Cheap leases may provide revenue

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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.”