International Battery Metals Ltd (IBATF)

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Recent legislation in Texas to promote the recycling of water produced from oil and gas operations are steps in the right direction but may create as many problems as they fix. As technology improves, our population continues to grow at an unprecedented pace, and our water supplies remain limited, recycling of water is becoming vital. At issue is the ownership of, and with it the right to profit from, produced water.

A measure passed by the 2013 Legislature (HB 2767, enacting new Section 122 of the Natural Resources Code 3) and then updated in 2019 (HB 3246, amending Section 122.002 3) provides that any party that takes possession of produced water to treat it for a subsequent beneficial use takes title to that water.

But wait!

Doesn’t produced water belong to the surface owner? Decisions by Texas courts strongly suggest that is the law, and if operators or re-cyclers are making money off that water, even though it has always been viewed as waste to be disposed as a bothersome component of oil and gas production, surface owners will want compensation.

It is well established in Texas that groundwater is part of the surface estate, owned by the surface owner as a vested property right. It is just as well established that mineral owners and their lessees have the implied right to use as much of the surface estate, including groundwater, as is reasonably necessary to extract and produce oil and gas. Along with that duty is the obligation to dispose of the waste that is the byproduct of production. If part of that waste, i.e., produced water, can be sold by the operator for independent economic gain, surface owners will likely have something to say about it.

It will be interesting to see how this tension plays out, either at the courthouse or reviewed again during the next legislative session that begins in January 2021.

For a more detailed discussion of this timely topic, see the Gray Reed Client Alert prepared by Stephen. 27

https://www.mineralrightsforum.com/t/lithium-lease-bonus-and-royalty/73686/5