Background Information

Hydraulic fracturing has driven a major jump in oil and gas recovery in the Permian Basin. Fracking means pumping huge volumes of water, sand and chemicals into the shale to open fractures and free hydrocarbons. When the mix comes back up, separators strip out the oil and gas and leave behind “produced water,” a salty brine loaded with dissolved minerals, leftover hydrocarbons and treatment chemicals. Regulators treat produced water as oil-and-gas waste rather than groundwater, so it’s subject to strict handling and disposal rules. At scale, getting rid of billions of barrels of produced water each year adds up to a huge cost for drilling companies.

But markets don’t stand still. Advances in treatment technology have turned produced water into a potential money-maker. Once cleaned, you can reuse it for more fracking, sell it to third-party recyclers, apply it in agriculture or even extract critical minerals like lithium. The catch is that building treatment plants, pipelines and storage facilities require serious capital, and no one’s quite sure who owns the water once it comes out of the well. The Texas Supreme Court, in their opinion released in late June of 2025, settled this question.

The Appeals Court’s Legal Theories

That ownership question is at the heart of Cactus Water Services, LLC v. COG Operating, LLC. Does title to produced water pass to the mineral lessee under an oil-and-gas lease, or does it stay with the surface owner unless the lease says otherwise?

In 2023, the Texas Court of Appeals answered that produced water is part of the “product stream” covered by an oil-and-gas lease, so it belongs to the mineral lessee. The court pointed to Texas statutes and Railroad Commission rules that define “oil and gas waste” to include produced water while excluding it from “groundwater” or “fresh water.” Since operators have long borne the cost of handling and disposing of produced water, COG, in this case, paid over $20.5 million in disposal fees, and the decision aligns ownership with liability.

The dissent took a different view. Justice Palafox looked at the lease wording and noted that neither “water” nor “waste” appears in the granting clause only “oil and gas” and “other hydrocarbons.” Under cases like Sun Oil Co. and Robinson v. Robbins Petroleum, water stays with the surface estate unless the lease explicitly conveys it. The dissent also pointed out that the lease restricts COG’s use of surface and subsurface water, a provision that would be pointless if COG already owned the water. Finally, even if you imply a right to use produced water under the accommodation doctrine, that right does not amount to full ownership.

Which Side did the Texas Supreme Court Agree With?

The Texas Supreme Court affirmed the holding of the appeals court. Justice Devine delivered the opinion of the court, Justice Busby filed a concurring opinion, in which Justice Lehrmann and Justice Sullivan joined. Justice Young did not participate in the decision.

The Court characterized produced water as an unavoidable, hazardous byproduct of hydrocarbon extraction as it includes brine, flowback fluids, and contaminants like hydrocarbons, chemicals, and radioactive materials. The Court argues that under Texas law this waste is inseparable from hydrocarbon production. Because the lessee is legally obligated to manage and dispose of it, ownership necessarily accompanies that responsibility.

Although the leases were silent about produced water, the Court applied the principle that a grant of mineral rights includes not only the expressly listed substances, but also what is necessarily implied and incident to their production; the Court cited Brown v. Lundell, noting that the right to dispose of produced water is “necessarily incidental” to production, and thus is conveyed with the mineral lease.[1]

The Court also referenced the Texas Administrative Code and Natural Resources Code, which: (1) defines produced water as oil-and-gas waste; (2) imposes legal obligations for its separation, storage, treatment, and disposal on the operator; (3) prohibits its discharge without regulatory compliance. Since the control, custody, and liability for produced water falls upon the lessee, the Court held that ownership must follow.

The Court argues that Texas law requires express language to reserve rights in a deed or lease, holding that produced water cannot be impliedly reserved to the surface owner just because it contains water molecules. The leases did not reserve any rights in produced water, nor did they define or treat it as surface estate water. The Court rejected Cactus’s argument that produced water had newfound economic value and should be treated differently. Courts must interpret leases based on the legal and factual context at the time of execution, not in light of later technological or market developments, stating “Courts cannot employ a backward-looking construction... informed by new technologies offering the potential for recycling and reuse that were not within the parties’ contemplation.”

So what, why is this important?

Because the Texas Supreme Court affirmed, mineral lessees will have clear title, which should speed up recycling, infrastructure investment and R&D into cheaper, better treatment methods. Consequently, this decision slams the door on retroactive title claims by surface owners or speculators like Cactus: (1) operators can proceed without fear that a surface owner will try to reassert rights over the water years into the lease; (2) it also resolves the uncertainty over the legal status of third-party water leases executed by surface owners (now likely void unless separately negotiated with the lessee).

Clear ownership makes it easier to contract with recyclers, de-risk financing and attract investors. On the flip side it could increase the value of oil-and-gas leases as now we have clarification on who owns produced water, and thus, the clarified ownership structure enables more accurate forecasting of produced water value, allowing it to be reflected in lease pricing and commercial arrangements. This could create market opportunities for entrants who do not want to handle produced water and thereby negotiate or sell the water to another party.

Had the Supreme Court of Texas reversed, surface owners would keep title unless the lease says otherwise. That would mean separate produced-water leases for every surface owner, higher transaction costs and slower deals. Under that scenario, investors and third-party recyclers might hesitate to back large water-treatment projects, and fresh disputes would spring up over who pays to treat and dispose of the water.

Instead, there is now more pressure on Surface Owners to be more strategic and plan when negotiating leases. This decision will likely imply that they cannot assume ownership of anything not mentioned in the lease, meaning concerns regarding lithium rights in the produced water. Thus, there will likely be an uptick in expressly reserving rights to future byproducts, including produced water, lithium, or rare minerals.