Quiz Explanations
Test Your Knowledge of Water Rights and Water Leasing
By Judon Fambrough

1. False. Surface water is divided into two categories: diffused surface water and water in a natural body of water or watercourse. Diffused surface water is water running over the ground after a rain or snow melt but before it enters a natural body of water or watercourse. It belongs to the surface owner if it can be captured. Once the water enters a lake or watercourse, the water belongs to the state of Texas, and a permit is required for its use.



2. True. The Texas Supreme Court originated this definition in 1925. The court qualified the definition by adding that the "permanent source of water" does not have to be continuous.



3. True. Groundwater is divided into two categories, percolating groundwater and water in an underground lake or stream. Percolating water is water oozing or filtering through the soil. This belongs to the surface owner even though it is in the ground. All underground water is presumed to be percolating water, thus privately owned.
   
   Underground water in a lake or stream belongs to the state. Percolating groundwater belongs to the mineral owner only when it is specifically mentioned in the mineral reservation. Otherwise it belongs to the surface owner.



4. True. The common law rule of capture applies both to groundwater and to oil and gas. The Texas Supreme Court reaffirmed this fact. The rule of capture is sometimes said to be the rule legalizing drainage in Texas.



5. True. One of the problems confronting water producers is how to get the water to the purchaser. Either the municipality must condemn a pipeline right-of-way or the water producer must purchase an easement. The estimated cost is $1 million per mile.



6. True. Because oil and gas leasing has been prevalent in this state for many years, the Producers 88 Lease form serves as the basis for drafting groundwater leases. Evidently, groundwater producers expect Texas courts to construe the language in groundwater leases in the same manner as they have interpreted oil and gas leases.



7. False. The difference between a covenant and a condition lies in the remedy for a breach. The only remedy for breach of covenant is to sue.
   
   The remedy for breach of a condition is automatic lease termination. No litigation is necessary. Groundwater producers are more apt to agree to a covenant than a condition. However, unless the provision specifically states the breach terminates the lease, courts presume the provision is a covenant.



8. False. Because groundwater is not a mineral, the groundwater lessee must get the permission to use the surface in the lease. There is no implied right to use the surface. Even if these rights are secured in the lease agreement, the groundwater lessee is not exempt from cleanup and payment of surface damages.



9. False. While the calculation of surface damages is primarily determined by the size of the drill site in oil and gas leases, the same is not true of groundwater leases. According to the Texas Administrative Code, any water well supplying water to the public is subject to Sanitary Control Easement. The easement restricts, to some degree, the uses of the land up to a 500-foot radius around the well site. Consequently, the area impacted by the water well is 18 acres, not just the area used for the drill site. Damages should be calculated accordingly.



10. False. Filing the memorandum of lease favors the landowner for two reasons. First, the lease remains confidential and the lessees are more likely to grant more favorable provisions. Second, should the landowner negotiate another groundwater lease, the prior lease does not serve as a model.



11. False. Time is of the essence is implied in mineral leases but not in groundwater leases. Landowners must have the provision inserted in a groundwater lease to make the lessee comply with deadlines.



12. True. The state of Texas has few regulations that apply to groundwater leasing and production. The Texas Supreme Court has stated that it prefers local control of groundwater through the creation of underground conservation districts. By law, the districts have the authority to regulate the spacing and pumping of water wells capable of producing more than 25,000 gallons per day.



13. False. While two ways exist to convert production into its monetary equivalent for payment of royalties, groundwater leases use proceeds, not market price or value, to make the determination. Proceeds means the price at which the lessee can sell the water, not necessarily what it is worth based on fair market value.



14. True. Unless the landowner restricts where the groundwater lessee may produce, the lessee may produce from any depth or formation. This could intrude on the landowner's personal sources of water.



15. True. When the lease sets royalty payments at the well or wellhead, the royalty owner shares in all costs after the water is removed from the ground. This sharing is based on the size of the lease royalty. Transportation costs may include pipeline costs.