On June 27, 2025, the Texas Supreme Court issued a pivotal decision in Cactus Water Services, LLC v. COG Operating, LLC, holding that under the language of the granting clause found in the standard oil and gas lease, produced water – the liquid byproduct generated during oil and gas extraction – is the property of the mineral lessee, and not the surface owner, unless the lease expressly provides otherwise. The Court concluded that produced water is oil-and-gas waste, an “inevitable and unavoidable byproduct of oil-and-gas operations,” and dismissed arguments that Texas groundwater precedent should control.[1]
The Court noted that, while it contains molecules of water, produced water is “not water”; the solution is “waste – a horse of an entirely different color.”[2] As a result, the mineral lessee has the right to possession, control, and disposition of produced water. While the Court’s opinion provides clarity on the default rule for ownership of produced water, the concurring opinion identifies significant issues left open by the Court’s ruling, highlighting three key areas where future litigation and client questions are likely to arise.
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The Court’s holding is a default rule only; parties remain free to contract otherwise
The Court’s holding is a default rule. Parties to an oil and gas lease are free to negotiate and expressly agree to a different arrangement regarding the ownership, control, or disposition of produced water. The statutes and regulations do not prevent such agreements, and parties may contract for the surface owner to retain some or all rights to produced water, provided the lease language is clear. This leaves open questions about how such arrangements should be structured and documented, and what practical mechanisms are needed to allocate, measure, and transfer produced water rights.
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No ruling on ownership of unleased minerals or other substances
The decision is limited to leases conveying “oil and gas” or “oil, gas, and other hydrocarbons.” The Court expressly does not address the ownership of unleased minerals or other substances that may be produced along with leased minerals. This leaves unresolved the treatment of other valuable byproducts or commingled substances, and whether their ownership follows the same rule as produced water.
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Lessee’s obligations regarding produced water
The Court did not address what obligations, if any, the mineral lessee owes to the lessor with respect to produced water. This includes questions such as whether royalties are owed on produced water that is recycled or sold, how profits or losses from beneficial reuse should be accounted for, and whether any implied covenants apply to the management of produced water. These issues remain open for future litigation and negotiation.
Implications
This decision provides important guidance for drafting and interpreting oil and gas leases in Texas, especially as the commercial value of produced water continues to evolve. However, the open questions identified by the concurrence highlight the need for careful lease drafting, due diligence, and ongoing legal advice regarding produced water rights, obligations, and potential revenue streams.
[1] Pg 20
[2] Pg 22
