From Waste to Asset: How Cactus Water Services, LLC v. COG Operating, LLC Reshapes Produced-Water Ownership and Future Oil and Gas Litigation

Key Takeaways

• Cactus establishes a default rule that produced water belongs to the mineral lessee absent express lease language, but leaves unresolved critical questions that will drive future disputes over classification, conveyance, and allocation of value.

• As produced water transitions from a disposal cost to a monetizable asset, operators should expect increased royalty litigation over whether reuse, mineral extraction, or avoided disposal costs constitute royalty-bearing “production” or other lease benefits.

• The decision opens the door to novel operator-liability theories—ranging from implied covenants to negligence standards—forcing courts to define what constitutes prudent produced-water management in a post-Cactus landscape.

I. Introduction: The New Frontier in Oil‑and‑Gas Litigation

In the Permian Basin, oil is king—but recently produced water has quietly gained significance both financially and legally. Long dismissed as an operational and regulatory burden, produced water has historically represented an expensive “cost of doing business” for mineral lessees. That view is quickly dissipating.

Technological advances in recycling, beneficial reuse, and mineral extraction have transformed produced water into a commercially significant asset. Combined with the Texas Supreme Court’s watershed decision in Cactus Water Services, LLC v. COG Operating, LLC, issues relating to produced water are poised to become Texas’s next major arena for high‑stakes litigation.

II. Background and Holding of Cactus

COG Operating, LLC was the lessee of several oil and gas leases in Reeves County, Texas that granted it the exclusive right to explore for, produce, and keep “oil and gas” or “oil, gas, and other hydrocarbons.” Cactus Water Servs., LLC v. COG Operating, LLC,  718 S.W.3d 214, 217–18 (Tex. 2025). The leases did not address “produced water,” “oil‑and‑gas waste,” or “other minerals,” and three prohibited almost all use of water. Id. at 218. Years later, the surface owners entered into “produced water lease agreements” with Cactus Water Services, LLC, which conveyed rights to “water from oil and gas producing formations and flowback water produced from oil and gas operations.” See id. at 221. After learning of these agreements, COG promptly sued for declaratory relief that it—not Cactus—owned the produced water from its wells. Id. at 222. 

The trial court and court of appeals sided with COG, concluding that produced water constitutes oil‑and‑gas waste owned by the mineral lessee. See id. at 222–23. On review, the Texas Supreme Court addressed a question of first impression: who owns produced water when an oil‑and‑gas conveyance does not expressly mention it? The Court held that, absent an express reservation, the mineral lessee owns water incidentally and necessarily produced with hydrocarbons. Id. at 230. 

Although the Court’s holding appears straightforward, Justice Busby’s concurrence emphasizes the narrowness of the majority’s opinion and how it leaves open numerous issues that will ultimately become the new wave of oil and gas litigation over produced water. 

III. The First Fault Line: Ownership Classification of Produced Water

The Court’s reasoning largely rests on regulatory and industry practice: produced water is hazardous, heavily regulated, inseparable from hydrocarbon production, and is treated differently from groundwater. See id. at 227. Also emphasizing its position on a molecular level, the Court reasoned that “produced water contains molecules of water, both from injected fluid and subsurface formations,” thereby making “the solution itself a waste” Id. 

Yet, this reasoning exposes a conceptual tension. Texas precedent holds that groundwater—fresh or saline—is part of the surface estate, and produced water undeniably includes subsurface groundwater molecules. Id. at 226–27; see also Sun Oil Co. v. Whitaker, 483 S.W.2d 808, 811 (Tex. 1972) (holding that water has been held to be part of the surface estate but also recognizing that lessees have the right to “drill water wells on said land and to use water from such wells to the extent reasonably necessary for the development and production of such minerals”). Cactus argued that this molecular reality means some portion of produced water remains “water” owned by the surface estate. See id. The Court rejected that position, but the logic is not airtight: if molecular composition is legally significant as the Court suggests, one could argue the inverse—i.e., that produced water is not (entirely) waste because it is comprised of molecules of groundwater. This inconsistency will not go unnoticed by future litigants. 

Accordingly, operators should expect ownership challenges centered on questions such as:

• Whether lease language granting “other minerals” encompasses dissolved minerals such as lithium, bromine, rare earth elements, or naturally occurring radioactive materials (NORMs) in produced water.
• Whether dissolved minerals are truly “incidental” to hydrocarbon production or instead part of groundwater historically owned by the surface estate.
• Whether prior agreements or covenants, such as surface‑owner water‑use restrictions, sufficiently imply retained ownership of produced water, or whether only an express reservation would suffice after Cactus.
• Whether produced water should be treated as a “dual‑character” resource (i.e., part waste, part mineral‑bearing solution), triggering split ownership depending on its stage of processing.
• Whether the act of separating hydrocarbons from produced water qualifies as a “severance event” that changes ownership status at the moment hydrocarbons are removed, similar to severance concepts in NGL and casinghead gas jurisprudence.

Recent legislative activity will also play a role in the fights ahead. For example, SB 1763 would have classified brine‑borne minerals as part of the mineral estate—but did not address the produced water itself. Its failure, however, leaves courts without statutory guidance and invites litigants to creatively deconstruct Cactus and the Court’s reasoning.

Finally, Cactus establishes only a default rule, not a universal one. Justice Busby made clear that if parties wish to allocate produced‑water ownership differently, they may do so—but must do so expressly. Id. at 232 (J. Busby, concurring). This raises foundational questions such as:

• When a mineral and surface estate are severed, who has ownership of produced water, and which owner is entitled to reserve such rights?
• Does the mineral lessor convey that right through an oil‑and‑gas lease, or must the surface owner expressly reserve it?
• If ownership traces back to the surface estate, should operators begin seeking surface‑owner ratifications as a matter of course?

These unanswered questions could set the stage for substantial litigation over the basic classification and conveyance of produced water.

IV. The Second Fault Line: Royalty Litigation tied to Produced Water

The historical backdrop is stark: “[d]isposing of produced water [has been] one of the largest operation costs” for producers. Id. at 219–20. But as recycling and reuse technologies advance, and as value‑adding processes become commercially viable, produced water is shifting from a liability to an asset. 

This transition invites the central royalty question: If the mineral lessee owns produced water under the lease, does the lessor receive a royalty on the proceeds derived from its sale or reuse? Under Cactus, the right to possess produced water is conveyed to the mineral lessee unless expressly reserved. Id. at 230. If this right is part of the leasehold grant, lessors will argue that disposal or monetization of produced water is a lease‑governed disposition—i.e., a royalty‑bearing product. 

Courts will soon face questions such as:

• Does selling treated produced water or monetizing it through reuse constitute “production” for royalty purposes?
• When third parties extract valuable minerals (e.g., lithium), is the mineral owner entitled to a share of the extracted mineral value?
• If produced‑water reuse generates emissions‑reduction credits or similar environmental offsets, do those credits constitute an “other benefit” owed to royalty owners?
• When produced water from multiple leases is commingled, what allocation methodology applies—and what proof is required?
• Whether royalty clauses covering “other benefits,” “proceeds,” or “value received” could sweep in avoided disposal costs, treating avoided expenses as a form of royalty‑bearing economic gain.
• Whether downstream revenue could be subject to post‑production costs.

As the Court acknowledged, “industry methods are evolving to better manage byproducts.” Id. at 228. As byproduct management becomes more efficient, so, too, does its value. However, these unresolved issues are likely to fuel a new class of royalty claims, accounting disputes, and attempts to expand the scope of “production” under royalty clauses.

V. The Third Fault Line: New Theories of Operator Liability

In addition to the foregoing, Cactus opens the door to novel theories of operator liability. Litigants are likely to explore claims such as: 

• Whether implied covenants—such as the covenant to protect against drainage—extend to maximizing produced‑water value.
• Whether operators owe a duty analogous to an executive‑right owner’s duty of good faith when deciding whether (and how) to monetize produced water or extract dissolved minerals.
• Whether failure to market or exploit produced water constitutes imprudence under the reasonably prudent operator standard, particularly if disposal costs exceed potential monetization options.
• Whether operators have an obligation to test produced water to determine its economic potential.
• Whether disposal constitutes a legally actionable “waste” if the operator could have captured measurable value instead.
• Whether operators could face negligence‑based claims for failing to adopt emerging technologies (e.g., lithium‑extraction pilots) that have become industry‑standard, raising the question: What is the “reasonable operator” in a post‑Cactus world?
• Whether produced‑water mismanagement could give rise to tortious interference claims when an operator’s actions prevent a surface owner who retained such rights from capitalizing on separate contractual opportunities.
• If a mineral owner does reserve the rights to produced water, how does the operator go about producing hydrocarbons while not interfering with the mineral owners right to produced water?

These theories will push courts to determine whether produced water is simply another operational byproduct—or whether, post‑Cactus, it is an asset the operator must manage with fiduciary‑like diligence.

VIII. Practical Takeaways for Operators and Property Owners

• Document decision‑making regarding disposal, treatment, reuse, and potential extraction of dissolved minerals.
• Incorporate produced‑water considerations into financial and litigation forecasting, including royalty‑exposure scenarios and potential implied‑covenant claims.
• Anticipate extensive discovery into produced‑water composition, treatment alternatives, and economic analyses supporting operational decisions.
• Update lease forms, JOAs, and surface‑use agreements to expressly address ownership, monetization rights, and allocation of produced‑water value.
• Consider adding surface owner ratifications into existing leasing programs.
• Develop internal valuation models for produced water to document why certain monetization pathways were or were not pursued, creating litigation‑ready evidence of prudent operator judgment.

IX. Conclusion: A Narrow Holding with a Wide Range of Possibilities

The evolution of produced water from waste to asset has transformed a routine operational byproduct into the next frontier for operators across Texas. Cactus provides clarity on one limited question—absent express language, produced water belongs to the mineral lessee. But by declining to resolve the many issues lurking beneath that rule, the Court has set the stage for a decade of complex litigation over ownership, royalty obligations, operator liability, and more. Cactus and its inevitable protégés will not be viewed as the end of the fight, but the beginning of complex disputes that will reshape oil‑and‑gas litigation—particularly as produced water becomes more economically valuable through advanced technologies.