Gravel2Gavel Construction & Real Estate Law Blog
On June 27, 2025, the Texas Supreme Court issued its long-awaited decision in Cactus Water Services, LLC v. COG Operating, LLC, No. 23-0676, resolving a high-stakes dispute over the ownership of produced water—a vexing byproduct of oil and gas production that is increasingly being viewed as a resource rather than waste—and its constituents. The Court held that, unless expressly reserved, a deed or lease conveying oil and gas rights also conveys produced water as part of the mineral estate. The decision not only reinforces the ownership of produced water under Texas oil and gas law, but also offers insight into how emerging practices such as direct lithium extraction (DLE) from produced water might be treated under existing legal frameworks.
Background
The crux of this case is whether produced water belongs to the surface or mineral estate. Under Texas law, groundwater is owned by the surface owner, irrespective of the minerals contained in the groundwater. Coyote Lake Ranch, LLC v. City of Lubbock, 496 S.W.3d 53 (Tex. 2016); Robinson v. Robbins Petrol. Corp., 501 S.W.2d 865 (Tex. 1973). However, certain minerals, including lithium, are part of the mineral estate.
COG Operating, an oil and gas operator in the Permian Basin and mineral lessee, brought a declaratory judgment action against Cactus Water Services, a company that had acquired purported rights to produced water through a produced water lease granted by the surface owners, including the right to sell all water “produced from oil and gas wells and formations [on the covered properties].” COG, which had operated the lease and managed the transportation and disposal of produced water for years prior to the Cactus’s lease, argued that it owned the produced water as part of its mineral leasehold rights.
The Texas Supreme Court agreed, holding that “produced water is not water” subject to traditional groundwater ownership by the surface estate. Rather, produced water is an oil and gas waste byproduct necessarily included in the conveyance of oil and gas rights. “While produced water contains molecules of water, both from injected fluid and subsurface formations, the solution itself is waste—a horse of an entirely different color.” Thus, the Court held, produced water belongs to the mineral estate owner absent an express reservation to the contrary. Because produced water is an unavoidable byproduct of hydrocarbon production—and its handling is both a legal obligation and an operational necessity—the rights to it pass with the mineral estate unless clearly retained by the surface owner.
In COG’s leases—as is typical in Texas oil and gas leases—the granted interests were defined as “oil and gas” and “oil, gas, and other hydrocarbons.” Without an express reservation of produced water, the Court held that this granting language conveyed to COG “the right to possession, custody, control, and disposition of the constituent water in the liquid waste from its hydrocarbon production.”
Implications for Lithium and Other Critical Mineral Extraction
Oil and gas drillers inject a mixture of water, chemicals and other fluids into wells to dislodge underground hydrocarbons. The resulting produced water returns to the surface, typically laden with dissolved constituents such as salts, heavy metals, and naturally occurring elements—including lithium. Notably, lithium is the lightest metal and highly soluble in water, making produced water a potentially valuable source of this critical mineral. (For more on extracting lithium from brine, see Lithium for Batteries from Geothermal Brine.) Historically, most produced water is reinjected into subsurface disposal wells, but such practices have increasingly been linked to induced seismicity, prompting operators to explore alternatives.
As interest in critical mineral recovery accelerates—especially in Texas, where produced water volumes are vast, salinity levels are high, and there are abundant lithium reserves—the concept of using DLE technologies to harvest lithium (and other minerals) from produced water has gained traction among investors, operators and regulators. Conceptually, DLE presents a dual opportunity: transforming a legally and logistically burdensome waste stream into a revenue-generating resource, while reducing reliance on injection disposal. Further, it has relatively minor surface impact compared to traditional extraction techniques.
But Texas law had not definitively answered whether lithium and other minerals in produced water belong to the mineral or surface estate. This legislative session, the Texas Legislature considered—but ultimately did not pass—SB 1763, which would have classified minerals contained within produced water, such as lithium, as part of the mineral estate. The Cactus Water ruling now clarifies that the oil and gas lessee holds the right to possess and control the produced water itself, including the ability to transport, treat and dispose of it. (For a deeper look at recent legislative developments affecting liability protections in produced water handling, see Texas Legislature Expands Liability Protections for Produced Water Operations.)
One critical question the Court did not expressly address is who owns the lithium and other critical minerals dissolved in produced water. However, the Court’s reasoning can ostensibly be extended to support the view that ownership of these constituents follows ownership of the produced water itself. Because the Court confirmed that produced water is part of the mineral estate, it follows that the constituent elements within that waste stream, including dissolved minerals, would also belong to the mineral estate, absent an express reservation or contrary agreement.
The Court emphasized that the parties “understood that disposal of liquid waste meant consumption of the capital value, if any, of constituent water,” suggesting that any potential value inherent in the water and its contents was part of what the mineral estate owner controlled. The Cactus Water decision further clarifies that the oil and gas lessee holds the right to possess, manage and dispose of the produced water, reinforcing the notion that control over the water includes control over its dissolved contents.
While the Court stopped short of definitively stating that minerals like lithium are conveyed with the mineral estate, its reasoning points in that direction. Nonetheless, this issue remains legally nuanced. Traditional oil and gas leases often do not address ownership of non-hydrocarbon minerals, raising the possibility of future disputes or the need for further legislative or judicial clarification.
Lithium Royalties: The Next Legal Frontier
While Cactus Water clarifies ownership of produced water, it leaves open the critical question of how to structure and value royalties for lithium and other critical minerals extracted from that water. As DLE technologies move from pilot projects to commercial deployment, operators, mineral owners and surface owners will need to confront the absence of a standardized royalty framework for lithium produced in this unconventional context.
In Texas, royalties for oil and gas typically fall between 12.5% and 25% of the value of production, depending on the lease terms. By contrast, royalty provisions in water disposal agreements (where they exist) tend to be minimal or fixed-fee based. Lithium extracted from produced water does not neatly fit into either paradigm. It is a high-value mineral historically unaccounted for in traditional lease structures, and its production may involve entirely different economics, infrastructure and processing timelines.
Establishing an appropriate royalty structure for lithium will require careful balancing of interests. Landowners and mineral holders may seek compensation aligned with prevailing royalty rates for valuable subsurface commodities, while operators may argue for lower rates to account for the technological risks and processing costs associated with DLE. Regulatory agencies may also enter the conversation, particularly if public lands or seismic concerns are involved.
Until more precedents emerge, parties should approach lithium royalty negotiations with a focus on transparency, detailed revenue-sharing mechanisms, and clear delineation of costs. Leases that are expressly tailored for lithium recovery should avoid relying on boilerplate oil and gas royalty language and instead define valuation benchmarks, pricing indices and audit rights specific to lithium and other critical minerals.
As DLE projects advance, royalty terms may become a flashpoint for litigation or legislative scrutiny, making proactive structuring a key risk management strategy.
Conclusion
The Texas Supreme Court’s decision in Cactus Water provides long-awaited clarity on the ownership of produced water under Texas law, with far-reaching implications for oil and gas operators, midstream companies, water management service providers, and parties exploring critical mineral recovery. By affirming that produced water is part of the mineral estate absent an express reservation, the Court has provided a legal foundation for mineral lessees to assert control over both the water itself and its potentially valuable constituents, such as lithium.
As demand for domestic sources of critical minerals grows, driven by clean energy goals, battery manufacturing and national security priorities, produced water is quickly emerging as a strategically important resource. The evolving market for direct lithium extraction and similar technologies positions produced water not only as an environmental and operational challenge, but also as a potential asset.
In light of the Cactus Water decision, stakeholders should take proactive steps to protect and optimize their interests:
- Review Existing Leases and Surface Agreements: Carefully evaluate oil and gas leases, water use agreements, and surface waivers to determine whether produced water and its constituents are adequately addressed. Ambiguous or outdated language could give rise to competing claims.
- Assess Title and Reservation History: Determine whether prior owners, lessors or surface estate holders reserved any rights to produced water or dissolved minerals, which could affect current operations or future monetization opportunities.
- Negotiate with Clarity in Future Transactions: Ensure that future leases and purchase agreements expressly allocate rights to produced water and any valuable dissolved elements, including lithium and other critical minerals. Where appropriate, include terms related to transportation, treatment and commercial use.
- Track Legislative and Regulatory Developments: As interest in lithium recovery grows, lawmakers and agencies may move to codify or clarify rules governing ownership, permitting and environmental oversight. Staying ahead of these developments is key to risk management and investment planning.
- Evaluate Strategic Partnerships and Technology Access: Operators interested in lithium recovery should begin evaluating DLE technology providers, potential joint ventures and commercialization models to align legal rights with operational capabilities.
Ultimately, the Cactus Water ruling represents a pivotal moment for Texas energy and mineral law, aligning traditional oil and gas principles with emerging technologies and the accelerating energy transition. Stakeholders who act now to secure their rights and plan for future recovery efforts will be best positioned to capitalize on this shift.
Pillsbury’s Energy and Environmental & Natural Resources team continues to monitor legal and commercial developments surrounding produced water, lithium extraction and subsurface mineral rights across Texas and beyond. Please contact us with questions about how this decision may impact your assets, operations, or strategic plans.
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