Incidentally Produced Groundwater as Part of the Hydrocarbon Conveyance: Commentary on Cactus Water Services, LLC v. COG Operating, LLC

Incidentally Produced Groundwater as Part of the Hydrocarbon Conveyance: Commentary on Cactus Water Services, LLC v. COG Operating, LLC

I. Introduction

The Supreme Court of Texas’s decision in Cactus Water Services, LLC v. COG Operating, LLC addresses a question of growing economic and legal importance in Texas oil-and-gas practice: when hydrocarbons are produced together with groundwater, who owns the water once it is brought to the surface and separated from the oil and gas—the surface owner (and those claiming through the surface owner) or the mineral lessee?

Justice Busby’s concurring opinion, joined by Justices Lehrmann and Sullivan, is particularly important because it carefully situates the Court’s holding within a century of Texas groundwater and oil-and-gas jurisprudence, and clarifies both the reach and limits of the new default rule. While reaffirming that groundwater in place belongs to the surface estate unless expressly severed, the Court concludes that, in a typical oil-and-gas lease that grants “oil and gas” or “oil, gas, and other hydrocarbons” and says nothing about groundwater, the incidentally produced subsurface water is included in the hydrocarbon conveyance. The mineral lessee thereby acquires possession and control over the disposition of the fluid waste stream, including its constituent water.

The concurring opinion underscores that this is only a default rule. Parties remain free to contract otherwise—allowing surface owners, mineral lessees, and third-party water companies to restructure ownership and economic rights in produced water if they do so expressly. At the same time, the opinion carefully preserves existing doctrines about unleased minerals, constitutional protection of groundwater ownership, and implied covenants in oil-and-gas leases, leaving several significant questions for future litigation.

II. Background and Issues Presented

A. The underlying dispute (as reflected in the concurrence)

The concurrence does not recount the detailed facts of the dispute between Cactus Water Services, LLC and COG Operating, LLC. However, from the issues the Court resolves and the authorities cited, the core controversy can be identified:

  • Landowners executed oil-and-gas leases granting “oil and gas” or “oil, gas, and other hydrocarbons” to COG (the mineral lessee).
  • In producing hydrocarbons, COG also produced significant volumes of subsurface water—“groundwater that is mixed with oil when it is produced.”
  • At some point, the water was separated from the oil and gas and treated as “oil-and-gas waste” under Texas statutes and Railroad Commission regulations.
  • A dispute arose over who owned or controlled this produced water once separated: the surface owners (or those claiming through them, such as Cactus Water Services) or the mineral lessee, COG.

The key legal issue framed by Justice Busby is therefore:

When a landowner has leased its “oil and gas” or “oil, gas, and other hydrocarbons,” and those leases limit the lessee’s right to use water, who owns groundwater that is mixed with oil when it is produced: the landowner or the lessee?

The court of appeals had focused on characterizing the produced fluid as either “water” or “waste” and, in doing so, adopted a “product stream” view favorable to the lessee. The Supreme Court’s decision, as described in the concurrence, rejects that framing and instead anchors the analysis in:

  • the underlying common-law allocation of groundwater to the surface estate, and
  • the scope of the grant in typical oil-and-gas leases.

B. Questions explicitly addressed in the concurrence

Justice Busby structures his concurrence around three main clarifications:

  1. The decision creates a narrow, contractual default rule about who controls incidentally produced groundwater under a hydrocarbon lease that is silent on the matter.
  2. The decision does not alter existing law about unleased minerals or other substances produced along with leased hydrocarbons.
  3. The decision does not resolve the lessee’s financial or covenant obligations regarding the produced water vis-à-vis the landowners (e.g., royalties, profit/loss accounting, implied covenants).

The commentary below focuses on these three themes and the doctrinal scaffolding Justice Busby uses to support them.

III. Summary of the Supreme Court’s Holding (as Reflected in the Concurrence)

Based on Justice Busby’s description and quotations from the majority opinion, the Court establishes the following core principles:

A. Groundwater in place belongs to the surface estate unless expressly severed

The Court reaffirms a centurylong line of Texas authority:

  • “Unless expressly severed, subsurface water remains part of the surface estate” and is owned by the surface owner.
  • Groundwater includes “percolating, mineral-laden native water found in many subsurface strata.”
  • The mineral lessee does not own the groundwater: it has an implied right to use the surface, including water, “as reasonably necessary to produce and remove the minerals.”

B. Incidentally produced groundwater is included in the hydrocarbon conveyance in a silent lease

The pivotal new rule is the default treatment of groundwater once it is produced together with leased hydrocarbons under leases that say nothing specific about such water:

  • “Incidentally produced” subsurface water “was included in the hydrocarbon conveyances.”
  • The “common and ordinary meaning of a grant of hydrocarbons includes the water incidentally produced with those substances at the mineral lessee’s expense, which the lessee is required to properly dispose of free from third-party interference.”
  • Accordingly, when a lease “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.”

In other words, once groundwater is produced as part of the hydrocarbon stream under a silent oil-and-gas lease, control over that water shifts to the lessee as part of the granted hydrocarbons and their “waste” stream.

C. Parties remain free to contract around the default rule

Crucially, Justice Busby emphasizes that this rule is only a default:

  • Landowners and mineral lessees “are free to strike a different deal” regarding ownership and control of groundwater produced and then separated from hydrocarbons.
  • No statute or regulation cited by the Court “prevent[s] the parties from doing so,” and none “purport to divest the landowners of their groundwater ownership by operation of law.”

Thus, the decision does not constitutionally or statutorily reallocate groundwater ownership; it fills a contractual gap in standard hydrocarbon leases when the parties have not addressed produced water explicitly.

D. The decision does not change law on unleased minerals or define financial obligations regarding produced water

The concurrence underlines two important limitations:

  1. Unleased minerals and other substances. When a lease grants only “oil and gas” or “oil, gas, and other hydrocarbons,” non-hydrocarbon minerals are not leased and remain with the landowner or others who hold them. Established precedents like Amarillo Oil Co. v. Energy-Agri Products, Inc. and Guffey v. Stroud govern the treatment of other substances produced along with the leased hydrocarbons.
  2. Obligations between landowner and lessee regarding water. The Court “does not go on to address the mineral lessee’s obligations to the landowners with respect to this leased groundwater.” Questions about royalties on water, profit-and-loss sharing from beneficial reuse, and implied covenants relating to water management are expressly reserved for future cases.

IV. Doctrinal Context and Precedents

Justice Busby’s concurrence is rich in precedent, drawing from both groundwater and oil-and-gas jurisprudence, as well as from takings cases and academic commentary. The following subsections explain the major authorities he invokes and how they support the Court’s framework.

A. Groundwater as part of the surface estate

From the early 20th century onward, Texas has generally treated percolating groundwater as part of the surface estate, owned by the surface owner unless expressly severed. Justice Busby canvasses several landmarks:

  • Houston & Tex. Cent. R.R. v. East, 81 S.W. 279 (Tex. 1904)
    Established the “absolute ownership” doctrine: the owner of the surface is the “absolute owner” of percolating groundwater under his land, akin to ownership of the soil itself. Although later limited by regulation, this case anchors the notion that groundwater is a private property right.
  • Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927)
    Reiterated that “ordinary percolating waters” are “the exclusive property of the owner of the surface of the soil,” confirming groundwater’s place in the surface estate.
  • City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955)
    Treated groundwater as owned by the landowner, reinforcing that it is not a distinct estate absent severance.
  • Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972)
    Explicitly held that “[w]ater, unsevered expressly by conveyance or reservation, has been held to be a part of the surface estate.” This case is a central citation for the notion that groundwater belongs to the surface owner, although a mineral lessee may use it as reasonably necessary for production.
  • Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973)
    Dealt with briny subsurface water produced “for the extraction and use of the mineral content” by a mineral lessee. The Court held that “the water itself is an incident of surface ownership in the absence of specific conveyancing language to the contrary,” an important precursor to the current dispute over produced water.
  • City of Sherman v. Public Utility Commission, 643 S.W.2d 681 (Tex. 1983)
    Confirmed the understanding that groundwater belongs to the surface owner.
  • Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984)
    Though principally about the meaning of “other minerals,” Moser also reinforces the conceptual division between the mineral and surface estates, and acknowledges groundwater as surface-owned.
  • Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016)
    Recognized that a severed groundwater estate is “in many respects similar to a severed mineral estate,” but grounded that analogy on the premise that, absent severance, groundwater belongs to the surface owner.

These cases collectively support Justice Busby’s starting proposition: as a matter of common law, groundwater in place belongs to the surface estate unless expressly severed, and this remains true despite the regulatory overlay.

B. Constitutional protection and regulatory overlay

Justice Busby also situates groundwater ownership within constitutional takings doctrine and modern regulatory frameworks:

  • Edwards Aquifer Auth. v. Day, 369 S.W.3d 814 (Tex. 2012)
    Held that landowners own groundwater in place as a constitutionally protected property right, and that regulation of groundwater pumping can, in some circumstances, amount to a compensable taking. The concurrence cites Day for the point that:
    • The Water Code recognizes groundwater ownership (TEX. WATER CODE §§ 36.001(5), 36.002(a)).
    • Constitutional protection attaches to that ownership (as a background principle against which statutes and rules are judged).
  • TEX. WATER CODE §§ 36.001(5), 36.002(a) and 30 TEX. ADMIN. CODE § 297.1(22)
    These provisions recognize “groundwater” as a property interest of the landowner and define it for regulatory purposes, yet—crucially—do not alter common-law property rights.
  • Amarillo Oil Co. v. Energy-Agri Products, Inc., 794 S.W.2d 20 (Tex. 1990)
    Cited here for the proposition that statutes and regulations “do not alter common-law property rights,” but must be interpreted against that background.
  • 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)
    These takings cases illustrate how background property rights are used to measure whether government action amounts to a taking. Justice Busby uses them to reiterate that:
    • Regulations may impose obligations or restrictions without necessarily triggering compensation; but
    • They cannot silently extinguish established property rights without raising takings concerns.

Applied here, these authorities reinforce Justice Busby’s assurance that no statute or regulation has divested surface owners of groundwater ownership in place, and that the Court’s ruling operates on the level of contract interpretation rather than a legislative reallocation of property.

C. Oil-and-gas leases, mineral substances, and “other minerals”

Justice Busby carefully distinguishes this case from earlier disputes over which substances are conveyed by mineral instruments:

  • Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984)
    Established that a general grant of “other minerals” is typically read to convey all substances within the “ordinary and natural meaning” of “mineral,” absent contrary intent. Moser thus frames how Texas courts interpret broad mineral grants.
  • Myers-Woodward, LLC v. Underground Servs. Markham, LLC, ___ S.W.3d ___, 2025 WL 1415892 (Tex. May 16, 2025)
    Recently held that a lease of “salt” did not convey ownership of “non-salt substances or spaces adjacent to the salt.” Justice Busby invokes this to highlight that narrow grants (e.g., “oil, gas, and other hydrocarbons”) are limited to the enumerated substances and do not sweep in other minerals.

The key takeaway is that the leases in Cactus Water were not broad “all minerals” instruments; they granted “oil and gas” or “oil, gas, and other hydrocarbons.” As Justice Busby notes:

Accordingly, no non-hydrocarbon minerals were leased.

This sets up the distinction between:

  • Hydrocarbons and incidentally produced groundwater (the subject of the present decision), and
  • Other, unleased minerals that happen to be produced along with hydrocarbons (governed by Amarillo Oil and Guffey and left untouched by this opinion).

D. Production of unleased substances with leased hydrocarbons

Texas law has long held that substances not included in the grant are not conveyed to the lessee, even if they are physically produced through the lessee’s operations. Justice Busby cites:

  • Guffey v. Stroud, 16 S.W.2d 527 (Tex. Comm’n App. 1929, judgm’t adopted)
    The Court there held that:
    • A grant of oil to an “oil lessee” did not entitle that lessee to gas when the same land was subject to a separate gas lease in favor of a different entity.
    • At the same time, the Court observed that a “grant of the oil carried with it a grant of the . . . water . . . essential to the enjoyment of the actual grant of the oil.”
    This dual holding is crucial in Cactus Water: it both preserves the principle that unleased gas is not conveyed and foreshadows the idea that incidentally produced water may be treated as part of the oil interest for purposes of production.
  • Amarillo Oil Co. v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990)
    Involved a lease conveying only “oil and casinghead gas.” The Court held that the lessee did not acquire ownership of other gas or liquids that became mixed with the product stream during production; those substances remained with their respective owners. This case solidifies the principle that:
    • The lessee owns only what is within the scope of the grant, even if other substances are commingled in production.
    • The mere fact of physical mixing does not transfer title to unleased substances.

Justice Busby explicitly notes that Cactus Water does not disturb this body of law. The Court is not adopting the lessee’s expansive “product stream” theory (which would give the lessee everything in the stream, leased or not), but rather articulating a tailored rule about groundwater as incidentally produced with the granted hydrocarbons.

E. Developed water doctrine in surface water law

Justice Busby draws an analogy to the “developed water” doctrine applied in some Texas surface-water cases:

  • 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.)

These decisions, as summarized and discussed in scholarship by Edmond R. McCarthy, Jr. and Frank R. Booth, adopt the notion that:

  • A permittee who diverts water at its own expense acquires an exclusive right to control that “developed water,” including its application to permissible uses.
  • That right is protected against interference by third parties.

The analogy is that, similarly, a mineral lessee that brings subsurface water to the surface as part of oil-and-gas operations at its own expense may have exclusive control over that water as against third parties. Justice Busby does not formally import the doctrine into groundwater law, but he notes the conceptual parallel to reinforce the Court’s conclusion that the hydrocarbon grant includes control over the incidentally produced water.

F. Statutory overlay: Texas Natural Resources Code § 122.002

Justice Busby addresses TEX. NAT. RES. CODE § 122.002, which concerns “fluid oil-and-gas waste,” defined in § 122.001(2) as:

waste containing salt or other mineralized substances, brine, hydraulic fracturing fluid, flowback water, produced water, or other fluid that arises out of . . . production of oil or gas.

He highlights several key points:

  • This statutory definition applies to the fluid after the oil or gas has been separated—i.e., the waste stream.
  • The statute creates default rules for when ownership of this fluid changes hands, but:
    • Ownership (absent contrary agreement) transfers when the fluid is used or transferred to another person “for the purpose of treating it for a subsequent beneficial use” (§ 122.002(1)).
    • Thus, the statutory transfer occurs at a later stage than the point of production and separation, and presupposes the existence of an initial owner.
  • The statute does not purport to resolve, or interfere with, contractual allocations between landowners and hydrocarbon lessees regarding the water component before such transfer for beneficial use.

In short, the statute governs downstream transactions in “fluid oil-and-gas waste” for beneficial reuse; it does not answer the upstream question the Court confronted—who initially controls the water under a silent lease?—nor does it strip landowners of their groundwater ownership in place.

G. Other notable authorities: implied covenants and accounting

In underscoring the open questions left for future cases, Justice Busby cites several decisions that will likely guide subsequent disputes:

  • Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981)
    Addressed how to determine applicable royalty obligations for substances not expressly named in a lease. This case will be relevant when courts confront whether royalties are owed on produced water—or on revenues from its sale or beneficial reuse—if water is deemed part of the granted estate.
  • French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014)
    Concerned complex accounting related to tertiary recovery operations. Justice Busby cites it in connection with how parties might account for “profit or loss realized from beneficial reuse or disposal of the water,” suggesting that similar accounting problems may arise in produced-water disputes.
  • Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987)
    Addressed implied covenants in oil-and-gas leases (e.g., to develop, protect against drainage, and manage the lease). Its citation here signals that future cases may need to identify whether, and to what extent, the lessee owes implied duties concerning the management, treatment, or marketing of produced water.
  • Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974)
    Discussed the lessee’s burdens and obligations when it injects non-native substances into a formation. Justice Busby analogizes this to the difficulty of devising a “practical method” to quantify how much of the produced fluid is attributable to groundwater that a landowner might retain if the parties contract around the default rule.

V. The Court’s Legal Reasoning (as Illuminated by the Concurrence)

A. Step 1: Reaffirming baseline property rights in groundwater

The Court begins from a familiar premise: subsurface water, unless expressly severed, is part of the surface estate. The mineral lessee has only an implied right to use that water “as reasonably necessary to produce and remove the minerals,” not ownership in place.

By grounding the analysis in this baseline, the Court avoids reading regulatory classifications—such as “oil-and-gas waste”—as silently divesting surface owners of property rights. Instead, it treats those classifications as regulatory labels imposed on substances whose ownership is determined by common law and contract.

B. Step 2: Rejecting the “water versus waste” framing

The court of appeals had framed the issue as whether the produced fluid was “water” (implying surface ownership) or “waste” (implying lessee control). Justice Busby finds this framing unhelpful:

  • The fluids are “both”: they contain groundwater originally belonging to the landowners, and they are classified as “oil-and-gas waste” under statute and rule.
  • Focusing solely on the regulatory label “waste” risks obscuring the underlying property interests and contractual allocations.

Thus, instead of asking whether the fluid is “water or waste,” the Court asks the more precise question: Did the landowners, by leasing “oil and gas” or “oil, gas, and other hydrocarbons,” also convey to the lessee the groundwater that is incidentally produced with those hydrocarbons?

C. Step 3: Interpreting the hydrocarbon lease – the meaning of “oil and gas”

The Court, as summarized by Justice Busby, concludes that:

  • A grant of hydrocarbons ordinarily includes whatever is essential or incident to the enjoyment and production of those hydrocarbons.
  • Historically, Texas recognized that “[a] grant of the oil carried with it a grant of the . . . water . . . essential to the enjoyment of the actual grant of the oil” (Guffey v. Stroud).
  • Expanding upon this, the Court states that the “common and ordinary meaning of a grant of hydrocarbons includes the water incidentally produced with those substances at the mineral lessee’s expense.”

From that interpretive stance, it draws the key inference:

“Incidentally produced” subsurface water “was included in the hydrocarbon conveyances.”

In other words, when the parties execute a typical hydrocarbon lease and remain silent on produced water, they are presumed to have intended that:

  • The lessee will not only have the right to use groundwater as reasonably necessary, but
  • Will also have possession and control over the waste stream (including the constituent water) once those fluids are produced in the course of enjoying the granted hydrocarbons.

D. Step 4: Distinguishing this from the lessee’s “product stream” theory

Importantly, the Court does not adopt COG’s broader “product stream” theory, under which the lessee would own all substances in the stream simply because they are produced together. Justice Busby notes:

  • Cases like Amarillo Oil and Guffey make clear that unleased minerals produced along with leased hydrocarbons remain with their owners.
  • The Court explicitly disclaims any departure from those precedents and confirms that it is not endorsing a theory that the lessee owns the “entire product stream.”

The doctrinal move here is subtle but important:

  • Hydrocarbons + incidentally produced groundwater are treated as integrated components of the “hydrocarbon conveyance” under a silent lease.
  • Other, unleased minerals or substances (e.g., gas when only oil is leased; or non-hydrocarbon minerals when only “oil, gas, and other hydrocarbons” are granted) remain governed by the traditional separation of estates and are not swept into the lessee’s title merely by being in the production stream.

E. Step 5: Recognizing the limited role of statutes and regulations

Justice Busby stresses that neither the Water Code, nor the Railroad Commission’s regulations, nor Natural Resources Code § 122.002, purports to:

  • Divest landowners of groundwater ownership in place, or
  • Compel a particular allocation of property rights between surface owners and mineral lessees.

Instead, those provisions:

  • Define regulatory terms (like “groundwater” and “fluid oil-and-gas waste”),
  • Impose duties on operators regarding safe handling and disposal of waste, and
  • Create default rules governing ownership transfer when waste is moved for beneficial reuse (e.g., to a treatment company).

Within that framework, the Court’s ruling:

  • Uses common-law property rules as the baseline, and
  • Fills contractual silence in leases by interpreting what the parties have implicitly agreed concerning incidentally produced water.

F. Step 6: Emphasizing the narrow, contractual nature of the decision

Justice Busby’s concurrence repeatedly warns against overreading the opinion. He highlights three key limitations:

  1. Default, not mandatory rule.
    The holding is “simply a default rule”: if the lease is silent, the produced water is included in the hydrocarbon conveyance. But:
    • Landowners and lessees can “strike a different deal,” and
    • Nothing in the statutory or regulatory framework bars them from allocating ownership and control of produced water differently (e.g., allowing the surface owner to retain ownership and contract with a water services company for treatment and sale).
  2. No change to law on unleased minerals.
    The opinion expressly “does not break any new ground” on ownership of unleased minerals produced along with leased minerals. Those questions remain governed by longstanding precedent.
  3. No decision on financial and covenant obligations.
    The Court does not decide:
    • Whether royalties are due on produced water or revenues from its sale,
    • How to account for profits or losses from beneficial reuse or disposal, or
    • Which implied covenants might apply to the lessee’s handling of the water.
    These are left for future cases.

VI. Complex Concepts and Terminology Explained

A. Surface estate vs. mineral estate

In Texas, ownership of land can be split into:

  • Surface estate: The rights to use the surface of the land and everything that is not a “mineral,” which includes groundwater unless expressly severed.
  • Mineral estate: The rights to oil, gas, and other minerals in the subsurface, typically including an implied right to use the surface (and water) as reasonably necessary to produce the minerals.

An oil-and-gas lease is usually treated as a conveyance of the mineral estate (or some portion of it) for the term of the lease, not merely a contract.

B. Severance of estates

“Severance” occurs when the mineral estate (or groundwater estate) is separated from the surface estate by deed, reservation, or lease. After severance:

  • The surface owner no longer owns the severed substance (e.g., oil, gas, or groundwater) but retains the rest of the surface estate.
  • The severed owner has rights to access and use the surface to develop the severed resource, subject to reasonable accommodation doctrines and implied rights.

C. Produced water and “fluid oil-and-gas waste”

  • Produced water: Water that comes to the surface as part of the production of oil or gas. It may be naturally occurring formation water, flowback of injected fluids (like frack water), or a mixture.
  • Fluid oil-and-gas waste (under TEX. NAT. RES. CODE § 122.001(2)): Includes “brine, hydraulic fracturing fluid, flowback water, produced water, or other fluid” arising out of the production of oil or gas, typically after the hydrocarbons have been separated.

Regulatory classification as “waste” does not itself determine property ownership; it governs how the substance must be handled and under what permits, and when ownership may transfer in the course of treatment for beneficial use.

D. Implied right to use the surface (including water)

A mineral lessee is presumed to have an implied easement to use as much of the surface estate, and such surface resources (including water), as is reasonably necessary to explore for, produce, and market the minerals granted. This includes:

  • Constructing roads, well sites, and pipelines,
  • Using water from the land for drilling and completion, and
  • Disposing of produced fluids in a manner consistent with regulations.

However, this implied right is limited:

  • The lessee must act reasonably and cannot arbitrarily or excessively burden the surface owner.
  • It is a right of use, not of ownership of groundwater in place.

E. Developed-water doctrine (surface water context)

In some Texas surface water cases, “developed water” refers to water that a user has captured or developed through artificial works (e.g., reservoirs, canals) at his own expense pursuant to a permit. The doctrine typically:

  • Recognizes the permittee’s exclusive right to control and use that water, and
  • Protects it from interference by others, even if their lands would naturally have enjoyed some of that flow.

Justice Busby suggests an analogy: a lessee that brings groundwater to the surface in producing hydrocarbons, at its own expense and under regulatory duties, may likewise have an exclusive right to control that now-produced water as against third parties.

Texas oil-and-gas leases carry several implied covenants, unless expressly disclaimed, such as:

  • Covenant to develop: To reasonably develop the leased premises after discovery of hydrocarbons.
  • Covenant to protect against drainage: To protect from substantial drainage by wells on adjacent lands.
  • Covenant to manage and administer the lease: To operate diligently, prudently, and in a way that maximizes mutual benefit.

Justice Busby hints that future cases may need to examine whether there are analogous implied covenants regarding the management, marketing, or beneficial reuse of produced water, once that water is treated as part of the leased estate.

VII. Likely Impact and Open Questions

A. Impact on drafting and negotiation of oil-and-gas leases

The most immediate practical consequence of Cactus Water is that:

  • Silence is no longer neutral on produced water: if a lease says nothing, the default rule is that the incidentally produced groundwater is included in the hydrocarbon conveyance, giving the lessee possession and control over the waste stream (including water).
  • Surface owners or groundwater-rights holders who want to retain ownership and economic control over produced water will need to expressly reserve or define those rights in the lease.
  • Lessee-drafted forms will likely evolve to codify this default or, in some cases, to negotiate revenue sharing or joint beneficial-use arrangements concerning produced water.

B. Impact on produced-water markets and midstream water service providers

Texas has seen rapid growth in the market for:

  • Treatment and recycling of produced water for reuse in oil-and-gas operations (e.g., frac water), and
  • Potentially, for other beneficial uses, subject to regulatory approval.

This case:

  • Clarifies that under a silent lease, the starting point for ownership and control of produced water is the mineral lessee, not the surface owner.
  • Means that third-party water service companies (like the petitioner, Cactus Water Services) must ensure that their contracts either:
    • Run directly to the lessee, or
    • Are supported by lease language reserving produced-water rights to the surface owner (so the surface owner has something to convey).
  • Encourages more sophisticated multi-party agreements allocating:
    • Operational control over produced water,
    • Responsibility for regulatory compliance, and
    • Economic interests in any revenues from treatment, recycling, or sale of that water.

C. Interaction with Natural Resources Code § 122.002 and beneficial reuse

The decision harmonizes with, but does not replace, the statute’s default rule that ownership of “fluid oil-and-gas waste” transfers to a person who takes possession of it for treatment for beneficial use (absent contrary agreement). In practice:

  • Initially, under the Court’s default, the lessee controls the waste stream (including water) as against the surface owner.
  • Later, when the lessee (or its contractor) transfers the fluid to a treatment company for beneficial reuse, § 122.002’s default may transfer ownership to that company—again, absent different contractual arrangements.

Thus, the case reinforces the importance of contract design at multiple stages:

  • Lease stage (between landowner and lessee), and
  • Midstream/water-service stage (between lessee and treatment/reuse providers).

D. Preservation of rights in unleased minerals and other substances

By expressly declining to adopt a broad “product stream” theory and reaffirming cases like Amarillo Oil and Guffey, the Court preserves:

  • The ability of different owners (e.g., separate oil and gas lessees) to assert rights to particular components of the produced stream (such as separately leased gas or non-hydrocarbon liquids).
  • The principle that physical commingling does not, standing alone, transfer title to unleased minerals or other substances.

Future disputes will likely focus on:

  • Characterizing particular substances as “hydrocarbons” vs. “other minerals” vs. “water,” and
  • Applying commingling and accounting doctrines where multiple owners have interests in a mixed stream.

E. Open questions flagged by the concurrence

Justice Busby explicitly leaves several important issues for future adjudication:

  1. Royalties on produced water.
    If produced groundwater is part of the hydrocarbon conveyance:
    • Do royalty clauses based on “oil and gas produced and saved,” or similar language, require payment on revenues from water sales or reuse?
    • Does Sun Oil v. Madeley provide a framework for determining royalty rates on unnamed substances like water?
  2. Profit and loss accounting for beneficial reuse.
    When produced water can be treated and sold (or used to reduce operating costs), courts will need to decide:
    • How to allocate net benefits between lessor and lessee,
    • Whether the water is viewed as a separate “product,” and
    • How accounting doctrines like those in French v. Occidental Permian apply to water-related revenues and costs.
  3. Implied covenants relating to water management.
    Possible future questions include:
    • Is there an implied duty to manage produced water in a manner that reasonably maximizes the mutual economic benefit of the lease?
    • Must the lessee consider beneficial reuse markets instead of simply disposing of water at cost?
    • What standard of care applies to environmental and regulatory compliance in water handling?
  4. Quantification and allocation when parties deviate from the default.
    If a lease reserves to the surface owner ownership of some portion of the produced water:
    • How will parties practically measure what fraction of the produced fluid belongs to the surface owner?
    • Will analogies to Humble Oil v. West and similar commingling cases govern metering and proof burdens?

VIII. Conclusion

Cactus Water Services, LLC v. COG Operating, LLC marks a significant but carefully circumscribed development in Texas oil-and-gas and groundwater law. The Supreme Court of Texas reaffirms that:

  • Groundwater in place, unless expressly severed, is part of the surface estate and constitutionally protected as a property right.
  • Regulatory classifications such as “oil-and-gas waste” do not silently divest landowners of groundwater ownership.

At the same time, the Court introduces a new default rule for standard hydrocarbon leases that are silent on produced water: the grant of “oil and gas” or “oil, gas, and other hydrocarbons” is interpreted to include incidentally produced groundwater—the lessee acquires possession and control of the liquid waste stream (including constituent water), subject to regulatory duties and free from third-party interference.

Justice Busby’s concurrence is critical in clarifying that this rule:

  • Operates at the level of contract interpretation, not legislative reallocation of property rights;
  • Is a default that parties may alter by explicit lease provisions; and
  • Does not disturb settled law on unleased minerals or pre-resolve complex questions about royalties, profit sharing, and implied covenants concerning produced water.

In the broader legal context, the decision underscores the enduring importance of:

  • Careful drafting in oil-and-gas and water-related agreements,
  • Respect for established property-rights baselines in the face of proliferating regulatory schemes, and
  • The need for courts to address, incrementally, the economic and legal challenges posed by the emerging produced-water economy in Texas.

    As markets for treatment and reuse of produced water continue to expand, Cactus Water provides a foundational rule for allocating initial control of that resource between surface owners and mineral lessees, while expressly inviting future litigation and legislative action to refine the economic and covenantal dimensions of this evolving area of law.

Case Details

Year: 2025
Court: Supreme Court of Texas

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