On June 27, 2025, the Texas Supreme Court issued yet another landmark decision: Cactus Water Services, LLC v. COG Operating, LLC. Justice Devine delivered the opinion of the Court, holding that produced water is oil-and-gas waste, and, therefore, it belongs to the hydrocarbon lessee (i.e., the operator who is legally obligated to dispose of waste). Justice Busby filed a concurring opinion, in which Justice Lehrmann and Justice Sullivan joined, outlining what the Court's holding did not say and what issues related to ownership of produced water remain unresolved.
Oil and gas production in areas of Texas containing dense shale formation with poor permeability necessitates hydraulic fracturing—or "fracing"—to extract minerals. Fracing involves the injection of pressurized fluid (the most common being water), proppants (such as sand, ceramic beads, or bauxite), and chemicals into the formation to fracture the rock and release the trapped hydrocarbons through the wellbore. The majority of the injected fluid remains underground, but about 15 to 20% of it returns to the surface and is called "flowback," bringing with it a mix of hydrocarbons, brine, and other substances. Oil and gas can be separated from this mix, and the remaining brackish mixture of drilling, fracing, and formation fluids is known as produced water. Hydrocarbons cannot be produced in these areas of Texas without simultaneously producing produced water, and vice versa. As such, operators have historically, and are, legally obligated to handle and dispose of produced water—which is hazardous to human health—and if operators fail to do so, they are subject to penalties and other liabilities. Given this background, produced water historically has been considered a costly byproduct of oil-and-gas production, and it has been treated as oil-and-gas waste, with the burden of handling and disposal being placed on the operator. In recent years however, technical advancements offering the potential for recycling and reuse of this product, water scarcity, and lithium extraction, among other things, have resulted in produced water being viewed as having increased utility.
The dispute raised in Cactus Water Services, LLC v. COG Operating, LLC is a "first-of-its-kind" dispute, pitting an oil and gas lessee/operator of producing wells (COG) against a surface-estate lessee asserting claims to the produced water collected at or near the wellhead (Cactus). On one hand, COG argued that conveyance of the right to produce oil and gas (by lease or deed) necessarily includes the liquid-waste byproducts entrained with hydrocarbons absent an express reservation or exception. On the other hand, Cactus argued that once the hydrocarbons have been separated after production at the well, the remaining mixture, which is neither oil nor gas, is considered water owned by the surface estate absent an express conveyance of water rights. Ultimately, the lower courts and the Texas Supreme Court found COG's argument more persuasive.
Between 2005 and 2014, COG acquired four hydrocarbon leases covering approximately 37,000 acres in Reeves County, Texas. COG's leases granted it the exclusive right to explore for, produce, and keep "oil and gas" or "oil, gas, and other hydrocarbons"—note, not "other minerals." The leases were silent about ownership of waste byproducts. Regarding water, three of the leases expressly prohibited the use of water except in limited circumstances, and the fourth lease was silent about water use. The leased acreage was concentrated in the Delaware Basin—a dense formation underlying the Permian Basin that is characterized by low permeability. As such, fracing was the principal method of production employed there by COG. At the surface, COG separated the oil and gas, leaving produced water.
Between 2013 and 2016, to facilitate waste handling, COG entered into a surface use-compensation agreement and multiple right-of-way agreements with the landowner for three of the leases. These agreements allowed COG to construct tank battery sites to gather, separate, and store the produced water. Disposing of produced water was costly. COG drilled 72 horizontal oil wells that had generated nearly 52 million barrels of produced water. COG disposed of the produced water independently and through third parties. Between December 2018 and March 2021, COG paid roughly $21 million in disposal fees to a third-party contractor—these disposal expenses were borne exclusively by COG. While disposal was expensive, treating and recycling of produced water was much more costly. Therefore, COG did not reuse produced water. If COG failed to timely dispose of the produced water offsite, it would have been required to cease its production efforts.
In 2019 and 2020, the surface owners and Cactus executed produced water lease agreements ("PWLAs"). The PWLAs purportedly conveyed all right, title, and interest in and to the produced water on the lands covered by COG's leases. The PWLAs expressly excluded water unrelated to oil-and-gas production. In March 2020, Cactus, which did not possess permits, infrastructure, or the ability to handle, transport, or dispose of produced water, informed COG of its claimed rights under PWLAs and stated that it was entitled to produced water from COG's wells. COG then sued for declaratory relief, seeking a judgment declaring that COG, not Cactus, owned and had the exclusive right to the produced water from COG's wells. Cactus responded by seeking a judgment declaring that it alone owned and had the exclusive right to the produced water from COG's wells. Both parties moved for summary judgment on their declaratory judgment claims. These claims centered on whether COG's claimed rights were "baked into" the express conveyance of oil-and-gas rights (by deed or lease) or whether produced water was part of the surface estate as no water rights were expressly and separately conveyed to COG. The trial court ruled in COG's favor. Cactus appealed, and the court of appeals affirmed, holding that produced water constitutes oil-and-gas waste belonging to the mineral lessee, not groundwater belonging to the surface estate. The Texas Supreme Court granted Cactus's petition for review.
Beginning with an overview of the historical and regulatory practices that task the operator with the handling and disposal of waste, Justice Devine, writing for the Court, stated that "produced water is not water," explaining that "[w]ater is something that must be protected from oil-and-gas waste; the two are not interchangeable." The Court reasoned that if Cactus's argument—that produced water is water—were to be deemed correct, the leases' express water-use constraints would functionally prevent the production of oil and gas and thus frustrate, not facilitate, the purpose of the lease. Further, the authorities Cactus relied on involved ground water, not produced water. Finding all of Cactus's arguments and authorities unpersuasive, the Court held that deeds or leases that use the "typical language" to convey oil-and-gas rights, even when they do not expressly address produced water, include produced water as part of the conveyance. If a surface owner seeks to retain ownership of produced water, it may include an express reservation or exception from the mineral conveyance—said reservation or exception may not be implied. Because the conveyances at issue here did not include an express reservation or exception of produced water, COG, not Cactus, had the right to possess, control, and dispose of produced water. This holding is a narrow one. As such, Justice Busby issued a concurring opinion outlining all the things the Court's opinion does not hold.
Justice Busby opened his concurrence by stating that it is not helpful to focus on whether produced water is "water" or "waste," as the answer is both. Rather, Justice Busby instructed that the Court must instead focus on whether the landowners leased produced water to the lessee. He agreed that the "incidentally produced" subsurface water was included the hydrocarbon conveyances, but wrote separately to make clear what the Court did not decide. First, the Court's holding is simply a default rule; it does not prevent parties from striking a different deal regarding produced water ownership. Second, the COG leases at issue only concerned "oil and gas," or "oil, gas, and other hydrocarbons;" thus, the Court's opinion does not "break new ground" concerning unleased minerals or other substances that may be produced with leased minerals. Third, and finally, because no claims between the landowners and COG were before the Court, its opinion does not address or concern mineral lessees' obligations to the landowners with respect to produced water. The concurrence concludes by posing several outstanding questions, including:
- Does the lessee owe royalties to the lessor on produced groundwater it leased?
- If not, how should parties account for profit or loss realized from beneficial reuse or disposal of the produced water?
- Does the lessee owe any implied covenants with respect to management of produced water when a lease does not expressly address the issue?
Additional questions will surely arise, particularly in the context of the lithium boom in northeast Texas. Currently, companies are targeting the Smackover Formation, a large formation of rock extending from East Texas to Florida, as the brines contained therein are rich with lithium and other minerals. Would a Texas court view lithium and other minerals contained in the brine as "other minerals" under Texas law? Further, if a brine mining well is drilled for the purpose of extracting lithium and other minerals, which party owns those constituents? While these questions may well be the subject of a future lawsuit, for now, this case establishes, at least for instruments executed prior to September 1, 2019, that produced water is owned by mineral owners when those instruments convey "oil and gas" or "oil, gas and other hydrocarbons" without specifically reserving produced water or oil and waste.
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