Making a splash in the courts: The Cactus decision

In a landmark decision, the Supreme Court of Texas held in Cactus Water Services, LLC v. COG Operating, LLC¹Cactus Water Servs., LLC v. COG Operating, LLC, No. 23-0676 (Tex. June 27, 2025)., that produced water belongs to the operator. When presented with a case where both the operator and a third party who contracted with the surface owner claimed ownership of the produced water, the Court determined that under the typical deed or lease language conveying oil and gas rights, produced water is a part of the conveyance, even though not expressly addressed.²Id. at 29.

However, the Court left open the possibility for surface owners to reserve ownership of produced water, potentially turning the tide in future lease negotiations.³Id.

I. Background

Between 2005 and 2014, COG Operating, LLC (“COG”), acquired four hydrocarbon leases from two different surface owners in the Permian Basin (collectively, the “Leases”).⁴Id. at 4. The Leases granted the right to explore for, produce, and keep “oil and gas” or “oil, gas, and other hydrocarbons,” with variance in phrasing.⁵Id. Operations were targeted in the Delaware Basin subregion of the Permian Basin. The principal method of production was through hydraulic fracturing, which involves injecting pressurized fluid, proppants, and chemicals into the rock to release trapped hydrocarbons.⁶Id. at 5-6. A portion of the injected fluid returns to the surface, with varying substances mixed in with the fracking fluid, from which COG separates the oil and gas.⁷Id. at 6. The remaining substance, known as produced water, is subsequently disposed of, as it can be harmful to human health and the environment in its current state.⁸Id. at 7.

In 2019 and 2020, the surface owners of the Leases executed produced water lease agreements (“PWLAs”) with Cactus Water Services, LLC (“Cactus”).⁹Id. at 11. The PWLAs conveyed all right, title, and interest in and to water from oil and gas producing formations and flowback water produced from oil and gas operations in the land covered by the Leases.¹⁰Id.

Cactus informed COG of its claim under the PWLAs in March 2020.¹¹Id. at 12. COG responded by suing for a declaration that COG, not Cactus, owns and has the exclusive right to possession, custody, control, and disposition of its production stream, including the produced water.¹²Id. Both the trial and appellate court held for COG.¹³Id. at 13.

II. Differing opinions

On review, Cactus and COG had differing conclusions on why they owned the produced water. COG contended that under Texas law and long-standing practice, the language used in the Leases to convey to them oil and gas rights included liquid waste byproducts incorporated with the hydrocarbons, despite any express reservation or exception. Therefore, they were the true owners of the produced water.¹⁴Id. at 2. Cactus, however, contended that once the hydrocarbons were separated, the remaining watery mixture was surface wastewater.¹⁵Id. Surface/ground water is owned by the surface owner, absent any express conveyance of water rights.¹⁶Id.

III. The Supreme Court weighs in

Presented with the question of who owns produced water under an oil-and-gas conveyance that does not expressly address the matter, the Supreme Court of Texas ultimately held that the operator, not the surface owner, owns produced water.

In its June 27, 2025 opinion, the Texas Supreme Court held that Cactus’ argument rested on a ‘seductively simple’ proposition, asserting that surface owners retain ownership of produced water merely because it contains water molecules.¹⁷Id. at 21. The Court examined the definition of “water,” and considered how “produced water” might fall within that scope.¹⁸Water, unlike oil and gas, is not considered part of the mineral estate and remains part of the surface estate subject to the mineral estate’s implied right to use the surface as reasonably necessary to produce and remove minerals. Id. Cactus supported its argument with cases such as Edwards Aquifer Authority v. Day,¹⁹369 S.W.3d 814, 832 (Tex. 2012). Robinson v. Robbins Petroleum Corp.,²⁰]501 S.W.2d 865, 867-68 (Tex. 1973). and Sun Oil Co. v. Whitaker,²¹483 S.W.2d 808, 811 (Tex. 1972). all of which affirm that a landowner owns groundwater under its land. However, the Court found these precedents inapplicable, noting that they focus on ownership of groundwater in its original place found or through water wells for use of water, and not the byproducts of oil and gas production.

The Court relied on key distinctions between water and produced water. First, produced water cannot be defined as “water,” as it cannot be handled in the same manner. Produced water is an oil and gas byproduct, also referred to as liquid waste, and is a regulated substance which must be handled and disposed of properly. The characteristics of produced water have been described as hazardous, even toxic, and the handling of such waste is highly regulated and requires appropriate permits and infrastructure. Comically, produced water has been identified as a contaminant, and, as a result, should be kept separate from surface and subsurface water.²²16 TEX. ADMIN CODE E §§ 3.8(a)(26), (“Oil and gas wastes — Materials to be disposed of or reclaimed which have been generated in connection with activities associated with the exploration, development, and production of oil or gas or geothermal resources… The term ‘oil and gas wastes’ includes, but is not limited to, saltwater, other mineralized water, sludge, spent drilling fluids, cuttings, waste oil… and waste generated in connection with activities associated with gasoline plants, natural gas or natural gas liquids processing plants, pressure maintenance plants or repressurizing plants…”), (b) (“No pollution. No person conducting activities subject to regulation by the commission may cause or allow pollution of surface or subsurface water in the state.”).

Second, the Court emphasized the principle that “waste and hydrocarbon production go hand in hand.”²³Cactus at 19. The Court cited to Brown v. Lundell²⁴344 S.W.2d 863, 866-67 (Tex. 1961), wherein the separation and disposal of oil and gas wastewater was deemed necessary and incident to the production [of oil and gas].²⁵Cactus at 20. Important to note, COG’s tank batteries can only separate and store up to 24 hours’ worth of produced water, which must then be handled and transported elsewhere for production to continue.²⁶Id. at 8. Disposal of such waste has been an unwanted, but important, part of oil and gas production, and the Court notes that applying water-use limitations to produced water would only frustrate, not facilitate, the production of minerals.²⁷Id. at 8, 24. As noted, to facilitate production, produced water must be swiftly handled and disposed of, and the lack of infrastructure operated and owned by Cactus, along with most surface estate owners, would make production next to impossible. The Court leans on this argument when confirming that the right to produce hydrocarbons necessarily encompasses the right to produce and manage the resulting waste.²⁸Id. at 18.

Finally, the Court rejected Cactus’ oversimplified argument that produced water qualifies as ‘water’ simply because it contains water molecules. As previously discussed, produced water and water are not interchangeable, despite sharing some chemical properties.²⁹Both water and produced water may contain H2O molecules, along with a plethora of similar and dissimilar molecules. To further prove this point, the Court referenced Brief of Amicus Curiae Permian Basin Petroleum Association at 8-9, which listed substances such as blood plasma, vodka, and concrete, each of which contains water molecules, but is not considered ‘water.’³⁰Cactus at 23. While extreme, these examples underscore the Court’s point: the mere presence of water molecules does not render produced water as ‘water.’ Produced water and water are treated differently because they are different.³¹The Concurring Opinion contends that raising the issue of ownership based on the nature of the produced water is unhelpful to the overall analysis, as it is clearly both water and waste. Cactus Water Servs., LLC v. COG Operating, LLC, No. 23-0676 (Tex. June 27, 2025) (Busby, J., concurring). “The fluids include groundwater originally belonging to the landowners, and they are also classified by statute and rule as oil-and-gas waste, which the lessee has a duty to handle and dispose of safely.” Id. The focus should not be on the nature of the produced water, but on whether the landowners leased the groundwater to the lessee. Id. To this, the Concurrence agrees with the Majority Opinion. The incidentally produced subsurface water was included in the Leases’ hydrocarbon conveyance. Id.

IV. Concurrence

The Concurring Opinion emphasized that the Majority’s holding is a narrow one and noted that this case did not resolve three key issues.

First, the Majority Opinion did not decide surface owners’ rights to contract differently as to the ownership of groundwater produced and subsequently separated from hydrocarbons. For this, the Concurrence references Section 122.002 of the Natural Resources Code.³²Id. at 3-6. This Section creates default rules for ownership of fluid oil and gas waste when a contract does not provide otherwise. Specifically, the statute provides that ownership of the fluid oil and gas waste changes hands, not at separation of the fluid and the hydrocarbons, but when it is used by or transferred to a person who takes possession of it for the purpose of treating it for a subsequent beneficial use.³³Tex. Nat. Res. Code § 122.002(1). Therefore, a surface owner could contract with the lessee to retain ownership of the groundwater component of fluid oil and gas waste. However, the surface owner would then be charged with the safe disposition of said groundwater component.

Second, the Court did not address ownership of unleased minerals or other non-hydrocarbon substances that may be produced along with leased minerals. The Leases at issue in this case only conveyed “oil and gas” or “oil, gas, and other hydrocarbons.” No non-hydrocarbon minerals were leased, such as salt or potash.³⁴Cactus Water Servs., LLC v. COG Operating, LLC, No. 23-0676 (Tex. June 27, 2025) (Busby, J., concurring) at 5. Could this mean lost economic opportunity for lessors?

Third, the Concurrence states that the mineral lessee’s obligations to the landowners as to the leased groundwater were not addressed. It is unclear whether the lessee owes royalties on leased produced groundwater. If they do not owe royalties, it is unclear how the parties should account for any profit or loss realized from the beneficial reuse or disposal of the produced groundwater. Finally, it is unclear whether any implied covenants are due to the lessor with respect to the management of water, given that the leases do not expressly address this issue.³⁵Id. at 6-7.

V. Conclusion

The Supreme Court of Texas has ruled that produced water and water are not one and the same. Produced water is incident to the production of oil and gas in hydraulic fracturing; therefore, granting the right to produce hydrocarbons necessarily encompasses the right to produce and manage the resulting waste. Cactus Water Services, LLC v. COG Operating, LLC relies on longstanding practices in the oil and gas industry, the current statutory scheme, and a lack of express reservation or exception in the Leases. However, as discussed, the Court makes it clear that this holding does not prohibit surface owners from reserving water incidentally and necessarily produced with hydrocarbons. Rather, the Court instructs surface owners that such a reservation must be express. With recent technological advances in the recycling of produced water for reuse in industrial processes and irrigation of non-food crops and the questions presented in the Concurring Opinion, this likely is not the last time you’ll see produced water making a splash in Texas courts.

Footnotes

• 1
  Cactus Water Servs., LLC v. COG Operating, LLC, No. 23-0676 (Tex. June 27, 2025).
• 2
  Id. at 29.
• 3
  Id.
• 4
  Id. at 4.
• 5
  Id.
• 6
  Id. at 5-6.
• 7
  Id. at 6.
• 8
  Id. at 7.
• 9
  Id. at 11.
• 10
  Id.
• 11
  Id. at 12.
• 12
  Id.
• 13
  Id. at 13.
• 14
  Id. at 2.
• 15
  Id.
• 16
  Id.
• 17
  Id. at 21.
• 18
  Water, unlike oil and gas, is not considered part of the mineral estate and remains part of the surface estate subject to the mineral estate’s implied right to use the surface as reasonably necessary to produce and remove minerals. Id.
• 19
  369 S.W.3d 814, 832 (Tex. 2012).
• 20
  ]501 S.W.2d 865, 867-68 (Tex. 1973).
• 21
  483 S.W.2d 808, 811 (Tex. 1972).
• 22
  16 TEX. ADMIN CODE E §§ 3.8(a)(26), (“Oil and gas wastes — Materials to be disposed of or reclaimed which have been generated in connection with activities associated with the exploration, development, and production of oil or gas or geothermal resources… The term ‘oil and gas wastes’ includes, but is not limited to, saltwater, other mineralized water, sludge, spent drilling fluids, cuttings, waste oil… and waste generated in connection with activities associated with gasoline plants, natural gas or natural gas liquids processing plants, pressure maintenance plants or repressurizing plants…”), (b) (“No pollution. No person conducting activities subject to regulation by the commission may cause or allow pollution of surface or subsurface water in the state.”).
• 23
  Cactus at 19.
• 24
  344 S.W.2d 863, 866-67 (Tex. 1961)
• 25
  Cactus at 20.
• 26
  Id. at 8.
• 27
  Id. at 8, 24.
• 28
  Id. at 18.
• 29
  Both water and produced water may contain H2O molecules, along with a plethora of similar and dissimilar molecules.
• 30
  Cactus at 23.
• 31
  The Concurring Opinion contends that raising the issue of ownership based on the nature of the produced water is unhelpful to the overall analysis, as it is clearly both water and waste. Cactus Water Servs., LLC v. COG Operating, LLC, No. 23-0676 (Tex. June 27, 2025) (Busby, J., concurring). “The fluids include groundwater originally belonging to the landowners, and they are also classified by statute and rule as oil-and-gas waste, which the lessee has a duty to handle and dispose of safely.” Id. The focus should not be on the nature of the produced water, but on whether the landowners leased the groundwater to the lessee. Id. To this, the Concurrence agrees with the Majority Opinion. The incidentally produced subsurface water was included in the Leases’ hydrocarbon conveyance. Id.
• 32
  Id. at 3-6.
• 33
  Tex. Nat. Res. Code § 122.002(1).
• 34
  Cactus Water Servs., LLC v. COG Operating, LLC, No. 23-0676 (Tex. June 27, 2025) (Busby, J., concurring) at 5.
• 35
  Id. at 6-7.