Default Rule: Oil-and-Gas Conveyances Include Possession and Control of Incidentally Produced Groundwater as Waste Byproduct (Absent Express Lease Terms)

Introduction

In Cactus Water Services, LLC v. COG Operating, LLC (Tex. June 27, 2025), the Supreme Court of Texas addressed a recurring modern oilfield question intensified by produced-water reuse: when an owner 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 component that comes to the surface mixed with hydrocarbons during production—surface owner or mineral lessee?

Justice Busby (joined by Justices Lehrmann and Sullivan) wrote separately to concur, agreeing with the Court’s core holding but emphasizing the narrowness of the decision and identifying important issues left open—especially how parties can contract around the default rule and what financial and operational obligations may follow from treating produced water as included in the hydrocarbon conveyance.

Summary of the Opinion

  • Baseline property principle reaffirmed: Unless expressly severed, subsurface water remains part of the surface estate, though subject to the mineral lessee’s implied right to use the surface (including water) as reasonably necessary for production.
  • Default conveyance rule adopted: where 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 the constituent water incidentally produced with hydrocarbons.
  • Framing rejected: it is unhelpful to treat the byproduct as either water or waste; it is both—groundwater in origin, and regulated oil-and-gas waste in handling/disposal.
  • What the Court does not decide: (i) parties may contract for different ownership; (ii) the decision does not alter rules about unleased minerals produced with leased minerals; (iii) the Court does not resolve royalty, accounting, implied covenant, or other obligations that might arise between lessor and lessee regarding produced water.

Analysis

Precedents Cited

The concurrence situates the Court’s default rule within two long-running Texas doctrines: (1) groundwater as part of the surface estate, and (2) the mineral lessee’s implied rights and practical control over byproducts necessary to enjoy the mineral grant.

A. Groundwater belongs to the surface estate (absent severance)

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279 (Tex. 1904): early articulation that percolating groundwater is part of the land, supporting the foundational premise that water is a surface-estate attribute unless expressly severed.
  • Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927): percolating waters are the exclusive property of the surface owner—used here to underscore that even subsurface, mineral-laden native waters start as surface-estate property.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955): continues the line recognizing groundwater ownership principles.
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972): water, unless expressly severed, remains part of the surface estate—cited to show the Court’s holding does not deny the general rule; it supplies a default allocation when water is produced incidentally with hydrocarbons.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973): particularly important because it recognizes that briny subsurface water may be produced for its mineral content, yet the water itself is an incident of surface ownership absent specific conveyancing language—highlighting why the question in this case turns on what the hydrocarbon lease conveys by default.
  • City of Sherman v. Pub. Util. Comm'n of Tex., 643 S.W.2d 681 (Tex. 1983), and Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984): reinforce the taxonomy of estates/minerals and the interpretive approach to what a mineral conveyance includes.
  • Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016): invoked to show continuity in Texas’s treatment of groundwater as owned by the surface estate while subject to accommodation principles when other estates exercise their rights.
  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814 (Tex. 2012): key constitutional/property-rights anchor; confirms groundwater ownership is a protected property right relevant to takings analysis, which frames why regulations classify produced water as waste without automatically reallocating title.

B. Mineral grants carry implied rights necessary to enjoy the grant; incidentally produced water can be included

  • Guffey v. Stroud, 16 S.W.2d 527 (Tex. [Comm'n Op.] 1929): central to the concurrence’s alignment with the Court’s result; a grant of oil carried a grant of water essential to enjoyment of the oil grant. The concurrence uses this to justify treating incidentally produced water as within the hydrocarbon conveyance (by default) so the lessee can control and dispose of unavoidable byproduct.
  • Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974): cited by analogy regarding evidentiary/practical burdens when non-native substances are injected—supporting the concurrence’s point that if parties contract around the default rule, they should also specify workable measurement/allocation methods.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990): used in two ways—(i) to note statutes/regulations generally do not alter background property rights, and (ii) to reinforce that producing a commingled stream does not automatically transfer ownership of unleased substances.

C. Produced water as “waste” does not resolve ownership; regulation operates against a property baseline

  • 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): cited for the proposition that property rights form the baseline for evaluating takings and regulatory burdens; regulations can constrain use without necessarily reallocating ownership or effecting a compensable taking.

D. Analogies in surface-water law: “developed water” exclusivity

  • 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.), and Harrell v. F.H. Vahlsing, Inc., 248 S.W.2d 762 (Tex. App.—San Antonio 1952, writ ref'd n.r.e.): cited for an analogous doctrine under which a permittee who diverts water at its own expense may have an exclusive right to control it against third-party interference—supporting the Court’s instinct that the party who must handle/dispose of the produced-water byproduct should, by default, control it.

E. Unleased substances produced with leased substances: no automatic transfer

  • Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984): provides the interpretive principle that a conveyance of all minerals generally intends to include all substances within the ordinary meaning of minerals. The concurrence uses it to contrast the narrower conveyances here: oil and gas or oil, gas, and other hydrocarbons.
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892 (Tex. May 16, 2025): recent confirmation that a lease of a specific substance (salt) does not convey ownership of other substances/spaces—supporting the concurrence’s caution that this case is about incidentally produced water within a hydrocarbon grant’s ordinary meaning, not a wholesale “product stream” theory.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990), and Guffey v. Stroud, 16 S.W.2d 527: both support the proposition that unleased minerals (or separately leased minerals) produced in a wellbore/stream are not automatically owned by the lessee holding a different mineral lease.

F. Issues reserved: royalties, accounting, implied covenants

  • Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981): cited by analogy for determining royalties for unnamed substances—foreshadowing future disputes over whether produced water (or value derived from it) is royalty-bearing under particular lease forms.
  • French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014): referenced to suggest potential accounting/profit-allocation questions when a byproduct is disposed of or beneficially reused.
  • Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987): cited for implied covenants in oil-and-gas leases, signaling potential future arguments that water management might implicate implied duties even if the lease is silent.

Legal Reasoning

  1. Start with the estates: Texas treats groundwater as part of the surface estate unless severed by conveyance/reservation. The concurrence stresses this is settled ownership-in-place doctrine, reinforced by the Water Code’s recognition and constitutional takings protections discussed in Edwards Aquifer Auth. v. Day.
  2. Identify the operative question: not whether produced fluids are “water” or “waste,” but whether the lease—as a matter of default interpretation— conveys the groundwater component when it is produced incidentally with hydrocarbons.
  3. Apply ordinary-meaning conveyance logic plus operational necessity: relying on Guffey v. Stroud and the practical realities of production, the Court reads a hydrocarbon grant to include incidentally produced water because it is an unavoidable byproduct produced at the lessee’s expense and because the lessee bears legal duties to manage and dispose of regulated waste safely and without third-party interference.
  4. Constrain the holding as a default rule: the concurrence emphasizes that parties remain free to contract around this result; the holding fills a silence in the instrument rather than overriding express language.
  5. Preserve adjacent doctrines: the concurrence rejects any implication that the lessee owns the entire “product stream,” and reiterates that the decision does not change rules governing unleased minerals produced alongside leased minerals.

Impact

  • Drafting and negotiation: the decision strongly incentivizes explicit lease provisions addressing (i) title to produced water after separation, (ii) measurement/allocation methodologies, (iii) treatment and transportation rights, (iv) commercialization and revenue sharing (if any), and (v) indemnity and environmental risk.
  • Produced-water reuse markets: by assigning the lessee default possession/control over disposition, the ruling reduces the risk that third parties (including surface owners or their water marketers) can interfere with disposal and reuse pathways absent a contract right—potentially lowering transaction costs for reuse projects.
  • Regulatory compliance alignment: the default rule fits the party bearing day-to-day statutory and regulatory waste-management duties (the operator/lessee), minimizing conflicts between operational responsibility and control of the byproduct.
  • Future litigation focus shifts: the concurrence flags likely next-wave disputes: royalties on produced water or on reuse proceeds, accounting for disposal costs versus reuse revenue, implied covenant theories tied to water management, and how to reconcile lease clauses limiting water “use” with lessee control over water “disposition.”
  • Interaction with statute: the concurrence highlights TEX. NAT. RES. CODE § 122.002’s default rule for ownership transfer of “fluid oil-and-gas waste” upon possession for treatment for beneficial use—suggesting that private agreements can still allocate ownership earlier (or differently) without statutory preemption.

Complex Concepts Simplified

Surface estate vs. mineral estate
Texas land can be divided so one party owns the surface (including groundwater by default) and another owns minerals. A mineral lessee may use the surface as reasonably necessary to produce the minerals, but that implied right does not automatically mean the lessee owns everything encountered.
“Incidentally produced” water
Water that necessarily comes up with oil and gas during production (often saline) as part of the produced fluids. The concurrence treats this as part of what a hydrocarbon grant ordinarily includes—because it must be handled as part of producing the hydrocarbons.
Oil-and-gas “waste” classification
Statutes and regulations may classify produced water as waste to ensure safe handling and disposal. Classification answers how it must be regulated, not necessarily who owns it; ownership is determined first by property and contract principles, with regulation operating against that baseline.
Default rule vs. mandatory rule
A default rule applies only when parties’ documents are silent. The Court’s holding (as the concurrence stresses) can be overridden by express lease language allocating title, control, and economics differently.
Implied covenants
Judge-made duties read into oil-and-gas leases (e.g., to reasonably develop or protect the lease). The concurrence notes—without deciding—that future plaintiffs may argue water management triggers implied obligations even if the lease does not mention produced water.

Conclusion

Justice Busby’s concurrence frames the Court’s decision as a careful, contract-sensitive default rule: while groundwater is owned by the surface estate unless severed, an oil and gas or oil, gas, and other hydrocarbons conveyance that is silent on produced water nonetheless grants the lessee possession and control over the disposition of incidentally produced liquid-waste byproduct, including its groundwater component. The concurrence’s most consequential contribution is its roadmap of what remains unresolved—royalties, accounting, implied covenants, and practical allocation—signaling that produced-water ownership is not “settled” so much as re-centered on precise drafting and future, issue-specific litigation.

This commentary is for informational purposes and does not constitute legal advice.