Default Ownership and Control of Produced Groundwater in Texas Oil-and-Gas Leases: Commentary on Cactus Water Services, LLC v. COG Operating, LLC

Default Ownership and Control of Produced Groundwater in Texas Oil-and-Gas Leases

Commentary on Cactus Water Services, LLC v. COG Operating, LLC, Supreme Court of Texas

I. Introduction

The concurring opinion by Justice Busby (joined by Justices Lehrmann and Sullivan) in Cactus Water Services, LLC v. COG Operating, LLC addresses an increasingly important question in Texas oil and gas law:

When a landowner has leased “oil and gas” or “oil, gas, and other hydrocarbons,” and the lease restricts the lessee’s use of water, who owns the groundwater that is produced mixed with oil and gas, after the hydrocarbons are separated out – the surface owner or the mineral lessee?

The answer matters because “produced water” – the saline, mineral-laden groundwater that comes up with hydrocarbons – is no longer just a nuisance waste stream. It is now a commodity with potential value for recycling, reuse in drilling and completion operations, and even other industrial or agricultural uses. Companies like Cactus Water Services have emerged to acquire, transport, and treat this produced water. At the same time, mineral lessees like COG Operating remain obligated by regulation to manage and dispose of oil-and-gas waste safely.

Within this context, the Court’s decision establishes and clarifies a critical default rule under Texas law: where an oil-and-gas lease grants “oil and gas” or “oil, gas, and other hydrocarbons” and is silent about ownership of produced water, the grant is interpreted to include subsurface water incidentally produced with the hydrocarbons. That means the mineral lessee ordinarily acquires possession and control of the produced water as part of the leasehold, subject to its regulatory duty to handle and dispose of that waste, unless the parties contract otherwise.

Justice Busby fully joins the Court’s opinion but writes separately to (1) emphasize the narrowness of the ruling, (2) carefully distinguish what the Court does and does not decide, and (3) situate the holding within more than a century of Texas groundwater and mineral jurisprudence. This commentary draws out those themes, explains the precedents cited, and analyzes the implications of the Court’s new default rule.

II. Summary of the Opinion

A. Core Question

The dispute centers on ownership and control of groundwater that has been produced along with oil and gas from wells drilled under traditional oil-and-gas leases. Key features of the legal setting include:

  • The landowners own the surface estate, which includes groundwater unless expressly severed.
  • The mineral lessee (COG) holds leases conveying “oil and gas” or “oil, gas, and other hydrocarbons.”
  • The leases limit the lessee’s right to use water, but do not expressly address who owns produced water once it comes to the surface and the hydrocarbons are separated.

Against that backdrop, the Court answers:

  • Does the surface owner retain ownership of produced groundwater after separation from hydrocarbons?
  • Or, by leasing hydrocarbons, did the landowner also convey the burden of handling produced water, together with any associated value, to the lessee?

B. Holding (As Reflected in the Concurrence)

Justice Busby summarizes the Court’s holding as follows:

  1. Groundwater in place remains part of the surface estate. Unless “expressly severed,” subsurface water belongs to the surface owner, although it is subject to the mineral lessee’s implied right to use the surface – including water – as reasonably necessary to produce and remove the minerals (ante at 16).
  2. However, incidentally produced groundwater is included in the hydrocarbon conveyance by default. When an oil-and-gas lease grants “oil and gas” or “oil, gas, and other hydrocarbons” and is silent about ownership of produced water, “incidentally produced” subsurface water “was included in the hydrocarbon conveyances” (ante at 21). The lessee thus obtains possession and control over the disposition of the liquid-waste byproduct, including its water component (ante at 2–3, 21–22).
  3. This is a default rule only. The landowner and mineral lessee “are free to strike a different deal” allocating ownership or value of produced groundwater differently (ante at 3). No statute or regulation cited by the Court prevents such private ordering.
  4. Statutes governing fluid oil-and-gas waste (notably Texas Natural Resources Code § 122.002) do not divest landowners of groundwater ownership by operation of law; they establish default rules for ownership once the fluid has been transferred for beneficial reuse, not for the initial lessor-lessee allocation (Busby, fn.4).
  5. The Court does not adopt a broad “product-stream” theory. It expressly rejects the idea that the lessee automatically owns everything in the stream of production (including unleased minerals or other substances) simply because it brought them to the surface (Busby, fn.6; ante at 20 n.58).

C. What the Court Expressly Does Not Decide

Justice Busby emphasizes several important limits:
  • The opinion is limited to leases of “oil and gas” or “oil, gas, and other hydrocarbons.” It does not change the rules governing leases of “all minerals” or the ownership of unleased minerals produced along with leased substances (ante at 3 n.3, 20 n.58).
  • The Court does not decide:
    • whether the lessee owes royalties on revenues from produced water;
    • how to account for profits or losses from beneficial reuse or commercial sale of produced water;
    • whether there are implied covenants regarding management, marketing, or disposition of produced water.
    Those issues are left for future cases (ante at 12–13, 20 n.58).
  • The opinion does not alter the longstanding rule that subsurface water in place is part of the surface estate unless expressly severed. It only clarifies how leases of hydrocarbons are interpreted with respect to water incidentally produced with those hydrocarbons.

III. Legal Background

A. Surface Estate, Mineral Estate, and Groundwater

Texas law recognizes that a tract of land can be divided into distinct estates – most commonly the surface estate and the mineral estate. Ownership of the mineral estate can be severed from the surface estate, and the mineral estate is “dominant” in the sense that the mineral owner (or lessee) has an implied right to use so much of the surface as is reasonably necessary to explore for, produce, and remove minerals.

Groundwater has traditionally been treated as part of the surface estate, not the mineral estate. Justice Busby traces that rule through a long line of cases:

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279 (Tex. 1904) – recognized 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” (Busby at 2 n.1).
  • Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927) – reaffirmed that “ordinary percolating waters” are the exclusive property of the surface owner.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955); Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972) – both confirm that, absent severance, water is part of the surface estate.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973) – held that even briny subsurface water, produced for extraction of its mineral content by a mineral lessee, remains surface estate property “in the absence of specific conveyancing language to the contrary” (Busby at 2 n.1).

More recent authority such as Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016), and Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984), reiterates that groundwater (unless expressly severed) is part of the surface estate and that severed groundwater interests may be analogized to mineral estates for some purposes.

B. Groundwater as Constitutionally Protected Property

The Court’s modern leading case on groundwater ownership is Edwards Aquifer Authority v. Day, 369 S.W.3d 814 (Tex. 2012). There, the Court held that a landowner owns groundwater in place beneath his land in a manner analogous to oil and gas, and that such ownership is protected against uncompensated takings under the Texas Constitution.

Justice Busby notes that:

  • The Texas Water Code recognizes groundwater ownership by surface owners (Tex. Water Code §§ 36.001(5), 36.002(a)).
  • Texas Commission on Environmental Quality regulations similarly acknowledge this principle (30 Tex. Admin. Code § 297.1(22)).
  • These statutes and regulations do not themselves transfer ownership; instead, they operate against the backdrop of common-law property rights (Busby at 2 n.2).

He cites Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20, 26 (Tex. 1990), and the U.S. Supreme Court’s decision in Cedar Point Nursery v. Hassid, 594 U.S. 139 (2021), as well as Tex. Dep’t of Transp. v. Self, 690 S.W.3d 12 (Tex. 2024), to emphasize that regulations may impose obligations or restrictions without necessarily effecting a compensable taking; courts must evaluate such claims against the background of preexisting property rights.

C. Produced Water and Oil-and-Gas Waste

The fluids that come to the surface during oil and gas production typically include:

  • Hydrocarbons (oil and/or gas);
  • Native formation water (groundwater in the reservoir);
  • Injected fluids used in drilling, completion, or enhanced recovery operations;
  • Suspended solids and dissolved minerals (salts, other ions).

After separation, the water fraction – usually saline, mineral-rich, and sometimes contaminated with drilling or completion fluids – is commonly referred to as “produced water” or “oil-and-gas waste”. Texas statutes and Railroad Commission regulations treat this fluid as regulated waste that must be handled and disposed of under strict environmental and safety rules.

In this case, the court of appeals framed the issue largely as whether such fluids are “water” or “waste.” Justice Busby criticizes that framing as unhelpful: the fluids are both:

  • As a physical matter, they are predominantly groundwater that originally belonged to the surface owner.
  • As a legal and regulatory matter, once produced they are also fluid oil-and-gas waste, which the lessee is duty-bound to manage and dispose of safely (ante at 16, 19, 21).

The critical question, then, is who owns that groundwater component after production and separation, not whether it is “really” water or “really” waste.

IV. Precedents and Authorities Cited

A. Historical Groundwater Ownership Cases

Justice Busby’s concurrence situates produced groundwater within the broader tradition of Texas groundwater law:

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279 (Tex. 1904).
    Established the “rule of capture” for groundwater and recognized that percolating groundwater is part of the land, held as property by the surface owner. The case is foundational for the notion that groundwater is treated much like oil and gas in place, but owned as part of the surface estate unless severed.
  • Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927).
    Confirmed that “ordinary percolating waters” belong exclusively to the surface owner. Burkett is often cited for the proposition that water and minerals are distinct estates and that oil-and-gas conveyances, without more, do not transfer groundwater.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955).
    Addressed municipal acquisition and use of groundwater, reinforcing surface-owner control.
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972).
    Explicitly held that, “unsevered expressly by conveyance or reservation,” water is part of the surface estate. Whitaker is particularly relevant in oil-and-gas contexts because it confirms that the mineral lessee’s right to use water is an implied surface use right, not an ownership interest in the water itself.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973).
    Involved briny subsurface water produced so that its mineral content could be extracted by the lessee. The Court held that although the lessee could produce and use the briny water to access its mineral content, the “water itself is an incident of surface ownership” absent specific language to the contrary (Busby at 2 n.1).

Collectively, these decisions support Justice Busby’s reaffirmation that, as a baseline rule, groundwater belongs to the surface estate unless expressly severed.

B. Modern Groundwater Regulation and Takings

  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814 (Tex. 2012).
    Recognized that a landowner has a constitutionally protected property interest in groundwater in place. Regulations by the Edwards Aquifer Authority could, in some circumstances, amount to a compensable taking. Justice Busby cites Day to underscore that:
    • Groundwater is property;
    • Regulation operates against that property baseline;
    • Not all regulation constitutes a taking (Day at 838–843).
  • Cedar Point Nursery v. Hassid, 594 U.S. 139 (2021).
    The U.S. Supreme Court held a California regulation granting union organizers limited access to agricultural employers’ property was a per se physical taking. Justice Busby cites Cedar Point as authority on how background property rights shape takings analysis (Busby at 2 n.2).
  • Tex. Dep’t of Transp. v. Self, 690 S.W.3d 12 (Tex. 2024).
    A recent Texas case reinforcing how background principles of property law inform whether certain governmental intrusions or regulations are takings (Busby at 2 n.2).
  • Statutory recognition:
    • Texas Water Code §§ 36.001(5), 36.002(a): recognize surface owners’ rights in groundwater.
    • 30 Tex. Admin. Code § 297.1(22): regulatory definition aligned with that ownership structure.

Justice Busby stresses that these statutes and rules do not alter common-law ownership, but must be interpreted in harmony with it (Busby at 2 n.2).

C. Cases on Ownership of Non-Hydrocarbon or Mixed Substances

The opinion’s most important doctrinal move is distinguishing between:

  • Substances that are actually leased (e.g., “oil and gas,” or “oil, gas, and other hydrocarbons”); and
  • Other substances or minerals that are not leased but may be physically produced along with the leased substances.

Several precedents illuminate these distinctions:

  • Guffey v. Stroud, 16 S.W.2d 527 (Tex. Comm’n App. 1929, judgm’t adopted).
    Recognized that “a grant of the oil carried with it a grant of the gas and water essential to the enjoyment of the actual grant of the oil” (Busby at 3). This supports the idea that some ancillary substances – including water – can be understood as incidentally included in an oil grant, to the extent necessary for that grant to be enjoyed.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990).
    Dealt with a lease of “oil and casinghead gas” and held that this did not convey ownership of other gas or liquids that became mixed with the product stream during production. The Court refused to treat everything in the mixed stream as if it were covered by the lease, thus preserving ownership of unleased substances for their owners (Busby at 6).
  • Guffey v. Stroud (another aspect).
    In addition to the incidental grant of gas and water, Guffey holds that when a tract is subject to both oil and gas leases held by different entities, the oil lessee is not entitled to the gas produced from a well even if both come from the same borehole (Busby at 6). This reinforces that a lessee cannot claim unleased minerals simply because its operations produced them.
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892 (Tex. May 16, 2025).
    The Court recently held that a lease of “salt” did not convey “ownership of non-salt substances or spaces adjacent to the salt” (Busby at 5). This is closely analogous to the rule here: a specific substance lease (salt; or “oil, gas, and other hydrocarbons”) does not implicitly transfer unrelated minerals or formations.

Justice Busby uses these authorities to make two key points:

  1. The present case concerns leases of “oil and gas” or “oil, gas, and other hydrocarbons,” not of “all minerals” (Busby at 5). Therefore non-hydrocarbon minerals remain unleased and are owned by the party who owns them under general principles.
  2. Consistent with Amarillo Oil and Guffey, production of unleased minerals along with leased ones does not transfer ownership of the unleased minerals to the hydrocarbon lessee (Busby at 6).

D. “Developed Water” in Surface-Water Law

Justice Busby briefly references the “developed water” doctrine recognized in some Texas surface-water cases:

  • 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.).
    Held that where a permittee diverts and develops water at its own expense, it obtains an exclusive right to control that water and apply it to authorized uses, protected from interference.
  • Harrell v. F.H. Vahlsing, Inc., 248 S.W.2d 762 (Tex. App.—San Antonio 1952, writ ref’d n.r.e.).
    Similar recognition of proprietary control over developed water.

Commentators such as Edmond R. McCarthy, Jr., and Frank R. Booth have analyzed this doctrine in the surface-water context (Busby fn.3). Busby’s analogy is that, just as a person who lawfully diverts and develops surface water at their expense gains a protected right to control that water, a mineral lessee who, at its own expense, produces oil and gas also obtains control over the associated produced water against third-party interference. The Court does not formally import the “developed water” doctrine into groundwater law but uses it as a helpful conceptual parallel.

E. Statutory Framework: Texas Natural Resources Code § 122.002

A crucial statutory piece is Texas Natural Resources Code chapter 122, dealing with fluid oil-and-gas waste. The statute:

  • Defines “fluid oil and gas waste” as “waste 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” (Tex. Nat. Res. Code § 122.001(2)).
  • Establishes default rules for when and how ownership of such waste changes hands once it is transferred for treatment and beneficial reuse (§ 122.002(1)).

Justice Busby underscores two important boundaries (fn.4):

  1. The statute addresses the waste after oil or gas has been separated from it by the lessee or its agent. It does not purport to decide who, as between the landowner and lessee, owns the fluid at the point of production or separation.
  2. By its own terms, ownership of the fluid waste changes hands, absent contrary agreement, when it is:
    • Used by, or
    • Transferred to
    a person who takes possession for the purpose of treating it for a subsequent beneficial use (§ 122.002(1)).

Hence, chapter 122 does not affect any agreement between landowner and hydrocarbon lessee about continued ownership of the groundwater component. It only regulates the relationship between the lessee (or generator) and the subsequent user or treater.

F. Royalty and Implied-Covenant Cases

Justice Busby points to several cases not as controlling authority for the present ownership question, but as signposts for future disputes about royalties and implied obligations concerning produced water:

  • Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981).
    Involved lease interpretation and determination of the applicable royalty for a substance not explicitly named in the royalty clause (Madeley at 728 n.1). Busby suggests a similar analysis may eventually be necessary for produced water (Busby at 6–7).
  • French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014).
    Addressed how profits and costs are shared in the context of enhanced-recovery operations (CO2 floods). Busby invokes French as a possible analog for how to allocate “any profit or loss realized from beneficial reuse or disposal of the water” (Busby at 6–7).
  • Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987).
    Discussed implied covenants in oil-and-gas leases (e.g., to reasonably develop, protect, and market the minerals). Busby notes that whether similar implied duties apply regarding produced water remains an open question.

By citing these cases, the concurrence signals that the Court’s default ownership rule will likely trigger follow-on litigation over how produced water is valued, who shares in its economic benefits, and what operational obligations a lessee might owe.

V. The Court’s Legal Reasoning

A. Framing the Question: Not “Water vs. Waste,” but “Was It Leased?”

Justice Busby strongly criticizes the court of appeals’ effort to classify produced fluids as either “water” or “waste” (676 S.W.3d 733, 738 (Tex. App.—El Paso 2023)):

  • Physically and as a matter of property law, the fluid is groundwater that originally belonged to the landowner.
  • As a matter of statutory and regulatory law, once produced and separated from hydrocarbons, it is oil-and-gas waste which the lessee must handle and dispose of properly (ante at 16, 19, 21).

Because it is simultaneously water and waste, the classification exercise does not resolve the ownership question. Instead, Busby directs attention to the actual issue: did the landowners lease this groundwater to the lessee? That is a question of lease interpretation, not of regulatory nomenclature.

B. Groundwater in Place: Surface Ownership Plus Mineral Lessee’s Implied Right

The concurrence reaffirms that:

  • Unless severed by express conveyance, subsurface water is part of the surface estate.
  • However, the mineral lessee has an implied easement to use the surface estate, including water, as is reasonably necessary to produce and remove the minerals (ante at 16).

Thus, prior to production:

  • The surface owner owns the groundwater in place.
  • The mineral lessee has non-ownership rights to use reasonable amounts of that water in connection with hydrocarbon operations.

The novel question is what happens after the water is brought to the surface, mixed with produced hydrocarbons, and then separated in field facilities.

C. Interpreting “Oil and Gas” or “Oil, Gas, and Other Hydrocarbons” Leases

The Court concludes that the common and ordinary meaning of a grant of hydrocarbons in an oil-and-gas lease includes the water incidentally produced with those substances at the lessee’s expense, for which the lessee is responsible to dispose, and which it must be able to manage “free from third-party interference” (ante at 21–22).

By relying on Guffey v. Stroud and analogous reasoning, the Court treats produced water as:

  • An incident of the hydrocarbon estate once production occurs; and
  • Part of the “bundle” of rights necessary to enjoy the actual grant of oil and gas.

Accordingly, a lease of “oil and gas” or “oil, gas, and other hydrocarbons,” even if silent on produced water, is interpreted to include:

  • The right to produce hydrocarbons;
  • Possession and control over the liquid-waste byproduct, including the constituent water, for purposes of storing, treating, reusing, or disposing of it.

D. The Default Rule: Incidentally Produced Water Is Included in the Conveyance

Putting the pieces together, Justice Busby endorses the Court’s central conclusion:

“I agree with the Court that ‘incidentally produced’ subsurface water ‘was included in the hydrocarbon conveyances.’” (Busby at 3, quoting ante at 21).

He further describes the holding as:

“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.’” (Busby at 4, quoting ante at 2–3).

Key features of this default rule:

  • The rule applies when the lease:
    • Grants “oil and gas” or “oil, gas, and other hydrocarbons”; and
    • Is silent about ownership of groundwater produced with those hydrocarbons.
  • The lessee acquires possession and control of the produced water for purposes of handling, treating, or disposing of it.
  • The rule is grounded both in:
    • The practical necessity of lessee control (given regulatory duties); and
    • Interpretive logic that the leased hydrocarbons carry with them the burdens (and opportunities) associated with the waste stream they necessarily generate.

E. Rejection of a Broad “Product Stream” Theory

Justice Busby is careful to distinguish the Court’s holding from the more expansive theory advanced by COG and adopted by the court of appeals majority, namely that the lessee owns the entire “product stream” and everything in it simply because the lessee caused the production.

The Court does not adopt that theory (Busby fn.6; ante at 20 n.58). Instead:

  • The lessee’s ownership is coextensive with the substances actually granted or reasonably implied in the lease (here, hydrocarbons and water incidentally produced with them, to the extent necessary to enjoy the hydrocarbon grant).
  • Substances that are not leased – like other minerals not expressly or impliedly included in the lease – remain owned by their respective owners, even if physically commingled with the leased substances during production.

This careful limitation preserves the logic of Amarillo Oil, Guffey, and Myers-Woodward: no mineral lessee acquires title to unleased substances merely by being the operator who produced them.

F. No New Rule on Unleased Minerals

Justice Busby emphasizes that the Court’s opinion “does not break any new ground regarding ownership of unleased minerals or other substances” (Busby at 5). The reasoning remains:

  • Under Moser v. U.S. Steel, a grant of “all minerals” or “oil, gas, and other minerals” is construed to convey all substances ordinarily understood as “minerals” unless clearly excluded (Moser, 676 S.W.2d at 102).
  • But where, as here, the grants are only of “oil and gas” or “oil, gas, and other hydrocarbons,” no non-hydrocarbon minerals are leased (Busby at 5).
  • Following Amarillo Oil and Guffey, production of unleased minerals along with leased hydrocarbons does not shift ownership of those unleased minerals to the hydrocarbon lessee (Busby at 6).

The only new interpretive move is the inclusion, by default, of incidentally produced groundwater within the hydrocarbon grant, as a component of the waste stream that is functionally tied to hydrocarbon production.

G. Relationship to Statutory Regimes and Takings Doctrine

The concurrence insists that:

  • Nothing in the Court’s ruling alters the common-law baseline that the surface owner owns groundwater in place.
  • Statutory regimes (Water Code, Natural Resources Code ch. 122) regulate how those existing rights may be exercised or transferred, but do not themselves reallocate ownership unless clearly stated.
  • Any claim that a regulation effects a taking must be evaluated against these background property rules (citing Day, Cedar Point, and Self).

By treating the Court’s interpretation of leases as a default contractual rule rather than a direct reallocation of property by statute, Busby avoids raising additional takings concerns. The parties remain free to negotiate around the default and to allocate both risk and reward associated with produced water as they see fit.

H. Issues Deliberately Left Open

Justice Busby ends by emphasizing that the Court’s opinion:

  • Does not decide the financial consequences between the landowners and lessee arising from the inclusion of produced groundwater in the lease:
    • Will the lessee owe royalties on water it produces and sells or reuses?
    • How should profit or loss from beneficial reuse or commercial sale be accounted for as between lessor and lessee?
    • Do any implied covenants govern produced-water management, marketing, or disposition?
  • Leaves open the possibility that, depending on lease language, these issues could be resolved by:
    • Analogizing to Sun Oil v. Madeley (royalty determinations for unnamed substances);
    • Adapting the profit-sharing and expense-allocation analyses from French v. Occidental Permian;
    • Extending existing implied-covenant doctrines as in Cabot Corp. v. Brown.
  • Does not opine on how parties should measure or allocate volumes of produced water where ownership is split or where non-native fluids have been injected (Busby at 5; cf. Humble Oil v. West, 508 S.W.2d 812 (Tex. 1974)).

Busby underscores that, particularly if landowners retain some ownership interest in produced groundwater, they would be “well advised to agree upon a practical method” for quantifying such interests (Busby at 5).

VI. Complex Concepts Simplified

A. Surface Estate vs. Mineral Estate (and Dominance)

  • Surface estate: Everything above the ground and the soil itself, including the right to use and enjoy the surface, plus groundwater (unless severed).
  • Mineral estate: The subsurface minerals (like oil, gas, and sometimes other minerals) granted or reserved by deed or lease.
  • Dominant estate concept: The mineral estate is “dominant” because the mineral owner or lessee can use as much of the surface as is reasonably necessary to produce the minerals, but this does not give them ownership of the surface or groundwater in place.

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

  • Produced water: Water (usually saline, mineral-rich formation water) that comes to the surface with oil or gas during production.
  • Oil-and-gas waste: A regulatory term that includes produced water, flowback, and other fluids arising from oil and gas operations. The lessee is legally responsible for managing and disposing of this waste under Railroad Commission and other regulations.

In this decision, produced water is treated simultaneously as:

  • Water originally owned by the surface owner as groundwater; and
  • Waste associated with the hydrocarbon production process, which the lessee must control and handle.

C. “Incidentally Produced” and “Developed Water”

  • Incidentally produced water: Water that is unavoidably brought to the surface as part of producing oil or gas, rather than being intentionally produced as the primary target resource.
  • Developed water (surface-water context): A doctrine under which someone who diverts and develops water at their own expense gains exclusive control over that water for beneficial use, protected against third-party interference. Justice Busby uses this concept by analogy to justify giving the lessee exclusive control of produced water it has brought to the surface at its own expense.

D. “Default Rule” and Contracting Around It

  • A default rule is a legal rule that applies when the parties have not agreed otherwise in their contract or lease.
  • Here, the default is that, absent express lease terms to the contrary:
    • Subsurface water in place is owned by the surface owner; but
    • Groundwater incidentally produced with hydrocarbons and separated from them is treated as part of the hydrocarbon conveyance, giving the lessee possession and control of that produced water.
  • Parties remain free to negotiate a different allocation – for example, by:
    • Reserving ownership of produced water to the surface owner;
    • Granting the lessee only a non-exclusive use right with revenue-sharing provisions;
    • Setting explicit royalty rates on produced water sales.

E. Implied Covenants and Royalties (Basic Concepts)

  • Royalties: The landowner’s share of production or proceeds under an oil-and-gas lease, usually expressed as a fraction of production or revenue, sometimes net of certain costs.
  • Implied covenants: Duties not expressly stated in the lease but implied by law, such as:
    • To reasonably develop the lease;
    • To protect against drainage;
    • To market production as a reasonably prudent operator.
  • The Court leaves open whether similar implied covenants will be recognized with respect to management and marketing of produced water, should the lease be construed to grant the lessee valuable water rights.

VII. Impact and Future Implications

A. Consequences for Surface Owners and Groundwater Markets

For surface owners, the decision has a mixed effect:

  • It reaffirms that they own groundwater in place and that this ownership is constitutionally protected against uncompensated governmental takings.
  • However, absent explicit lease language, it establishes that they ordinarily do not control groundwater once it is incidentally produced with hydrocarbons and separated. That control belongs to the lessee as part of the hydrocarbon leasehold.
  • If surface owners wish to benefit economically from produced water – for example, by selling it to water midstream companies or reusing it for other purposes – they will now need:
    • Either leases that expressly reserve or define ownership and rights in produced water, or
    • Separate agreements with the lessee recognizing such surface-owner rights.

This will likely drive more detailed drafting of oil-and-gas leases and separate water agreements, addressing:

  • Ownership of produced water;
  • Right to sell or reuse it;
  • Allocation of costs and liabilities for storage, treatment, and transportation; and
  • Royalty or profit-sharing provisions for water-related revenue streams.

B. Effects on Mineral Lessees and Water Midstream Companies

For mineral lessees like COG:

  • The decision provides greater certainty and security that they have exclusive control of the produced-water stream, enabling them to fulfill regulatory obligations without interference.
  • It strengthens their legal position vis-à-vis third parties (such as water midstream companies) that might contract solely with surface owners claiming rights to produced water.
  • It may create incentives to monetize produced water (through beneficial reuse or sale), subject to whatever contractual obligations exist with the lessor.

For water midstream companies like Cactus Water Services:

  • The decision underscores that contracting only with surface owners is not sufficient in many cases to secure rights to produced water.
  • Going forward, midstream companies will likely:
    • Insist on contracts directly with the mineral lessee (or its operator); or
    • Require surface owners to demonstrate that their leases reserve sufficient rights to produced water to support the surface-owner’s grant.
  • Project financing and risk allocation will need to take the Court’s default rule into account, especially where leases are silent about water.

C. Drafting Implications for Leases and Related Agreements

Given the Court’s clear statement that the rule is a default, sophisticated parties are likely to respond by:

  • Adding specific “produced water” clauses to oil-and-gas leases, addressing:
    • Who owns produced water upon production and after separation;
    • Who bears costs of disposal vs. who reaps any profits from reuse or sale;
    • Whether royalties are owed on produced-water-related revenue streams;
    • Standards of care and operational obligations for water handling.
  • Negotiating separate water-use and water-disposal agreements between surface owner and lessee, or between lessee and third-party water companies, to align with Natural Resources Code § 122.002’s rules on ownership transfers for beneficial reuse.
  • Addressing measurement issues directly – for example, specifying how to quantify:
    • Volumes of produced water;
    • Fractions attributable to native groundwater vs. injected fluids; and
    • Allocations in commingled systems (drawing on principles from Humble Oil v. West).

D. Regulatory and Takings Ramifications

Although the opinion is primarily about private law between lessor and lessee, it will indirectly shape public-law disputes:

  • By clarifying that surface owners still own groundwater in place, the decision preserves the foundation for future takings challenges like those in Day, should regulations severely restrict groundwater use.
  • At the same time, by confirming that lessees hold possession and control of produced water as part of the leasehold, the Court supports the regulatory expectation that operators, not surface owners, are primarily responsible for compliance with waste-handling rules.
  • The decision avoids any implication that statutes like Natural Resources Code § 122.002 have reallocated groundwater property rights by operation of law, thereby minimizing additional takings concerns that might otherwise arise.

E. Open Questions Likely to Generate Future Litigation

Justice Busby’s concurrence identifies several questions that remain open and are almost certain to become focal points in future cases:
  • Royalties on produced water: If produced groundwater is “leased” to the mineral lessee, is it:
    • A separate “substance” subject to royalty, akin to those addressed in Sun Oil v. Madeley?
    • An incidental benefit of the hydrocarbon estate not separately royalty-bearing?
  • Profit and cost sharing: How should profits (or losses) from beneficial reuse or commercial sale of produced water be allocated between:
    • Lessor and lessee; and
    • Lessee and third-party water-treating companies?

    Cases like French v. Occidental Permian may provide a framework but do not answer this directly.

  • Implied covenants specific to produced water: Are there implied duties requiring a lessee to:
    • Reasonably maximize value from produced water (e.g., by pursuing beneficial reuse rather than mere disposal)?
    • Share information or revenues with lessors when produced water is monetized?
    Or will courts treat produced water purely as a waste-management issue within the lessee’s discretion?
  • Ownership where leases explicitly address water: When future leases contain detailed produced-water provisions, courts will be called upon to interpret those clauses, potentially leading to new doctrines about concurrent or fractional ownership of produced water.
  • Interaction with severed groundwater estates: Where groundwater rights have been separately severed from surface rights (as in some large ranch or municipal transactions), how do those severed rights interact with the default rule that incidentally produced water is included in hydrocarbon conveyances?

VIII. Conclusion

Cactus Water Services, LLC v. COG Operating, LLC, as illuminated by Justice Busby’s concurrence, establishes an important but carefully cabined default rule in Texas oil-and-gas and groundwater law:

  • Groundwater in place remains part of the surface estate unless expressly severed, and enjoys constitutional protection as property under cases like Edwards Aquifer Auth. v. Day.
  • Nevertheless, when that groundwater is incidentally produced with oil and gas under leases that grant “oil and gas” or “oil, gas, and other hydrocarbons” and are silent about produced water, the common understanding of such grants – buttressed by regulatory realities and cases like Guffey v. Stroud – is that the lessee acquires possession and control over the resulting liquid-waste byproduct, including the constituent water.
  • This interpretive rule is default and contractual, not mandatory or statutory. Landowners and lessees remain free to “strike a different deal” explicitly allocating ownership, control, and economic value of produced water.
  • The Court expressly declines to adopt a sweeping “product-stream” theory and reaffirms traditional rules that production of unleased minerals does not transfer ownership of those minerals to the hydrocarbon lessee.

The decision will significantly shape how parties draft oil-and-gas leases and related water agreements, how water midstream businesses structure their contracts, and how courts analyze future disputes over royalties, profit-sharing, and implied covenants involving produced water. At the same time, it leaves the door open for substantial further development in Texas law at the intersection of minerals, groundwater, and waste reuse.

In sum, Cactus Water Services marks an important doctrinal step in clarifying that, by default, the burden and control of produced water travel with the hydrocarbon lease – not with the surface estate – while preserving the foundational principle that groundwater in place remains a protected surface interest unless the parties clearly and expressly agree otherwise.

Case Details

Year: 2025
Court: Supreme Court of Texas

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