University Lands

Photo Credit: Zachary Strain | Daily Texan Staff

University Lands, a division of the UT System’s Office of Business Affairs, generated $1 million by leasing land in far West Texas on Wednesday. This sale is dwarfed by the $70 million sale of oil and gas leases in the Permian Basin on the same day, but the $1 million might prove to be a flag signaling University Lands’ newest revenue stream.

University Lands manages 2.1 million acres that together make up the Permanent University Fund, a state endowment for public higher education. The division’s semi-annual lease sales typically focus on the oil-rich acreage University Lands manages in the central Permian Basin, and on Wednesday, the 60,844 acres up for lease in the basin went for an average $1,144 each. 

The areas owned in Hudspeth County, near El Paso, get less attention — they haven’t been leased since the ‘90s — and on Wednesday, 134,000 acres were leased for a little more than $7 each. The reason for this difference in value is that Hudspeth County has not historically been rich in oil production. But Scott Kelley, the UT System executive vice chancellor for business affairs, said because of technological advancements and the popularization of techniques including fracking, some investors are looking at the unexplored lands with new confidence that they will be able to strike black gold. 

“[The land in Hudspeth County] isn’t a very attractive area, and there hasn’t been much production there,” Kelley said. “But there were some interested parties who were willing to take on a little more risk.”

The lease sales in the two areas of land were also structured differently. Normally, companies submit sealed bids to compete for oil and gas leases on specific tracts, and University Lands receives a 25 percent royalty on any oil and gas revenue. Because the land in Hudspeth County was sitting unused, University Lands offered acres for a fee that Kelley described as “relatively nominal” and companies submitted bids on the percentage of royalties University Lands will receive. The winning bid was a 20 percent royalty contract. 

Kelley said if horizontal drilling and hydraulic fracturing lead to the discovery of oil, the Hudspeth lands might one day be sold alongside the other oil-producing tracts.

“If [the bidders] are able to start producing in the future, we might be able to move toward a more traditional lease bid for the tract,” Kelley said. 

University Lands’ Executive Director Jim Benson expressed similar hopes. 

“The ability to drill into source rock has really widened the scope of what people can look for,” Benson said. “The last time we drilled, there was no really fabulous result. But things have progressed quite a bit since then, so I think someone thinks there’s room for improvement.” 

Jeanne Eckhart, the Senior Student Associate at UT’s Campus Environmental Center, said hydraulic fracturing makes sense from an economic perspective, even though it can be risky if executed incorrectly. 

“Generally, hydraulic fracturing can have severe environmental implications if not done in the proper way,” Eckhart said. “[But] I think that economically and financially, the practice is the best way the System sees to acquire the funds it needs to sustain its operations.”

University Lands, operated through the UT System’s Office of Business Affairs, sold almost $70 million of oil and gas leases during its semi-annual sale Wednesday, according to preliminary figures released by the office. 

University Lands is responsible for 2.1 million acres of land that together make up the Permanent University Fund, a state endowment established in 1876. The UT System’s investment company invests lease sale profits and revenue from production, including oil and gas extraction on the fund’s land, and returns on those investments benefit the UT and A&M systems. 

Executive director Jim Benson said he was happy with the results of the sale.

“I’m very pleased, especially in the continuing interest in University Lands for drilling purposes,” Benson said. “We had many returning companies and some new companies, too — I’m generally very pleased.” 

The sale netted slightly fewer dollars per acre than University Lands’ last sale in September. On Wednesday, University Lands offered 60,844 acres for lease, averaging roughly $1,144 per acre. In contrast, the September 2012 sale averaged $1,329 per acre. The March 2012 University Lands sale averaged $644 per acre. University Lands made record lease profits in 2011, when both lease sales averaged more than $2,000 per acre for a total of $560 million combined. 

Beyond the regular lease sale, University Lands also leased 134,000 acres in Hudspeth county in West Texas. Benson said while historically the land has not been a viable source for significant oil production, new advancements in technology might make the land more attractive to buyers. 

“It’s kind of exciting to have someone actually looking at the area,” Benson said. “The last time we leased it was back in the 1990s, and things have progressed quite a bit since then, so I’m sure the people who are interested think they might be able to find a reservoir that makes the land more economically profitable.”

Benson cited developments in horizontal drilling and hydraulic fracturing as examples of techniques that increase the odds a leaseholder will strike oil.

Printed on Thursday, April 11, 2013 as UT profits $70 million from sale of land leases 

Photo Credit: Natasha Smith | Daily Texan Staff

University Lands, operated through the UT System’s Office of Business Affairs, sold a combined $72 million in oil and gas leases during its 2012 semiannual sales.

The leases come on the heels of University Lands’ most lucrative sales in history in 2011, when lease sales totaled $560 million.

Jim Benson, executive director of University Lands, said total sales were less this year because less acreage was available to lease.

“Of our total land mass of 2.1 million acres, 1.6 million are in production in the Permian Basin, and of that 1.4 million are under leased or currently in production,” he said.

The September 2012 sale offered 49,007 acres, just a little more than an eighth of the September 2011 sale when University Lands offered 372,163 acres for lease to oil and gas companies.

University Lands is responsible for the 2.1 million acres of land that make up the Permanent University Fund, a state endowment funded by the investment of lease sale profits and revenue from production on the land. The land is leased for multiple purposes, including oil and gas production and for surface uses. 

The UT System and the Texas A&M University System are beneficiaries of the PUF.

The UT Investment Management Company invests sale profits and lease revenue in various industries including oil, gas and gold on behalf of the System. Returns on investment go straight into the Available University Fund, which usually makes up about 8 percent of UT’s operating budget.

The UT System receives two-thirds of returns on investment while the A&M System receives one-third.

The University received $205 million in returns through the Available University Fund for the 2012 fiscal year operating budget — up almost $26 million from 2011.

Mary Knight, associate vice president and UT budget director, said fluctuations in lease sale profits are smoothed over time because Available University Fund estimates are based on 12 previous financial quarters rather than only the previous year.

“Long-term declines could have a major impact on the recurring budget and could require budget reductions across all colleges, schools and departments, including research and student scholarships,” she said.

Bruce Zimmerman, CEO of the UT Investment Management Company, said the company is not looking to invest in new industries.

The bulk of revenue generated from the lands is from oil production, Benson said. University Lands receives 25 percent of royalties from all oil and gas production on its leased land and produced almost $1 billion in revenue last year. He said $600 million was from oil and gas.

“While it’s kind of exciting to see big oil and gas lease sales, the real revenue comes from long-term production on the land,” Benson said. “Of all these new leases companies buy, the ultimate goal is to get them to drill.”

The sale is a sealed bid process in which companies bid on land where they think they can hit oil. Permanent University Fund lands are primarily located in 24 counties, mostly in West Texas.

Benson said many major companies have production operations on University Land tracts.

“We get newcomers every year, but a lot of the same companies are consistently drilling and producing on our land in the Permian Basin for years,” he said.

ConocoPhillips Company, Approach Oil & Gas Inc. and Angelle & Donohue Oil & Gas Properties Inc. are among the leaseholders.

Oil was first discovered on Permanent University Fund land in 1923 in Reagan County, according to University Lands.

Printed on Friday, October 12, 2012 as: University Lands' revenue dereases