Oil and Gas Update
Technological Advancements Raise Questions to Ownership of Produced Water from Hydraulic Fracturing
December 27, 2023
By: Elizabeth B. Elmore and Seth Backus
Produced water is a byproduct generated during hydraulic fracturing, or “fracking.” During the fracking process, the extracting party fractures bed rock by injecting water into the subsurface at a high pressure to extract oil and natural gas. Upon completion, a slurry byproduct remains known as “produced water.” Originally seen as a waste product with limited uses, the extracting party typically placed produced water in underground injection wells. Due to recent advancements in refinement technology, produced water has become valuable as it has been determined that it may contain rare-earth elements (“REE”).
Manufacturers use REEs in production of smartphones, computer components, radar, satellites, solar panels, and wind turbines. Thus, REEs are incredibly valuable, but also hard to find in large quantities. Therefore, the ability to refine and separate REEs from produced water presents a lucrative opportunity for those in possession of the byproduct.
While courts in states such as Texas have explicitly stated who holds ownership rights of produced water from hydraulic fracturing, other states, including West Virginia, have not explicitly addressed the issue. Despite West Virginia law being silent on ownership of REE in produced water from fracking, the West Virginia Legislature passed House Bill 4003 (“HB 4003”) during the 2022 Regular Session. Now codified in W. Va. Code § 22-2-10, HB 4003 permits any group that disposes of and “treats” any mine drainage for REEs to “commercially benefit” from its treatment.
As HB 4003’s application does not extend to ownership of REEs in produced water from fracking, ownership of REEs may be determined by existing West Virginia case law pertaining to oil and gas rights. West Virgnia law holds the owner of the mineral estate owns any mineral byproducts, including produced water from oil or gas wells, unless a deed or lease provides otherwise. For example, in Wood County Petroleum Co. v. West Va. Transp. Co., 28 W. Va. 210 (1886), the Supreme Court of Appeals of West Virginia held that when a mineral estate enters a lease with another party for the extraction of resources, any mineral byproduct incidental to the original mineral grant will be the property of the lessee. There, the mineral estate entered into a lease agreement with a third-party for the extraction “rock or carbon oil.” During operations, the lessee found little oil, but substantial amounts of natural gas, a common byproduct of oil production. The lessee took the gas and then used it for drilling operations at other sites. After the district court ruled in favor of the owners of the mineral estate, the lessees appealed and the Supreme Court of Appeals determined that as natural gas was commonly incidental to oil production, the lease implicitly included natural gas in its granting language.
Therefore, the right to REEs in West Virginia typically vests in the mineral estate owner. If West Virginia courts rely upon the holding in Wood County Petroleum when the mineral estate enters a lease with a third-party to extract oil and gas through hydraulic fracturing, any REEs extracted from the produced water may be the property of lessee because produced water is arguably incidental to the production of oil and gas much like natural gas used to be considered an incidental byproduct to the production of oil. Alternatively, a court may use its equitable power to permit the lessee to extract the REEs from the produced water but may require payment of a royalty interest to the mineral estate for profits derived from REEs. Such a royalty interest would likely be similar to the agreed upon interest negotiated in the lease agreement for the production of oil or natural gas.
Contests over ownership of REEs in produced water have begun to make their way into other state courts as well. In Cactus Water Services, LLC v. COG Operating, LLC, the Texas Court of Appeals in El Paso determined the mineral estate holds legal title to produced water from fracking operations. In that case, COG Operating served as lessee to a mineral estate which they used in a fracking operation, and Cactus Water Services held the water rights to the surface estate above. After the trial court ruled in favor of the mineral estate, Cactus Water appealed to the Court of Appeals in El Paso who held that the mineral estate had legal title to both the produced water and any REE in the water. The majority came to this determination by finding that produced water was “oil and gas waste” under the Texas Natural Resources Code and Texas Water Code and it was the industry practice that producers of oil and gas waste historically were responsible for its handling. Thus, notwithstanding any prior agreement between the two estates, ownership of REEs in produced water in Texas is the property of the mineral estate.
Due to recent advancements in mineral refinement technologies, ownership of produced water containing REEs is an emerging area of the law awaiting development. Thus, state legislatures may choose to pass hydraulic fracturing legislation mirroring HB 4003, permitting those who treat the produced water to commercially benefit. Without legislative action, litigants may ask courts to rule on this emerging issue as discussed above.
To keep up to date on developments in the coal, oil, and gas field, please contact a member of the Jackson Kelly PLLC Land Practice Group.