Produced water is not simply water. It is a byproduct of oil and gas exploration and development, generated through hydraulic fracturing and other production activities. The authority to handle, dispose of, and potentially reuse this waste stream has traditionally been held by lessees and operators of the mineral estate. That authority is now unequivocally confirmed.
The Supreme Court of Texas has now answered the question directly. In Cactus Water Services, LLC v. COG Operating, LLC, the Court considered a dispute over who owns produced water generated under an oil and gas lease. Its holding is clear: the operator owns the produced water. Produced water is included within the grant of oil and gas rights, even if a lease or deed does not expressly mention it, and even if the parties never anticipated the value it might eventually hold.
What is Produced Water?
Produced water is a “briny mixture of drilling, fracking, and formation fluids” that is the “costly byproduct of oil-and-gas production.” Hydrocarbons cannot be extracted from underground formations without generating produced water, and oil and gas production cannot continue without disposing of it.
Hydraulic fracturing (fracking) is now the primary method of hydrocarbon recovery, and the most common fracturing fluid used is water. When an operator injects fluid into a well, a portion returns to the surface as “flowback.” This flowback contains hydrocarbons, emulsified brine, and various other chemicals and formation materials. This mixture is known as produced water.
Texas has historically viewed the operator’s possession and control of produced water as part of the rights they receive from the lessor. Under the Texas Administrative Code (§§ 3.8, 3.13), operators are responsible for the proper handling and disposal of produced water and may face significant liability for improper management. In addition, failure to remove produced water from the wellsite can force production to cease.
In recent years, emerging technologies have made produced water a potentially lucrative resource. Produced water can be reused for fracking or recycled for other beneficial uses if adequately treated. Still, treatment and recycling often remain far more expensive than disposal, which limits widespread commercial adoption.
Case Overview: Cactus Water Services, LLC v. COG Operating, LLC
From 2005 to 2014, COG entered into four leases with two surface owners in Reeves County, Texas, which included total mineral interests across roughly 37,000 acres. All four leases gave COG “the exclusive right to explore . . . produce, and keep either ‘oil and gas’ or ‘oil, gas, and other hydrocarbons.’” Notably, none of the leases referenced the handling, ownership, or disposal of waste products generated during production, including produced water.
Water-use provisions varied across the leases. Three prohibited the use of water from the leased lands unless sourced from wells drilled by COG, and even then, only for limited operational purposes and not for flooding, secondary recovery, or camp operations. The remaining lease was silent on water use entirely. Across all four, produced water was never mentioned.
COG’s operations targeted the Delaware Basin, where dense shale formations and low permeability make hydraulic fracturing essential. Once hydrocarbons were extracted, the resulting fluids were separated at the surface, leaving large volumes of produced water requiring disposal. By the time litigation arose, COG drilled 72 horizontal oil wells on the leases, resulting in almost 52 million barrels of produced water. In just over two years, COG spent roughly $21 million on produced water disposal for these leases. COG alone paid these disposal costs.
After issuing the leases, the surface owners entered into produced water lease agreements in 2019 and 2020 with Cactus Water Services, LLC. These agreements allegedly gave Cactus the rights to the produced water generated under the leases with COG. Even though Cactus had no permits, infrastructure, or ability to manage the produced water, Cactus attempted to claim entitlement to it under these agreements. COG sued Cactus seeking a declaration of their rights to the produced water, and Cactus responded by seeking a declaration that the produced water was theirs. Both the trial court and court of appeals sided with COG. Cactus then sought further review, setting the stage for the dispute to reach the Texas Supreme Court.
The Court’s Decision
The Texas Supreme Court focused on whether Texas law treats produced water as property belonging to the operator or to the surface owner. Although groundwater is normally excluded from the mineral estate, the Court made clear that produced water is not considered water at all. It is classified as waste created during oil and gas production, and the right to manage that waste necessarily transfers to the lessee when the mineral estate is leased. The Court highlighted that the law and other regulations “treat water and produced water differently because they are distinct and different.”
The Court further held that if there are no express provisions in the leases that give the surface owner rights to the produced water under the leases, then the leases give “exclusive possession, custody, control, and disposition of produced water as part of the hydrocarbon production rights.” Because none of the four leases contained any reference to produced water, COG retained the full rights to it. The later agreements between the surface owners and Cactus Water Services therefore conveyed nothing, and Cactus acquired no interest to assert.
The Court provides a simple solution for surface owners hoping to retain produced water rights from their lessees: include an express reservation or exception in the mineral conveyance. Courts will not imply one.
The Benefits of Cactus Water Services
Operator lessees clearly benefit from this decision because they have increasing opportunities to either save or make money by reusing or recycling their produced water. This decision also benefits lessors and lessees alike because it maintains the status quo for oil and gas operations in Texas as they have existed since before this case.
Despite initial impressions, surface owners and lessors gain protection as well. By reaffirming that operators remain responsible for managing produced water, the Court avoided upending regulatory duties and liability. If the Court had ruled the other way, many lessors who never addressed produced water in their leases could have suddenly found themselves responsible for handling and disposing of it, creating widespread confusion and financial risk.
Although Cactus and the surface owners in this case did not prevail, the Court provided a clear path for surface owners who want to reserve produced water rights in the future: include an express reservation in the lease. Courts will enforce what is written, and only what is written.
Kuiper Law Firm, PLLC specializes in oil and gas issues; if you have any questions about the information in this article, or how it applies to you and your operations, do not hesitate to contact us.
