Posted by Oil is Not the Only Multi-Horizon Resource Play in the Permian Basin
Oil is not the only multi-horizon resource play in the Permian Basin. Brackish groundwater also increasingly offers landowners a chance to make money from water sales to the oilfield and other consumers while preserving the precious Ogallala Aquifer and other freshwater layers under their land. [1] Imagine the following scenario:
Dry conditions are hitting Sarah’s ranch in Gaines County, TX hard. The drought has slashed cotton yields and forced her to sell half of her once formidable cattle herd. Compounding matters, the Ogallala Aquifer under her ranch is depleting fast, and many wells are becoming less productive and spit a bubbly, air-infused water. Sarah cannot bear the thought of selling a ranch that has been in the family for 100 years and must rapidly identify and monetize other assets the ranch might have. Her father sold the ranch’s minerals long ago, but another asset located deep underground just might save the family’s ranch: deep Santa Rosa brackish water for which oilfield users will pay her more than $0.25/barrel.
Brackish groundwater is rapidly becoming an important industrial commodity in the Permian Basin. It is abundant and using it avoids competition for scarce freshwater, thus enhancing the oil industry’s social license to operate. Indeed, fracing a long-lateral well in core parts of the Permian Basin may require as much as 350,000 bbl of water, according to FracFocus data. Completing 400 of these wells uses nearly as much water as the City of Midland does in a year. And that figure would equal only a small portion of the more than 7,700 oil wells that were completed during 2015 in Texas RRC District 8, which covers many of the most productive areas of the Permian and Delaware Basins.
As is often the case, the law trails behind developments on the ground and industry participants have worried about the parameters of brackish water ownership in Texas, with one prominent executive noting that “I caution people when they’re planning on using a lot of brackish water and Santa Rosa-type water. Ownership will be an issue going forward. I think people are looking at who owns brackish water; it’s a bit of a gray area right now.”
The caution of certain industry participants notwithstanding, brackish water ownership is in fact much clearer under Texas law than many potential users have thus far believed. Based on existing statute and caselaw, as well as actual practical treatment of brackish water in deals done so far, there is in fact a robust brackish water estate under Texas law. Being able to legally defend the existence of this estate is very important for two core reasons. First, it enables landowners to maximize the economic value of their tracts via lease or sale of brackish water without jeopardizing their ownership of the surface.
Second, courts needing to adjudicate disputes over a severable brackish water estate would be able to tap into a decades-old, richly developed body of split estate jurisprudence capable of providing guidance under numerous scenarios. This in turn would reinforce the water’s economic value by increasing legal predictability and reducing a fundamental risk factor that might otherwise lead potential investors to unduly discount the resources’ value.
Texas Law Supports Brackish Water Ownership
- Legal Support for Surface Owner Ownership and a Brackish Water Estate
Texas law clearly affirms that groundwater is a form of real property that goes with the surface unless severed or otherwise reserved. Edwards Aquifer Auth. v. Day, 369 S.W.3d 814, 832 (Tex. 2012); Tex. Water Code Ann. § 36.002. As such, the core question is whether the law will also accord brackish water the same status. A step-by-step walkthrough strongly suggests that the answer is “yes”, the law treats brackish groundwater the same as it views less saline water such as the Edwards Aquifer waters that Day was litigated over.
- Brackish water pumped from a well is groundwater. The Legislature defines groundwater as meaning “water percolating below the surface of the earth.” Water Code Ann. § 36.001. Texas courts have long held that underground water capable of being obtained via a well is “percolating.” Texas Co. v. Burkett, 117 Tex. 16, 29, 296 S.W. 273, 278 (1927).
- Groundwater is owned as real property in Texas. The Legislature “recognizes that a landowner owns the groundwater below the surface of the landowner’s land as real property.” Water Code Ann. § 36.002 (West). So brackish water in Texas—unless otherwise conveyed—goes with the surface and is owned by the surface owner as real property.
- Texas law does not distinguish between groundwater types based on salinity or depth. Neither Day nor the Texas Legislature make any ownership distinction based on the salinity or potability of groundwater under a tract of land. To boot, none of the signature Texas groundwater cases leading up to Day—a case line more than 110 years old—distinguishes between “fresh” water and more saline waters.
The one Texas Supreme Court case that did focus on water salinity as a potential determinant of groundwater ownership delivered a clear message: salinity bore “no consequence upon ownership.” Robinson v. Robbins Petroleum Corp., Inc., 501 S.W.2d 865, 867 (Tex. 1973). And in this case, the water in question was produced from a deep oil & gas bearing formation, a much more extreme end of the hydrogeological spectrum than the brackish aquifers found in many parts of Texas. Despite the fact that the water was produced from a converted oil well, the Court nonetheless determined that the water was “an incident of surface ownership in the absence of specific conveyancing language to the contrary.” Id. The Robinson Court pointed out that In essence, highly saline produced water from a deep layer (even an oil & gas bearing one) was just another form of groundwater.
The bottom line is that brackish water appears to enjoy the same status as less-saline groundwater. This in turn broadly supports the idea that brackish water under a tract is part of the groundwater estate and should give comfort to those who might seek legal re-assurance that they can lease or sell brackish water from under their land.
- What Parties Are Doing in Practice With Brackish Groundwater
Many parties have long assumed that they owned the brackish water under their tracts and operated accordingly. The author has reviewed multiple water lease and sale agreements from the Permian Basin and Panhandle that specifically reserved portions of the groundwater estate based on depth and/or potability. These agreements involved sophisticated sellers, including University Lands and a large independent cattle feeder. The contracts I reviewed date back as far as 1969, so the view that specific groundwater layers may be reserved (and are thus severable sub-portions of the groundwater estate) has decades’ old historical roots.
More recently, STW Resources has leased Capitan Reef brackish water rights from the City of Fort Stockton and also reached royalty agreements with ranchers for the sale of brackish groundwater in Upton County. Recent developments in the Permian Basin—Texas’s most active brackish water marketplace—illustrate the two fundamental pathways presently dominating brackish water use.
First, some E&P operators are investing in large-scale proprietary water supply systems that allow them to blend treated produced water, reclaimed water purchased from cities, and brackish water from the massive Santa Rosa Aquifer in order to conduct fracing operations without competing for scarce local freshwater supplies. Second, parties are selling brackish water to third-party vendor/treaters such as STW, who are contracting with local landowners to lease brackish groundwater rights and sell treated brackish water to oilfield customers.
My sense is that certain E&P operators who have built large proprietary water handling systems with excess capacity would, under the right conditions, consider selling access on their systems to third party suppliers and buyers. Low oil prices have obscured this possibility over the past 18 months, but it is one with real merit, since it offers infrastructure situated near potential sources of supply and consumers, would allow the E&Ps to monetize excess system capacity, and lower the capital barrier to entry for market participants who might otherwise not be able to fund system infrastructure footprints that cost tens of millions of dollars.
Brackish water has made deeper inroads into the Texas oilfield water supply picture in recent years. Concerns over drought and social license to operate are driving operators to find ways of weaning themselves off of freshwater, particularly in the arid Permian Basin, where intense oil & gas activity levels can strain relations with landowners and other parties who perceive industry as a competitor for water supplies.
Texas law strongly supports a severable brackish water estate and brackish water sales offer a potential windfall for ranchers and farmers in the Permian Basin who otherwise could not have made full use of the water in their agricultural operations (because they would have had to dilute it with freshwater) and also could not have sold it to cities without expensive desalination.
Greater oilfield needs, drought, technological advances, and better understanding of the industrial-scale groundwater resources underlying many parts of Texas are driving the growth of an increasingly dynamic market for brackish groundwater. The next analysis in this series will discuss the prices brackish groundwater is fetching in various transactions across Texas, which will help gives landowners a baseline sense as to what their resources could be worth.
**This analysis in no way, shape, or form, constitutes legal advice nor does it create any type of attorney-client relationship. Parties seeking legal advice or representation should contact the author directly.**
[1] In Texas, brackish water is often defined as “water containing total dissolved solid (TDS) concentrations of between 1,000 and 10,000 milligrams per liter (mg/l).” For comparison, seawater typically has a TDS of at least 35,000 mg/l.
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