 166 and 11-acre tracts to Darrell by deed.

1979: Emil dies, Darrell acquires the 17-acre tract under Emil’s will.

2020: Jeanine and sister sue for judgment declaring that the deed to the 118 acres is void because she was 12 years old when she signed. Darrell, wanting it all, pleads limitations. The trial court grants summary judgment for Darrell that he acquired title to the Disputed Tracts by adverse possession, limitations bars Jeanine’s claim on the 118 acres, and declaratory judgment is an improper vehicle for adjudicating title (you knew that because you’ve been reading Energy and the Law for years).

The parties became cotenants of the Disputed Tracts when Emil died in 1979. Thus, the court reviewed the evidence in light of the heightened standard applicable to cotenants. A cotenant’s use of common property is presumed not adverse unless the cotenant repudiates his cotenant’s title. Repudiation must be evidenced by actions or declarations that clearly manifest intent to repudiate the cotenancy.

Upon Thekla’s death ownership of the Disputed Tracts was:

 Emil 50% fee, Emil 50% life estate, Jeannine 50% remainder.

In 1976 (after Emil’s deed to Darrell), ownership became:

 Darrel 50% fee, Darrell 50% life estate, Jeannine 50% remainder.

Upon Emil’s death in 1979 ownership became:

 Darrell 50% fee, Jeannine 50% fee.

No adverse possession by Darrell

Darrell asserted that his deed from Emil purporting to convey the entirety of the property in fee was a repudiation of the cotenancy between him and Jeanine. The court disagreed. First, Emil and Jeanine were not cotenants because her interest did not become possessory until Emil’s death. Second, Darrell’s deed was filed of record after Jeannine acquired the remainder interest from Thekla. Thekla could not impart constructive notice on Jeannine after repudiation. Recordation on a date after the other cotenants have already acquired their property interests does not put those cotenants on constructive notice that their cotenant claimed an adverse interest. Darrell failed to conclusively establish notice of repudiation of the cotenancy.

Limitations and Jeannine’s voidable deed

Responding to Jeanine’s challenge to the deed to the 118 acres, Darrell claimed the affirmative defense of three-year statute of limitations under Civil Practice and Remedies Code 16.024. This defense failed because Darrell could not prove every element of his adverse possession claim (See above). The parties continued to jointly use the 118 acres until at least September 2020.

Your musical interlude.

The question in Self v, BPX Operating Company is how to balance the Louisiana Civil Code Art 2292 principle of negotiorum gestio against Louisiana’s conservation statutes.  

When a tract of land is subject to a unit formed under La. R.S. 30:9(B) and 30:10(A(1) and the tract is not subject to a lease, the unit operator can sell the landowner’s share of production but must pay the landowner his pro rata share of “proceeds”.

The Selfs own unleased mineral interests that are in a forced drilling unit. BPX is the operator. The Selfs allege for themselves and for a class that BPX has been improperly deducting PPCs from their pro rata share of production. BPX has also been withholding amounts related to minimum volume commitments and capacity reservation fees. The district court granted BPX’s motion to dismiss, holding that the doctrine of negotiorum gestio provides a mechanism for BPX to properly deduct PPCs not otherwise covered by specific statutes.

Self contends that La. R.S 30:10(A)(3) requires BPX to pay on gross proceeds from the sale of production. BPX counters that “proceeds” is ambiguous and should be interpreted to mean net proceeds after deduction of PPCs. Regardless, 30:10(A)(3) is harmonized with the Louisiana Civil Code regime under the negotiorum gestio doctrine. The relationship between the parties is quasi-contractual under Louisiana law.

If negotiorum gestio applies, Art. 2297 allows reimbursement by a manager of another of all necessary and useful expenses. The gestor must act (1) voluntarily and without authority, (2) to protect the interests of another, and (3) in the reasonable belief that the owner would approve of the action if made aware of the circumstances.

The Selfs assert that BPX’s acts are not voluntary and without authority because it acts pursuant to a statutory duty and it acts to protect its own interests, not the interests of unleased mineral owners.

The Fifth Circuit determined that there is no controlling case law dealing specifically with the facts at hand and that it could not make a reliable guess as to the applicability of the doctrine. Thus, it certified to the Louisiana Supreme Court:

Does Louisiana Civil Code Art. 2292 apply to a unit operator selling production in accordance with La. R.S. 30:10(A)(3)?

Justice Dennis dissented, arguing that under 30:10(A)(3) a unit operator who sells an owner’s production under the authority of the statute cannot be a gestor because it acts with authority.  The majority disregarded the plain text of Art. 2292, he says. Rather than elaborate, we will wait for a definitive answer from the Louisiana Supreme Court.

Your musical interlude. Yes, there is music from North Louisiana after Jerry Lee.

Barkley v. Connally, a “bet-the-farm” case if there ever was one, invokes the merger clause, a basic principle of contract law. Clients and lawyers: Read this analysis so as to avoid boundless grief and disappointment for client and lawyer alike.

Jim Barkley, having undergone bankruptcy and nearing retirement, agreed to sell his farm to Connally, owner of an adjacent tract, if Jim and Ms. Barkley could buy back their residence and the 40-acre pasture across the road. Connally agreed. A Purchase and Sale Agreement was signed by all parties.  Connally was represented by a real estate lawyer and a bankruptcy lawyer. A merger clause in the PSA said:

This Agreement constitutes the sole and only agreement of the parties hereto and supersedes any prior understanding or written or oral agreements between the parties respecting the within subject matter. This expressly includes the Offer to Purchase submitted to the Seller on or about April 10, 2017 … ..

The “Offer to Purchase” was to buy back the family home.

The transaction closed. The Barkleys remained on the property and emailed to the Connallys their readiness to buy back the home place and pasture for $60,000, the agreed price. The Connallys responded that there was no enforceable agreement for the sale and they had no intention of doing so due to the Barkleys’ “recent behavior toward the Connellys” (gotta wonder what that was all about).

The Barkleys sued. The court granted Connally’s motion for summary judgment dismissing the Barkleys claims for breach of contract, trespass to try title and promissory estoppel. After a trial the jury determined that the Connnallys had not induced the Barkleys into entering the PSA through fraud.

The merger doctrine

The general rule is that the courts presume that all prior oral and written agreements are merged into a subsequent written contract. A written merger clause is essentially memorialization of the merger doctrine. When parties have entered into a valid written integrated contract the parole evidence rule precludes enforcement of prior or contemporaneous agreements that address the same subject matter and are inconsistent with the written contract.

The court found that the subject matter was the same as the written agreement and rejected the Barkleys’ assertion that enforcement of the agreement for purchase of the house was collateral to and not inconsistent with the PSA and thus was enforceable. 

A collateral agreement is one that is supported by separate consideration and that the parties might naturally make separately under the circumstances and would not ordinarily be expected to embody in the writing. The agreement to purchase the house was barred by the parole evidence rule.

Trespass to try title

The Barkleys did not assert any of the four methods allowed by the trespass-to-try-title statute and that claim was rejected.

Promissory estoppel as a claim for affirmative relief

The Barkleys’ promissory estoppel claim was denied. According to some Texas appellate courts, promissory estoppel can constitute the basis for a claim for affirmative relief, but in this one (the 7th Court in Amarillo), promissory estoppel is defensive in nature and not an independent cause of action.

Your musical interlude.

Parish of Plaquemines v. Northcoast Oil Co. is yet another remand of yet another of the 43 suits filed in state courts against a legion of oil and gas companies under the Louisiana’s State and Local Coastal Resources Management Act of 1978. The suits arise out of the defendants’ decades-long oil production activities on the Louisiana coast.

So far, the message seems to be: Producers, surrender to the jurisdiction of the state courts and trust in the wisdom of the well-intentioned citizen-jurors of the coastal parishes. You are not likely to find solace in the relative safety of the federal courts.

The decision is long and dense, including a tutorial on prior rulings. The long and short of it is that after being remanded repeatedly upon the failure of a variety of theories of removal jurisdiction, the defendants crafted a new one: World War II era oil production activities, conducted during a time of significant governmental regulation and oversight, allow for federal officer removal.

The removing defendants failed to show that they were acting pursuant to a federal officer’s or agency’s direction. They argued that at the very least they should be treated as federal subcontractors because, even though they had no contracts of their own with the federal government for oil production, at least Gulf Oil Corporation had contracts with refineries who had contracts with the federal government to deliver fuel used in the war effort. But the crude oil production was not under federal direction. The federal district court was not persuaded that the argument satisfied either the acting-under requirement or the related-to requirement for federal officer removal. Both must be satisfied for there to be removal jurisdiction.

Which leads to this query

They don’t teach metaphors in law school, and lawyer-bloggers are well-advised to delete their naval-gazing before publication. That said, here goes anyway: Some species of animals eat their young. Older male, king-of-the-jungle lions, for example, will devour young males in order to eliminate the competition (and to clear the decks for more “quality time” with the ladies).  One can rationalize the myriad suits against “Evil Oil” by anti-fossil fuel blue governments on the principle that Evil Oil competes with undependable but virtuous alternative energy, ergo Evil Oil must be destroyed by vexing litigation before hometown juries. I get it.

But in a state in which oil and gas production is so vital to economic prosperity, are these suits also “eating the young”? Will they chase off producers’ exploration dollars in favor of friendlier locales? From my corner of the oil patch, that’s what the legacy contamination suits have done.

On the other hand, coastal deterioration is real. Maybe the millions in potential recoveries will actually be put to work to save the wetlands that also drive prosperity. And maybe, as some believe, the producers have exploited the state like it was a third-world backwater and its time for payback. Here is a podcast from Baton Rouge NPR station WRKF that might answer the questions.

Your musical interlude is one way to look at it.

Can the Texas lessee perpetuate his oil and gas lease by “constructive participation” in wells drilled by another? Under the facts in Cromwell v. Anadarko E&P Onshore, LLC, the answer is no.

Cromwell and Anadarko’s wells

In 2009 Cromwell obtained the Ferrer and Tantalo leases covering small fractional interests in several sections. Anadarko owned working interests in the same sections. Before Cromwell obtained his leases Anadarko executed joint operating agreements with other working interest owners and was the operator. Cromwell asked for a JOA and to participate in Anadarko’s wells. Anadarko never responded.

Anadarko drilled the 75 – 26 –1 well, which paid out in August 2009. Anadarko sent Cromwell JIB’s for his share of the working interest and revenue checks. Cromwell paid the JIBs, including charges for a variety of operating costs. Anadarko netted Cromwell’s debts against his share of production proceeds in months when costs exceeded revenues. In letters Anadarko addressed Cromwell as a “working interest owner”. Anadarko claimed this was in error. 

The primary term of Cromwell’s leases passed in 2012 and 2014 respectively. Anadarko realized this but did not tell Cromwell, and continued sending JIBs and cutting revenue checks and communicating as if his leases were effective. Anadarko said this also was a mistake. Anadarko took leases from Ferrer and Tantalo in January 2017 and in March 2018 informed Cromwell that because it never received an executed well election the leases had expired and had been leased to “third parties”.

Cromwell sued for declaratory judgment, trespass to try title and damages alleging that his leases never expired because he constructively participated in drilling sufficient to perpetuate his leases and that he and Anadarko had formed a partnership. The trial court granted Anadarko’s motion for summary judgment.

Were Cromwell’s leases still valid?

Production had occurred in paying quantities and Cromwell participated in the costs and production. But Anadarko’s production could not be attributed to Cromwell. The court of appeals ruled that Cromwell was required to take some action of his own to cause production on the leased property to keep his leases alive despite the use of the passive voice in the habendam clauses that might indicate otherwise.

The costs Cromwell referred to as his “constructive participation” reflected his proportionate share of operating expenses ordinarily owed by a nonparticipating cotenant. Those costs were not indicative of the parties’ intent that Cromwell shouldered any risk or liabilities inherent in the operation of the well.  

Despite Anadarko’s reference to Cromwell as a working interest owner and to the existence of an operating agreement, the parties did not engage in conduct that would otherwise suggest they had a joint operating relationship. Cromwell’s course-of-conduct argument could not overcome the absence of an agreement to share in expenses of development and operation.

Anadarko treated Cromwell as if his leases had not expired after their primary terms lapsed, but the habendam clauses defined the terms under which the leases could be perpetuated. The leases terminated at the end of their primary term. The habendam clause was a special limitation, the failure which does not result in forfeiture.

Was there a partnership?

In a word, no. Of the five factors under the Business Organizations Code to determine whether there is a partnership the court accepted only Cromwell’s receipt of profits as proving a partnership. But this was equally consistent with Anadarko’s accounting to Cromwell as a cotenant.

Also, Cromwell’s evidence could not overcome the statute of frauds. Cromwell and Anadarko were cotenants, not partners.

Your musical interlude.

Co-author Katherine Sartain*

If you are scoring at home, count Permico Royalties LLC v. Barron Properties, Ltd., as a win for “floating” in the fixed-or-floating royalty battles. Permico, successor to grantors in a 1937 Deed for a tract in Ward County, argued that a mineral reservation was of a ½ floating royalty interest. Barron, successor to grantee and owner of the mineral estate subject to the reservation, claimed that the deed reserved a 1/16 fixed royalty. Grantors reserved:

“… a one-sixteenth (1/16) free royalty interest (being ½ of the usual 1/8th free royalty) … And the Grantors, …. shall be entitled to receive 1/16th of the oil and/or gas produced, saved and sold from said land, being ½ of the usual 1/8th royalty therein.”

In dueling motions for summary judgment the trial court denied Permico’s motion and granted Barron’s, ordering that Permico take nothing.

The double-fraction question and the usual doctrines

In reversing and rendering judgment that the deed reserved a ½ floating royalty, the court of appeals cited Hysaw v. Dawkins. Under the “legacy of the 1/8th royalty”, use of “1/8” has a special meaning. In deeds of that era the parties had an erroneous belief that a royalty in a lease would always be 1/8. The fraction was used as a placeholder for future royalties generally. It was “shorthand” for what the mineral owner believed was the entire royalty a lessor could retain under a mineral lease. It had no mathematical value.

Then you have the estate misconception doctrine recognizing that in that era mineral owners erroneously believed that they only retained a 1/8th interest in their mineral estate after leasing for a 1/8th royalty, citing Van Dyke v. Navigator Group.

Barron urged the court to reject the legacy doctrine, arguing that it is incorrect to presume that all mineral interest owners at the time believed that their royalty interest would always be 1/8. By the 1930s oil and gas leases existed providing for royalties other than 1/8. The court responded that Van Dyke shows continued reliance on the legacy doctrine.

Barron also argued there was no need for the legacy doctrine because there were no inconsistencies in the Deed that required harmonization of provisions. The Court responded: That is not true here, but even if so, Hysaw says the courts can use the doctrine even if there are no internal inconsistencies. Under the estate misconception doctrine the use of a double fraction created the rebuttable presumption that the parties intended to use the 1/8th as a placeholder for the grantor’s entire mineral estate.

Barron also contended that the court should ignore the double fractions as nonessential to the deed language, therefore to grantor’s intent, because the double fractions were in non-restrictive clauses.  The court rejected that assertion as taking the grammatical argument to an extreme.  Applying grammatical rules may be helpful in interpreting a deed, but the focus is still on harmonizing the entire deed.

The conclusion

If grantors had meant to reserve a fixed 1/16th royalty interest, there would have been no reason for them to use the double fractions in not one, but two clauses. The only way to give meaning to all of the Deed’s provisions was to apply the legacy doctrine and find that grantors’ use of the 1/8 fraction was a placeholder.

The Deed consistently demonstrated the parties’ intent to reserve a ½ floating royalty interest given its repeated use of the “usual 1/8 royalty” in the double fraction describing that interest.

Your musical interlude.

*Katherine is a rising 3L at Baylor School of Law and progeny of your author.

Co-author Katherine Sartain *

We begin with a document-drafting tip: When reserving an interest in minerals, before cutting and pasting from your old document that would be yellowed and dusty if it remained in its original papyrus format, lawyers and non-lawyers alike should consider Devon Energy Prod. Co. v. Enplat II, LLC. The Court was asked to determine whether a 1940 deed from Harris et al to Lopoo conveying a tract in Reeves County, Texas, reserved a cost-free royalty interest or a cost-bearing non-executive mineral interest.

The reservation was of an:

“… undivided one-sixteenth (1/16) of any and all oil, gas or other minerals produced on or from under the land above described. Lopoo …  shall have the right to lease said land for mineral development without the joinder of Grantors or their heirs and assigns, and to keep all bonus money, as well as all delay rentals, but when, if and as Oil, Gas or other mineral is produced from said land, one-sixteenth (1/16) of same, or the value thereof, shall be the property of Grantors,.”(emphasis ours)

Enplat, successor of Harris, sued Devon, successor of Lopoo, for a judgment declaring that Harris granted the entire mineral interest and reserved a 1/16 royalty interest. Devon counterclaimed saying that Harris conveyed a 15/16 mineral interest. On cross-motions for summary judgment the trial court granted judgment for Enplat; The deed reserved a fixed royalty interest. Devon appealed.

The result

The court of appeals reversed. The deed reserved a mineral estate shorn of all attributes but for the right to receive a royalty, if and when there was production.  

This deed did not use “in, on or under”, which indicates a mineral interest, not a royalty. However, a deed need not use the exact term to denote a mineral interest; it may instead use terms “of similar import.”

Emplat argued:

  • The language did not meet the “of similar import” standard because “produced on or from under” reflected the grantor’s specific intent to reserve a royalty interest after production.
  • Courts interpret “produced, saved and made available for market” as a royalty interest because they denote the grantor’s intent to reserve a post-production interest only.
  • “1/8th of all minerals that may hereafter be produced and saved on the land conveyed” was “akin” to a royalty interest.    

The Court acknowledged Enplat’s argument that  the last provision alone may denote a royalty interest, but that clause must be read with other portions of the document to determine the type of interest that was reserved.

The magic language historically associated with a post-production intent was not used. “Produced on or from under” is not the same as “produced, saved and made available,” and is not necessarily a royalty interest.

According to the Court, Harris specifically stated their intent not to strip themselves of the fourth attribute of their estate – the right to receive royalty payments (the first three being right to develop, right to lease, and right to receive the bonus) – because they specifically stated “but when, if and as Oil, Gas or other mineral is produced … ”  The deed as a whole indicated reservation of a mineral interest.

The Court distinguished a reservation with similar language in which “royalty” was used “no less than six times”. Here, the Harris grantors did not use the term once in describing the reservation.

Caveat: Don’t generalize from this post. Each case turns on the specific language of the reservation in light of previous decisions, and there are many.  

Your musical interlude. This is what the appellate court is for.

*Katherine is a rising 3L at Baylor School of Law and progeny of your author.

Unit Petroleum Company v. Koch Energy Services, LLC is another force majeure case arising out of winter storm Uri. Unlike a similar case, summary judgment was denied because, said the United States District Court,

The word “reasonable”, although not ambiguous, is a question of fact that must be answered by looking into the circumstances of the case at issue, including the nature of the proposed contract, the purposes of the parties, the course of dealing between them, and any relevant usages of trade.

The facts

Unit agreed to sell gas to Koch under a Base Agreement (the North American Energy Standards Board General Terms and Conditions Base Contract for Sale and Purchase of Natural Gas). Specific transactions were memorialized in Transaction Confirmations. The parties’ obligations were “firm”, meaning that either party may interrupt its performance without liability only to the extent that performance is prevented by events of force majeure.

The operative portion of the clause was, “Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of force majeure and to resolve the event or occurrence once it has occurred in order to resume performance”.

In January 2021 Unit informed Koch that in February it would sell 25,000 MMBTU/day as a base load and up to 6,500 as a swing option. Then came Uri, which damaged Unit’s wells. Unit alerted Koch that it was declaring force majeure, explaining that Uri had reduced gas supply such that it could not fill Koch’s order. Koch rejected the declaration insisting that Unit perform by either buying back its contract obligation or buying gas on the spot market for Koch. Unit did neither. During this time Unit delivered gas to two other purchasers with whom it had interruptible contract obligations.

Koch bought spot gas for substantially greater sums for its spot gas and the next month withheld $1.3 million from Unit as cover damages and invoiced Unit $5.1 million for gas that it purchased on the spot market.

Arguments

Unit argued that because the storm was a qualifying force majeure event it had no obligation to buy gas on the spot market or buy back its obligation, arguing that to require Unit to either buy spot gas or buy back its obligation would effectively eliminate the force majeure clause.

Koch responded that there were fact questions precluding summary judgment, such as whether the storm caused Unit’s nonperformance and whether Unit undertook reasonable efforts to avoid the effects of the event. Koch also argued that industry practice requires the seller to either buy back its obligation or buy gas on the spot market during an event such as Uri and that Unit should have allocated to Koch gas that it sold under interruptible contracts.

Result

Summary judgment denied. Whether a particular gas allocation was fair and reasonable was a fact issue. The experts disagreed on what activities were reasonable in the context of “resonable efforts”. A jury could disagree both as to whether Unit’s gas allocation waa fair and reasonable and whether Unit exerted reasonable efforts to avoid the effects of the force majeure event.

Your musical interlude.

Davenport v. EOG Resources, Inc. is an appeal of a temporary injunction. The title of this post tells you the result.

Davenport owned four tracts comprising 5,000 acres in Webb County that were originally part of a larger tract burdened by the 1967 Garner oil and gas lease. EOG has operated the lease since 1999 and its chief point of entry had been the Krueger Road gate on the east side of the ranch. In 2022 Davenport and EOG negotiated a water purchase agreement allowing a large frac pond and for EOG to purchase fresh water and have the right of ingress and egress on designated roads for the purpose of taking the water.  

EOG informed Davenport of its plans to drill new wells and to access the ranch from the west via a new gate using a new road. Davenport objected and sued, arguing that EOG already had access to the proposed sites via Krueger Road, and if a road was needed there was a better route.

EOG’s witnesses at the temporary injunction hearing testified:

  • The unpaved Krueger Road with its four wooden bridges and below-grade water crossings could not support the heavy equipment needed for its planned nine 12-well pads and associated production facilities.
  • EOG had been accessing the Garner lease from an adjacent ranch north and west of the Davenport Ranch.
  • EOG planned new roads would run primarily east-west across the northern portion of the ranch.
  • Irreparable injury would occur because of unrecoverable loss of hydrocarbons based the delay in offsetting production.

Davenport’s witnesses testified:

  • EOG did not express any concerns about Krueger Road
  • EOG had been running large trucks and other equipment over that road and the wooden bridges with no problem.
  • EOG’s planned route for the new road would damage a new asphalt road and waterlines running across his property.
  • The new entrance is visible from his home, and
  • He was concerned about the safety of his children from passing vehicles.

Davenport argued that in the water agreement EOG agreed to use the Krueger Road gate. EOG responded that the agreement pertained only to activities in getting water from the frack pond and relied on its pre-existing rights of access under the Garner lease.

The trial court found that Kreuger Road was not capable of sustaining EOG’s operations and enjoined Devonport from interfering with EOG’s access to the ranch. The status quo ante was EOG’s previously unhindered access to the ranch for its oil and gas operations.

The law

The purpose of a temporary injunction is to preserve the status quo of the litigation’s subject matter pending a trial on the merits. To prevail on an application three elements must be pled and proven:

  • a cause of action against the defendant
  • a probable right to the relief sought, and
  • probable imminent and irreparable injury in the interim.

The court of appeals cannot overrule a trial court’s decision unless the trial court acted unreasonably or in an arbitrary manner without reference to guiding rules or principles. That is a high hurdle for any appellant.

EOG proved all three elements: its cause of action under the oil and gas lease, a probable right to recover because the trial court gave greater weight to the credibility of EOG’s witnesses, and EOG needed to timely develop planned facilities and forcing it to access the ranch through the Krueger Road gate would delay or deny development which would harm future production, the reservoir damage could be permanent, and hydrocarbons could be irretrievably lost. Thus, damages would be difficult if not impossible to calculate.

Your musical interlude. Jimmy Buffet RIP.

Co-author Stephen A. Cooney

In Cactus Water Services LLC v. COG Operating, LLC., a divided Texas court of appeals answered the question this way: The oil and gas producer prevails over the purchaser of the surface owner’s right to own and sell produced water.

The majority discussed the composition of produced water. To be scientific, it’s got a bunch of nasty s$%^ in it that needs to be gotten rid of. But recent water treatment technologies have made what was once a cost for operators into a new industry in which treated wastewater can be sold back to operators.

The contracts

Along with its rights under oil and gas leases, COG has agreements with surface owners giving it the right to gather, store and transport oil and gas waste, lay lines on the surface for freshwater and produced water, and lay pipelines for transportation of oil and gas, produced water and other oilfield-related liquids or gases. Under the leases COG is not allowed to sell produced water to third parties for off-premises use.

The surface owners granted Cactus Water the right to own and sell all water produced from oil and gas wells on the property, defining water as all water produced from geologic formations.

COG sued for declaratory judgment that it has the sole right to the produced water by virtue of its leases and surface use agreements and common law. Cactus Water counterclaimed that it had ownership of produced water under its own agreements.

The court

The regulatory scheme governing handling and disposing of produced water includes these provisions:

  • Texas Natural Resources Code 91.1011: oil and gas waste includes salt water and other liquids.
  • TNRC 122.001(2): Fluid oil and gas waste is water containing salt or other mineralized substances from hydraulic fracturing, including flowback water, produce water, etc.
  • Water Code 27.002(6): Oil and gas waste includes saltwater, brine and other liquid or semiliquid waste material.
  • 16 Texas Administrative Code 3.8(a)(26): Oil and gas waste includes saltwater, other rmineralized water and other liquid waste material.
  • Water Code 27.002(8): Freshwater means water having properties that make it suitable for beneficial use.
  • Water Code 35.0029(5): Groundwater is water percolating below the surface.
  • 16 TAC 3.8(a)(29) Surface or subsurface water is groundwater, percolating or otherwise.

The majority concluded that in the regulatory lexicon, produced water cannot be groundwater. There is a clear distinction in the law between the two. And industry practice characterizes produced water as oil and gas waste rather than groundwater.

Given the legal framework, produced water is categorized within the former and places the burden of safe disposal on operators. For years operators have had the rights and duties associated with processing, transporting, and disposing of oil and gas waste, including produced water.

COG’s leases were executed before the parties saw produced water as having value. The majority concluded that parties’ knowledge of the value or even the existence of a substance at the time a conveyance ia executed is irrelevant to its inclusion or exclusion from a grant of minerals.

The dissent thought otherwise:

  1. Water recovered from operations was not conveyed by the leases’ granting language. It is well settled that groundwater is part of the surface estate that can be severed and conveyed similar to the mineral estate.
  • Characterizing produced water as waste does not automatically make it subject to the granting clause in the leases. Under case law, even deep, mineralized water produced from a well belongs to the surface estate and is only transferred by specific conveyance.  “Water by any name, even mixed with other substances, still remains water.”
  • The Texas Supreme Court “has not distinguished between different types of groundwater indicating that some water does not belong to the surface estate.”
  • The regulatory framework and industry practice should have nothing to do with ownership of produced water. Just because an operator has a duty dispose of this waste does not mean it has ownership.

Stay tuned. This debate is not over.

Your musical interlude.