The Texas Supreme Court ruled last week in Cactus Water Services, LLC v. COG Operating, LLC. [Read Opinion here.] This opinion is extremely important for all Texas landowners as it was the first time the Supreme Court weighed in on who owns produced water in Texas.
Photo by Delfino Barboza
Background
This case involves 37,000 acres of land in Reeves County.
Mineral Leases and Production
COG Operating acquired four mineral leases from two surface owners for the land. The leases granted COG the right to explore, produce, and keep “oil and gas” or “oil and gas and other hydrocarbons.” The leases made no express reference to oil and gas waste. The leases expressly prohibited any use of water except in limited circumstances where written consent is obtained from the Lessor or COG drilled its own well for use on lease but not to be used for flooding, secondary recovery, or camp operations.
COG extracted oil and gas from the Delaware Basin using hydraulic fracturing (“fracking”). Fracking involves injecting pressurized fluid, proppants like sand, and chemicals into formations to fracture the rock and to release hydrocarbons. The most common fracking fluid is water. A portion of the fracking fluid returns to the surface mixed with hydrocarbons, brine, and a variety of other substances like potassium, barium, carbon dioxide, and hydrogen sulfide.
At the surface, COG separated the oil and gas from the water mixture, which is known as produced water. Given the health and environmental hazards produced water can pose, it must be treated and disposed of in accordance with regulatory requirements. Hydrocarbons cannot be produced without generating produced water. “Under the law at the time of the conveyances, and to this day, the well operator–in this case, COG–has been charged with proper handling and disposal of produced water.” Regulations address storage and disposal of produced water.
The Court noted disposing of produced water is one of the largest operation costs for an oil well. COG entered into a number of agreements related to waste-handling at their own expense. On the wells at issue, COG has generated nearly 52 million barrels of produced water. From December 2018-March 2021, COG paid nearly $21 million in disposal fees to third-party contractors.
Recent technological innovations have given a new purpose to produced water allowing it to be treated and reused as drilling or fracking fluid. Depending on treatment, the produced water may be able to be recycled and reused for other purposes as well. Currently, the cost of treatment exceeds the cost of disposal. Thus, COG does not reuse produced water from its operations for any purpose and receives no compensation for its use anywhere else.
Water Lease
In 2019 and 2020, the surface owners executed lease agreements with Cactus Water Services, LLC. The agreements conveyed “all right, title, and interest in and to…water from oil and gas producing formations and flowback water produced from oil and gas operations” on the land covered by COG’s mineral leases. The definition of “water” in the lease is narrow, meaning “any and all water contained in and produced from geologic formations under the Subject property through any wellbores drilled for the production of oil, gas, and natural gas liquids…whether economically productive or not, regardless of salinity.” The definition expressly excludes “all water originating from shallow geological intervals that do not and have never produced oil, other hydrocarbon liquids, and/or natural gas anywhere in the [Delaware/Permian] Basin” and water produced from freshwater aquifers.
Cactus notified COG of the lease and its claimed rights there under, asserting an entitlement to the produced water from COG’s wells. As the Court put it, “that interaction did not go well.”
Litigation
COG sued for a declaration it was COG, not Cactus, that owned and has the exclusive right of possession, custody, control, and disposition of produced water. COG alleged without such declaration, hydrocarbon production could not continue. Cactus responded seeking its own injunction that it owned the produced water from COG’s wells, and it had the exclusive right to sell or transfer it off the leased premises. Both parties moved for summary judgment.
The trial court sided with COG holding COG owned the produced water and Cactus had no rights to produced water so long as COG’s leases were in effect. Cactus appealed.
The El Paso Court of Appeals affirmed. [Read blog post on that decision here.] Specifically, the court held produced water constituted oil and gas waste, which belongs to the mineral lessee, rather than groundwater which belongs to the surface estate. Judge Palafox wrote a dissenting opinion stating the granting language in the hydrocarbon lease did not include groundwater incidentally recovered and separated from produced hydrocarbons.
Cactus sought review from the Texas Supreme Court. Its petition was granted, and oral arguments were held in March 2025. A number of amicus briefs were filed on both sides, including several agricultural groups writing in support of Cactus Water Services.
Texas Supreme Court Decision
The Texas Supreme Court affirmed. [Read Opinion here.]
“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.” There was no dispute among the parties as to the language of the lease; rather, only as to the status of the unnamed substance: produced water.
Groundwater is not part of the mineral estate. Unless expressly severed, it is held by the surface owner subject to the mineral estate’s implied right to use the surface–including the water–as reasonably necessary to produce the minerals.
Under Texas law, “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 of value was known at the time of conveyance, and to preserve the uses incident to each estate.” Any reservations must be express and will not be implied. A mineral lessee’s rights include not only the right to explore and produce, but also to do what is necessarily incidental to such exploration and production.
The Court held it “beyond cavil, and not in genuine dispute” that produced water is oil and gas waste. The leases do not mention or define “waste” or “produced water,” but the Court said this was expected. Because waste is an inevitable byproduct of oil and gas operations, it goes without saying that the right to produce hydrocarbons necessarily contemplates and encompasses the right to the resulting waste. This, the Court reasoned, was the understanding at the time of the mineral lease and was well-established for decades before. The statutory and regulatory authority shows this, and the Court cited a number of statutes and regulations defining oil and gas waste as including produced water.
Although the Court agreed with Cactus that Texas law is clear the surface owner owns the groundwater, it held the precedent relied upon by Cactus to show this is “simply inapplicable” to the question before us, as the cases addressing groundwater ownership do not address waste byproducts of oil and gas operations. The groundwater cases address water extracted through a water well, not in the context of oil and gas production. “Despite its colloquial appellation, produced water is not water.” Produced water contains molecules of water, but the Court stated the produced water itself was “a horse of an entirely different color.” Produced water is hazardous, even toxic. There are laws directly focused on disposal of produced water so as to protect groundwater from oil and gas waste. This indicates the two are not interchangeable.
Next, the Court rejected Cactus’ argument COG had only a usufructuary right–meaning the right to use someone’s property without damaging or diminishing it. The right to destroy, dispose of, and consume property is inconsistent with a usufructuary right. The original scope of the conveyance must be interpreted as a transfer of rights, including rights to the produced water. Further, the Court noted, had either party believed otherwise at the time of conveyance, the leases would have likely included provisions to facilitate the transfer of produced water from the mineral lessee to the surface owner. The absence of any provisions related to produced water confirms the conclusion that the leases conveyed exclusive possession, control, and disposition as part of the hydrocarbon production rights. The Court compared this absence of language with other lease provisions, such as those allowing for delivery of gas in kind if the lessors provide certain equipment or facilities and secure the required permits. There are no similar provisions in the mineral leases here.
Then, Cactus relied on the water restriction language contained in the leases to claim no water could have been included in the conveyance. The Court held this argument actually worked against Cactus, reasoning that were produced water considered water under the leases, there could have been no production contemplated by the parties. “Courts cannot employ a backward-looking construction of the conveyances that is informed by new technologies offering the potential for recycling and reuse that were not within the parties’ contemplation at the time of the convenances.”
Finally, the Court distinguished what it called Cactus’ best precedent, Robinson v. Robbins Petroleum. Robinson involved a failed oil well that was converted to a water well for the mineral lessee to extract saltwater to use on other tracts. The Texas Supreme Court held the saltwater was owned by the surface owner. The Court distinguished the holding because Robinson was a water case, not a produced water case. The saltwater produced there was not part of the oil and gas production; it was produced by a water well.
Thus, the Court held “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. That being so, if the surface owner actually wants to retain ownership of constituent water incidentally and necessarily produced with hydrocarbons, the reservation or exception from the mineral conveyance must be express and cannot be implied.” In light of that, the Court affirmed the judgment COG has the right to possession, custody, control, and disposition of the produced water in the liquid waste from its hydrocarbon production.
Concurring Opinion
Justice Busby authored a concurring opinion, which was joined by Justices Lehrmann and Sullivan. [Read concurring opinion here.]
Justice Busby wrote to note the question here is not whether produced water is water or waste (as the Court of Appeals phrased the question) because it is, of course, both. The fluids include groundwater originally belonging to landowners, and they are classified by statute and regulation as oil-and-gas waste, which the lessee is obligated to handle and dispose of safely. Instead, Justice Busby believes, the correct question is whether the landowners leased the groundwater to COG. He agreed a grant of oil carries with it the right to use water incidentally produced therewith.
Justice Busby then noted the Court’s majority opinion is a narrow one, and there are several issues he notes the Court did not decide therein.
First, the Court set the default rule. The landowner and mineral lessee are free to strike a different deal with regard to produced water.
Second, the Court does not “break any new ground” regarding ownership of unleased minerals or other minerals produced along with leased minerals. He made clear the lease only included “oil, gas, and other hydrocarbons” meaning no non-hydrocarbon minerals were leased. Were there any non-hydrocarbon minerals produced with the oil and gas, this opinion would not provide a basis to convey ownership to those minerals.
Third, he stated the Court does not address the mineral lessee’s obligation to a landowner for the groundwater produced with the hydrocarbons. He noted no such claims were before the Court. Will the lessee owe royalties on the produced groundwater it leased? How should the parties account for such royalties? Are there any implied covenants with respect to the management of the water? None of these questions, Justice Busby wrote, were raised or answered.
Key Takeaways
This is an extremely important case for all Texas landowners.
First, the Court reiterated Texas law that, absent any agreement or conveyance to the contrary, surface owners own the groundwater beneath their property.
Second, the Court made clear in the absence of any reservation language expressly addressing produced water, the mineral lessee has the right to possession, custody, control, and disposition of the produced water.
Third, landowners who wish to reserve ownership of the produced water must expressly include such reservation. When considering whether to include a produced water reservation in an oil and gas lease, landowners should seek counsel to assist in drafting such reservations and carefully consider the repercussions from doing so such as the additional expense, necessary equipment, and potential liability of doing so.
Fourth, it is incumbent upon the mineral lessee to dispose of this produced water in accordance with the applicable permitting requirements, statutes, and regulations.
Fifth, the concurring opinion raised an interesting point referencing the distinction between exactly what minerals were leased in an agreement. This could be particularly important for landowners interested in lithium mining, which is currently occurring in East Texas. You can hear more about that here. For example, if a mineral lease included language leasing “oil, gas, and other minerals,” it seems there could at least be an argument that any minerals in the produced water (such as lithium, for example) could have been leased to the operator. Conversely, if the lease conveyed only the “oil, gas, and other hydrocarbons,” it well may be that none of the other minerals in the produced water would be included in the lease. How this might play out logistically will remain to be seen.
