Default Rule: Oil-and-Gas Conveyance Includes Control of Incidentally Produced Groundwater in Liquid-Waste Byproduct Unless Expressly Reserved

1. Introduction

Cactus Water Services, LLC v. COG Operating, LLC comes to the Supreme Court of Texas on petition for review from the Eighth Court of Appeals. Justice Busby (joined by Justices Lehrmann and Sullivan) writes a concurrence emphasizing what the Court’s opinion does and does not decide.

The central practical question is ownership and control of groundwater that is produced alongside hydrocarbons: when a landowner has leased “oil and gas” or “oil, gas, and other hydrocarbons,” and the lease limits the lessee’s right to use water, who owns the groundwater once it is produced in a mixed stream with oil and then separated—surface owner or mineral lessee?

The concurrence frames the dispute as one of contractual intent and default property rules, cautioning against treating the issue as a mere classification debate over whether the produced fluid is “water” or “waste.”

2. Summary of the Opinion (as addressed in the concurrence)

Justice Busby agrees with the Court’s key holdings:

  • Baseline ownership: “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 minerals.
  • Default conveyance rule for incidentally produced water: When an oil-and-gas conveyance does not expressly address the matter, it conveys to the hydrocarbon lessee “possession and control over the disposition of liquid-waste byproduct,” including its “constituent water” (i.e., groundwater produced with hydrocarbons at the lessee’s expense and subject to regulatory disposal duties).

The concurrence stresses the decision is narrow: it establishes a default rule that parties may contract around, and it leaves open numerous downstream questions (royalties, accounting, implied covenants, etc.).

3. Analysis

3.1 Precedents Cited

The concurrence anchors the Court’s default rule within long-settled Texas property principles—surface ownership of groundwater—while also relying on oil-and-gas conveyancing doctrine recognizing that a mineral grant carries necessary incidents.

A. Surface estate ownership of groundwater (and the “unless severed” principle)

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279, 281 (Tex. 1904): identifies the early Texas rule treating percolating groundwater as part of the land (and thus owned by the landowner), setting the background property principle.
  • Texas Co. v. Burkett, 296 S.W. 273, 278 (Tex. 1927): reiterates “ordinary percolating waters” as “exclusive property” of the surface owner.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798, 802 (Tex. 1955): reinforces groundwater’s treatment as part of surface ownership in disputes over water rights.
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808, 811 (Tex. 1972): restates that water, unless expressly severed, is part of the surface estate—an important predicate for the Court’s “unless expressly severed” formulation.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865, 867 (Tex. 1973): particularly influential because it recognizes that even briny, mineral-laden water may be produced for mineral extraction, yet “the water itself is an incident of surface ownership in the absence of specific conveyancing language to the contrary.” The concurrence uses this to separate (i) ownership of water in place from (ii) what a mineral conveyance may include by default for operational purposes.
  • City of Sherman v. Pub. Util. Comm'n of Tex., 643 S.W.2d 681, 686 (Tex. 1983), and Moser v. U.S. Steel Corp., 676 S.W.2d 99, 101-02 (Tex. 1984): reaffirm broader mineral and property interpretive principles that inform how conveyances are read against background rules.
  • Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 63 & n.43 (Tex. 2016): modern confirmation that groundwater remains with the surface estate absent severance; also relevant to implied surface-use principles.

B. Constitutional protection and regulatory “backdrop”

  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814, 823-838 (Tex. 2012): crucial to the concurrence’s emphasis that groundwater ownership is a protected property right; regulations cannot silently reallocate ownership without raising takings issues.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20, 26 (Tex. 1990): cited for the proposition that statutes and regulations do not alter common-law property rights, underscoring that the default rule comes from conveyancing and common law, not agency redefinition.
  • Cedar Point Nursery v. Hassid, 594 U.S. 139, 160, 161 (2021), and Tex. Dep't of Transp. v. Self, 690 S.W.3d 12, 27 (Tex. 2024): invoked to frame property rights as the baseline for assessing whether government actions effect a taking, supporting the concurrence’s point that regulation of “waste” does not itself decide ownership.

C. Mineral conveyancing: incidents, commingling, and unleased substances

  • Guffey v. Stroud, 16 S.W.2d 527, 528 (Tex. [Comm'n Op.] 1929): the centerpiece for the default incident rule—“a grant of the oil carried with it a grant of the . . . water . . . essential to the enjoyment of the actual grant of the oil.” The concurrence uses this to justify including incidentally produced water in the hydrocarbon conveyance when necessary to produce and dispose of the stream.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20, 25-27 & n.6 (Tex. 1990), and Guffey v. Stroud, 16 S.W.2d at 528-29: cited to clarify what the Court is not doing—i.e., it is not transferring ownership of genuinely unleased minerals/substances merely because they are produced along with leased minerals.
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892, at *6 (Tex. May 16, 2025): a contemporary confirmation that a lease of one substance (salt) does not convey ownership of other substances or adjacent spaces; used to reinforce limits on “bundle-of-rights” arguments.

D. Related doctrines referenced (surface water “developed water” analogy)

  • Guelker v. Hidalgo County Water Improvement Dist. No. 6, 269 S.W.2d 551, 553 (Tex. App.—San Antonio 1954, writ ref'd n.r.e.), and Harrell v. F.H. Vahlsing, Inc., 248 S.W.2d 762, 768-770 (Tex. App.—San Antonio 1952, writ ref'd n.r.e.): offered as an analogy—when a party develops/diverts water at its own expense, it may gain exclusive control against third-party interference. The concurrence does not adopt this doctrine for produced water, but uses it to show the intuitive structure of the Court’s default allocation.

E. Issues left open: royalties, accounting, implied covenants

  • Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 728 n.1 (Tex. 1981): cited by the concurrence to illustrate unresolved royalty questions for an “unnamed substance” once produced water is treated as within the lease by default.
  • French v. Occidental Permian Ltd., 440 S.W.3d 1, 8-10 (Tex. 2014): referenced for potential accounting/profit-and-loss allocation issues associated with post-production handling and value.
  • Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex. 1987): cited to flag the possibility of implied covenants concerning management of the produced water—a major open question because the leases did not expressly address it.
  • Humble Oil & Ref. Co. v. West, 508 S.W.2d 812, 818-19 (Tex. 1974): invoked in connection with practical measurement/burden issues when substances are injected or commingled—relevant to proving volumes and allocating ownership/value.

3.2 Legal Reasoning

The concurrence’s reasoning proceeds in three steps:

  1. Start with baseline title: Texas common law treats groundwater (including “mineral-laden native water”) as owned by the surface estate, and the Water Code recognizes that ownership (TEX. WATER CODE §§ 36.001(5), 36.002(a); see also 30 TEX. ADMIN. CODE § 297.1(22)).
  2. Avoid the “water vs. waste” distraction: Produced fluids can be both groundwater (as a property concept) and “oil-and-gas waste” (as a regulatory classification). Regulatory duties to manage/dispose do not, by themselves, answer who owns the constituent water.
  3. Apply conveyancing defaults and operational necessity: Absent express lease terms, the “common and ordinary meaning” of granting hydrocarbons includes the incident right to possess and control the liquid-waste byproduct (including constituent water) that is produced at the lessee’s expense and must be disposed of without third-party interference. This is justified both by (a) implied surface-use rights reasonably necessary for production and (b) the historical “incident” principle articulated in Guffey.

A key limiting move is the concurrence’s insistence that the holding is a default rule, not a mandatory one: parties may “strike a different deal” by expressly reserving, allocating, or granting rights in produced water.

3.3 Impact

The concurrence identifies (and helps shape) the decision’s likely effects:

  • Drafting incentives: Leases and surface-use agreements in Texas oil and gas will likely begin to address “produced water” expressly—ownership, measurement/allocation methodologies, sale/treatment rights, revenue sharing, indemnities, and operational control.
  • Operational certainty for lessees: By default, lessees gain “possession and control” to comply with waste-handling duties and to avoid interference risk—important for disposal logistics and beneficial-reuse projects.
  • New litigation fronts: The concurrence spotlights issues that are now primed for litigation: royalties on produced water (if any), accounting for profits/costs of treatment and sale, implied covenants on water management, and evidentiary burdens for quantifying “constituent water.”
  • Interaction with statutory defaults: The Natural Resources Code’s later-enacted default rules (TEX. NAT. RES. CODE § 122.002) may govern certain transfers for beneficial use, but the concurrence reads the statute as not preventing private reallocation in the lease itself—suggesting contract terms will remain central even under evolving produced-water reuse markets.
  • Property-rights continuity: By grounding the analysis in common-law ownership and takings jurisprudence, the concurrence signals skepticism toward arguments that regulatory labels alone reassign title—relevant beyond produced water to other regulated byproducts.

4. Complex Concepts Simplified

Surface estate vs. mineral estate
Texas property can be split: the surface owner may own groundwater and the surface, while a mineral owner/lessee holds rights to explore for and produce minerals. The mineral right typically includes an implied right to use the surface as reasonably necessary.
“Unless expressly severed”
Water is presumed part of the surface estate unless a deed/lease clearly separates (severs) it from the surface and grants it to someone else.
Produced water / liquid-waste byproduct
Water that comes up with oil and gas during production. It may be salty or mineralized. Regulators may classify it as “waste,” imposing handling and disposal duties, but that classification does not automatically decide ownership.
Default rule vs. mandatory rule
A default rule applies only if the parties’ contract is silent. The parties can change the outcome by drafting explicit terms.
Implied covenants
Judge-made duties that can arise in oil-and-gas leases even if not written—such as duties to act as a reasonably prudent operator. The concurrence notes potential implied duties regarding produced-water management but emphasizes the Court did not decide them.

5. Conclusion

Justice Busby’s concurrence underscores that the Supreme Court of Texas has adopted a narrow, contract-sensitive default rule: when an oil-and-gas/hydrocarbon conveyance does not expressly address produced water, the lessee receives possession and control over the disposition of the liquid-waste byproduct, including its constituent groundwater. The rule is justified by longstanding groundwater ownership principles, the mineral lessee’s implied operational rights, and conveyancing doctrine recognizing that a mineral grant carries necessary incidents.

Equally important, the concurrence clarifies what remains open: parties may draft around the default; the decision does not alter rules for unleased minerals; and it does not resolve royalties, accounting, or implied-covenant obligations regarding produced water. Those questions—now clearly framed—are likely to define the next phase of Texas produced-water and oil-and-gas lease litigation.