Ownership of Lithium in Water Reservoirs May Hinge on Texas Law

The expansion of technology to extract the world’s lightest metal—lithium—is creating significant market opportunities for landowners and oil and gas operators in the Gulf of Mexico region. But the legal landscape is still evolving, so operators should clearly and explicitly address ownership and surface-use issues in any direct lithium extraction agreement to take advantage of these emerging opportunities while avoiding unwanted surprises.

Growing requirements for decarbonizing the power grid and manufacturing of electric vehicles and energy storage batteries have surged demand for lithium, causing DLE to emerge as an efficient sourcing alternative. Because of its solubility, lithium is commonly found in seawater and other saltwater sources.

Lithium also can be found in produced water, a waste byproduct brought to the surface during oil and gas drilling operations. As a result, the oil and gas industry is in a unique position to tap produced water as a potential new lithium source.

For example, Standard Lithium Ltd. has identified concentrated lithium brine resources in the East Texas Smackover region. The Department of Energy selected Standard Lithium Ltd. and Equinor, a global energy leader, last September for up to $225 million in provisional grant funds to develop and expand a DLE facility in the region.

In 2023, Exxon Mobil announced its plans to develop lithium operations in the Smackover formation. Last November, Exxon Mobil announced a non-binding lithium supply deal with LG Chem, a battery parts maker, for 100,000 metric tons of the metal over several years.

Texas has emerged as a key market due to its abundant lithium reserves, but the state lacks a clear and comprehensive legal framework to govern DLE, adding complexity for investors and market participants.

The question of who owns lithium, and the royalty interests arising out of DLE, turns on whether the lithium-bearing substance is characterized as belonging to the mineral estate or the surface estate.

Since 1862, Texas law has allowed for the severance of mineral and surface estates. The fact of severance determines whether certain minerals, and rights and proceeds arising out of those minerals, belong to the mineral estate or the surface estate.

In Texas, lithium would likely be characterized as part of a mineral estate. Certainly, lithium is largely considered to be a “mineral” within the ordinary and natural meaning of the word under Moser v. US Steel Corp. And although current extraction methods outside the state significantly impact the surface, lithium processing in Texas seems positioned to employ DLE at the surface of an existing wellbore.

However, the intersection of this framework with Texas water law could muddy the waters, depending on the circumstances involved in DLE activities.

Under Texas law, underground water belongs to the surface owner, regardless of the minerals contained in solution. In contrast, produced water generated during oil and gas operations recently has been held to belong to the mineral estate.

In Cactus Water Services v. COG Operating, the El Paso-based Court of Appeals was asked to decide whether a typical oil and gas lease conveys to the mineral lessee the right to possess and dispose of produced water. The dispute arose when the surface owner entered leases purporting to transfer “water”—narrowly defined as water produced through wellbores drilled for hydrocarbon production—covering acreage previously leased to COG for oil and gas operations.

The court ultimately sided with COG, relying on the distinction between “produced water” and “groundwater” under Texas law, noting that the “relevant legal definitions of oil and gas waste include produced water” and “because the Legislature defines produced water as oil and gas waste, it cannot also be groundwater.” The ruling has been appealed to the Texas Supreme Court.

The Texas Legislature also has spoken on the issue of produced water ownership. Under Section 122 of the Texas Natural Resources Code, produced water used by or transferred to a person for the purpose of treating it for subsequent beneficial use is the property of that person, until it’s transferred again for disposal or use.

Separate from ownership, DLE raises unique accommodation-doctrine issues. For example, in Coyote Lake Ranch v. City of Lubbock, the Texas Supreme Court confirmed that certain surface-estate use obligations exist as between a landowner and a groundwater interest owner.

This raises implications for producers seeking to extract lithium from water-bearing reservoirs, particularly if the same acreage is subject to a separate oil and gas lease. The surface owner would need to accommodate use by separate interests, and it remains an open question on how Texas courts would employ the accommodation doctrine to resolve disputes regarding such usage.

As DLE and the demand for lithium transform the Gulf of Mexico region, operators should address ownership and surface-use issues in any direct lithium extraction agreement—doing so provides the advantages that come with these significant market opportunities, while Texas courts navigate usage disputes arising from extraction.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rebecca Seidl-Inglesby is partner in Baker Botts’ global projects department and leads its critical minerals and metals subsector.

Adrienne Murr is an associate at Baker Botts and represents public and private companies in mergers and acquisitions.

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