UT banking on profit from oil land deals

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The regents this week authorized UT officials to negotiate with oneor more parties to sell a portion of its oil and gas production ata fixed price over a set time period.
The buyer would pay up front for the oil and gas produced in comingyears from 2.1 million acres spanning 19 West Texas counties.
"Current market conditions have given us this opportunity to takeadvantage of relatively high oil and gas prices and low interestrates," said Scott Kelley, the UT System's executive vicechancellor for business affairs, in a written statement.
"This move gives us the potential to significantly enhance therevenue stream for the institutions in the near term."
Energy industry experts said the decision won't likely have asignificant impact on the prices drivers pay at the fuel pump. AndUT System leaders wouldn't say whether the expected infusion ofmoney might reduce tuition costs, which have skyrocketed in recentyears.
Matt Flores, spokesman for the UT System, said no decisions havebeen made on production amount, the length of the royalty lease orhow agreements would be structured. $50 million for education Any revenue gained would go into the Permanent University Fund tobe invested by managers of the endowment, currently valued at $12.2billion.
Five percent of the fund is distributed annually to highereducation, with two-thirds going to the UT System and one-third tothe Texas A&M System.
Under the fund's distribution formula, if the so-called "forwardsales" contracts bring in a possible $1 billion, that would mean anadditional $50 million available for higher education. By law, thatmoney must be shared by 18 institutions and six agencies across thetwo systems.
"It's not an inconsequential amount but, by no means is ittransformational," Flores said.
He wouldn't speculate on whether the effort to boost the endowmentmight ease future tuition increases.
"Any time there's a revenue stream that goes toward our universitythat is improved it benefits our students in the long run," hesaid. Regents' approval needed A competitive bid process will be used to select a company orcompanies, UT said. Terms of any contracts would need approval fromthe UT Board of Regents as well as the Board for Lease ofUniversity Lands, a panel headed by Land Commissioner JerryPatterson and including some regents from both UT and A&M.
Patterson said many details need to be worked out such as whatwould happen if UT couldn't deliver all the oil guaranteed in acontract.
"Like anything else, the devil's in the details. But with oilprices where they are, if you can do this, there's no better timeto do this than now," Patterson said.
Ken Medlock, an economics professor at Rice University, said themain risk in selling future production is that prices risesignificantly.
"You get a nice big check at the beginning, what if prices go up?Then you've actually sold your assets for pennies on the dollar,"he said.
Another risk is that problems with the wells or oil reservesprevent the delivery of the promised amounts. Then the state wouldhave to go out and buy oil in the market.
An oil industry analyst said he expects there will be interestedbuyers. Peter Beutel, president of Cameron Hanover, an energy riskmanagement firm in New Canaan, Conn., said the deals make sense forthe endowment.
"They are getting today's price, and going to be able to investthat money in other things," he said.
Additionally, Beutel said, consumers could benefit by having theoil on the futures market.
"They are taking a socially responsible approach to this. Ratherthan hold the asset, they are selling it and trying to be part ofthe solution to bring down prices."
The Texas Constitution of 1876 established the Permanent UniversityFund through the appropriation of land grants previously designatedto UT, as well as an additional 1 million acres. Another grant of 1million acres was made in 1883.
The land is managed to produce income from oil, gas and mineralproduction and surface grazing.
In fiscal year 2007, nearly $273 million was generated from oil andgas production, up roughly $57 million from the previous fiscalyear. That resulted in distributions of $9.1 million to the UTSystem and $4.5 million to the Texas A&M System.