Default Lessee Control over Produced Groundwater under Texas Hydrocarbon Leases:
Commentary on Cactus Water Services, LLC v. COG Operating, LLC

I. Introduction

Cactus Water Services, LLC v. COG Operating, LLC (Supreme Court of Texas, June 27, 2025) sits at the intersection of Texas groundwater law and oil-and-gas law at a moment when “produced water” has shifted from being viewed as a costly waste to a potentially valuable resource.

The core question addressed in Justice Busby’s concurring opinion (joining the Court) is:

When a landowner has leased its “oil and gas” or “oil, gas, and other hydrocarbons,” and those leases limit the lessee’s right to use water, who owns groundwater that is mixed with oil when it is produced: the landowner or the lessee?

The Court (and Busby, J.) reaffirm that groundwater in place belongs to the surface owner, absent an express severance. But they also hold that, as a default rule, when such groundwater is incidentally produced along with leased hydrocarbons under a standard oil-and-gas lease that is silent about the matter, the produced groundwater is included within the hydrocarbon conveyance. In practical terms, this gives the mineral lessee possession and control over the liquid-waste byproduct—including its water component—for purposes of handling, disposal, and beneficial reuse, unless the parties have expressly agreed otherwise.

Justice Busby’s concurrence is important not because it changes that holding, but because it carefully:

• Reaffirms surface-owner groundwater rights as fully recognized property interests.
• Clarifies that the Court’s rule is a contractual default, not a statutory reallocation of property.
• Emphasizes what the opinion does not decide—especially regarding royalties, implied covenants, and unleased minerals produced with leased hydrocarbons.

This commentary synthesizes the Court’s (as reflected through the concurrence) and Justice Busby’s reasoning, traces the key precedents and statutes, and explores the likely impact on Texas oil-and-gas practice, groundwater rights, and water midstream markets.

II. Overview of the Case and Issues

A. Parties and Context

The caption identifies:

• Cactus Water Services, LLC – Petitioner, a company in the water-services or “water midstream” sector.
• COG Operating, LLC – Respondent, an oil-and-gas operator and mineral lessee.

Although the concurring opinion does not recite a full factual narrative, the dispute clearly centers on ownership and control of “produced water”—the salty, often contaminated water that is brought to the surface together with oil and gas. With the rise of recycling, reuse, and treatment technologies, that stream of fluid has become economically and strategically significant.

The legal tension arises from two competing realities:

1. Groundwater in place under Texas law belongs to the surface owner, is protected as a property right, and is subject to takings protections.
2. Produced water (the mixture of groundwater, hydrocarbons, and other substances that comes out of the well) is classified as “oil-and-gas waste” under Texas statutes and regulations, and the operator (lessee) has the duty to handle and dispose of it safely.

The central question is therefore not whether the fluids are “water” or “waste” (they are both), but what the oil-and-gas leases convey: Does the surface owner retain ownership of the groundwater component of the fluid mixture after production and separation, or is that groundwater effectively leased to the mineral lessee along with the hydrocarbons?

B. Prior Proceedings

The Eighth Court of Appeals in El Paso, in a reported decision at 676 S.W.3d 733 (Tex. App.—El Paso 2023), focused on whether the produced fluids should be characterized as “water” (favoring surface-owner rights) or “waste” (favoring the operator’s control). It also credited a broad “product-stream” theory advanced by COG—essentially, that the lessee owns the entire product stream coming out of the well, irrespective of how particular substances are characterized in the lease.

The Texas Supreme Court grants review, reorients the analysis away from the water/waste dichotomy and the expansive product-stream theory, and instead grounds its decision in lease interpretation and long-standing property principles.

III. Summary of the Supreme Court’s Holding (as Reflected Through the Concurrence)

Based on Justice Busby’s concurrence (which joins the Court’s opinion), the Supreme Court’s main holdings are:

1. Groundwater in place belongs to the surface owner.
   The Court reaffirms that, unless expressly severed, subsurface water remains part of the surface estate. This includes percolating and mineral-laden native water.¹
2. The mineral lessee has an implied right to use groundwater reasonably necessary to produce oil and gas.
   This implied right encompasses using surface and subsurface water as needed in exploration and production, subject to a standard of reasonable necessity.
3. Default rule: A grant of “oil and gas” or “oil, gas, and other hydrocarbons” includes incidentally produced groundwater.
   When an oil-and-gas lease is silent about produced water, “incidentally produced” subsurface water that comes up with the hydrocarbons is included in the hydrocarbon conveyance. The lessee thereby obtains:
   • Possession and control over the liquid-waste byproduct of production; and
   • The right (and statutory duty) to dispose of or manage it free from third-party interference.
4. The rule is a contractual default that parties may alter.
   Landowners and lessees are “free to strike a different deal” concerning ownership of groundwater produced with, and then separated from, hydrocarbons. No statute or regulation prevents them from negotiating a different arrangement or purports to divest landowners of groundwater ownership by operation of law.
5. Statutory rules on “fluid oil-and-gas waste” do not override private agreements.
   Texas Natural Resources Code § 122.002 establishes default rules for when ownership of fluid oil-and-gas waste passes to a person who treats it for beneficial use, if no contract says otherwise. That statute does not control, or prevent, private allocations of rights between landowners and lessees concerning the groundwater component of that fluid.
6. The Court does not adopt a broad “product-stream” theory.
   Echoing Amarillo Oil Co. v. Energy-Agri Products, Inc. and Guffey v. Stroud, the Court rejects the idea that a lessee automatically owns all substances that emerge from the well. Unleased minerals or substances produced along with leased hydrocarbons remain the property of their owners unless expressly conveyed.
7. Several critical questions involving economic rights and obligations remain unanswered.
   The Court does not decide:
   • Whether royalties are owed on produced groundwater or proceeds from its beneficial reuse.
   • How profits or losses from water treatment and reuse should be allocated between lessor and lessee.
   • Whether implied covenants in oil-and-gas leases extend to the management of produced groundwater.
   These issues are left for future litigation.

Justice Busby’s opinion ultimately joins the Court’s, while stressing the narrowness of the holding and the continuing vitality of Texas groundwater property law.

IV. Detailed Analysis

A. Precedents and Authorities Underpinning the Decision

1. Groundwater as a Component of the Surface Estate

Texas has long treated subsurface groundwater—particularly “percolating” water—as part of the surface estate, owned by the surface owner unless expressly severed. Justice Busby cites a line of cases and statutes that anchor that principle:

• Houston & Texas Central R.R. v. East, 81 S.W. 279 (Tex. 1904) – One of the earliest Texas cases, explaining that the owner of land is the “absolute owner of the soil and of percolating water, which is a part of, and not different from, the soil.”
• Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927) – Describes “ordinary percolating waters” as the exclusive property of the surface owner.
• City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955) – Affirms that water, unsevered by conveyance or reservation, is part of the surface estate.
• Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972) – Expressly states that water, unless severed by deed, “has been held to be a part of the surface estate.”
• Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973) – Crucial to this case. The Court held that briny, subsurface water—even though it contained minerals that could be extracted by the mineral lessee—was still “an incident of surface ownership” absent specific conveyancing language to the contrary.
• City of Sherman v. Public Utility Commission, 643 S.W.2d 681 (Tex. 1983) – Recognizes groundwater as part of the surface estate in the context of regulatory disputes.
• Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984) – Although primarily about which substances fall under “minerals,” it reaffirms the separation between the mineral and surface estates and locates groundwater on the surface side.
• Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016) – Applies the “accommodation doctrine” (borrowed from mineral law) to groundwater. Again confirms surface-owner rights in groundwater and analogizes the groundwater estate to the mineral estate.

Statutory and regulatory recognition of groundwater ownership further bolsters this baseline:

• Texas Water Code §§ 36.001(5), 36.002(a) – Section 36.002(a) declares that “the legislature recognizes that a landowner owns the groundwater below the surface of the landowner’s land as real property.”
• 30 Tex. Admin. Code § 297.1(22) – A TCEQ rule that similarly treats groundwater as private property, consistent with common law.

These authorities supply the backdrop against which the Court interprets leases: any conclusion that the lessee controls produced groundwater must fit within, not rewrite, the long-standing rule that groundwater in place is a privately owned surface asset.

2. Groundwater as a Protected Property Right under the Takings Clause

In Edwards Aquifer Authority v. Day, 369 S.W.3d 814 (Tex. 2012), the Court held that a landowner’s interest in groundwater in place is a constitutionally protected property right. Regulations can limit use, but if they go too far, they may effect a compensable “taking.”

Justice Busby emphasizes:

• Day confirms groundwater is a vested property right.
• Day sets out a framework for assessing whether regulation becomes a taking, considering factors like the economic impact of the regulation and interference with reasonable investment-backed expectations.

He also notes that these property rights form the “background” against which takings claims are evaluated, citing:

• Cedar Point Nursery v. Hassid, 594 U.S. 139 (2021) – U.S. Supreme Court case underscoring that long-standing property rules inform whether a regulation “takes” an owner’s rights.
• Texas Department of Transportation v. Self, 690 S.W.3d 12 (Tex. 2024) – Recent Texas case applying takings principles.
• Amarillo Oil Co. v. Energy-Agri Products, Inc., 794 S.W.2d 20 (Tex. 1990) – Clarifies that statutes and regulations do not alter common-law property rights; rather, those rights frame takings analysis.

By emphasizing these authorities, Busby signals that the Court’s ruling about produced groundwater stems from contract interpretation (what the landowner agreed to lease), not from any legislative or regulatory confiscation of property.

3. Implied Inclusion of Incidentally Produced Water in an Oil Grant

A key precedent here is Guffey v. Stroud, 16 S.W.2d 527 (Tex. Comm’n App. 1929, judgm’t adopted), which concluded that a grant of oil carried with it the grant of the water necessary to enjoy that grant:

“[A] grant of the oil carried with it a grant of the . . . water . . . essential to the enjoyment of the actual grant of the oil.”

This principle bridges groundwater law and mineral leasing. When a party leases “oil” (or “oil and gas”), it is understood that the lessee must drill wells, manage the fluids that come up, and handle water that is inherently part of the production process. Guffey provides historical support for the Court’s view that the “common and ordinary meaning” of a hydrocarbon grant includes the incidentally produced water—at least insofar as that water must be handled and disposed of to enjoy the hydrocarbons.

4. Unleased Minerals and Mixed Production Streams

The Court’s decision explicitly does not disturb existing law on unleased minerals produced along with leased ones. Justice Busby highlights two major cases:

• Amarillo Oil Co. v. Energy-Agri Products, Inc., 794 S.W.2d 20 (Tex. 1990)
  In Amarillo Oil, the lease covered only “oil and casinghead gas.” Other gases or liquids that became intermingled with the production stream during operations were not conveyed; the lessee did not acquire ownership simply by producing them. The case illustrates that conveyed substances are limited to what is described in the grant, even if the production process mixes in other materials.
• Guffey v. Stroud, 16 S.W.2d 527 (Tex. Comm’n App. 1929, judgm’t adopted)
  There, one lessee held an oil lease, and another held a gas lease. The oil lessee’s well produced both oil and gas. The Court held that the oil lessee was not entitled to the gas; that gas belonged to the gas lessee. Again, production and mixing do not shift ownership of substances that were never granted.

Justice Busby also references:

• Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984) – The Court construed a grant of “all minerals” to reflect the general intent to convey “all valuable substances” within the ordinary meaning of “mineral,” but only within that understanding. Here, by contrast, the leases at issue were narrower—covering “oil and gas” or “oil, gas, and other hydrocarbons”—so they did not lease non-hydrocarbon minerals.
• Myers-Woodward, LLC v. Underground Services Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892 (Tex. May 16, 2025) – Held that a lease of “salt” did not convey ownership of non-salt substances or adjacent spaces. This fresh decision reinforces that the scope of a mineral lease is limited by its express terms.

Collectively, these cases confirm:

• Ownership follows the grant language, not merely the physical production stream.
• Unleased substances that are produced remain owned by their original owner.

In Cactus Water, groundwater is not an “unleased mineral” in the traditional sense. It is part of the surface estate, and the question is whether—by implication—it is included in a lease of “oil and gas” when the lease is otherwise silent. The Court answers yes for incidentally produced groundwater, but does not extend ownership to other unleased minerals or substances.

5. Statutory Regime for Fluid Oil-and-Gas Waste

Justice Busby notes the legislature’s enactment of Texas Natural Resources Code Chapter 122, especially:

• Tex. Nat. Res. Code § 122.001(2) – Defines “fluid oil and gas waste” as:

  “[W]aste containing salt or other mineralized substances, brine, hydraulic fracturing fluid, flowback water, produced water, or other fluid that arises out of . . . production of oil or gas.”

  This definition applies to the fluid that exists after oil or gas is separated by the lessee or its agent.
• Tex. Nat. Res. Code § 122.002(1) – Provides that, absent an agreement to the contrary, ownership of fluid oil-and-gas waste transfers when it is “used by or transferred to” a person who takes possession for treatment and subsequent beneficial use. In other words, default ownership passes from the generator (typically the operator) to the re-user or treater at the point of beneficial-use transfer, not at the moment oil and gas are separated.

Justice Busby underscores that:

• Chapter 122 sets default rules about later transfers of waste fluid.
• It does not negate or preempt private agreements allocating ownership of the fluid (or its groundwater component) between landowner and lessee.
• It does not purport to divest landowners of their underlying groundwater rights “by operation of law.”

6. The “Developed Water” Doctrine in Surface-Water Law

By analogy (though not as a controlling authority), Justice Busby notes that Texas courts recognize a doctrine of “developed water” in surface-water contexts. Under this doctrine, a party who at its own expense diverts or develops water (for example, by constructing diversion works or reservoirs) acquires an exclusive right to control and use that developed water, protected against interference by others who have not borne the costs.

He cites cases such as:

• Harrell v. F.H. Vahlsing, Inc., 248 S.W.2d 762 (Tex. App.—San Antonio 1952, writ ref’d n.r.e.); and
• Guelker v. Hidalgo County Water Improvement Dist. No. 6, 269 S.W.2d 551 (Tex. App.—San Antonio 1954, writ ref’d n.r.e.).

While the Court does not adopt or directly apply this doctrine in the produced-water context, the analogy supports the notion that:

• A party (here, the operator/lessee) who incurs the cost and risk of bringing fluids to the surface is logically afforded control over them for disposal and beneficial use.
• This control can be reconciled with the original owner’s underlying real-property right, especially when the owner has granted an oil-and-gas lease that implicitly allocates such control.

B. The Court’s Legal Reasoning: Why Incidentally Produced Water Is Included

1. Step One: Reaffirming Groundwater as Surface Property Subject to Implied Mineral Use

Both the Court and Justice Busby begin from a clear baseline:

“Unless expressly severed, subsurface water remains part of the surface estate subject to the mineral [lessee’s] implied right to use the surface—including water—as reasonably necessary to produce and remove the minerals.” (Concurring op. at 1–2)

This statement does two things:

1. It confirms that groundwater in place is part of the surface estate, owned by the landowner (consistent with cases like East, Burkett, and Whitaker).
2. It recognizes the implied-easement-like right of the mineral lessee to reasonably use the surface, including water, to carry out operations—an application of the well-established principle that the mineral estate is the “dominant” estate.

This avoids any suggestion that the Court is redefining property rights in groundwater. The only question is what the parties did with those rights via contract.

2. Step Two: The Focus on Lease Conveyance, Not “Water vs. Waste” Labels

The court of appeals framed the issue as whether the produced fluids were “water” (invoking groundwater ownership rules) or “waste” (invoking operator duties and control). Justice Busby criticizes this framing as unhelpful:

“[I]t is not helpful to focus—as the court of appeals majority did—on whether fluids produced along with hydrocarbons are ‘water or . . . waste.’ … The answer, of course, is both: the fluids include groundwater originally belonging to the landowners, and they are also classified by statute and rule as oil-and-gas waste, which the lessee has a duty to handle and dispose of safely.” (Concurring op. at 2–3)

Instead, the key question is:

“[O]ur focus must be on whether the landowners leased this groundwater to the lessee.” (Id. at 3)

Thus, the case becomes one of contract interpretation: What does a grant of “oil and gas” or “oil, gas, and other hydrocarbons” ordinarily include when the lease is silent about produced water?

3. Step Three: Common and Ordinary Meaning of a Hydrocarbon Grant

The Court (as summarized by Busby) concludes:

“[I]ncidentally produced” subsurface water “was included in the hydrocarbon conveyances.” The “common and ordinary meaning of a grant of hydrocarbons includes the water incidentally produced with those substances at the mineral lessee’s expense, which the lessee is required to properly dispose of free from third-party interference.” (Concurring op. at 3–4, 5)

This reasoning is grounded in practical and legal realities:

• Production realities. Virtually all oil and gas production in Texas brings up water (native formation water, injected fluids, or both). Safe disposal (often by injection) or treatment is integral to production.
• Regulatory obligations. The Railroad Commission and other agencies classify produced water as “oil-and-gas waste” and impose duties on the operator to handle and dispose of it safely. If the operator must shoulder those duties and costs, it is logical to understand the lease as giving the operator control over the relevant fluid stream.
• Historical expectations. For much of Texas oil-and-gas history, produced water was a cost, not a revenue source. Industry practice assumed that the operator took on the burdens and liabilities associated with it, which suggests an implied allocation of control and risk consistent with the Court’s reading.
• Guffey principle. As Guffey v. Stroud held, granting oil carries with it the water “essential to the enjoyment of the actual grant.” This supports including incidental produced water in the grant, at least to the extent necessary to produce and handle the hydrocarbons.

Legally, therefore, the Court is not saying groundwater in place loses its status as surface property. Rather, it is saying: when the surface owner leases out the right to produce hydrocarbons, the parties’ default intent is understood to include the incidental produced water necessary to those operations, unless they expressly provide otherwise.

4. Step Four: Framing the Holding as a Default Rule, Preserving Freedom of Contract

Justice Busby is explicit that the Court’s holding is a default rule:

“[T]he Court’s holding is simply a default rule: ‘an oil-and-gas conveyance that does not expressly address the matter’ conveys to the hydrocarbon lessee ‘possession and control over the disposition of liquid-waste byproduct,’ including ‘constituent water.’ The landowners and the hydrocarbon lessee ‘are free to strike a different deal’ regarding ownership of groundwater produced with and then separated from hydrocarbons.” (Concurring op. at 4–5)

This has two important implications:

1. Contractual flexibility. Parties can draft leases and side agreements to:
   • Reserve ownership of produced water (or its groundwater component) to the landowner.
   • Allocate profits or costs from treatment and reuse in any agreed proportion.
   • Specify operational control arrangements between lessee and landowner or third-party water companies.
2. No statutory confiscation. By carefully separating its common-law default from statutory rules, the Court avoids any suggestion that statutes (like Chapter 122) have expropriated surface-owner property. Private parties remain free to alter the default by express agreement.

5. Step Five: Harmonizing with Chapter 122’s Ownership-Transfer Rule

As Busby explains, Chapter 122’s rule that ownership of fluid oil-and-gas waste transfers to a re-user or treater at transfer (absent contrary agreement) presupposes that some party—ordinarily the lessee—already owns that waste fluid at the point of separation:

“Thus, the fluid addressed by the statute arises once the oil or gas is separated from it by the lessee or its agent. And the statute provides that ownership of this fluid changes hands not at this point of separation, but (absent contrary agreement) when it is used by or transferred to a person who takes possession of it for the purpose of treating it for a subsequent beneficial use. Accordingly, the statute would not affect any agreement between a landowner and its hydrocarbon lessee regarding the landowner’s continued ownership of the groundwater component of fluid oil-and-gas waste.” (Concurring op. at 4–5)

In other words, Chapter 122:

• Addresses later transfers for beneficial use, not the initial allocation of ownership between landowner and lessee.
• Is expressly subject to contrary agreements among private parties.
• Is fully compatible with the Court’s default rule that incidentally produced groundwater belongs to the lessee under a standard hydrocarbon lease unless the parties agree otherwise.

6. Step Six: Rejecting the Broad “Product-Stream” Theory

Justice Busby notes that the Court does not adopt the more sweeping view advanced by COG and apparently accepted by the court of appeals majority—that the lessee automatically owns the entire “product stream” from the well:

“[T]he Court also does not adopt the contrary theory advanced by COG and the court of appeals majority—that the lessee owns the entire ‘product stream.’” (Concurring op. at 6–7)

This is doctrinally significant. The product-stream theory would effectively convert every non-hydrocarbon substance produced with hydrocarbons—whether or not within the lease’s granting language—into the lessee’s property simply because it was brought to the surface as part of production.

By rejecting that approach, the Court stays within traditional Texas principles:

• The lessee acquires only what is conveyed in the lease (here, oil and gas and incidentally produced water, as necessary to enjoy that grant).
• Other substances—non-hydrocarbon minerals, or perhaps certain gases, chemicals, or non-native materials—are not automatically conveyed, even if they become part of the production stream.

C. Clarifications and Limits Emphasized in the Concurrence

1. The Opinion Is Narrow and Leaves Contractual Space

Justice Busby repeatedly stresses that the Court’s opinion is “narrow” and should not be over-read:

• It creates a default presumption, not a mandatory rule.
• It does not prevent landowners from reserving ownership of produced groundwater by express lease terms or separate agreements.
• Nothing in the cited statutes and regulations bars landowners from:
  • Obtaining permits to transport, treat, or sell produced water they own; or
  • Contracting with lessees or third parties to perform those activities on their behalf.

He does caution that any such alternative arrangement would require a “practical method” for determining how much of the liquid-waste byproduct the landowner continues to own (a non-trivial engineering and accounting issue).

2. No Expansion to Unleased Minerals or Other Substances

Busby is explicit that the Court’s holding:

“does not break any new ground regarding ownership of unleased minerals or other substances that may be produced along with leased minerals.” (Concurring op. at 5)

And, as discussed, he anchors this in Moser, Amarillo Oil, and Guffey. The takeaway:

• Groundwater is treated differently from “unleased minerals” because it is part of the surface estate and—by implication—leased as incidental to hydrocarbon production.
• But other unleased substances (e.g., certain gases, hard minerals, or perhaps pore space) are not affected by this ruling; standard oil-and-gas lease language does not automatically grant them to the lessee.

3. The Court Does Not Decide Lessor–Lessee Economic Issues

Critically, the opinion does not determine the financial or contractual consequences between landowners and lessees arising from the conclusion that produced groundwater is leased. Justice Busby lists several open questions:

• Royalties on produced groundwater?
  He asks whether the lessee will owe royalties on the produced groundwater it leased, analogizing to Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981), where the Court determined the applicable royalty for an unnamed substance. The question is whether, and how, standard royalty clauses (often keyed to “oil, gas, and other hydrocarbons produced and saved”) encompass proceeds from the sale or beneficial use of produced water.
• Accounting for profit or loss from water management.
  If produced water can be treated and sold, or reused in operations, how should the resulting profits or losses be shared between lessor and lessee? Busby references French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014), which addressed complex royalty and accounting questions in the context of CO₂ flooding and enhanced oil recovery.
• Implied covenants relating to water management.
  Does the lessee owe any implied covenants concerning management of produced water—e.g., a duty to act as a reasonably prudent operator in maximizing value, or to avoid wasteful practices? Busby cites Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987), one of many cases addressing implied covenants in oil-and-gas leases (development, protection against drainage, marketing, etc.).

Busby concludes:

“These questions and more remain to be answered in future cases as a result of the Court’s holding today. Our opinion should not be read to settle them.” (Concurring op. at 7)

This preserves significant flexibility for litigants and courts to shape the economic consequences of produced-water rights in future disputes.

D. Practical and Doctrinal Impact

1. Impact on Oil-and-Gas Lease Drafting and Negotiation

The clearest immediate impact is on how oil-and-gas leases, surface-use agreements, and water agreements will be drafted going forward:

• Baseline assumption. If a lease simply grants “oil and gas” (or “oil, gas, and other hydrocarbons”) and is silent on water, Texas law will now presume:
  • The lessee owns and controls incidentally produced groundwater for purposes of disposal and beneficial use.
  • The surface owner has no independent right to extract value from that water without the lessee’s consent (subject to any separate agreement).
• Express reservations and carve-outs. Surface owners who wish to retain rights to produced water will need:
  • Clear lease provisions reserving ownership of produced groundwater (in whole or in part); and
  • Mechanisms for measurement, allocation, and coordination with the operator’s regulatory obligations.
• Royalty and value-sharing clauses. Expect increased attention to whether royalty clauses expressly include or exclude revenues from water treatment, recycling, and sale, and how costs of such operations are borne.

2. Impact on Water Midstream and Third-Party Service Companies

Companies like Cactus Water Services, which specialize in gathering, transporting, treating, and reusing produced water, must now calibrate their contracting strategies accordingly:

• Under the new default rule, the operator/lessee is presumed to control produced water, including its groundwater component.
• Third-party water companies therefore generally must contract with:
  • Lessee/operators (as owners of the waste fluid), rather than
  • Surface owners alone, unless the surface owner has reserved ownership in a way that supersedes the default rule.
• Chapter 122’s rules on ownership transfer at beneficial use still apply, but now against the backdrop that the lessee typically owns the waste fluid at the outset.

3. Impact on Surface Owners and Groundwater Policy

From a surface-owner and groundwater-policy perspective:

• Surface owners retain full ownership of groundwater in place and continue to enjoy constitutional protections under Day.
• But if they enter into a standard hydrocarbon lease that is silent about produced water, they will normally be treated as having leased the right to produced groundwater as part of the hydrocarbon grant.
• To capture economic value from produced water (e.g., for agriculture, industrial uses, or municipal supplies after treatment), surface owners may need to:
  • Negotiate lease terms or side agreements that reserve such value; and
  • Coordinate with lessees on permitting and regulatory compliance.

This decision therefore nudges sophisticated lessors and their counsel toward more granular negotiation of water issues in oil-and-gas leasing.

4. Encouraging Investment in Produced-Water Management and Reuse

For operators, the default rule provides clarity:

• They can rely on having exclusive possession and control over the produced-water stream (including groundwater) for disposal and beneficial use, unless a contract says otherwise.
• That clarity may encourage investment in:
  • Water recycling and treatment infrastructure.
  • Beneficial reuse projects (e.g., for drilling, completion, industrial, or possibly agricultural applications, where allowed).
• Operators can negotiate from a known legal baseline when partnering with water-midstream firms or landowners.

In this sense, the decision can be seen as aligning legal default rules with modern resource-management realities, where produced water is no longer purely a liability but also a potential asset.

5. Doctrinal Coherence with Takings and Property Law

By grounding its rule in contractual interpretation, the Court reduces potential friction with takings doctrine:

• Groundwater remains the surface owner’s property until the owner voluntarily leases hydrocarbon rights.
• The allocation of produced-water control to the lessee arises from the owner’s own grant, not from legislative fiat.
• Regulatory overlays (like groundwater conservation district rules or Railroad Commission waste rules) are analyzed against this stable common-law framework under Day, Cedar Point, and Self.

The decision thus maintains coherence between oil-and-gas law, groundwater law, and constitutional property protections.

E. Remaining Open Questions

Justice Busby’s explicit caveats ensure that Cactus Water will not be the last word on produced-water law. Among the questions he highlights:

• Royalty structure. If the lessee profits from selling treated produced water, are those profits subject to:
  • Royalty under the existing lease language?
  • A duty to account to the lessor as part of production revenues?
• Cost and profit allocation. How should courts treat:
  • Costs of treatment and transportation?
  • Net gains or losses from beneficial reuse operations?
  The analogies to French v. Occidental Permian Ltd. suggest complex accounting could be required.
• Implied covenants. Are there implied obligations to:
  • Manage produced water prudently?
  • Seek economically reasonable beneficial uses rather than mere disposal?
  • Avoid waste or environmental harm consistent with the reasonably prudent operator standard?
• Measurement and severance. If a landowner expressly reserves ownership of produced groundwater:
  • How are volumes measured and allocated?
  • How are conflicting operational and regulatory duties reconciled?

These questions ensure that produced-water issues will remain a fertile field for future Texas litigation and legislative attention.

V. Simplifying the Key Legal Concepts

A. Surface Estate vs. Mineral Estate

Texas law often treats land as comprising two key estates:

• Surface estate – Includes the surface of the land and everything not expressly severed, including groundwater, sand, gravel, and other non-mineral interests.
• Mineral estate – Includes oil, gas, and other minerals that have been severed by deed or reservation.

When a landowner grants an oil-and-gas lease, the lessee typically acquires:

• The right to explore for, produce, and sell the covered minerals.
• Implied rights to use the surface (and some water) reasonably necessary to those operations.

B. Groundwater and Percolating Water

Groundwater refers to water beneath the surface of the earth. In Texas, most such water—particularly “percolating water” that moves through the soil and rock—is treated as part of the surface estate and belongs to the surface owner.

This is distinct from:

• Surface water (water in rivers, lakes, and streams, subject to different rules and permitting regimes).
• Minerals dissolved in water (which may raise separate questions, as in Robinson v. Robbins Petroleum and Moser).

C. Produced Water and “Oil-and-Gas Waste”

Produced water is the fluid that comes out of a well along with oil and gas. It typically contains:

• Native formation water (groundwater residing in the reservoir rock).
• Injected fluids (such as hydraulic fracturing fluid or water used for enhanced recovery).
• Salts, minerals, hydrocarbons, and other contaminants.

Texas statutes and Railroad Commission rules generally classify produced water as “oil-and-gas waste”. Operators are responsible for:

• Handling, storing, and transporting it safely.
• Disposing of it in accordance with regulations (often via injection wells) or reusing it under approved plans.

Cactus Water clarifies that the same fluid can be:

• “Water” for purposes of property rights (its groundwater component originally belonged to the surface owner); and
• “Waste” for purposes of regulatory classification and operator obligations.

D. Default Rules vs. Freedom of Contract

Many areas of law supply default rules—rules that apply if the parties do not specify otherwise in a contract. Parties remain free to “opt out” by agreement.

In Cactus Water, the Court’s key contribution is to establish such a default:

• If an oil-and-gas lease does not address produced water, the law presumes the lessee:
  • Controls the produced-water waste stream, including its water component, and
  • May dispose of or reuse it free from interference by others.
• But the lessor (surface owner) and lessee can override that rule by express contractual language.

E. Implied Covenants in Oil-and-Gas Leases

Oil-and-gas leases often contain implied covenants—unwritten obligations recognized by courts that reflect the basic expectations of the parties, such as:

• A covenant to reasonably develop the lease.
• A covenant to protect the lease from drainage by nearby wells.
• A covenant to market production as a reasonably prudent operator.

Cactus Water does not decide whether there is an implied covenant regarding management of produced water. But the Court’s recognition that produced water is part of the leased bundle raises the prospect that such covenants could be recognized or developed in later cases.

VI. Conclusion

Cactus Water Services, LLC v. COG Operating, LLC marks a significant step in aligning Texas oil-and-gas law with modern realities of produced-water management, without undermining the deep-rooted principles of groundwater ownership and constitutional property rights.

The decision, as illuminated by Justice Busby’s concurrence, establishes that:

• Groundwater in place remains part of the surface estate, owned and constitutionally protected as recognized in Day and related authorities.
• An oil-and-gas lease that grants “oil and gas” (or “oil, gas, and other hydrocarbons”) and is silent on produced water is understood—by default—to include incidentally produced groundwater as part of the hydrocarbon conveyance.
• The lessee thereby gains possession and control over the produced-water waste stream, consistent with its regulatory obligations, while parties are free by contract to allocate ownership and economic interests differently.
• The Court carefully avoids endorsing a broad “product-stream” theory and preserves longstanding rules governing unleased minerals and mixed production streams.
• Numerous economic and doctrinal questions—royalties, profit sharing, implied covenants, and measurement—remain open for future case law development.

In the broader legal context, this opinion provides needed clarity at a time when produced water is both a major environmental and operational challenge and an emerging resource. It offers a clear starting point for contractual negotiation and regulatory compliance, while leaving space for private ordering and future judicial refinement. For Texas practitioners, lessors, lessees, and water-service companies alike, Cactus Water is now a central precedent in the rapidly evolving law of oil, gas, and water.

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Notes:
1. See, e.g., Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 63 & n.43 (Tex. 2016); Moser v. U.S. Steel Corp., 676 S.W.2d 99, 101–02 (Tex. 1984); City of Sherman v. Pub. Util. Comm’n, 643 S.W.2d 681, 686 (Tex. 1983); Robinson v. Robbins Petroleum Co., 501 S.W.2d 865, 867 (Tex. 1973); Sun Oil Co. v. Whitaker, 483 S.W.2d 808, 811 (Tex. 1972); City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798, 802 (Tex. 1955); Texas Co. v. Burkett, 296 S.W. 273, 278 (Tex. 1927); Houston & Tex. Cent. R.R. v. East, 81 S.W. 279, 281 (Tex. 1904).