By Lynn Sherman, Leonard H. Dougal, Peter E. Hosey, & Alicia R. French 

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.

1. 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.

2. 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.

3. 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.

Please contact our team for further analysis or to discuss how this decision may impact your current or future transactions, lease negotiations, or operational practices.

[1] Pg 20

[2] Pg 22

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For questions, please contact a member of the Environment & Natural Resources practice.

Meet Lynn

Lynn Sherman is a partner in the Environmental, Regulatory, & Legislative practice group. With over three decades of experience, Lynn concentrates on resolving complex water-related challenges across Texas. Lynn has significantly influenced water policy, development, and conservation through his roles as a lawyer, consultant, executive, and thought leader. He has been instrumental in major water projects, including the development of some of the state’s most significant water pipelines, water sales agreements, and water rights purchases. In both the public and private sectors, Lynn has led initiatives to develop water projects and has co-authored authoritative works on Texas water issues, including the seminal article on the Rule of Capture and an upcoming article on produced water. His contributions have provided actionable solutions to some of Texas’ most pressing water challenges.

Meet Leonard

Leonard H. Dougal represents clients in complex permitting and water supply matters, including high-tech companies, semiconductor manufacturers, data center owners, power generation companies, real estate developers, and special utility districts. Leonard is frequently sought after to speak at Bar and Continuing Legal Education seminars. He is the author of a chapter in the treatise on Texas water law, The Essentials of Texas Water Resources. He is board certified in Administrative Law by the Texas Board of Legal Specialization.

Meet Pete

Peter E. Hosey advises clients concerning all aspects of exploration, production, transportation, processing, sale, and marketing of oil and gas and other natural resources. He is a frequent lecturer around the State of Texas at various CLE-sponsored events concerning oil and gas issues, land titles, title insurance, and other real estate-related topics. Peter is Board Certified in Oil, Gas and Mineral Law with the Texas Board of Legal Specialization and has served on the Joint Editorial Board for the Texas Title Examination Standards since 1998. He is an adjunct professor at St. Mary’s University School of Law and is Chair of the Board of Visitors and President of the St. Mary’s Law Foundation. He is a past Chair of the State Bar of Texas – Oil, Gas, and Energy Resources Law Section and former President of the San Antonio Bar Association Natural Resources Committee.

Meet Alicia

Alicia R. French practices energy and environmental law, with an emphasis on regulatory matters. She has experience in administrative law and frequently practices before the Texas Railroad Commission, along with the Public Utility Commission of Texas and the Texas Commission on Environmental Quality. Alicia represents a diverse set of clients in permitting, enforcement, and other matters before the Texas Railroad Commission, including matters involving the exploration, production, development, storage, sales, and transportation of oil and gas; advising gas utilities, gas and crude oil pipeline operators, and consumers regarding midstream regulatory matters.