/>iIn a significant decision for Texas property and energy law, the Texas Supreme Court has affirmed the Eighth Court of Appeals’ ruling in Cactus Water Services, LLC v. COG Operating, LLC, holding that produced water — a byproduct of oil and gas production — belongs to the mineral estate unless expressly conveyed otherwise. The opinion, released on June 27, 2025, resolves a contentious dispute between surface estate owners and mineral estate holders, with far-reaching implications for the water midstream sector and upstream oil and gas industry.
Background
The case arose from a disagreement between Cactus Water Services, LLC, representing surface estate interests, and COG Operating, LLC, a mineral lessee, over ownership of produced water extracted during oil and gas operations in the Permian Basin. Cactus Water argued that produced water, as a form of groundwater, inherently belongs to the surface estate absent a clear conveyance to the contrary. COG countered that produced water is part of the mineral estate’s product stream, akin to oil and gas, and thus owned by the mineral lessee under standard lease agreements.
On July 28, 2023, the Eighth Court of Appeals in El Paso sided with COG in a 2-1 decision, ruling that produced water is not groundwater in the traditional sense but rather a byproduct of mineral extraction, vesting ownership with the mineral estate. A link to our previous client alert on this topic is available here.
Cactus Water then petitioned the Texas Supreme Court for review, and oral arguments were heard on March 18, 2025.
The central issue before the Court was whether COG’s claimed rights to the produced water were included in the express conveyance of oil-and-gas rights or whether produced water was part of the surface estate because no water rights were expressly and separately conveyed to COG.
The Ruling
In its June 27, 2025, opinion, the Texas Supreme Court upheld the appeals court, affirming 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.” The court went on to say that “if the surface owner actually wants to retain ownership of constituent water incidentally and necessarily produced with hydrocarbons, the reservation or exception from the mineral conveyances must be express and cannot be implied.”
In its opinion, the Court notes that “[w]hile produced water contains molecules of water, both from injected fluids and subsurface formations, the solution itself is a waste…produced water is not water.”
This ruling introduces a significant exception to the enduring principle that groundwater inherently pertains to the surface estate. While the mineral owner or lessee, holding the dominant estate, traditionally possesses an inherent right to utilize groundwater for oil and gas production (unless otherwise agreed), this decision distinguishes produced water from this general groundwater rule. Following this ruling, any deed conveying or reserving ‘oil, gas and other minerals’ now implicitly transfers ownership of the produced water to the mineral lessee responsible for its extraction.
Implications for the Upstream and Midstream Sectors
For upstream oil and gas producers, the ruling is a clear win. Ownership of produced water strengthens their control over the entire product stream, enabling integrated water management strategies and creating new revenue streams from the beneficial reuse or sale of treated water. It also significantly curtails the ability of surface owners to engage in rent-seeking by demanding payment for what the court, and industry, views as a waste product and historical liability.
For water midstream companies, the ruling reaffirms the framework for their operations, supporting their ability to perform contractual obligations to handle the vast volumes of produced water — more than 100 billion gallons annually — generated by the industry. This clarity on ownership is crucial for their investment and operational planning.
For surface owners, the ruling is a clear setback. However, the court did acknowledge that “although disposal is the norm, recent technological innovations have given new purpose to produced water as a potentially lucrative commodity.” Crucially, in footnote #3, the court cautioned that “we express no view regarding ownership of any nonhydrocarbon minerals included in liquid-waste byproduct, as no such substances are in dispute here.” This suggests a potential avenue for future litigation regarding the ownership of valuable trace minerals within produced water. As a result, surface owners are likely to increase scrutiny of lease agreements, pushing for express provisions addressing produced water rights in future negotiations.
