oil and gas leases

Oil Pumpjack, Midland, TX

Photo Credit: Zachary Strain | Daily Texan Staff

A technology-driven oil boom in the Permian Basin is changing the nature of the 2.1 million acres of University Lands, which will pull in an estimated $1 billion this year. On the heels of a $70 million lease sale Wednesday, The Daily Texan examines the myriad operations on the land and how the West is changing.

Read more in depth about UT and oil issues: 

UT System to make $1 billion in oil, gas revenue this year from production in Permian Basin

Cheap leases may provide revenue

More Native American artifacts found on UT land with increase in oil, gas exploration

Path to University Lands success includes many failed ideas

Research on hydraulic fracturing continues as UT adapts new disclosure guidelines

Groups struggle to preserve habitat of West Texas lizard

Drought, oil indsustry take a toll on University Lands ranchers

University Lands, legislature and regulators mull water rules

We Asked... Oil and Gas

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.”

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

The Office of Business Affairs, which directs University Lands, sold almost $250 million of oil and gas leases Wednesday during its most lucrative semiannual lease sale in history.

The sale included oil and gas leases for 117,000 of the 2.1 million acres of Permanent University Fund land.

The Republic of Texas set aside 220,000 acres of public land in 1839 as an endowment for a public university. Oil was first discovered on the land in 1923 in Reagan County, according to the UT System’s website.

This sale and the last one in September 2010 collected considerably more money than any previous sales, said Stephen Hartmann, executive director of University Lands, which is dedicated to managing and leasing the lands.

The September 2010 sale totaled $207 million, and the highest sale before that came in the ‘80s and totaled $52 million, Hartmann said. Other sales have topped at about $40 million.

Hartmann said oil and gas, drilling or brokerage companies bid on specific plots of land before the date of the sale based on the amount of oil or gas they think they can get from the area. He said the bidders have no way of knowing information about other bids for the plots they bid on.

He said this forces companies to bid in relation to how much they can get from the land.

“If you’re bidding on this, you take your best shot because you don’t know,” Hartmann said. “If you really want it, you better make it good. I had one guy say, ‘You ought to at least provide doughnuts for making us go through this.’ I took a look at his bids and said, ‘I should bring Wheaties instead.’”

In addition to oil and gas leases, the Land Office leases land for pipelines and fiber-optic cables, wind farms, businesses and a commercial winery.

The University of Texas Investment Management Company invests the profits from the lands that make up the Available University Fund. The University of Texas System receives two thirds of the returns on investment, and the Texas A&M University System receives one third.

For its 2010-11 budget, UT Austin received $166 million from the returns, which comprise the Available University Fund.

Much of the land is leased for multiple uses, but because the three-year oil and gas leases have different statutory requirements than the 10-year surface leases, they are sold separately, said Jim Benson, director of business operations of University Lands.

Benson said all oil and gas leases are sold in sales similar to Wednesday’s and approved by the Board for Lease of University Lands, and the rest are negotiated individually and approved by the UT System Board of Regents.

He said the office expected a successful sale because of high oil prices and political events worldwide.

“Worldwide demand and probably the instability in some of the other oil-producing regions in the world have driven people back to domestic oil,” Benson said.

He said a few key players always influence sales, but which companies bid year to year is unpredictable.

ConocoPhillips purchased tracts of land for between $500,000 and $2.3 million, according to the Land Office’s preliminary sale numbers. Official numbers will be released Thursday morning.

“We are always looking for good opportunities. We believe the tracts purchased today in Crockett and Reagan counties are among them,” said Davy Kong, a ConocoPhillips representative, in a statement for the company.

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1. Andrews 50,414.31
2. Upton 52,400.00
3. Ward 134,918.08
4. Winkler 519,440.00
5. Schleicher 649,102.35
6. Pecos 893,836.63
7. Crane 5,037,009.54
8. Ector 5,266,078.34
9. Reagan 35,399,122.46
10. Crockett 193,864,094.51


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