In a case closely watched by oil and gas producers and surface owners, the Texas Supreme Court has decided that produced water, the chemical mix of brine and drilling, fracking, and formation fluids that comes out of the well bore along with oil and gas, belongs to the producer unless the mineral conveyance expressly reserves ownership to the surface owner.
Cactus Water Services, LLC v. COG Operating, LLC (No. 23-0676; June 27, 2025) arose from a dispute between COG, the mineral lessee on four leases covering 37,000 acres in Reeves County, and Cactus, an entity formed by a group of landowners to sell produced water from oil and gas operations in the area. Since COG began producing wells on its leases, it has disposed of its oil and gas waste, including produced water, with the assistance of surface use compensation agreements and right-of-way agreements with the surface owners that allow COG to gather, store, and transfer waste. These agreements gave COG the right to construct fresh water lines, produced water lines, and flow lines on the surface, as well as the right to lay pipelines for the transportation of “oil, gas, petroleum, produced water and any other oilfield related liquids or gases.” In 2019 and 2020, the surface owners organized Cactus and transferred to the new entity all the surface estates’ water rights on the leases. Cactus acquired ownership and the right to sell all water “produced from oil and gas wells and formations on or under the” properties. When Cactus informed COG of its water leases in March 2020, COG filed a declaratory judgment action seeking a declaration that it had the sole right to the produced water under the mineral leases and other agreements with the surface owners. Cactus counterclaimed, joining the issue of “whether the mineral leases conveyed produced water to COG.”
The trial court granted summary judgment for COG, declaring that COG owned the oil, gas, and other products contained in the commercial oil and gas bearing formations and has the right to exclusive possession, custody, control, and disposition of its product stream, including produced water. Cactus appealed. In an opinion by Justice Rodriguez, joined by Justice Soto, the El Paso Court of Appeals affirmed. In short, the court held that t the time the leases in question were executed, there was no question about it: produced water was part of the waste stream, not a commodity, and “nothing in the mineral leases suggests the parties intended to assign rights at a molecular level, following both extraction from the well and post-production processing.” Cactus sought review, which SCOTX granted.
In an opinion by Justice Devine, SCOTX affirmed. “Texas law has long recognized,” Justice Devine began, “that the hydrocarbon producer’s possession and control over the disposition of liquid-waste byproduct is necessarily incidental to, and therefore encompassed in, a conveyance of oil-and-gas rights” (citing Brown v. Lundell, 344 S.W.2d 863, 866-67 (Tex. 1961). This principle has always been necessitated by “the burden and expense of liquid-waste disposal.” Here, as Justice Devine pointed out, COG drilled 72 horizontal wells that generated about 52 million barrels of produced water. Disposal of the water has already cost COG $21 million in third-party disposal fees. He further observed that “Cactus possesses no permits, no infrastructure, and no ability to handle, transport, or dispose of produced water.” Be that as it may, “[i]n this dispute, ownership of produced water depends on the scope of the language employed in the granting clauses of COG’s leases, which specifically name only ‘oil and gas’ or ‘oil, gas, and other hydrocarbons.’”
As Justice Devine observed, “Water, unlike oil and gas, is not considered part of the mineral estate. Unless expressly severed, subsurface water remains part of the surface estate subject to the mineral estate’s implied right to use the surface—including water—as reasonably necessary to produce and remove the minerals.” That much is clear, as is the Texas rule that “the general intent of parties executing a mineral deed or lease is presumed to be an intent to sever the mineral and surface estates, convey all valuable substances to the mineral owner regardless of whether their presence or value was known at the time of conveyance, and to preserve the uses incident to each estate.” Reservations have to be clearly specified and “cannot be implied.” When the COG leases were executed, they didn’t mention or define “waste” or “produced water” because everyone understood that “[t]he production of liquid waste is an inevitable and unavoidable byproduct of oil-and-gas operations; one cannot occur without the other.” Consequently, “granting the right to produce hydrocarbons necessarily contemplates and encompasses the right to produce and manage resulting waste.”
Under well-established law, produced water “is liquid oil-and-gas waste, and operators bear the burden, right, and duty of possessing, handling, and disposing of it.” Along with that responsibility, producers must comply with statutory and regulatory provisions that have defined produced water and the legal standards for disposing of it, or, since 2013, treating it for beneficial use. The Court rejected Cactus’s argument that the “water” in produced water should be treated the same as groundwater, which belongs to the surface estate. “Produced water,” Justice Devine wrote, “is not water. While produced water contains molecules of water, both from injected fluid and subsurface formations, the solution itself is waste—a horse of a different color.” One need look no farther than the statutory and regulator structure for handling, transporting, and disposing of this “hazardous, even toxic, mixture produced with hydrocarbons and separated from them after extraction at the wellbore.” Nobody worries about groundwater getting loose on people’s land and in the water supply. That is not the case for produced water.
The Court concluded that “a deed or lease using typical language to convey oil-and-gas rights, though not expressly addressing produced water, includes that substance as part of the conveyance whether the parties knew of its prospective value or not.” Justice Busby, joined by Justices Lehrmann and Sullivan, filed a concurring opinion to clarify that the Court decision does not: (1) prevent parties to an oil-and-gas lease from cutting “a different deal with respect to ownership of groundwater produced with the and then separated from hydrocarbons”; (2) “break any new ground regarding ownership of unleased minerals and other substances that may be produced along with leased minerals”; and (3) “address the mineral lessee’s obligations to the landowners with respect to this leased groundwater.”
What will be interesting to see will be how the immense cost of fractionating the waste and delivering the constituent parts where they need to go will be handled. Under the typical lease, the producer bears that cost. As pointed out in our amicus brief in this case, the landowners should be careful what they ask for. If they want the waste, they’ll have to take on the costs that go with it. It seems more likely that in the future, as waste treatment for beneficial use becomes more efficient and cost-effective and a viable economic market for the byproducts of treatment develops, parties to oil-and-gas leases will negotiate royalty deals like they do now. We’re certainly not at that point yet, however.
