Cactus Water Services, LLC v. COG Operating, LLC ( 2023 )

COURT OF APPEALS
EIGHTH DISTRICT OF TEXAS
EL PASO, TEXAS
CACTUS WATER SERVICES, LLC, § No. 08-22-00037-CV
Appellant, § Appeal from the
v. § 143rd District Court
COG OPERATING, LLC, § of Reeves County, Texas
Appellee. § Cause No. 20-03-23456-CVR
DISSENTING OPINION
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
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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
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stream” (of which produced water is only a part), 1 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.
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
1
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.
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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.”).
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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. 2
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
2
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, 344 S.W.2d 863, 867 (Tex. 1961), Turner v. Big Lake Oil Co., 96
S.W.2d 221 (Tex. 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.
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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.
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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. 3
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).
3
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”).
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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).
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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.
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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, 289 S.W.2d 743, 745 (Tex.
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
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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
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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.
GINA M. PALAFOX, Justice
July 28, 2023
Before Rodriguez, C.J., Palafox, and Soto, JJ.
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