My New Podcast Episode: Is “Produced Water” Groundwater or Oil & Gas Waste?

Executive Summary

This landmark Supreme Court of Texas decision definitively resolves the question of produced water ownership in Texas for oil and gas conveyances that do not explicitly address the matter. 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. This ruling holds true even in light of emerging technologies for the beneficial reuse of produced water. Crucially, the Court emphasized that for a surface owner to retain ownership of produced water, an express reservation in the mineral conveyance is required, a condition not met in this case.

II. Main Themes and Key Ideas

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 reinforce this distinction, treating “water” and “produced water” differently. Produced water is subject to specialized environmental and energy-law regulations governing its disposal, treatment, and reuse due to its contaminants. The Court emphasized that “Water is something that must be protected from oil-and-gas waste; the two are not interchangeable.”

1. 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: the right to produce hydrocarbons “necessarily contemplates and encompasses the right to produce and manage the resulting waste.”
• Historically, the “burden and expense of liquid-waste disposal has been an unwanted, but quotidian, fact of oil-and-gas production,” signifying ownership for disposal purposes. 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.”

1. 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.”

1. 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.”

1. 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.”
• The Court also dismissed the notion that the mineral lessee’s rights to produced water are merely “usufructuary” (the right to use and enjoy another’s property without owning it). The right to “destroy, dispose of, or consume property is generally inconsistent with a merely usufructuary right.” Given the operator’s legal obligation and significant expense in disposing of produced water, this right is indicative of ownership.

III. Key Facts

• Parties Involved:COG Operating, LLC: Mineral-estate lessee and operator of producing wells under hydrocarbon leases.
• Cactus Water Services, LLC: Surface-estate lessee, asserting a claim to produced water based on “produced water lease agreements” (PWLAs) with the surface owners.
• Location: Permian Basin, West Texas, specifically Reeves County.
• Hydrocarbon Leases: COG acquired four leases between 2005 and 2014, granting exclusive rights to “oil and gas” or “oil, gas, and other hydrocarbons.” These leases were silent on “oil-and-gas waste” or “produced water.”
• Cactus’s Claim: In 2019 and 2020, surface owners executed PWLAs with Cactus, purporting to convey “all right, title and interest in and to” produced water from COG’s operations. Cactus claimed the exclusive right to sell or transfer this water.
• Nature of Produced Water in COG’s Operations: COG’s operations involve hydraulic fracturing, producing “flowback”—a complex and hazardous mixture of hydrocarbons, hypersaline brine, residual hydrocarbons, and various substances (e.g., potassium, strontium, barium, iron, carbon dioxide, hydrogen sulfide, and chloride). This mixture, after separation from oil and gas, is known as “produced water.”
• Disposal Burden and Cost: Produced water disposal is a significant operational expense for oil wells. COG, for instance, paid nearly $21 million in disposal fees to a third-party contractor from December 2018 to March 2021. Production ceases if produced water cannot be expeditiously moved offsite for disposal.
• Regulatory Context: Texas law has long established produced water as “liquid oil-and-gas waste,” placing the burden of handling and disposal on operators. Statutory and regulatory definitions of “oil-and-gas waste” explicitly include saltwater, brine, flowback water, and produced water.
• Lower Court Rulings: Both the trial court and the court of appeals sided with COG, declaring that COG owns the product stream, including produced water, and has exclusive possession, custody, control, and disposition rights.

IV. Conclusion

The Supreme Court of Texas’s decision in Cactus Water Services, LLC v. COG Operating, LLC provides crucial clarity on produced water ownership in Texas. By firmly classifying produced water as “oil-and-gas waste” necessarily incidental to hydrocarbon production, the Court reinforces the historical understanding that its management and disposition are implicitly included in mineral leases. This ruling underscores that surface owners must proactively and explicitly reserve any desired ownership rights over produced water in future mineral conveyances if they wish to capitalize on its emerging beneficial uses.