This episode explores a brand new Texas Supreme Court decision in Cactus Water Services, LLC v. COG Operating, LLC (No. 23-0676 (June 27, 2025)) that definitively resolves the characterization of produced water ownership.
Summary by Trey Wilson, Texas Real Estate and Water Law Attorney in San Antonio
The Court affirmed that produced water is an inherent and inescapable byproduct of oil and gas production, and its ownership, possession, custody, control, and disposition are implicitly conveyed to the mineral-estate lessee (the oil and gas operator) as part of the hydrocarbon rights.
For a surface owner to retain ownership of produced water, an express reservation in the mineral conveyance is required.
1. Produced Water is Classified as "Oil-and-Gas Waste," Not Surface Water.
- The central dispute hinged on whether produced water is legally "water" (part of the surface estate) or "waste" (an incidental byproduct of mineral production).
- The Court unequivocally classified produced water as "oil-and-gas waste," stating, "We think it beyond cavil, and not in genuine dispute, that produced water is, and was at the time of the conveyance, oil-and-gas waste."
- Despite containing water molecules, produced water is characterized as a "hazardous, even toxic, mixture produced with hydrocarbons and separated from them after extraction at the wellbore."
- Statutory and regulatory frameworks treat "water" and "produced water" differently.
- Produced water is subject to specialized regulations governing its disposal, treatment, and reuse due to its contaminants. The Court emphasized: "Water is something that must be protected from oil-and-gas waste; the two are not interchangeable."
2. Ownership of Produced Water is Implicitly Conveyed to the Mineral Lessee.
- The Court held that "a deed or lease using typical language to convey oil-and-gas rights, though not expressly addressing produced water, includes that substance as part of the conveyance whether the parties knew of its prospective value or not."
- This conclusion is rooted in the "necessarily incidental" doctrine: hydrocarbon production "necessarily contemplates and encompasses the right to produce and manage the resulting waste."
- Historically, the "right to consume the value of property is generally a right of ownership, not use."
- Therefore, the hydrocarbon producer's "possession and control over the disposition of liquid-waste byproduct is necessarily incidental to, and therefore encompassed in, a conveyance of oil-and-gas rights."
3. Subsequent Innovations and Beneficial Uses Do Not Alter Original Conveyances.
- A key aspect of the ruling is that emerging technologies for the beneficial reuse and recycling of produced water do not retrospectively change the scope or intent of past conveyances.
- The Court explicitly states, "subsequent innovations do not change the parties’ expectations or the deal that was struck."
- Interpretation of the conveyance must be "as of the transfer of rights, not through a modern lens."
4. Express Reservation is Required for Surface Owners to Retain Ownership.
- The Court clarified that if surface owners wish to retain ownership of produced water, "the reservation or exception from the mineral conveyance must be express and cannot be implied."
- Texas law presumes "an intent to sever the mineral and surface estates, convey all valuable substances to the mineral owner... and to preserve the uses incident to each estate." Any reservation "must be by clear language."
5. Produced Water is Distinct from Groundwater; Mineral Lessee's Rights are Ownership, Not Usufructuary.
- The Court rejected Cactus's argument that produced water is simply "water" belonging to the surface estate, distinguishing it from cases concerning groundwater ownership (e.g., Edwards Aquifer Authority v. Day and Sun Oil Co. v. Whitaker). These prior cases pertain to "ownership of groundwater in situ or extracted through water wells for use as water," not "waste byproducts of oil-and-gas production."
