One of the major hurdles when it comes to produced water management has always been ownership. Who owns the water? There are some updates on this front, as well as other news we will cover. But first, let’s talk about water ownership.
With the development of hydraulic fracturing, a new industry developed for onshore produced water management. Most of this produced water went to disposal wells. As the industry matured, and the pressure increased to reduce freshwater use in well completions, it led to the recycling of produced water. Increased recycling led debates about the value of produced water, which led to ownership issues. Does the surface rights owner or the mineral rights owner own the produced wate? Of course, this was never an issue when produced water was considered a waste product, but recycling led to discussions of beneficial reuse and potential increased value for produced water, and the ownership issue boiled to the surface.
Cactus Water Service, LLC vs COG Operating, LLC. This was partially resolved in Texas on Sept. 1, 2019, when the Texas Legislature passed legislation that extended ownership to whomever took title to recycle, treat or beneficially reuse the produced water. This does have some limitations, but that is the general idea. This, of course, doesn’t apply to agreements that were executed before Sept. 1, 2019.
This resulted in a new challenge in the case of Cactus Water Services, LLC v. COG Operating, LLC. COG Operating, as the mineral rights owner, won the initial case, as it was determined the produced water belonged to the mineral rights owner. This case, of course, ended up in the Texas Supreme Court. The good news is that the Texas Supreme Court supported the original rulin,g and the produced water ownership stayed with the mineral rights owner. This will likely become precedence for other cases when produced water ownership comes into question.
Colorado produced water recycling moves forward. This is good news for recycling, but there are other updates to further encourage more recycling. In Colorado, recent legislation requires oil and gas operators to start reporting their water use, including produced water recycling, commencing on Sept. 1, 2023. The act also requires that new rules be adopted, restricting freshwater use and increasing recycling of produced water by Dec. 31, 2024. The act also forms the Colorado Produced Water Consortium within the Department of Natural Resources. This consortium will be responsible for making recommendations on produced water recycling and reuse, and develop guidance documents and best practices relative to produced water management. This act was approved on June 7, 2023. This should increase the recycling of produced water in Colorado, something that has been fairly limited in the state up to now.
Oklahoma takes action. in Oklahoma, they took the “carrot” approach—instead of coming up with recycling mandates, they developed a different way to encourage recycling. The Oklahoma Corporation Commission announced proposed rules that include produced water recycling. Under these new rules, the use of recycled produced water for well completions can reduce the Gross Production Tax. The exemption from the Gross Production Tax is a function of the percentage of recycled water used for well completions. More good news for produced water recycling—in the Permian, there has been an economic reason to recycle besides the good ESG story, but in other shale plays, the economic incentive isn’t always there. So, these regulatory actions are developed to help push recycling of produced water.
Not just recycling gets a boost. Another important development to consider is the development of the Texas Water Fund. This fund was developed through a group of legislative pieces, including Senate Joint Resolution 75, Senate Bill 28, and SB 30. This includes capitalizing the Texas Water Fund with $1 billion. The battle isn’t over here, as this fund still requires voter approval this coming November. Although this fund is designed to expand infrastructure and repair existing infrastructure, it has requirements for new water sources. Those sources include desalination and produced water recycling. Let’s keep our fingers crossed that the Texas Water Fund gets voter approval this November; so, spread the word, vote “Yes” on The Texas Water Fund.
The Texas Water Fund will be managed by the existing Texas Water Development Board, a state agency responsible for financing infrastructure projects. By taking an existing program that is working, it eliminates some of the administrative problems that new agencies typically have upon start-up. I expect that beneficial reuse projects, using produced water, may have a new advocate, especially when considering how difficult it is to find new water sources. But Texas has a significant one in produced water ready to go. So, if Texas voters support the Texas Water Fund, it gets its $1 billion down payment and is ready to go.
There definitely are some exciting things happening in the world of produced water. The question is whether we will see further legislation or incentives, as seismicity continues to be pervasive in the Permian basin. It will be interesting to see whether the “carrot” in Oklahoma increases recycling more than the “stick” approach in Colorado. Which do you think will provide the greatest incentive?
The future is bright. The reason that some of this recent news is so exciting, and necessary, for oilfield water management is we are transitioning from produced water as a waste to a resource, and it will have an ever-increasing value as a resource, as we move from recycling to beneficial reuse. Although we still have regulatory hurdles to overcome, produced water ownership has turned from a murky proposition to a much clearer one today.
Additionally, you have potential funding sources becoming available, and I still believe the development of water markets will help make drought a thing of the past. To further encourage water markets is the concept of net water positivity. You have major corporations making pledges to become net water positive, which means they will offset their use of water. What other way can you offset water use than beneficially reusing produced water?
I see a day in our future where, like the ever-growing carbon offset market, we will have a water offset market that creates regional values for water and provides the incentive to create new water sources from produced water. And, all of this new legislation is just taking us closer to that day. I can dream, can’t I? See you next column.
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