Land & Renewables Connection

Does the Texas Supreme Court’s Decision in Cactus Water Services v. COG Operating Provide Guidance About Lithium and Rare Earth Minerals Ownership in Pennsylvania?

Lithium demand is expected to continue to increase as demand grows for batteries used in renewable energy projects and in electric vehicles. Pennsylvania, and its Marcellus shale gas development, could play a significant role in meeting this demand.  Studies indicate that produced water from Marcellus shale oil and gas development in Pennsylvania could satisfy up to 40% of the current demand for lithium in the United States.

Since lithium is already being removed from the ground in Pennsylvania as part of the produced water from shale gas development, its economic utilization could provide another level of benefit for landowners in the Commonwealth. While technologies to remove and process lithium from the produced water need to mature and become more cost effective, the economic potential is nonetheless there.

That raises the question that we have explored before - who owns the lithium that comes out of the ground in the produced water from oil and gas operations in Pennsylvania. Because of this open question, there was a lot of attention directed to the Texas Supreme Court, which was considering the ownership of produced water from oil and gas operations.

On June 27, 2025, the Texas Supreme Court issued its long-awaited decision in Cactus Water Services, LLC v. COG Operating, LLC, ___ S.W. 3d ___ (Tex. 2025), answering a question about the ownership of oil and gas produced water in Texas. In Cactus Water Services, the Texas Supreme Court agreed with the lower appellate court that, based on the broad terminology of the oil and gas leases it was reviewing, the oil and gas produced water was owned by the natural gas lessee and that the oil and gas produced water was not subject to produced water agreements that were executed after the oil and gas leases.

Although it is a Texas state law decision that would not bind Pennsylvania courts, the Cactus Water Services decision addresses a core component of potential lithium development in Pennsylvania - the ownership of oil and gas produced water. So, does the Texas Supreme Court’s decision in Cactus Water Services offer a compelling foundation for Pennsylvania landowners, and courts, to make decisions about the ownership of lithium that is extracted from oil and gas produced water?

The answer to that question is - probably not. And the reason is straightforward. The Cactus Water Services court only addressed the ownership of produced water from oil and gas operations. It did not specifically address ownership of all substances within the produced water, because it did not have to. This is a critical distinction and an open issue that significantly minimizes the utility of the Texas Supreme Court’s decision in Cactus Water Services as a baseline to evaluate ownership of lithium and other substances that come to the surface in oil and gas produced water in Pennsylvania.

Did Bad Facts Make Bad Law?

There is a maxim in the legal community that bad facts make bad law. Whether history will judge the Cactus Water Services decision as “bad law”, it is certainly a decision that is rooted in bad facts.

On one hand, COG Operating was an oil and gas producer. It “acquired four hydrocarbon leases from two surface owners” with those leases granting broad and exclusive rights “. . . to explore for, produce, and keep ‘oil and gas’ or ‘oil, gas, and other hydrocarbons.’” Those oil and gas leases said nothing about oil and gas waste and only addressed water in the context of using water for operations.

To produce oil and gas, COG Operating engaged in hydraulic fracturing operations. That involved the injection of hydraulic fracturing fluid into subsurface formations to induce the flow of oil and gas. “A portion of the injected fluid returns to the surface as ‘flowback’, bringing with it a mixture of hydrocarbons, emulsified brine, and a complex mélange of substances that varies depending on the particular formation and the fracking fluid’s chemical composition.” The Cactus Water Services court colorfully observed that, in this case, “these substances include a hazardous brew of potassium, strontium, barium, iron, carbon dioxide, hydrogen sulfide, and chloride.”

When this “toxic brew” came to the surface with the hydrocarbon oil and gas molecules, COG Operating “mechanically separates the oil and gas, leaving a mixture of fracking fluid, hypersaline brine, residual hydrocarbons, and other substances of varying concentrations.” That amalgamation of substances, “known in the industry as ‘produced water,’ can carry serious risk to human health and the environment and must be treated and disposed of in accordance with the applicable regulatory standards.”

A critical fact here is that COG Operating “does not reuse produced water from its operations for any purpose, either on or off lease, or receive any compensation for its use elsewhere. And if COG is unable to expeditiously move produced water offsite for disposal, production from its wells must cease.”

On the other hand, Cactus Water Services was a company that took “produced water agreements” from some surface owners on the same land that was already burdened by the oil and gas leases with COG Operating. Those produced water agreements granted “all right, title and interest in and to ‘water from oil and gas producing formations and flowback water produced from oil and gas operations’” in the properties that were subject to the oil and gas leases with COG Operating. Importantly, those produced water agreements defined “water” to mean:

any and all water contained in and produced from geologic formations under the Subject property through any wellbores drilled for the production of oil, gas, and natural gas liquids, whether economically productive, or not, regardless of salinity. ‘Water’ excludes all water originating from shallow geological intervals that do not have and have never produced oil, other hydrocarbon liquids, and/or natural gas anywhere in the [Delaware/Permian] Basin. ‘Water’ also excludes water purposely and directly produced from . . . freshwater aquifers.

In short, the “produced water agreements” were drafted with a particular purpose, targeting a particular substance. And, whereas COG Operating was actually producing oil and gas and had the infrastructure to do so, Cactus Water Services, “possesses no permits, no infrastructure, and no ability to handle, transport or dispose of produced water.” Worse yet, “Cactus has no assets other than its [produced water agreements] and owns no pipelines, disposal wells, or processing facilities, nor has it committed to acquiring such infrastructure.”

As part of its oil and gas production operations, COG Operating brought hydrocarbons and other fluids, being the produced water, to the surface. When COG Operating attempted to dispose of the produced water, Cactus Water Services claimed that it had rights to that produced water instead. The Court summarized that “[t]he central issue was whether COG’s claimed rights were baked into the express conveyance of oil-and-gas rights or whether produced water was part of the surface estate because no water rights were expressly and separately conveyed to COG.”

The Texas Supreme Court’s Reasoning

The outcome here was dictated by how the Texas Supreme Court defined “produced water”. According to the Court, “[d]espite its colloquial appellation, produced water is not water. 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.” By concluding that “produced water” is not actually “water”, the Cactus Water Services court freed itself to chart a course that was based on ownership of a waste byproduct.

In an introductory paragraph, the Texas Supreme Court summarized its view and conclusion that:

Produced water is an inherent and inescapable byproduct of oil-and-gas production. Hydrocarbons cannot be extracted without simultaneously generating liquid waste, and production cannot continue without disposing of this hazardous—sometimes toxic—solution. When the underlying hydrocarbon leases were executed, and for decades before, it was understood, expected, and contemplated that the well operator was legally obligated to dispose of produced water, thereby consuming the value of entrained water molecules. The right to consume the value of property is generally a right of ownership, not use. A conveyance that presupposes the disposition of water molecules entrained with hydrocarbon production necessarily factors that disposition into the transaction along with the benefits and burdens of transferring disposal rights. Though the parties are free to strike a different deal, subsequent innovations do not change the parties’ expectations or the deal that was struck.

To be sure, even though the Cactus Water Services court acknowledged that produced water contained “formation fluids” that already existed in the ground and were not introduced as part of the oil and gas drilling and production process, the produced water itself was part and parcel of oil and gas development. And, even more, in the Court’s eyes, the produced water was a waste byproduct of the oil and gas production process. “Hydrocarbons cannot be extracted without simultaneously generating liquid waste, and production cannot continue without disposing of this hazardous - and sometimes toxic - solution.”

The Cactus Water Services court’s conclusion that produced water was not “water” was critical because it avoided longstanding precedent in Texas law that “[w]ater, unlike oil and gas, is not considered part of the mineral estate.” And, “[u]nless expressly severed, subsurface water remains part of the surface estate . . .” For instance, in Robinson v. Robbins Petroleum Corp., 501 S.W. 2d 865 (Tex. 1973), the Texas Supreme Court stated decades ago that “[i]n either case the water itself is an incident of surface ownership in the absence of specific conveyancing language to the contrary. And in our case the saline content has no consequence upon ownership.” But here, the produced water did not fall into this broad umbrella and was instead a waste that was an “inevitable and unavoidable byproduct of oil-and-gas operations”, with the Cactus Water Services court reasoning that “it goes without saying that granting the right to produce hydrocarbons necessarily contemplates and encompasses the right to produce and manage the resulting water.”

The Cactus Water Services court made clear, however, that its decision was not an absolute, and was rooted in the language of the contracts before it. The Texas Supreme Court acknowledged that while typical granting language in deeds and leases involving oil and gas rights resulted in a conveyance of produced water, it was possible for the produced water to be excluded from such conveyance. The Court wrote that “if the surface owner actually wants to retain ownership of constituent water incidentally and necessarily produced with hydrocarbons, the reservation or exception from the mineral conveyance must be express and cannot be implied.” Contrary to that, “[t]he conveyances here include no such reservation or exception.”

The Concurrence

Three Justices signed a concurrence that suggests a very limited scope of the majority decision. The concurring Justices fundamentally agreed with the viewpoints that this was a conveyancing question and that rights to develop oil and gas carried with them rights to incidentally produced subsurface water. But, the Justice authoring the concurrence wrote that the Court’s “. . . opinion is a narrow one, and I write separately to make clear what we do not decide today.”

The concurrence observed several items that, in its view, were not resolved by this case and were not intended to be resolved by this case. They were:

1. Property owners are free to reach a business deal about water ownership different from the default rule expressed by the court;
   
2. The oil and gas leases that were the subjects of the case only granted rights to hydrocarbons, so non-hydrocarbon minerals were not leased; the production of unleased minerals along with leased minerals does not transfer ownership of unleased minerals to the lessee;
   
3. Since the produced water was granted in the leases, the potential financial obligations of the lessee (i.e. royalties) can be an issue, but were not before the court in this case.

Is the Texas Supreme Court’s Reasoning Persuasive and Transferable to Pennsylvania?

 The Texas Supreme Court did not appear to have a difficult time reaching its conclusion in Cactus Water Services. The Opinion gives no indication of intellectual struggles within the Court in its pursuit of an answer to the question presented. But, the matter at-hand is not as simple as the Texas Supreme Court presented. So, is the Texas Supreme Court’s decision persuasive to Pennsylvania courts and to Pennsylvania landowners? Likely not.

As a starting point though, the Texas Supreme Court was correct to stress that its decision was premised on the language of written documents. It was not a one-size-fits-all pronouncement that rights to produced water are always granted in an oil and gas lease, or always granted when oil and gas is sold. That means ownership questions about produced water (and what is in it) are specific to each particular property. That concept is reasonable and is transferrable to Pennsylvania.          

The overarching issue in Cactus Water Services, and its principal limiting factor, is that it only substantively addressed the ownership of produced water. The question here is the Texas Supreme Court’s definition of “produced water”. The Cactus Water Services court narrowly defined produced water as the waste product after hydrocarbons are removed. The Court had to pursue this “waste” definition in order to avoid the precedent that water is owned by the surface owner. But, if the produced water “waste” contains valuable metals, like lithium, can it fairly be categorized as a “waste”?

The stream coming out of the wells that contains the oil and gas, fluids and other substances is not a “waste” - because it contains the valuable oil and gas. However, just because the focus of oil and gas development is not the extraction of valuable metals, like lithium, does not mean that all “non-hydrocarbon” substances are “wastes”. Therefore, it is not clear that lithium, or any other valuable non-hydrocarbon substance that comes to the surface as part of oil and gas development, would fall within the scope of a “waste”, which is what produced water is defined as in Cactus Water Services. That casts doubt on the Texas Supreme Court’s fundamental definitions that were the basis of its decision. Accordingly, it becomes difficult to directly apply the Texas Supreme Court’s logic elsewhere.

Cactus Water Services seems similar to the Pennsylvania Supreme Court’s decision in United States Steel Corporation v. Hoge, 468 A.2d 1380 (Pa. 1983). In Hoge, the Pennsylvania Supreme Court held that coalbed methane gas within a coal seam was owned by the owner of the coal and not the owner of the oil and gas. Id. at 1385. Examining an instrument of title, the Hoge court reasoned of the coalbed methane gas that “[i]t strains credulity to think that the grantor intended to reserve the right to extract a valueless waste product with the attendant potential responsibility for damages resulting from its dangerous nature.” Id. at 1385. That parallels the Cactus Water Services court’s observation about waste and intent, when it wrote that “[t]he leases, when construed as a whole and in connection with the other transaction documents, do not reflect an understanding or intent that produced water is anything other than a waste byproduct necessarily included in the hydrocarbon conveyance.” Essentially, by defining something as a waste, both the Pennsylvania Supreme Court in Hoge and the Texas Supreme Court in Cactus Water Services were able to avoid precedent governing ownership.

There are, however, limits to this approach. In Butler v. Charles Powers Estate ex rel. Warren, 65 A.3d 885 (Pa. 2013), the Pennsylvania Supreme Court addressed an argument that shale gas was not owned by the owner of the oil and gas estate but was instead owned by whoever owned the rock of the shale formation. The reasoning was that shale gas came from and remained in in rock just like coalbed methane gas, so the logic in Hoge should carry the day. The Pennsylvania Supreme Court rejected that argument in Butler. In doing so, the Butler court pointed, in part, to the nature of coalbed methane gas having been viewed as a waste product in Hoge.

When viewed through the Butler lens, the reasoning in Cactus Water Services can only go so far. Labeling something as a waste may provide a foundation to answer a fairly specific question. But, it does not necessarily provide a comprehensive framework to apply to other situations. When the component of a waste starts to have value, the analysis can change, and that can impact courts’ review of instruments of title. Just because lithium may be present in produced water, which is a waste, does not necessarily mean that the legal reasoning applicable to produced water ownership would apply to lithium. And, vice versa.

At bottom, the Texas Supreme Court’s decision in Cactus Water Services answers a question about ownership of produced water. But, that court’s reasoning and definitions are not necessarily transportable to potential disputes in Pennsylvania about who owns, has a right to develop, and has a right to be paid on valuable metals and minerals that exist underground and are brought to the surface through oil and gas production. Those questions will have to be answered in Pennsylvania.

For questions about these subjects, contact Brendan A. O’Donnell at 412-288-2226 or odonnellba@hh-law.com