Default Rule: Hydrocarbon Leases Convey Control of “Incidentally Produced” Groundwater as Liquid-Waste Byproduct Unless the Lease Says Otherwise

I. Introduction

In Cactus Water Services, LLC v. COG Operating, LLC, the Supreme Court of Texas addressed a recurring oilfield question with growing economic significance: when groundwater is produced commingled with hydrocarbons under an “oil and gas” or “oil, gas, and other hydrocarbons” lease that does not expressly allocate rights to produced water, who has the right to possess and control that water once separated from the hydrocarbons—the surface owner (as owner of groundwater) or the hydrocarbon lessee (as the party producing and disposing of it as a waste byproduct)?

Justice Busby, joined by Justices Lehrmann and Sullivan, wrote separately to concur, emphasizing that the Court’s holding is a narrow, default rule that applies only absent express lease language, and that the decision leaves substantial downstream issues (royalties, accounting, implied covenants, and operational standards) for future cases.

II. Summary of the Opinion (Concurring)

Justice Busby agrees with two central propositions in the Court’s opinion:

  1. Baseline property rule: “Unless expressly severed, subsurface water remains part of the surface estate,” though it is subject to the mineral lessee’s implied right to use the surface (including water) as reasonably necessary to produce and remove minerals.
  2. Default lease-construction rule for produced water: when a hydrocarbon conveyance does not expressly address produced water, the conveyance includes “incidentally produced” subsurface water as part of the production stream and therefore gives the lessee possession and control over the disposition of the liquid-waste byproduct, including its “constituent water,” free from third-party interference.

The concurrence also highlights what the Court does not decide: parties may contract around the default; the ruling does not expand hydrocarbon leases into grants of non-hydrocarbon minerals; and the decision does not resolve financial and operational obligations between landowners and lessees regarding produced water (e.g., royalties, profits from reuse, implied covenants).

III. Analysis

A. Precedents Cited

1. Texas groundwater ownership and the surface estate

Justice Busby situates the dispute within a long line of Texas cases recognizing groundwater as an incident of surface ownership:

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279 (Tex. 1904) (describing the common-law view that percolating groundwater is part of the land).
  • Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927) (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) (groundwater ownership principles applied in disputes between municipalities).
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972) (unsevered water is part of the surface estate).
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973) (even mineral-laden briny water remains an incident of surface ownership “in the absence of specific conveyancing language to the contrary,” while recognizing a mineral lessee may produce such water for mineral extraction).
  • City of Sherman v. Pub. Util. Comm'n of Tex., 643 S.W.2d 681 (Tex. 1983) (groundwater ownership concepts in regulatory setting).
  • Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984) (general mineral-intent principles; invoked here to contrast “all minerals” grants with narrower hydrocarbon-only grants).
  • Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016) (modern articulation of groundwater rights and accommodation principles in water-related disputes).
  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814 (Tex. 2012) (groundwater ownership is a constitutionally protected property interest for takings analysis).

These cases supply the “starting point”: groundwater belongs to the surface estate unless severed. The Court’s task, as the concurrence frames it, is not to rewrite that rule, but to decide what the parties’ hydrocarbon conveyance includes by default when produced water is incidentally brought to the surface and must be handled as regulated oilfield waste.

2. Oil-and-gas conveyancing: what is impliedly included, and what is not

The concurrence relies on precedent recognizing that a mineral grant often carries implied rights necessary to realize the grant:

  • Guffey v. Stroud, 16 S.W.2d 527 (Tex. [Comm'n Op.] 1929) (a grant of oil carried with it a grant of water “essential to the enjoyment of the actual grant”).

It also emphasizes decisions limiting a lessee’s claim to substances not conveyed:

  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990) (a lease of only oil and casinghead gas did not convey ownership of other gas or liquids mixed into the product stream during production).
  • Guffey v. Stroud, 16 S.W.2d 527 (Tex. [Comm'n Op.] 1929) (oil lessee not entitled to gas where gas was leased to another entity).
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892 (Tex. May 16, 2025) (lease of salt did not convey “ownership of non-salt substances or spaces adjacent to the salt”).

This line of authority supports the concurrence’s limiting principle: the Court’s produced-water default rule is about what is included in a hydrocarbon conveyance as an incident of producing hydrocarbons—not a general endorsement of a “product stream” ownership theory (which the concurrence notes the Court did not adopt).

3. Statutory/regulatory backdrop and takings framing

The concurrence uses statutes and takings cases to clarify the legal landscape:

  • TEX. WATER CODE §§ 36.001(5), 36.002(a) and 30 TEX. ADMIN. CODE § 297.1(22) are cited as consistent with recognizing groundwater ownership, but not as altering common-law property rights.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990) is cited for the proposition that statutes/regulations generally do not alter common-law property rights absent clear intent.
  • Cedar Point Nursery v. Hassid, 594 U.S. 139 (2021) and Tex. Dep't of Transp. v. Self, 690 S.W.3d 12 (Tex. 2024) are invoked to explain that background property rights frame takings analysis.
  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814 (Tex. 2012) is used to distinguish between compensable takings and non-compensable regulation.
  • TEX. NAT. RES. CODE § 122.001(2) and § 122.002(1) are discussed to show legislative default rules for “fluid oil-and-gas waste” ownership upon transfer/possession for treatment for beneficial use—while emphasizing those provisions do not prevent landowner–lessee contracting over groundwater components.

B. Legal Reasoning

1. Rejecting the “water vs. waste” false choice

A key move in the concurrence is methodological: it criticizes the court of appeals’ framing—whether the produced fluid is “water or . . . waste” (676 S.W.3d 733, 738 (Tex. App.—El Paso 2023)). For Justice Busby, the produced fluid is both:

  • It includes groundwater that originates in the subsurface and, absent severance, is owned as part of the surface estate; and
  • It is classified as oil-and-gas waste, triggering the lessee’s duties to handle and dispose of it safely under statutory and regulatory regimes.

Thus, the interpretive question becomes: did the hydrocarbon lease, by its terms (express or implied), lease the groundwater component when it is incidentally produced with hydrocarbons?

2. The default construction: “incidentally produced” water is included in hydrocarbon conveyances

The concurrence endorses the Court’s core construction: the “common and ordinary meaning” of a hydrocarbon grant includes the water incidentally produced alongside hydrocarbons at the lessee’s expense, which the lessee must dispose of—thereby conferring on the lessee possession and control over disposition of the liquid-waste byproduct, including constituent water, absent contrary lease language.

This reasoning harmonizes three ideas:

  • Surface ownership remains the baseline (groundwater is part of the surface estate unless severed);
  • The mineral estate carries implied rights to use the surface as reasonably necessary to develop the leased minerals; and
  • Production necessarily generates waste streams that the lessee must manage without interference, and default lease meaning includes control over those incident byproducts.

3. The decision is expressly “default” and expressly “narrow”

Justice Busby stresses that the holding applies only where the “oil-and-gas conveyance . . . does not expressly address the matter.” The parties remain “free to strike a different deal.” The concurrence underscores that nothing identified in the statutory/regulatory scheme prevents contracting around the default rule or divests landowners of groundwater ownership by operation of law.

4. Questions reserved for future litigation

The concurrence identifies major unresolved issues that are likely to drive future disputes:

  • Royalty/accounting treatment: whether a lessee would owe royalties on produced groundwater if it is treated as within the lease, with Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981) flagged as an analogy for determining royalties for an unnamed substance.
  • Profits/losses from reuse or disposal: how to allocate value (or cost) if produced water is beneficially reused, with French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014) cited as a possible analog for accounting disputes.
  • Implied covenants: whether and how implied covenants apply to produced-water management where leases are silent, citing Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987).
  • Measurement/practicability: the practical difficulty of determining “how much” of the liquid-waste byproduct remains owned by a landowner under a contractual departure from the default, with a comparison to injection and tracing problems discussed in Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974).

C. Impact

The concurrence frames the Court’s holding as a transaction-default rule with immediate operational and commercial consequences:

  • Contract drafting: Leases and amendments are likely to become more explicit about produced-water ownership, control, commercialization, and revenue allocation, because the “silence” default favors lessee possession/control over disposition.
  • Produced-water markets and reuse: By locating control (by default) with the operator/lessee responsible for disposal, the rule may reduce title friction for recycling and reuse projects—while simultaneously encouraging landowners to negotiate express reservations or sharing arrangements.
  • Regulatory alignment: Treating produced water as part of the hydrocarbon conveyance by default aligns control with the party bearing regulatory duties to manage oil-and-gas waste, potentially reducing third-party interference arguments.
  • Future litigation hotspots: The concurrence signals likely next-wave disputes over royalties, implied covenants, valuation of beneficial use, and the enforceability/administrability of contractual water reservations.

IV. Complex Concepts Simplified

  • Surface estate vs. mineral estate: Texas property can be split so one party owns the surface (including groundwater by default) and another owns minerals. Mineral development often requires use of the surface.
  • Implied right to use the surface (implied easement): Even if not written, a mineral lessee typically has an implied right to use as much of the surface (including water) as is reasonably necessary to produce minerals.
  • Produced water / incidentally produced water: Water brought to the surface during oil-and-gas production as a byproduct, often commingled with hydrocarbons and other substances.
  • Oil-and-gas waste classification: Even if the fluid is “water,” the law may also regulate it as “waste,” imposing handling and disposal duties on the operator.
  • Default rule: A legal rule that applies only when parties have not expressly agreed otherwise; it is a “gap-filler,” not an unchangeable mandate.
  • Takings (property rights vs. regulation): Recognizing groundwater as property (as in Edwards Aquifer Auth. v. Day) does not mean all regulation is a taking; compensation depends on how severely regulation burdens property rights.
  • “Developed water” analogy: In surface-water cases (e.g., Guelker v. Hidalgo County Water Improvement Dist. No. 6; Harrell v. F.H. Vahlsing, Inc.), courts have sometimes protected the party who captures/diverts water at its own expense from third-party interference—analogous to the operator’s control over produced-water disposition.

V. Conclusion

Justice Busby’s concurrence crystallizes the decision’s significance while cabining its reach. Texas continues to treat groundwater as owned by the surface estate unless expressly severed, and that ownership is meaningful for takings purposes. But when groundwater is incidentally produced as part of hydrocarbon production under a lease silent on produced water, the Court adopts a practical default: the hydrocarbon conveyance includes the incidentally produced water to the extent necessary to give the lessee possession and control over disposition of the liquid-waste byproduct.

Equally important, the concurrence flags the next set of legal battlegrounds—royalties, profit allocation, operational standards, and implied covenants—ensuring that Cactus Water Services will be a foundation for produced-water contracting and litigation rather than the last word on produced-water economics.