UT System to Explore Agreements for Sale of Future Oil, Gas Royalties

AUSTIN – The University of Texas System Board of Regents today (July 24) authorized UT System officials to pursue contracts with companies that would purchase future oil and gas royalty production coming from 2.1 million acres of System-managed land in West Texas.

Such agreements would allow the UT System to competitively sell a portion of its oil and gas production at a fixed price over longer terms, allowing the System to access cash sooner to invest in campus activities.

“Current market conditions have given us this opportunity to take advantage of relatively high oil and gas prices and low interest rates,” said Scott C. Kelly, the System’s executive vice chancellor for business affairs. “This move gives us the potential to significantly enhance the revenue stream for the institutions in the near term.”

Kelley said such contracts, or “forward sales” as they are sometimes called, also would allow the additional one-time earnings to be invested with the possibility of greater returns.

By constitutional mandate, proceeds from the sale of oil and gas on the 2.1 million acres, which cover 19 counties, are deposited into the Permanent University Fund (PUF) endowment, which in turn supports 18 institutions and six agencies in the UT System and the Texas A&M University System.

In February, the UT System Board of Regents set the current distribution policy of the PUF to 5 percent.  The Board’s move to increase the payout this year was prompted by several years of impressive investment returns facilitated by The University of Texas Investment Management Co. (UTIMCO) and increasing annual oil and gas revenues from operations on the West Texas lands.

The distribution policy percentage increase and today’s action reflect the Board’s philosophy of providing UT institutions with additional financial assistance when it determines such resources are available. 

UT System officials would initiate a competitive bid process to select a company or companies to enter into the forward sale agreements.   The Board for Lease of University Lands, composed of the Commissioner of the General Land Office and regents from the UT System and Texas A&M University System, has final authority to approve the agreements following a formal recommendation by the UT System Board of Regents.

In Fiscal Year 2007, revenue from oil and gas production on the West Texas land was $272,682,000, up roughly $57 million from the previous fiscal year. The nearly $273 million deposited in fiscal 2007 is expected to generate approximately $13.6 million in additional distributions from the PUF, two-thirds of which ($9.1 million) supports 13 UT System institutions, while the other third ($4.5 million) goes to the Texas A&M System.

The Texas Constitution of 1876 established the PUF through the appropriation of land grants previously designated to The University of Texas, as well as an additional 1 million acres.  Another state grant of 1 million acres was made in 1883.  The lands are managed to produce two income streams: one from oil, gas and mineral interests, and the other from surface interests, such as grazing.

Read the Board motion concerning this item Here.

About the University of Texas System

The UT System is one of the nation’s largest higher education systems, with nine academic campuses and six health institutions. The UT System has an annual operating budget of $10.7 billion (FY 2008) including $2.3 billion in research funded by federal, state, local and private sources. Student enrollment exceeded 194,000 in the 2007 academic year. The UT System confers more than one-third of the state's undergraduate degrees and educates nearly three-fourths of the state's health care professionals annually. With more than 81,000 employees, the UT System is one of the largest employers in the state.