Default Rule: Oil-and-Gas Conveyances Include Incidentally Produced Groundwater and Grant the Lessee Control of Produced-Water Disposition Absent Express Lease Language

1) Introduction

Case: Cactus Water Services, LLC v. COG Operating, LLC, Supreme Court of Texas (Opinion filed June 27, 2025).
Writing: Justice Busby, joined by Justice Lehrmann and Justice Sullivan, concurring.
Posture: Petition for review from the Court of Appeals for the Eighth District of Texas.

The dispute centers on a recurring modern oilfield question: when groundwater is produced commingled with hydrocarbons under leases of “oil and gas” or “oil, gas, and other hydrocarbons,” and the lease limits the lessee’s right to use water, who owns (and controls) the groundwater component once it is brought to the surface as part of the production stream—particularly after the hydrocarbons are separated? The concurrence frames the inquiry as one of lease construction against the backdrop of Texas property law: the surface owner’s baseline ownership of groundwater versus the mineral lessee’s operational necessities and regulatory disposal duties.

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

Justice Busby agrees with the Court’s key holdings:

  • Baseline rule: “Unless expressly severed, subsurface water remains part of the surface estate,” but 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.”
  • Default conveyance rule for 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 “constituent water.”

The concurrence emphasizes the holding is narrow and default-based: parties remain “free to strike a different deal” by contract, and the Court does not decide downstream questions such as royalties, accounting, profit allocation, or implied covenants regarding water management.

3) Analysis

3.1 Precedents Cited

A. Groundwater as a surface-estate property right

The concurrence situates the decision within a century-long line of cases recognizing groundwater—often described as “ordinary percolating waters,” including mineral-laden native waters—as an incident of surface ownership absent express severance:

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279, 281 (Tex. 1904): articulates the foundational rule that percolating water is part of the land/soil estate.
  • Texas Co. v. Burkett, 296 S.W. 273, 278 (Tex. 1927): confirms percolating waters are “exclusive property” of the surface owner.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798, 802 (Tex. 1955): continues the surface-ownership baseline for groundwater.
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808, 811 (Tex. 1972): “Water, unsevered expressly by conveyance or reservation,” remains part of the surface estate.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865, 867 (Tex. 1973): even when produced for mineral extraction, “the water itself is an incident of surface ownership” absent contrary conveyancing language.
  • 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): reinforce interpretive baselines for estates and mineral conveyances.
  • Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 63 & n.43 (Tex. 2016): modern reaffirmation of groundwater ownership and the surface/mineral relationship (including the implied-right and accommodation framework).

The concurrence then ties groundwater ownership to constitutional protection via takings doctrine:

  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814, 823–838 (Tex. 2012): recognizes groundwater ownership as a property right protected against uncompensated takings.
  • 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): cited for the principle that background property rights inform takings analysis, while regulations may sometimes limit use without effecting a compensable taking.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20, 26 (Tex. 1990): cited to underscore that statutes/regulations generally do not alter common-law property rights absent clear direction.

B. Incidentally produced water as part of the hydrocarbon grant (and why “water vs. waste” is the wrong lens)

A key move in the concurrence is rejecting the court of appeals’ framing—whether produced fluids are “water or . . . waste” (citing 676 S.W.3d 733, 738 (Tex. App.—El Paso 2023)). The concurrence treats the fluids as both: (1) water that originated as groundwater owned by the surface estate, and (2) “oil-and-gas waste” subject to regulatory handling and disposal duties. The legal question becomes whether the leases conveyed the water component to the lessee.

The concurrence relies on:

  • Guffey v. Stroud, 16 S.W.2d 527, 528 (Tex. [Comm'n Op.] 1929): “grant of the oil carried with it a grant of the . . . water . . . essential to the enjoyment of the actual grant of the oil.” This supports the Court’s default conclusion that incidentally produced subsurface water falls within the ordinary meaning of the hydrocarbon grant—at least as to possession/control needed to manage the byproduct at the lessee’s expense.

The concurrence also notes an analogy from surface-water jurisprudence:

  • Harrell v. F.H. Vahlsing, Inc., 248 S.W.2d 762, 768–770 (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, 553 (Tex. App.—San Antonio 1954, writ ref'd n.r.e.): “developed water” doctrine protecting a permittee’s exclusive control over water it diverts at its expense from third-party interference. While not adopted here as a holding, the analogy reinforces the policy logic: the party bearing cost and regulatory burden to handle the water is protected against interference.

C. What the case does not do: unleased minerals and the “product stream” theory

Justice Busby stresses the Court does not alter rules governing ownership of substances not leased:

  • Moser v. U.S. Steel Corp., 676 S.W.2d 99, 102 (Tex. 1984): “all minerals” conveys substances within the ordinary meaning of mineral, but the leases at issue were narrower (“oil and gas” / “oil, gas, and other hydrocarbons”).
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892, at *6 (Tex. May 16, 2025): a lease of salt did not convey “ownership of non-salt substances or spaces adjacent to the salt,” underscoring the importance of the specific grant.
  • 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 527, 528–29 (Tex. [Comm'n Op.] 1929): where unleased substances commingle with leased production, commingling does not automatically transfer ownership of the unleased substance to the lessee.

The concurrence also notes the Court does not adopt the contrary “product stream” theory advanced by COG and accepted by the court of appeals majority.

D. Open questions flagged for future litigation

Because no landowner–lessee claims were before the Court, the concurrence highlights unresolved issues likely to drive future disputes:

  • Royalties: whether the lessee would owe royalties on produced groundwater treated as part of the leased grant (cf. Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 728 n.1 (Tex. 1981)).
  • Accounting/profit allocation: how to allocate profits/losses from reuse, treatment, disposal, or sale (cf. French v. Occidental Permian Ltd., 440 S.W.3d 1, 8–10 (Tex. 2014)).
  • Implied covenants: whether implied covenants apply to water management when leases are silent (citing Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex. 1987)).
  • Measurement/practical administration: parties who contract around the default should establish a workable method to determine “how much” of the liquid byproduct is retained by the landowner (with an analogy to burdens discussed in Humble Oil & Ref. Co. v. West, 508 S.W.2d 812, 818–19 (Tex. 1974)).

3.2 Legal Reasoning

The concurrence’s reasoning proceeds in three steps that mirror Texas’s estate-severance framework:

  1. Start with baseline title: groundwater belongs to the surface estate unless expressly severed. This is reinforced by long-standing case law and recognized in the Texas Water Code and related administrative definitions (TEX. WATER CODE §§ 36.001(5), 36.002(a); 30 TEX. ADMIN. CODE § 297.1(22)).
  2. Recognize the mineral lessee’s implied operational rights: even though the surface owner owns groundwater, the mineral lessee has an implied right to use the surface—including water—as reasonably necessary to produce and remove the minerals. The concurrence treats “incidentally produced” water as part of that operational reality.
  3. Resolve the post-separation “who owns it now?” question by default lease construction: rather than classifying the material as “water” or “waste,” the Court asks whether the leases conveyed the incidentally produced water. The concurrence agrees that the “common and ordinary meaning” of a hydrocarbon grant includes the incidentally produced water that (a) is produced at the lessee’s expense and (b) must be handled and disposed of by the lessee free from third-party interference.

The concurrence further stresses freedom of contract as a core limiting principle: the holding applies only “unless” the instrument “expressly address[es] the matter.” It also clarifies that nothing in the identified statutes/regulations purports to divest landowners of groundwater ownership by operation of law.

3.3 Impact

  • Drafting incentives: The most immediate effect is on lease and assignment drafting. Parties who want the surface owner to retain ownership of the water component after separation (or to share in beneficial reuse value) must do so expressly and should include a practical measurement/accounting mechanism.
  • Operational control and anti-interference protection: The default rule protects lessees and operators from third-party interference with produced-water handling—consistent with the reality that they bear regulatory duties to manage “oil-and-gas waste.”
  • Produced-water recycling market: By clarifying default control in the lessee/operator (absent express contrary language), the decision tends to stabilize ownership/control assumptions that underpin produced-water treatment, transport, and reuse transactions—while leaving room for negotiated carve-outs.
  • Future litigation pathways: The concurrence effectively tees up the next wave of disputes: royalties on water, implied covenants relating to water monetization or conservation, accounting for treatment profits, and conflicts between landowners, lessees, and third-party water-service entities.
  • Takings framing remains in the background: By reiterating Day and takings principles, the opinion hints that aggressive regulatory reallocations of groundwater-related value could raise constitutional questions— but the Court resolves this case through default conveyancing, not constitutional adjudication.

4) Complex Concepts Simplified

Surface estate vs. mineral estate
Texas property can be split so one party owns the surface (including groundwater by default) while another owns minerals. A mineral lease typically grants the lessee rights to explore for and produce the leased minerals.
Implied right to use the surface (including water)
Even without express words, mineral development would be impossible if the mineral owner/lessee could not use the surface as reasonably necessary. This implied right is limited by reasonableness and doctrines like accommodation, but it exists as a background rule.
Produced water / liquid-waste byproduct
Water that comes up from the formation along with oil and gas. Regulators often classify it as “oil-and-gas waste,” which triggers handling and disposal duties. The key point in the concurrence: it can be both “water” (property) and “waste” (regulated material) at the same time.
“Express severance” / “expressly address the matter”
Parties can change default ownership/control rules by clear contractual language—e.g., expressly reserving produced groundwater to the surface owner, or expressly granting the lessee ownership/value of treated water for beneficial reuse.
“Product stream” theory
A theory that the operator owns everything in the produced stream once it is produced. The concurrence notes the Court does not adopt that broad theory.
Texas Natural Resources Code § 122.002 (default transfer rules)
The concurrence reads § 122.002 as addressing when ownership of “fluid oil-and-gas waste” changes hands (absent agreement)—namely, upon possession/transfer for treatment for a subsequent beneficial use—rather than automatically rewriting the landowner–lessee bargain at the moment of separation.

5) Conclusion

Justice Busby’s concurrence underscores a tightly bounded but practically significant default rule: although groundwater is owned by the surface estate unless expressly severed, a hydrocarbon lease that is silent on the subject will be construed to give the mineral lessee possession and control over the disposition of incidentally produced water as part of the liquid-waste byproduct of production. At the same time, the concurrence carefully preserves freedom of contract and flags major unresolved questions—royalties, accounting for reuse value, and implied covenants—that will likely define the next chapter of Texas produced-water litigation.