On June 27, 2025, the Texas Supreme Court issued its opinion in Cactus Water Services, LLC v. COG Operating, LLC, No. 23-0676, determining that produced water belongs to the mineral lessee, and not the surface owner, under standard oil and gas leases, even when not expressly mentioned in the lease.
Between 2005 and 2014, two surface owners granted COG Operating, LLC (“COG”) four leases covering approximately 37,000 acres in Reeves County, Texas. The leases granted COG with the exclusive right to explore, produce, and keep “oil and gas” or “oil, gas, and other hydrocarbons.” Since its acquisition of these leases, COG has drilled 72 horizontal oil and gas wells, which have generated approximately 52 million barrels of produced water. Produced water is a hazardous byproduct consisting of fracking fluid, brine, and other chemical laden substances, which is left behind when oil and gas are separated at the surface. Disposing of produced water is one of the most significant expenses associated with operating oil and gas wells. COG bore all of the costs of disposal of the produced water from the four leases.
In 2019 and 2020, Cactus Water Services, LLC (“Cactus”) entered into “produced water lease agreements” (“PWLAs”) with the surface owners, conveying to Cactus Water Services all of the surface owners’ right, title, and interests in and to “water from oil and gas producing formations and flowback water produced from oil and gas operations.” In 2020, Cactus notified COG that it was entitled to the produced water from COG’s wells under the PWLAs.
COG responded by suing for a declaration from the trial court that it owned and had the exclusive right to handle the produced water. Cactus responded by seeking its own declaration that it owned the produced water.
The central issue for the court was whether COG’s rights to produced water were implicitly included in the express conveyance of oil and gas rights, or whether produced water remained part of the surface estate because water rights were not expressly and separately granted to COG. The trial court ruled in favor of COG and against Cactus. The court of appeals affirmed the trial court’s decision. The Texas Supreme Court granted review.
It is an established principle that water, unlike oil and gas, is not considered part of the mineral estate. However, the Texas Supreme Court emphasized that this case did not involve groundwater. It described the issue as whether produced water is legally considered water or waste, and it firmly concluded that it is waste: “The production of liquid waste is an inevitable and unavoidable byproduct of oil-and-gas operations; one cannot occur without the other. Accordingly, it goes without saying that granting the right to produce hydrocarbons necessarily contemplates and encompasses the right to produce and manage the resulting waste.”
The Supreme Court rejected Cactus’ argument that produced water should belong to the surface estate simply because it contains water molecules, noting that “statutes and regulations treat water and produced water differently and distinctly because they are distinct and different.”
Cactus also argued that COG only held usufructuary rights in the produced water (meaning it had a right to use the produced water, but not the right to own the produced water). The Court disagreed, holding that COG had the right to destroy, dispose of, and consume the produced water, all of which are rights inconsistent with merely a usufructuary right.
Further, the Court explained that although recent technological advancements have created the potential for produced water to become a lucrative resource by enabling its repurposing and reuse, at the time COG received its interest, it acquired the right to manage, dispose of, and control the produced water. The Court cautioned that the meaning of a conveyance cannot be reevaluated through a modern lens.
The Court concluded that if surface owners wish to retain ownership of produced water, they must do so explicitly in the lease.
The decision is a definitive win for operators, and a reminder to landowners that clear and express language matters when negotiating oil and gas leases.