Default Rule: Oil-and-Gas Leases Convey Control of Incidentally Produced Groundwater (Produced Water) Absent Express Reservation

1. Introduction

Case: Cactus Water Services, LLC v. COG Operating, LLC, Supreme Court of Texas (Opinion filed June 27, 2025).
Opinion discussed: Justice Busby’s concurrence (joined by Justice Lehrmann and Justice Sullivan).

The dispute centers on ownership and control of groundwater that comes to the surface mixed with hydrocarbons during oil-and-gas production—commonly described as “produced water”—where the underlying leases grant “oil and gas” or “oil, gas, and other hydrocarbons” and restrict the lessee’s right to use water. The key issue is not whether the fluid is “water” or “waste,” but whether, absent express lease language, the groundwater component is nonetheless included in the hydrocarbon conveyance such that the lessee may possess and control it for disposal and other disposition.

2. Summary of the Opinion

Justice Busby agrees with the Court’s central holdings:

  • Baseline property rule: “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 produced water: When a hydrocarbon conveyance does not expressly address ownership/disposition, it nevertheless conveys to the lessee possession and control over the “liquid-waste byproduct” of production, including the “constituent water” that is incidentally produced with hydrocarbons and that the lessee must lawfully handle and dispose of.

The concurrence emphasizes the decision’s narrowness: it is a default rule that parties can contract around, and it does not resolve downstream questions such as royalties, accounting for reuse profits/losses, or implied covenants concerning water management.

3. Analysis

A. Precedents Cited

1) Groundwater ownership as part of the surface estate

Justice Busby situates the case within a long line of Texas authority recognizing that groundwater—often including mineral-laden percolating water—belongs to the surface estate unless severed:

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279 (Tex. 1904): early articulation that percolating water is part of the land and owned by the landowner.
  • Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927): “ordinary percolating waters” are the surface owner’s exclusive property.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955): reaffirmation of groundwater principles in inter-municipal disputes.
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972): unsevered water remains part of the surface estate.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973): even when briny water is produced “for the extraction and use of the mineral content,” the “water itself” remains incident to surface ownership absent specific conveyancing language.
  • City of Sherman v. Pub. Util. Comm'n of Tex., 643 S.W.2d 681 (Tex. 1983); Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984); Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016): modern restatements of surface/mineral estate interactions and the surface owner’s water rights.
  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814 (Tex. 2012): constitutional significance of groundwater ownership in takings analysis, reinforcing groundwater as a protected property interest.

The concurrence also notes that statutory and regulatory definitions (TEX. WATER CODE §§ 36.001(5), 36.002(a); 30 TEX. ADMIN. CODE § 297.1(22)) recognize groundwater ownership but do not “alter common-law property rights,” citing Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990).

2) Property “background principles” and takings

In explaining why statutes and regulations generally operate against the background of existing property rights, the concurrence cites:

  • 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): the role of traditional property rights in evaluating alleged takings.
  • Day again, for the proposition that regulation may limit property without necessarily effecting a compensable taking.

3) Incidental substances necessary to enjoy the mineral grant

The central conveyancing move—treating incidentally produced water as included within a hydrocarbon grant unless the lease says otherwise—is supported by:

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

Justice Busby further analogizes (without making it controlling) to the surface-water concept of “developed water,” citing 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.), where investment and control can justify protection against third-party interference.

4) Limits of “oil and gas” grants; unleased minerals produced together

The concurrence stresses that the Court does not change rules about unleased minerals. It points to:

  • Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984): construing broad “all minerals” grants to convey valuable substances within the ordinary meaning of “mineral.”
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892 (Tex. May 16, 2025): a lease of salt did not convey “ownership of non-salt substances or spaces adjacent to the salt.”
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990): a lease limited to oil and casinghead gas did not convey other gas/liquids that became mixed in the production stream.
  • Guffey again: an oil lessee was not entitled to gas produced where gas rights were leased to another.

This distinction matters because the leases at issue conveyed only “oil and gas” or “oil, gas, and other hydrocarbons,” not “all minerals.”

5) Practicalities and open questions flagged by the concurrence

  • Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974): cited by the concurrence (via the Court’s footnotes) to highlight evidentiary/accounting burdens when non-native substances are injected into a stratum—analogous to measuring what portion of fluid is “owned” when commingled and processed.
  • Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981): royalty classification issues for unnamed substances.
  • French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014): invoked as a comparison point for accounting and allocation of profits/losses.
  • Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987): implied covenants in mineral leasing—raised as a potential future battleground for water-management duties.

B. Legal Reasoning

The concurrence reframes the controversy as a conveyancing question rather than a taxonomy question:

  1. Start with baseline ownership: Groundwater belongs to the surface estate absent express severance, and Texas law treats it as a constitutionally protected property interest (not merely a regulatory privilege).
  2. Acknowledge dual character of produced water: The fluid produced with hydrocarbons can simultaneously be (i) “water” that originated as the landowner’s groundwater, and (ii) “oil-and-gas waste” subject to safety and disposal duties. Focusing on “water vs. waste” misleads because it is both.
  3. Ask the decisive question: Did the landowner’s hydrocarbon lease—though silent on produced water—nonetheless convey the right to possess/control that incidentally produced water as part of the ordinary meaning of the hydrocarbon grant?
  4. Answer by implied incident-to-grant logic: Following Guffey v. Stroud, the grant includes what is essential to enjoy it; here, that includes possession and control of the incidentally produced water the lessee must handle and dispose of at its expense and under regulatory obligations, without third-party interference.
  5. Confirm it is a default rule, not an inalienable one: Parties may “strike a different deal” by express lease language; nothing cited (including waste-handling regulations) prevents contracting for continued landowner ownership or control, so long as permitting and compliance are addressed.

C. Impact

The concurrence suggests several practical and doctrinal effects:

  • Lease drafting will change: Because the rule is expressly a default, sophisticated parties are likely to negotiate explicit produced-water clauses allocating (i) title/ownership, (ii) possession and control, (iii) royalties or revenue-sharing for beneficial reuse, (iv) indemnity and regulatory compliance responsibilities, and (v) measurement/accounting protocols.
  • Litigation will shift from “who owns the water” to “what did the lease say”: Where leases are silent, lessees have a strong argument for control of produced water disposition; where leases speak, disputes will focus on interpretation, enforceability, and operational feasibility.
  • Regulatory-takings arguments remain bounded by property baselines: By emphasizing groundwater ownership as a property right (via Day) while also noting regulation can impose non-compensable obligations, the opinion frames future disputes over produced-water regulation against clarified “background principles.”
  • Open questions are preserved: The concurrence flags that future cases may address royalties, profit/loss allocation from reuse, and implied covenants concerning water management—issues likely to grow as produced-water treatment and resale become more common.

4. Complex Concepts Simplified

  • Surface estate vs. mineral estate: Texas often separates ownership of the surface (including groundwater) from ownership of minerals. A mineral lease grants the right to produce minerals and carries implied rights to use the surface reasonably necessary to do so.
  • Implied right of reasonable use: Even if a lease does not spell out every operational detail, the mineral lessee may use as much of the surface (and water) as reasonably necessary for production—subject to lease limits and other doctrines.
  • Produced water’s “dual status”: It can be privately owned groundwater in origin, but once produced during oil-and-gas operations it is heavily regulated as “waste,” meaning the operator must manage and dispose of it safely.
  • Default rule vs. mandatory rule: A default rule applies only when the contract is silent. Parties can override it by clear language allocating ownership/control differently.
  • “Product stream” theory (rejected as adopted rule): The concurrence notes the Court does not adopt the notion that the lessee owns everything in the produced stream simply because it is produced together; ownership still depends on the scope of the conveyance.

5. Conclusion

Justice Busby’s concurrence underscores a targeted but consequential principle: although groundwater is ordinarily part of the surface estate, a hydrocarbon lease that is silent on produced water will, by default, be read to convey to the mineral lessee possession and control of incidentally produced groundwater as part of the hydrocarbon grant, enabling lawful disposal and disposition without third-party interference. At the same time, the opinion carefully preserves party autonomy to contract around that default and leaves major economic and operational questions—royalties, accounting for reuse value, and implied covenants—for future litigation.