Shale drillers fight as environmental woes hit prolific Permian Basin of Texas, N. Mexico

The toxic water that gushes out of oil wells in the Permian Basin of Texas and New Mexico has spurred environmental concerns and even earthquakes.

Now the problem has become so acute that it’s turning producers against one another.

In an ongoing case in Texas’ Loving County (population: 48), a New Mexico oil driller says Devon Energy Corp. and another company wrecked its reserves by flooding them with wastewater.

Closely held Stateline Operating LLC says Devon and water disposal specialist Aris Water Solutions Inc. pumped so much fluid underground in the Permian Basin that it leaked into a prolific oil-producing layer of rock, making it all but impossible to extract crude, according to an April court filing. Bloomberg News is the first to report the existence of the lawsuit, originally filed in 2023.

The New Mexico producer says the injections caused “permanent damage to Stateline’s wells and production, and irrevocably lost oil and gas in place,” according to the filing. The company is seeking $180 million in damages.

“Aris strongly disputes that any of the water disposed in its wells has somehow damaged Stateline Operating’s production,” an attorney for the company said in a statement. In a court filing, Devon and Aris said the two-year statute of limitations for Stateline’s lawsuit has expired. A spokesperson for Devon declined to comment.

The Permian produces almost as much oil as Iraq and Kuwait combined. But its wells generate up to five barrels of chemical-laden waste fluid for every barrel of crude, creating a growing disposal challenge. Pumping that water deep underground has triggered earthquakes, while injecting it into shallower formations has led to leaks and well blowouts. It’s a problem that threatens to raise costs for drillers amid mounting evidence that U.S. oil production is peaking.

Permian dispute

Texas regulators have warned that wastewater from fracking in the Permian is causing a widespread increase in underground pressure. They’ve even placed limits on water-pressure levels due to “the physical limitations of the disposal reservoirs.” New Mexico has stricter disposal rules, resulting in millions of barrels of waste being pumped into Texas each day.

Wastewater injection underground “creates geological and cost issues that have the potential to get worse, requiring wells to be located further from producing regions [due to pressure], which is increasing water-handling costs,” Scott Gruber, an analyst at Citigroup Inc., wrote last month in a note to investors.

Earlier this year, Coterra Energy Inc. was forced to halt some oil production in the Permian after fluids leaked into its wells. But the Stateline case is unusual in that it pits one shale operator against another over wastewater disposal.

Loving County, home to the disposal wells that Stateline said leaked water into its production zone, has seen some of the biggest increases in wastewater injection anywhere in the Permian, according to industry consultant Enverus. Overall, water disposal has jumped more than sevenfold over the last 15 years through all corners of the Permian.

“The ramp is substantial,” said Steve Diederichs, director of oil and gas intelligence at Enverus.

‘Not how the law works’

At the center of the case is when, exactly, Stateline discovered a risk of harm from injected wastewaster. Attorneys for Devon and Aris argue the problem emerged before 2022, the year Stateline claims wastewater flooded its wells, and therefore the two-year statute of limitations to file suit has expired. But Stateline’s attorney, addressing Judge Mike Swanson in a December hearing, pushed back against that assertion.

“We have injection into a permitted disposal well,” said Michael Reer, a lawyer for Stateline. “It only becomes harmful when that injection causes damage, causes trespass, Judge. And that’s what we have here.”

Stateline has its roots in Flat Creek Resources, a company backed by private equity firm EnCap Investments until a partial management buyout led by Michael McCracken, a former reservoir engineer for Exxon Mobil Corp. Flat Creek then got a new sponsor in Fort Worth-based Vortus Investments, forming Stateline Operating as the new parent company.

Stateline sold its wells in August 2023 to Freedom Energy, which is backed by Crow Holdings. McCracken is now the CEO of Freedom Energy, while Stateline exists to hold the claims and pursue the damages sought in its lawsuit.

One noteworthy aspect of Stateline’s case is the depth at which its oil reserves were flooded. The affected rock layer, called the Second Bone Spring Sand, is well below where the water was allegedly injected, raising questions about the ability of the basin to safely contain large volumes of waste fluid.

The lawsuit may have ramifications for how Permian producers handle wastewater disputes. If Devon and Aris succeed in their defense, it could mean that Permian drillers would have to sue even before the wastewater impedes their reserves.

Christopher Hogan, a lawyer for Aris, argued in the December hearing that the risk to Stateline’s future oil production began when the producer discovered from a neighboring operator that the ground was being over-pressurized from wastewater disposal. Offering an analogy, he asked the judge to imagine a factory at the top of a hill with a giant tar bin that starts to leak downhill to a neighbor’s property line.

“Do you have to wait until the tar actually crosses the line in order to say that there’s a risk?” Hogan said. “No. You can’t. That is not how the law works.”