Background

COG Operating, LLC operated 72 horizontal wells in the Delaware Basin under oil and gas leases that did not expressly address ownership of produced water—the waste stream generated during hydrocarbon extraction. Over the course of operations, COG disposed of approximately 52 million barrels of produced water at a cost of $21 million. The surface owners entered into separate agreements purporting to convey produced water rights to Cactus Water Services, LLC. Cactus Water Services asserted ownership rights against COG based on these surface owner conveyances.

The Dispute

The central legal issue was whether produced water constitutes property of the mineral lessee-operator or the surface owner when the underlying oil and gas lease is silent on waste stream ownership. Cactus Water Services claimed ownership based on the conveyances from the surface owners. COG Operating contended that its leasehold interest in oil and gas production necessarily included ownership of all substances produced from the wellbore, including produced water as an incident of its extraction rights. The case required the Court to determine whether produced water falls within the bundle of rights granted to operators under standard oil and gas leases or remains with the surface owner absent express lease language addressing the waste stream.

The Court's Analysis

The Texas Supreme Court ruled that operators own produced water generated under oil and gas leases even when the leases contain no specific provisions addressing waste stream ownership. The Court determined that produced water ownership flows from the operator's leasehold rights to extract and produce hydrocarbons, treating the waste stream as an inherent component of the production process rather than a severable surface estate interest. By holding that the operator's production rights encompass produced water, the Court effectively foreclosed surface owners from conveying what they never owned. The ruling meant that the separate agreements between surface owners and Cactus Water Services conveyed nothing—the surface owners had no produced water rights to transfer because those rights vested in COG Operating as the lessee-operator from the moment of production.

Implications for Practice

This decision resolves a significant uncertainty in Texas oil and gas law regarding waste stream ownership when leases are silent on the issue. Operators who have invested substantial capital in produced water disposal infrastructure—as COG did with its $21 million expenditure—now have clear ownership rights to the produced water generated from their operations. Surface owners can no longer claim independent ownership of produced water to convey to third parties absent express lease provisions reserving such rights. The ruling provides certainty for operators managing produced water disposal and for parties seeking to acquire produced water rights, making clear that such rights must be obtained from the lessee-operator rather than the surface owner.