Leasing the Burden: Default Ownership of Incidentally Produced Groundwater in Texas Oil-and-Gas Leases

Commentary on Cactus Water Services, LLC v. COG Operating, LLC (Tex. 2025)

I. Introduction

The Supreme Court of Texas’s decision in Cactus Water Services, LLC v. COG Operating, LLC represents a major clarification at the intersection of Texas oil-and-gas law and groundwater law. The core question, framed crisply in Justice Busby’s concurring opinion, is:

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?

In other words, once groundwater—owned at common law by the surface estate—comes to the surface commingled with oil and gas as “produced water,” who holds the property right in that water, and on what terms?

The answer matters practically and financially. Massive volumes of saline “produced water” come up with hydrocarbons in Texas operations. That water has historically been a disposal burden, but increasingly it also has potential value (for recycling, reuse in hydraulic fracturing, or other “beneficial uses”). Conflicting claims have arisen between:

Surface owners (and their assignees, like Cactus Water Services), who claim continued ownership of the groundwater component; and
Mineral lessees/operators (like COG Operating), who claim that control (and often ownership) of produced water follows from the oil-and-gas lease.

The Court’s majority opinion (which Justice Busby joins) adopts a default rule about the allocation of rights to incidentally produced groundwater under a standard oil-and-gas lease. Justice Busby’s concurrence is significant because it:

Anchors the ruling in Texas’s longstanding doctrine that groundwater is part of the surface estate unless expressly severed;
Explains why the fluids are both “water” and “waste,” and why that classification does not itself resolve ownership; and
Carefully limits what the Court is not deciding—especially regarding royalties, implied covenants, and unleased minerals or substances.

This commentary synthesizes the majority rule as described in the concurrence and then focuses on Justice Busby’s detailed elaboration, which will guide lawyers, landowners, and operators in future disputes and in contract drafting.

II. Summary of the Court’s Holding

A. The Central Holding: A Default Conveyance of Incidentally Produced Groundwater

As described in the concurrence, the Supreme Court of Texas holds that, absent express contractual language to the contrary:

An oil-and-gas conveyance of “oil and gas” or “oil, gas, and other hydrocarbons” includes the incidentally produced subsurface water that comes up with those hydrocarbons;
That conveyance gives the mineral lessee possession and control over the disposition of the liquid-waste byproduct, including its “constituent water”; and
This control is necessary so that the lessee can fulfill its regulatory duties to safely handle and dispose of oil-and-gas waste, free from interference by third parties (including surface owners and their assignees), unless the parties have contracted otherwise.

In Justice Busby’s words, the Court concludes that “‘incidentally produced’ subsurface water ‘was included in the hydrocarbon conveyances’” and 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.”

B. Continued Groundwater Ownership in Place

At the same time, the Court reaffirms that:

“Unless expressly severed, subsurface water remains part of the surface estate,” and
The surface owner owns groundwater in place under longstanding Texas precedent and under the Texas Water Code.

That groundwater ownership is protected by the Texas Constitution against uncompensated takings, as elaborated in Edwards Aquifer Authority v. Day. Governmental regulations may limit or condition groundwater use, but do not automatically divest private ownership.

C. A Narrow, Contractable Default Rule

Crucially, Justice Busby emphasizes that the Court’s ruling is only a default interpretive rule:

“[A]n oil-and-gas conveyance that does not expressly address the matter” conveys to the hydrocarbon lessee “possession and control over the disposition of liquid-waste byproduct,” including “constituent water.” The landowners and the hydrocarbon lessee “are free to strike a different deal” regarding ownership of groundwater produced with and then separated from hydrocarbons.

Thus, surface owners and mineral lessees may:

Expressly reserve ownership of produced water to the surface owner; or
Allocate rights and economic benefits from the water in any other way they choose.

No statute or regulation cited in the opinion purports to prevent such private contractual arrangements or to reallocate ownership by operation of law.

D. What the Court Does Not Decide

Justice Busby is careful to mark several boundaries:

Unleased minerals and other substances.
The decision does not change Texas law governing ownership of unleased minerals or non-hydrocarbon substances that happen to be produced along with leased minerals. Where the lease covers only “oil and gas” or “oil, gas, and other hydrocarbons,” unleased minerals (e.g., other valuable subsurface substances) remain with their owners.
Economic obligations between lessor and lessee regarding water.
The opinion expressly leaves open:
- Whether the lessee owes royalties on produced water that is “leased”;
- How to account for profits or losses from beneficial reuse or sale of produced water; and
- Whether any implied covenants (such as duties to manage the leased property prudently) apply specifically to produced water management.
The “product stream” theory.
The Court does not adopt the broader theory advanced by COG and the court of appeals—that the lessee owns the entire “product stream” (all substances produced through the wellbore) by virtue of the lease.

III. Doctrinal and Precedential Background

A. Groundwater as Part of the Surface Estate

Justice Busby situates the decision within a century of Texas jurisprudence on groundwater ownership. The key points are:

Groundwater is part of the surface estate unless expressly severed.
“Ordinary percolating waters” are the “exclusive property of the owner of the surface of the soil.” (Texas Co. v. Burkett.)
Groundwater ownership is treated as ownership of an interest in real property, not merely a right of use.

Illustrative precedents cited include:

Houston & Texas Central R.R. v. East, 81 S.W. 279 (Tex. 1904): Often cited as the foundational “rule of capture” case, it also recognizes that the landowner is “the absolute owner of the soil and of percolating water, which is a part of, and not different from, the soil.”
Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927): Confirms that percolating water is part of the surface estate, reinforcing the idea that groundwater ownership attaches to surface ownership.
City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798 (Tex. 1955); City of Sherman v. PUC, 643 S.W.2d 681 (Tex. 1983): Further support the treatment of groundwater as a surface-ownership interest.
Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972): Explicitly notes that “[w]ater, unsevered expressly by conveyance or reservation, has been held to be a part of the surface estate.”
Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973): Holds that briny subsurface water—even when produced for extraction of mineral content—remains an incident of surface ownership “in the absence of specific conveyancing language to the contrary.”
Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984): While principally concerning the meaning of “other minerals,” it also affirms that groundwater is not a “mineral” under standard mineral conveyances.
Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016): Recognizes that groundwater rights can be severed from the surface estate but generally rest with the surface owner absent such severance, and analogizes groundwater estates to mineral estates for some purposes.

Statutorily, this common law is reflected—not displaced—by:

Texas Water Code §§ 36.001(5), 36.002(a). Groundwater is recognized as owned by the landowner, and regulation by groundwater conservation districts occurs against this backdrop of private ownership.
30 Tex. Admin. Code § 297.1(22). Administrative recognition of groundwater ownership consistent with the Water Code.

B. Constitutional Protection: Day and Takings Law

In Edwards Aquifer Authority v. Day, 369 S.W.3d 814 (Tex. 2012), the Court held that a landowner’s interest in groundwater is a constitutionally protected property right. Regulation can limit how much water is taken without necessarily effecting a compensable taking, but when regulation goes “too far,” compensation is required.

The concurrence relies on Day, as well as on modern takings jurisprudence (Cedar Point Nursery v. Hassid, 594 U.S. 139 (2021); Tex. Dep’t of Transp. v. Self, 690 S.W.3d 12 (Tex. 2024)), for the principle that:

Common-law property rights form the baseline against which governmental regulations are tested for takings; and
Statutes and regulations in the groundwater and oil-and-gas spheres generally do not redefine ownership, but instead regulate use, handling, and transfer.

C. Mineral Leases, Implied Surface Use, and Produced Water

Under Texas law, the mineral estate is the “dominant estate.” The mineral lessee has an implied right to use as much of the surface (including water) as is reasonably necessary to explore for, produce, and remove the minerals. The Court reiterates this:

“[S]ubsurface 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 the minerals.”

The key shift in Cactus Water is not this implied use right—which is longstanding—but the clarification of who owns and controls the groundwater component of “produced water” once it is brought to the surface and separated from hydrocarbons.

D. Unleased Minerals and the “Product Stream” Cases

Justice Busby underscores that the decision does not disturb existing doctrines regarding unleased minerals and commingled substances, relying especially on:

Guffey v. Stroud, 16 S.W.2d 527 (Tex. Comm’n App. 1929, judgm’t adopted):
- Holds that where land is subject to both an oil lease and a gas lease to different parties, an oil lessee that drills a well producing significant gas is not entitled to the gas; the gas belongs to the gas lessee.
- Famously states 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 dictum is a crucial foundation for the Court’s conclusion that incidentally produced water is included in a grant of hydrocarbons.
Amarillo Oil Co. v. Energy-Agri Products, Inc., 794 S.W.2d 20 (Tex. 1990):
- The lease at issue covered only oil and casinghead gas.
- The Court held that this did not convey ownership of other gas or liquids that became mixed with the product stream during production.
- Thus, substances not covered by the lease language remain unleased, even if physically commingled with leased production.
Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984):
- Articulates a general intent rule for grants of “all minerals” or “oil, gas, and other minerals”: the parties generally intend to convey “all substances within the ordinary and natural meaning of the word [mineral]” that are valuable.
- However, as Justice Busby notes, the leases in Cactus Water did not use broad “other minerals” language; they were limited to hydrocarbons. That limitation is crucial to preserving ownership in non-hydrocarbon minerals and substances.
Myers-Woodward, LLC v. Underground Services 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.”
- This reinforces that leases are interpreted according to their text; a grant of one substance (salt, or hydrocarbons) does not automatically include others (e.g., void space, brine, or unrelated minerals).

Taken together, these authorities distinguish between:

What is expressly leased (e.g., oil, gas, hydrocarbons, salt); and
Other substances (e.g., unleased gas, other minerals, non-salt materials), which remain with their owners unless expressly conveyed.

Cactus Water fits this framework by concluding that incidentally produced water, in the specific context of an oil-and-gas lease, is part of what is conveyed when hydrocarbons are granted—because the grant of hydrocarbons necessarily carries with it the burden of the associated waste stream that must be managed.

E. The Regulatory Backdrop: Oil-and-Gas Waste and Title 122

Produced water is environmentally sensitive and heavily regulated. Statutes and regulations classify it as “oil-and-gas waste.” The concurrence relies on:

Texas Natural Resources Code § 122.001(2). Defines “fluid oil and gas waste” 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.”
Texas Natural Resources Code § 122.002. Sets default rules for ownership of fluid oil-and-gas waste when a lease, contract, or other agreement is silent:
- Ownership does not automatically change at the moment oil or gas is separated from the fluid.
- Instead, absent contrary agreement, ownership passes when the waste is used by or transferred to someone “who takes possession of it for the purpose of treating it for a subsequent beneficial use.”

Justice Busby stresses that Title 122:

Addresses the status of waste after it leaves the operator’s hands for beneficial treatment;
Does not purport to dictate the allocation of property rights in groundwater between surface owners and mineral lessees; and
Does not prevent landowners and lessees from contracting around its default rules regarding ownership at the point of transfer.

IV. Detailed Analysis of the Court’s Legal Reasoning

A. Framing the Legal Question Properly

Justice Busby critiques the court of appeals majority for focusing on an artificial dichotomy—whether the produced fluid is “water” or “waste.” The concurrence explains that:

The answer is “both.”
The fluids contain groundwater, originally owned by the surface estate; and
They are also classified as “oil-and-gas waste” for regulatory purposes, creating statutory obligations on the operator.

This dual character means classification alone does not resolve the ownership question. The correct inquiry is:

Whether the landowners, by executing the hydrocarbon leases, leased the groundwater that is incidentally produced with oil and gas.

B. Interpreting the Hydrocarbon Lease: “Grant of Oil” Includes Its Necessary Burdens

Returning to Guffey v. Stroud, the concurrence notes:

We have long 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.”

This principle supports the following chain of reasoning:

A grant of hydrocarbons necessarily contemplates the physical reality that oil and gas are produced with substantial amounts of water.
That water must be controlled, handled, and disposed of safely if the grant of hydrocarbons is to be meaningfully enjoyed.
Therefore, when a lease grants “oil and gas” or “oil, gas, and other hydrocarbons,” the ordinary meaning of that grant includes the lessee’s right to control and dispose of the associated produced water, unless the parties agree otherwise.

The Court, as described by Justice Busby, thus reads the hydrocarbon grant as including:

Incidentally produced groundwater, as part of the conveyed interest; and
The burden of disposal—i.e., the lessee bears the cost and regulatory risk of handling it.

This conclusion is not based on any statutory reallocation of property rights; rather, it is an application of contract interpretation informed by the physical and regulatory context of oil-and-gas production.

C. The “Developed Water” Analogy

Justice Busby references an analogous doctrine in surface-water law: “developed water.” Under this doctrine, when a permittee or water user, at its own expense, diverts and captures water, it obtains an exclusive right to control that water and apply it to permissible uses, protected from interference by others.

Cases such as:

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.)

have recognized this concept. Legal scholarship (e.g., Edmond R. McCarthy Jr., “Mixing Oil and Gas with Texas Water Law,” 44 Tex. Tech L. Rev. 883 (2012); Frank R. Booth, “Ownership of Developed Water: A Property Right Threatened,” 17 St. Mary’s L.J. 1181 (1986)) further explains that developed-water rights arise to protect the investment and control of the party that captures and manages the water.

The analogy supports viewing the lessee—who bears the cost of producing, separating, and disposing of produced water—as having an exclusive right of possession and control over that water, at least under the default terms of a typical oil-and-gas lease.

D. The Default Rule and the Freedom to Contract Around It

Justice Busby repeatedly characterizes the Court’s holding as a default rule of interpretation:

If the lease is silent on produced water, the law presumes that incidentally produced water is included in the hydrocarbon conveyance;
But landowners and lessees remain “free to strike a different deal” regarding ownership and control of such water.

Nothing in the Water Code, Title 122, or Railroad Commission regulations:

Prevents the parties from explicitly allocating ownership of produced water; or
Strips landowners of groundwater ownership automatically by operation of law.

Justice Busby offers practical drafting advice:

Of course, parties who strike such a deal would be well advised to agree upon a practical method for determining how much of the liquid-waste byproduct of production the landowner continues to own.

This is a nod to the complexity of metering and allocating the water component within a mixed production stream—echoing issues addressed in cases like Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974), which discuss burdens of proof when non-native substances are injected into a formation.

E. Interaction with Title 122: Points of Transfer and Beneficial Use

As noted earlier, § 122.002 shifts ownership of fluid oil-and-gas waste when it is used by or transferred to a third-party for beneficial treatment, absent contrary agreement. The concurrence explains that:

This statutory default concerns the relationship between the operator and downstream handlers of the waste; it does not dictate the initial allocation of property rights between surface owner and lessee.
Thus, a landowner who retains ownership of the water component (by contract) is not barred from:
- Obtaining permits to transport and treat the water;
- Contracting directly with third-party service providers (like Cactus Water); or
- Entering into arrangements with the lessee to manage or sell the water on the landowner’s behalf.

The default rule of § 122.002 is therefore layered on top of, not in substitution for, private contract rights and common-law property rights.

F. Preserving the Law on Unleased Minerals and the “Product Stream” Theory

Justice Busby is explicit that the decision does not alter cases like Amarillo Oil and Guffey, which hold that:

Production of unleased substances along with leased minerals does not automatically transfer ownership of those unleased substances to the lessee; and
Where separate leases exist for different substances (e.g., oil vs. gas), the lessee of one is not entitled to the other merely because it is produced through the same wellbore.

In the same vein, the Court rejects the expansive “product stream” theory advanced by COG and the court of appeals:

Under that theory, the lessee would own everything produced through the wellbore—water, unleased minerals, and any other substances—simply because they form part of the “product stream.”
Justice Busby notes that the Court does not adopt this theory, which would risk undermining the settled rule that ownership of unleased minerals cannot be lost merely by commingling with leased production.

Instead, the decision is carefully confined to the unique status of groundwater that is incidentally produced with hydrocarbons under a hydrocarbon lease.

G. Open Questions Left for Future Litigation

After finding that incidentally produced groundwater is included in the lease, the Court does not decide how this affects the financial and contractual relationship between lessor and lessee. Justice Busby lists several unresolved issues:

Royalties on Produced Water.
Does the lessee owe royalties on the produced groundwater that is considered “leased”? The concurrence cites Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 728 n.1 (Tex. 1981), where the Court had to determine the applicable royalty rate for an unnamed substance. A similar inquiry may be required for water if it becomes a commercially valuable component of production.
Allocation of Profits or Losses.
If produced water is sold or treated for beneficial reuse (e.g., sold to a third party for reuse in hydraulic fracturing), how are profits or losses allocated between the lessor and the lessee? The concurrence references French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014), where the Court dealt with the impact of CO₂ injection and enhanced recovery on royalty and accounting issues.
Implied Covenants Related to Water Management.
Oil-and-gas leases contain implied covenants (e.g., to reasonably develop, to protect against drainage, to manage and market production reasonably). Does recognizing produced water as part of the leasehold interest mean that new or existing implied covenants govern water management?

The concurrence cites Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987), as a reminder of the breadth of implied covenants doctrine. Future cases may determine whether lessees owe duties to handle produced water not only to comply with regulation, but also to prevent economic waste or to maximize value for both parties.

Justice Busby emphasizes that these questions remain open and that the Court’s opinion “should not be read to settle them.”

V. Explaining Key Legal Concepts in Plain Terms

A. Surface Estate vs. Mineral Estate

In Texas, owning land often means owning two separate “estates”:

The surface estate: the land’s surface, including buildings, crops, and—unless severed—groundwater beneath it.
The mineral estate: subsurface minerals (oil, gas, sometimes other minerals) that can be separately bought, sold, or leased.

The mineral estate is usually treated as dominant: the mineral owner or lessee can use as much of the surface as is reasonably necessary to explore for and produce minerals, subject to express limitations in the lease or deed.

B. Groundwater and “Percolating Water”

“Percolating water” is the term historically used for groundwater that seeps through the soil in no defined underground channel. Texas follows the “rule of capture”: a landowner may pump groundwater from beneath their land, subject to regulation, without liability for draining neighbors’ groundwater (within limits).

But the rule of capture does not mean the landowner does not own the water; rather:

The landowner is considered to own the groundwater in place as a property interest; and
That ownership is protected against uncompensated governmental takings.

C. Produced Water and “Fluid Oil-and-Gas Waste”

In oil-and-gas operations, when a well is drilled and hydrocarbons are produced, large amounts of water also come to the surface. This water may be:

Native formation water (groundwater that was in the rock layers);
Flowback water (used in hydraulic fracturing and then produced back); or
A mixture of both, containing salts and other minerals.

Regulatory statutes call this “fluid oil and gas waste” when it contains salt, brine, hydraulic fracturing fluid, produced water, etc., arising from oil-and-gas production. Operators must handle and dispose of it under strict environmental regulations.

D. Beneficial Reuse and Title 122

“Beneficial reuse” means treating or using produced water for some useful purpose—such as:

Recycling for further hydraulic fracturing;
Agricultural or industrial use (if treated sufficiently); or
Other lawful applications rather than mere disposal.

Title 122 of the Natural Resources Code:

Recognizes that fluid oil-and-gas waste can have value beyond mere disposal;
Establishes a default rule that, when such waste is transferred to another party for treatment and beneficial use, ownership shifts to that party—unless the parties have agreed otherwise.

E. Implied Covenants in Oil-and-Gas Leases

Even if an oil-and-gas lease does not mention certain duties explicitly, Texas law implies some obligations on the lessee, such as:

A duty to reasonably develop the lease;
A duty to protect the lease against drainage by neighboring wells; and
A duty to manage and market production with reasonable care.

These “implied covenants” can be the basis for litigation if the lessor claims the lessee failed to act as a reasonably prudent operator. Cactus Water leaves open whether analogous duties apply to the lessee’s handling, commercialization, or disposal of produced water now treated as part of the leasehold interest.

F. Takings Context: Why Regulatory “Waste” Classification Does Not Erase Ownership

Calling produced water “waste” for regulatory purposes does not mean no one owns it. Rather:

Ownership interests (surface owners’ groundwater rights; lessees’ rights under the lease) continue to exist;
Regulations overlay those ownership rights with rules about how the fluid may be handled, disposed, or reused; and
If regulations go too far—e.g., effectively appropriating the resource or forbidding all economically viable use—takings claims under the Texas or U.S. Constitutions may arise.

Justice Busby points out that these statutes and regulations do “not alter common-law property rights”; they operate against the backdrop of such rights, as Day, Cedar Point, and Self recognize.

VI. Practical and Future Implications

A. For Surface Owners and Water-Midstream Companies

Surface owners—and companies like Cactus Water Services that contract with them—should draw at least three lessons:

Default rule is unfavorable to un-negotiated claims on produced water.
If the oil-and-gas lease is silent, incidentally produced water is treated as included in the hydrocarbon conveyance. Surface owners cannot, by default, assert ownership and control over that water at the surface in a way that interferes with the lessee’s operations.
Express lease language is critical.
Surface owners who wish to retain ownership of, or share in the value of, produced water must:
- Insert clear reservations or grants in the oil-and-gas lease (or in a separate surface-use or water-use agreement) specifying:
  - Who owns produced water once it is separated from hydrocarbons;
  - Who may transport, treat, and market it; and
  - How any proceeds or costs are to be shared.
- Consider metering and accounting provisions to measure the volume and quality of water subject to the agreement.
Regulatory permits are available.
Justice Busby notes no authority bars a landowner (who has reserved water rights) from obtaining permits to transport, treat, and sell produced water, or from contracting with the lessee or third parties to manage the water. The key is that the lease must preserve the landowner’s interest against the default rule.

B. For Mineral Lessees and Operators

For operators like COG, the decision provides several important clarifications:

Control over produced water is confirmed by default.
Unless the lease states otherwise, operators may assume they have:
- Exclusive possession and control over incidentally produced water;
- The ability to fulfill regulatory duties for safe handling and disposal without interference from the surface owner; and
- The capacity to enter into contracts with third parties (for disposal or beneficial reuse) without facing conversion or trespass-to-chattels claims by surface owners based solely on groundwater ownership in place.
Contracting power remains important.
Operators must still:
- Review existing leases carefully for any express water-use or water-ownership clauses that may override the default rule;
- Negotiate new leases with clear allocation of rights if the parties want to share in the upside of water reuse or avoid disputes down the line.
Regulatory obligations remain fully in force.
Nothing in the decision relaxes the operator’s duty to:
- Comply with Railroad Commission rules on disposal, injection, and recycling;
- Prevent contamination of usable groundwater or surface water; and
- Handle waste streams safely, regardless of who owns the underlying water component.

C. Implications for Contract Drafting and Due Diligence

The decision will likely reshape:

Oil-and-gas lease forms. Expect to see:
- New clauses expressly addressing “produced water,” “fluid oil-and-gas waste,” and “beneficial reuse”; and
- Provisions allocating revenue from water sales or recycling arrangements, if any.
Surface-use agreements. For multi-party arrangements (operator + surface owner + water-midstream company), parties may:
- Define easements and facilities rights for treatment and transport;
- Allocate which party applies for and holds regulatory permits; and
- Specify indemnity and risk-allocation provisions for environmental liabilities.
Due diligence. Purchasers of leases, overriding royalty interests, or water-midstream assets must:
- Examine underlying leases to determine who owns and controls produced water after Cactus Water;
- Identify any provisions that deviate from the default rule and might create conflicting claims.

D. Future Litigation and Unsettled Questions

Justice Busby’s list of open issues almost invites future test cases:

Royalties on water-derived value.
- If produced water itself becomes an economically valuable product—e.g., sold for reuse—does its value count as “production” for which royalties are owed?
- Are existing royalty clauses broad enough to capture this, or must leases be amended or interpreted in litigation (as in Madeley)?
Implied covenants and prudent operation.
- Will lessors argue that lessees have an implied duty to pursue economically reasonable beneficial reuse of produced water instead of mere disposal, to maximize shared value?
- Or is the lessee’s only duty as to water a regulatory compliance duty, with no economic implied covenant attached?
Conflicts with groundwater conservation and takings claims.
- As beneficial reuse of produced water grows, regulators may adjust groundwater and waste rules. To the extent those rules affect the allocation of control and value between surface owners and lessees, complex takings or preemption issues could arise, always built upon the baseline recognized in Cactus Water and Day.
Interaction with “other minerals” and non-hydrocarbon substances.
- Where leases include “other minerals” language, Moser and Myers-Woodward will interact with Cactus Water to determine which non-hydrocarbon substances (if any) are conveyed.
- Disputes may arise over brines rich in lithium or other valuable elements, where the “water” may itself be a valuable mineral-bearing resource.

VII. Conclusion

Cactus Water Services, LLC v. COG Operating, LLC establishes a clear, if carefully cabined, rule in Texas law:

Absent express agreement to the contrary, an oil-and-gas conveyance of hydrocarbons includes the incidentally produced groundwater that comes up with those hydrocarbons, granting the mineral lessee possession and control over the disposition of that liquid-waste byproduct.