Ranchers’ Rights to Use, Sell and Restrict “Their” Water In a prior article concerning the negotiation of key issues in an oil and gas lease from the perspective of the ranch owner, I wrote “A Lessee [oil company] should not be allowed the unrestricted right to use surface water without the consent of the Lessor [ranch owner]. Without providing that such rights are restricted, a Lessee can drain stock ponds, drill wells, dam creeks, etc.” Eggleston, Top Ten (Or More) Issues to Consider Regarding the Rural Oil and Gas Lease, 52 REAL ESTATE, PROBATE, AND TRUST LAW REPORTER 38 (May 2014). A reader replied, “There is a major flaw in the article . . . Landowners do not own surface water. The state does. The article indicates the mineral owner owns surface water and should address its use in the lease.” My immediate reaction was a defensive one until I considered the author of the comments who is imminently qualified to critique any article of a legal nature referencing Texas water law and landowner water rights. Nevertheless, I stand by what I intended to communicate in the article (that landowners should consider restrictions on the lessee’s use of all kinds of water on or about the property), though the critique is not without merit. I also submit that the line between “surface water” and “groundwater” (already fuzzy at best) is always under attack and the ranch owner and their counsel should be alert to encroachments on the rights of landowners and “their” water. It has not been long since an author of an article appearing in Texas Parks & Wildlife Magazine stated, “In a practical sense, the surface owner does not actually own the water until they capture it.” Kaiser, Who Owns the Water? A Primer on Texas Groundwater Law and Spring Flow, Texas Parks & Wildlife (July 2005). Elsewhere, he has stated, “The landowners do not own the water but have a right only to pump and capture whatever water is available, . . .” However, a few paragraphs later he made the following statement, “From an ownership perspective, Texas groundwater law is simple and straightforward: Groundwater is the private property of the owner of the overlying land.” Kaiser, Texas Water Law, TEXAS WATER (2005), www.texaswater.tamu.edu/water-law.com. He has also recently predicted that the state legislatures will change the rules so as to “not let the cities go dry” and the advantages held by farmers to their groundwater will be changed by statute. See Hill, Farmers vs. Cities in the War for Water, MARKETPLACE (April 11, 2013) www.marketplace.org/node/86861. All Texans should be grateful for the efforts of the foregoing authors and others to educate, inform and warn us of the urgency of water care and conservation. However, it is the author’s opinion that the status of ownership rights as to groundwater has been more well-settled than the above published statements suggest, not only after a number of cases since these statements were published, but for well over 100 years. Not surprisingly, a number of such authors have also argued for significant restrictions on the Rule of Capture (the right of the surface owner to capture all of the water below his land and more fully discussed below). They have opined that under that rule, “Texas springs will continue to go dry.” As has been written, “Discussions about water are anything but dull.” Page 1 This brief article intends to offer a primer for the lawyer representing farmers and ranchers as to what ownership rights his or her client has in the various types of water found on or under their property and whether providing for restrictions on the use of such water, regardless of who owns it, is warranted in various types of contracts involving farms and ranches, particularly oil and gas leases. “State Water” (Surface Water) Texas law is abundantly clear on who owns “surface water.” This long held rule is codified in the Texas Water Code (the “Code”). However, the Code doesn’t even use that term. Section §11.021 of the Code, under the heading “State Water,” provides that “(a) The water of the ordinary flow, underflow and tides of every flowing river, natural stream, and lake, and of every bay or arm of the Gulf of Mexico, and the storm water, floodwater, and rainwater of every river, natural stream, canyon, ravine, depression, and watershed in the state is the property of the state.” Section 11.021 goes on to provide that any water imported from out-of-state to be used in this state and which is transported through the beds and banks of navigable streams of the state also belong to the state. Water running across the surface of land that is not in a “bed and bank” environment becomes “state water” once it reaches a watercourse. This would include run-off from rain, melting snow and other water originating from sources other than typical watercourses. It is also seems clear that water that has not yet reached a watercourse is not state water and is presumed to be “groundwater” (defined hereinbelow). The foregoing statutory declaration rests on two fundamental maxims. The first is that the state of Texas holds title to the beds and waters of all navigable bodies of water. As a condition of entry into the union, Texas retained title to its vacant and unappropriated public lands lying within its limits. According to the Texas Supreme Court, the “rule has long been established” in this State that “the State is the owner of the soil underlying the navigable water, such as navigable streams, as defined by statute, lakes, bays, inlets and other areas within the tide water limits within its borders.” City of Galveston v. Mann, 135 Tex. 319, 142 S.W.3d 1028, 1033 (1940). The boundaries of the adjacent land end at the water’s edge. Consequently, it is common for the boundaries of private land abutting a navigable body of water to adjust from time to time. The additional underpinning for this declaration of ownership in the Code is that the state is to protect the public interest in scarce natural resources. Section 11.0235 says that the waters of the state “are held in trust for the public.” The Texas Legislature has declared that maintenance of the biological soundness of the state’s rivers, lakes, bays, and estuaries is of great importance to the public’s economic health and general well-being. TEX. WATER CODE § 11.0235(b). In summary, water flowing through a “watercourse” (having a bed and bank, a permanent source and supply, and a current) is not owned by the landowner of the land over or alongside which such watercourse passes. In the 1960’s, the Texas legislature severely restricted most “riparian rights” of landowners who owned land adjacent to rivers and streams. It implemented a Page 2 permit system requiring anyone wishing to use surface water to apply for a permit for “water rights.” TEX. WATER CODE § 11.022 et seq. Such permitting is overseen by the Texas Commission on Environmental Quality (the “TCEQ”). The TCEQ also has broad authority concerning the waters owned by the state of Texas including the right for any of its members or employees to enter any person’s land, natural or artificial water for the purposes of making an investigation helpful to the TCEQ in discharging its duties, the breadth of which duties are within the discretion of TCEQ’s executive director. Use of “state water” requires either an application to and approval by the appropriate state agency (the TCEQ) or the satisfaction of an express statutory exemption to the licensing or permitting requirements. To lawfully divert, store or use the waters of the state for any purpose, a water right (a right appropriation) must first be obtained from the state unless the use is statutorily authorized as an exempt use. It is illegal to “take, divert or appropriate” state water for any purpose without authorization. Civil penalties may be imposed for each day of unlawful use. Permission to use, sell or buy state water is evidenced by a TCEQ permit or another certified authorization or filing regarding the use of such water. Tex. Water CODE §§ 11.081 et seq. The inquiry doesn’t stop here. It is equally important to define the other “types” of water, determine who owns it, what rights they have in it, and what proactive steps they must take to protect such rights. “Groundwater” (Percolating Groundwater) Water below the surface of the land is typically called “groundwater.” Section 36.001(5) of the Code defines “groundwater” as water “percolating below the surface of the earth.” It is frequently brought to the surface using water wells. It may flow to the surface through springs. It is located between subsurface soil, rocks and crevices. Thus, it is said to “percolate,” i.e., pass through, trickle or diffuse through the subsurface of the land. There are several other types of water found “under the surface.” These include (a) underground streams in defined channels (which are treated the same as water in surface watercourses), (b) underflow of a water course, that is, surface water periodically flowing underground through sand or gravel in or beneath the bed of a stream, yet still constituting part of the surface flow of the stream, (c) water which has been allowed to sink into the ground, thus regardless of its prior character, it thereafter is considered percolating groundwater, and (d) artesan water confined underground in a pressurized environment, i.e., a geological trap, that is accessed through well casing and the natural pressure of the formation. Artesan water falls under the umbrella of “groundwater” and is generally subject to the same principles. However, there are statutory restrictions on its use, including requirements for reporting, maintaining records and obtaining TCEQ approval for producing such water. There are also restrictions on waste and producing artesan water containing dangerous minerals and substances, as well as minimum standards for casing and capping such wells. Page 3 Groundwater belongs to the owner of the land (i.e., farm or ranch) beneath which it lies. Edwards Aquifer Authority v. Day, 369 S.W.3d 814, 832 (Tex. 2012). See also Ellif v. Texon Drilling Co., 146 Tex. 575, 210 S.W.2d 558 (1948). Despite pronouncements by politicians, water activists, and newspaper editorialists, it is the law of Texas that owners of the surface of their real property also own the groundwater underlying their property, the same as he or she holds the rights to an underlying, unsevered mineral estate. Jones and Little, The Ownership of Groundwater in Texas: A Contrived Battle for State Control of Groundwater, 61 BAYLOR L.REV. 578, 582 (2009). This has been the law of Texas since Houston & Texas Central Railway Co. v. East, 98 Tex. 146, 81 S.W. 279 (Tex. 1904). Given the choice between granting the surface owner the absolute right of ownership of the underlying groundwater or only the right to a reasonable use of such water, the Supreme Court in East clearly chose the principal of “absolute ownership.” The Code also confirms this principal of absolute ownership. Section 36.002(a) of the Code provides that “The legislature recognizes that a landowner owns the groundwater below the surface of the landowner’s land as real property.” The Edwards court characterized the underlying groundwater as indistinguishable from the soil itself and the ownership of the water was unequivocally intertwined with the ownership of the land itself. Such rights are so fundamental as to be entitled to constitutional protection. Id. at 838. In furtherance of the long recognized absolute ownership concepts, the Texas Legislature also amended the Texas Property Code in 2003 to require, in an imminent domain action by a political subdivision, the admission of evidence concerning the market value of groundwater rights in order to determine compensation of these private property rights separate and apart from the land. TEX. PROP CODE § 21.0421(a). Additionally, the Private Real Property Rights Preservation Act defines the term “private real property” to mean “an interest in real property recognized by common law, including a groundwater or surface right of any kind that is not owned by the federal government, this state, or a political subdivision of this state.” Tex. GOV’T CODE § 2007.002(4). The Baylor Law Review article of Jones and Little referenced above provides an excellent review of the referenced cases and a broad survey of the various statutory provisions supporting Texas’ historical orientation favoring strong groundwater rights in landowners. The other legal pillar from the East case with respect to groundwater rights in Texas is the applicability of the “rule of capture.” This rule is, of course, a long established principle familiar to oil and gas practitioners and most lawyers passing the Texas bar exam. The principle does not establish or define the nature of groundwater ownership rights, but it establishes a “defense of non-liability.” City of Del Rio v. Clayton Sam Colt Hamilton Trust, 269 S.W.3d 613, 617-618 (Tex. App. – San Antonio 2008) pet. denied. That is, one who produces groundwater from beneath the surface they own will not be liable to a neighbor if the withdrawal of even a large volume of water causes the neighbor’s well to go dry or to lose water pressure. Each landowner may “capture” all of the water they can from beneath their property without being liable for damages to an adjoining or remote landowner. This principle applies even if such capture of groundwater also affects the flow and volume of surface water being Page 4 taken by a permitted “appropriator.” Pecos County Water Control and Imp. Dist. No. 1 v. Williams, 271 S.W.2d 503 (Tex. Civ. App.-El Paso 1954) writ refused n.r.e. The Supreme Court in East went so far as to say that the owner of the land owns the water under it and is entitled to divert it, consume it or cut it off with impunity, so that no action lies against the owner for interfering with or destroying percolating or circulating water under the earth’s surface. East at 281. Not surprising, this principle also is arguably under attack much as the well-established rule of absolute ownership. Common law imposes a few restrictions on this rule of capture, but very few. The capture and malicious use of groundwater for the purpose of injuring a neighbor or in a manner that amounts to wanton and willful waste of the water is actionable by the neighbor. City of Corpus Christi v. City of Pleasanton, 154 Tex. 289, 276 S.W.2d 798, 801 (1955). In addition, negligent pumping of groundwater that causes the subsidence of a neighbor’s land will also support a cause of action. Friendswood Development Co. v. Smith-Southwest Industries, Inc., 576 S.W.2d 21, 30 (Tex. 1978). Groundwater Conservation Districts (GCDs) The Code has already made some inroads on the rules of absolute ownership and capture, not the least of which is the delegation to groundwater conservation districts (GCDs) of the mandate to carry out the state’s groundwater management objectives. TEX. WATER CODE ANN. § 36.0015. The Supreme Court has acknowledged several times that GCDs are presently the only method available to the state for ground water management. Sipriano v. Great Spring Waters of Am., Inc., 1 S.W.3d 75 (Tex. 1999) (Hecht J. concurring, Id. at 81). Presently, the GCDs operate with broad regulatory authority, pursuant to rules and operating procedures they establish for themselves. They have the power to tax, incur debt, provide services pursuant to standards they establish, enter into contracts, and exercise the power of imminent domain. They have little supervision beyond the local level. Each district must develop a groundwater management plan every five years. These plans are intended to address pertinent local issues such as water supply needs, management goals, and the amount of water estimated to be used and recharged annually within the district. TEX. WATER CODE ANN. §§ 36.1072(e), 36.1071. This plan is then submitted to the Texas Water Development Board for approval. The GCDs are to act in concert with other GCDs within their applicable groundwater management areas (GMAs). They are to review each other’s management plans, participate in regional water planning and jointly meet with other GCDs to review plans for their GMAs. The Texas Legislature has granted unequivocal, albeit vague, authority to the GCDs to limit groundwater production utilizing such tools as establishing geographic parameters, implementing well spacing limitations, the adoption and enforcement of rules of conservation, preservation, protection and recharging of groundwater and groundwater reservoirs, and rules to prevent waste and the degradation of water quality. GCDs are required to adopt rules that are based on considerations of all groundwater uses and needs, that are fair and impartial, that take into considerations of groundwater ownership and the rights of the landowners. They must take into account the public's interest in groundwater conservation and water preservation, adhere to the goals of the district when it was established, and must not be discriminatory. TEX. WATER Page 5 CODE ANN. § 36.101. However, unfortunately, as much language is found in the GCD statute describing the broad range of employee benefits authorized for GCD employees as is found limiting the GCDs’ regulatory powers, including the broad powers of imminent domain and taxation. The mere presence of GCDs will fuel controversy for years, much less that generated by the occasional arbitrary and capricious manner in which they sometimes govern and “rule.” Their exercise of the police power of the state, in order to carry out the preservation and protection functions for the state on behalf of the public, is and will continue to create significant amounts of litigation concerning the excesses demonstrated in the exercise of such power and the corresponding interference with private property rights. Severance of Groundwater Rights and the Consequences Groundwater rights may be severed from the surface estate like mineral rights. The surface owner may sell the right to explore, develop, collect and sell the ground water under his or her property. When “severed” the groundwater is a severed estate. However, this groundwater estate does not, unlike a mineral estate, become “dominant” giving its holder implied or superior rights to use the surface, with “due regard” or otherwise. Notwithstanding that the groundwater estate is not a dominant estate, the owner of the land’s surface may not require the owner of the groundwater to avoid interfering with the surface owner’s use when it is capturing and producing the groundwater. In the oil and gas context, this doctrine of “accommodation” is well established so as to balance the rights of a dominant mineral estate owner and the servient surface estate owner. However, it is inapplicable to the groundwater/surface estate relationship. The owner of a groundwater estate does not owe “due regard” to the surface owner that an oil and gas lessee owes to the surface owner. The oil and gas lessee must exercise its right to explore and produce its mineral interest with due regard to the rights of the surface estate owner and the current uses of the surface. The owner of groundwater rights does not have such a duty. Given a recent opportunity to extend the accommodation doctrine to a groundwater dispute, the Court of Appeals in Amarillo refused. City of Lubbock v. Coyote Lake Ranch, LLC, Mem. Op. June 17, 2014, 2014 WL 2810419 (Tex. App.-Amarillo 2014). The Amarillo court read the Day ruling of the Texas Supreme Court as clearly not extending the accommodation doctrine to the groundwater context, despite the analogies drawn in the Day case between mineral estates and groundwater estates. It stated that any such dramatic change to the water law of Texas should come from the Texas Legislature or the Texas Supreme court. Id. at Headnote 7. Other Water Definitions and Changing the Classification of Water The character of water as groundwater or state water can change. Surface water that seeps into the ground can become groundwater and groundwater running across the surface of land into channels, streams, rivers and lakes can certainly become state water. The water that is flowing across the surface of the land is called “diffused water” or “occasional waters.” This water is initially groundwater and is generated by rainfall, snow or Page 6 overflow from a groundwater well. These flows can be captured and stored before they become part of the flow of the ordinary watercourse without the necessity of obtaining a permit from the state. Domel v. Georgetown, 6 S.W.3d 349, 353 (Tex. App.-Austin 1999) pet. denied. Once the diffused water migrates to a watercourse, the character of the water is legally changed to surface or state water, even though it is physically unchanged. “Developed water” is water that moves into a watercourse and thereby is state water, but is sometimes called “new water” because it is artificially introduced into the watercourse by a developer. This can include drainage, return water, or groundwater that is delivered to a watercourse. As soon as developed water is no longer under the control of the water developer (either because it is lost or abandoned), it becomes state owned as surface water. See Domel, 6 S.W.3d at 353. Advisability of Addressing Water Restrictions in Oil and Gas Leases Given the apparent clarity of the status of the law regarding “surface water,” is there a need to put restrictions in an oil and gas lease concerning surface water use when, in fact, the state owns all surface water? Are there “gaps” in our classification of various types of water making extra attention warranted in an oil and gas lease? It is this author’s opinion that the answer to each of the above two questions is yes and thus restrictions negotiated by the landowner/lessor on the use of surface water and ground water is warranted, even if title doesn’t always lie in the hands of the surface owner. In summary, the following factors appear to be in play based on the foregoing analysis: a. Because water may change classification; water moving across the surface of the land may move into watercourses and water in streams and other watercourses may move across the land and then below the surface. b. Because a lessee may obtain permission to use surface water from the TCEQ without the consent of the surface owner if such option is not restrained by the landowner. The argument is then raised as to how a surface owner can restrain a lessee from seeking permission to use that which he or she does own. By making it a contract term within the lease, the surface owner can require advance notice, its concurrence or joinder in the permitting process, and participaqte in any administrative process wherein the appropriation request is considered or conditions established. c. Because use of surface water (whether permitted, used per an exemption or otherwise) may impact the quality, volume and pressure of groundwater. While much of the legal analysis of the difference classifications of water suggests an easy distinction between surface water and ground water, the reality is quite different. Stock tanks may trap groundwater and surface/state water (pursuant to a landowner’s permit for such an appropriation), which water may subsequently migrate to underground locations. d. Because an oil and gas lease may last for a very long time and because of the dramatic assault on the rights of holders of groundwater and the possibility of the expansion of the definition of “state water” – it seems advisable to plan ahead so as to protect the environmental quality of adjoining bodies of surface water. Even though Page 7 the operator may not use such surface water in its operations, it can certainly damage surface water quality and ecosystems found therein. Suggested Provisions for Dealing with Water Issues in an Oil and Gas Lease Because of the foregoing “gaps” and possible issues due to water classifications, challenges and issues, the following provisions are suggested for consideration as part of an addendum attached to an oil and gas lease form: 1. Addendum Provisions Govern. In the event of a conflict between the terms of this addendum and the terms of the printed form lease to which this addendum is attached (the “Lease”), the terms of this addendum shall control. The real property covered by the Lease is referred to herein as the “Leased Land.” 2. Damages to Water Wells, Cleaning of Well Sites. Should any of Lessee’s operations, geophysical or otherwise hereunder, cause any damage to existing water wells, Lessee will immediately repair or replace such well or wells. Lessee shall clean and remove from each well site, tank battery location, Lessee’s roads and all other operational sites all discarded materials and debris of every kind as it accumulates, and shall keep each well site, tank battery location, Lessee’s roads and all other operational sites in a neat and orderly condition throughout the term of this Lease. 3. Use of State/Surface Water, Drilling of Wells, and Protection and Use of Water Wells. 3.1 Use of State/Surface Water Restricted. Any provisions herein to the contrary notwithstanding, Lessee shall not have the privilege of using state water (as defined by the Texas Water Code) from the Leased Premises without (a) the prior written consent of the Lessor and (b) compliance with all statutory and regulatory permitting requirements. In the event Lessee shall make application to any state agency for authority to use state water located on or about the Leased Premises, Lessee shall furnish copies of all such applications to Lessor contemporaneously with the submission of the application. 3.2 Drilling of Water Well and Cessation of Use. In the event Lessee drills a water well on the Leased Premises for its use in its operations thereon, then upon cessation of its operations, and at Lessor’s request (and only upon such request), such water well and all pipe and connections will be assigned to Lessor, who shall assume all rights, responsibilities and liabilities, if any, for operation and maintenance of said water well. 3.3 Water Use and Protection. Should any of Lessee’s operations, geophysical or otherwise hereunder, cause any damage to existing water wells, groundwater or any source of groundwater, Lessee will immediately repair or replace such well or wells. Lessor shall have access to any water well drilled by Page 8 Lessee, but only in amounts and at such times that will not interfere with Lessee’s operations on the Leased Property. 3.4 Restriction on Use of Water from Wells Drilled by Lessee. No water shall be taken from any water wells drilled on the Leased Premises for use by Lessee for any purpose other than for the conduct of operations on the Leased Premises. Water use shall be restricted to the actual drilling for oil, gas and other hydrocarbon substances and/or completion operations, and, absent Lessor’s prior written consent to the contrary, water shall not be used in any matter for secondary recovery flooding or any productive oil reservoir. *Additional suggested clauses: In the event that any of the foregoing-described activity of Lessee shall impair or damage the water wells on the Leased Premises or the quality of such water drawn therefrom or any other groundwater source, Lessee, at its sole expense, immediately upon notice from Lessor, shall connect Lessor’s water system to the cooperative system located closest to the Leased Premises. *Additional suggested clauses: In the event more than one (1) water well is drilled by Lessee on the Leased Premises pursuant to the foregoing paragraph, Lessee shall pay Lessor for the fair market value of all such water drawn from such additional wells. 4. Salt Water Disposal and Construction of Other Improvements. 4.1 Restrictions on Salt Water Disposal. It is understood and agreed that Lessor shall not let any salt water or any other deleterious substance run on or over the Leased Premises, or let the same run into Lessor’s stock tanks or any natural creek, stream, river or other body of water, and, absent Lessor’s prior written consent to the contrary, Lessee shall not drill, construct or use any wells for salt water disposal purposes. If at any time salt water is discovered escaping or discharging onto the Leased Premises, Lessee shall promptly take any necessary steps as are required to stop such escape or discharge. 21.2 Restrictions on Construction of Other Improvements. Lessee shall not have the right to establish and utilize facilities for surface or subsurface disposal of salt water, construct bridges, dig canals, build tanks, power stations, product treatment facilities or telephone lines on the Leased Premises except those on the drilling pad. 27. Compliance with Environmental Laws and Regulations. Lessee, its successors and assigns, by its acceptance of this Lease, hereby agrees to comply with all applicable laws, rules and regulations and agrees to indemnify, defend and hold harmless Lessor and Lessor’s heirs, successors and assigns from and against any and all loss, liability, claim, fine, expense, cost (including attorney’s fees and expenses) and causes of action caused by or arising out of the violation Page 9 (or the defense of the alleged violation) of any federal, state, or local laws, rules or regulations applicable to any water, material, drilling matter fluid or any hazardous substances released or caused to be released by Lessee or Lessee’s agents or independent contractors from the Leased Premises into the atmosphere or into or upon the land or any watercourse, stream, lake or body of water, including, without limitation, groundwater. Additionally, upon receiving any notice regarding any environmental, pollution or contamination problem or violation of any law, rule or regulation, Lessee will forward a copy of such contamination problem or violation of any law, rule or regulation by certified mail, return receipt requested, within ten (10) days of receipt of such notice. Important Note: Proper written indemnification and hold harmless provisions, along with requirements for adequate insurance, should also be included to provide for the situation where intentional or unintentional violations of the foregoing provisions cause damages. Conclusion Whether it is ranchers who negotiate restrictions on the use of “their” water in an oil and gas lease, or a groundwater district exercising in good faith its statutory authority, or the TCEQ pursuing its preservation and maintenance mission, all parties must contribute to solutions for a challenge that will not go away. Lessors under a mineral lease can do their part by making sure all of the water resources whether they are on, over, under or alongside their land are properly managed, protected, used and conserved. One more eloquent than I has written: As we look ahead, we should remember that water resources are precious and precarious, and most assuredly finite. Conservation is neither a luxury nor a privilege, but rather a promise that we cannot afford to ignore. We all play roles, big and small, in this undertaking. Smith, A Decade of Water, TEXAS PARKS & WILDLIFE (July 2011) www.tpwmagazine/archive/2011/jul/ed_1_intro/index/phtml Page 10