Oil and gas royalties on University Lands could reach $1 billion this year, and the increasing production in West Texas is the reason why.

Most of University Lands’ 2.1 million acres are out here, funneling money into the endowment that supports the University of Texas and Texas A&M University systems and in turn paying for capital investments such as libraries and major construction projects.

In December, oil and gas companies on University Lands produced more than 4 million barrels of oil equivalent for the first time since 1972.

“It’s really really ramped up,” said Doc Weathers, a senior geologist with University Lands, which is based in Midland.

Weathers is one of 37 workers who oversee the program in West Texas. He describes his job as a sort of day-to-day manager, focusing on Andrews, Dawson, Gaines and Martin counties.

They are areas that include intense oil and gas drilling operations, but like other University Lands, include leaseholders such as cattlemen too. Other areas include a few wind farms and in the Fort Stockton area, a vineyard. Keeping a balance between lessees, Weathers said, is one of his duties.

“The money comes from the oil and gas, but the thing is, I’m not going to let an oil and gas company run over our grazing lessees because they make a lot more money for us,” Weathers said. “Our mission is to maximize income and be good stewards of the land.”

So he said he tries to make sure the oil and gas and the agricultural respect each others’ space. This happens in Andrews, he said, where Pioneer Natural Resources surrounds the home of a ranch-hand for Bird Ranches, but willingly steers clear of his space.

Landmen and other oil and gas experts said requirements on University Lands can be more stringent than private leases. There are stricter water-usage rules, for example: requirements of a geologist and engineer to oversee drilling of a water well, and directives in some water-scarce places to use groundwater from the deeper and more brackish Santa Rosa Aquifer.

“You go because that’s where the oil is,” said Morris Burns, a Midland oil and gas consultant and former executive director of the Permian Basin Petroleum Association.

But there is also appeal for oil and gas operators in consistency of requirements on University Lands, said Kirk Edwards, the president of Las Colinas Energy Partners who has leased University Lands before.

“It is different from leasing from a land owner and having to negotiate things every single time, and to me it makes it much easier,” Edwards said. “If you don’t want to be out there, you don’t have to be out there, but if you do, here are the rules. I think it makes it much easier.”

The Texas Legislature authorized the creation of the Permanent University Fund in the Texas Constitution of 1876, the same year it created the University of Texas, according to the Texas State Historical Association. The land for the endowment was ironically chosen because it was poorly suited for agriculture, instead intended for cattle-grazing leases and future sales.

But then came May 1923, when the Santa Rita No. 1 gusher in Reagan County became the first oil well on PUF land. Production has mostly increased, except for a few down periods, ever since.

In November, Pioneer Natural Resources reported the results of the horizontal well University 2-20 #12 on University Lands in Reagan County, which flowed at 3,156 barrels of oil equivalent per day, reaching the highest 24-hour peak production rate ever recorded in the Midland Basin.

And University Lands shared in that milestone. Initial leasing earns a bonus for the University System of up to $250 per acre. But it is still the long-term production that brings the greatest windfall: royalties, according to Jim Benson, University Lands’ executive director in Midland.

“While the bonuses look good early on, the royalty dollars are the ultimate goal — for us to get to production,” Benson said.

The standard royalty on University Lands is 25 percent of production.

Pioneer has about 91,000 acres on University Lands, or about 10 percent of its Permian Basin holdings, according to representatives of the large independent company. Of those acres, about 20,000 acres are in Andrews County and another 56,000 acres are centered in Reagan County — referred to by company officials as the northern and southern University Lands units.

The company’s Permian Land Vice President David Sutter said he prefers the leases for several reasons: The process for getting an easement is uniform, for example, saving negotiation time. The leases can be linked in effect, supporting the Pioneer’s ability to drill long horizontal wells. On University Lands, an oil and gas company does not have to drill wells all over its land to make sure they keep their lease. And there are no co-owners on a lease.

Another major benefit Sutter and officials at other companies point to: University Lands leases simplify mineral acquisitions, because there is one owner — the state — and so landmen do not have to track down dozens of owners with a stake in a mineral tract.

“I wish the rest of the Basin was set up the way our southern and northern units are,” Sutter said. “I’d have a lot less headache.”

University Lands yielded 41 million barrels of oil equivalent last year (or about 112,000 barrels of oil equivalent per day), Benson said.

Last week, 182 wells were being drilled, about 100 wells were waiting a hydraulic fracturing and another 400 new wells were being permitted.

In the last fiscal year ending August 2013, oil and gas production made about $813.9 million in revenue for the UT and Texas A&M systems. So far this year, about halfway through the 2014 fiscal year, revenue already exceeds $500 million, Benson said.

And on Wednesday, companies that submitted the winning bids for tracts of lands in nine counties will get their piece of a total 21,953 acres in 82 tracts. The sale, at the Double Tree by Hilton Midland Plaza, presented a sign that oil and gas companies are increasingly moving to a production phase as about 75 percent of University Lands are leased, said Scott Mims, the associate director of accounting for University Lands who oversaw the bid tally.

By comparison, the record sale in September 2011 was about $310.3 million for 145,783 acres. The Wednesday preliminary sales were also less than half of the nearly $74.1 million at the sale of more than 41,628 acres in September 2013. But there were about twice as many attendees on Wednesday as there were at the last sale, including employees of companies that had not entered bids.

“Somebody obviously wants to know what’s going on,” Mims said.

About a quarter of the acres leased at the auction were in Andrews County, where winners will work with Weathers, who will sometimes play the role of mediator.

He offered an example of such a case (involving parties who he declined to name): A cow decided to scratch her back on a tank battery, knocked loose a plug and released some oil, which the cow then drank and died. In that case, he said, the oil and gas operator compensated the rancher.

“Generally the companies are pretty good about working with folks, in part because when you deal with us we are so big,” Weathers said.

4 Comments on "Where the oil is"

rockman on Sun, 23rd Mar 2014 4:31 pm 



Not to stir folks up and not that it will be an issue very soon but the state of Texas has the right to take those royalty payments in kind. It looks like the state will collect about $1 billion in royalty payments this year. But if it wanted to it could take possession of that oil/NG and control its distribution. IOW keep it all in Texas. Obviously if the country were facing real supply problems and the motivation were there to do so it would not go over well with the rest of the country. One could look at those remaining reserves under the state lands as our own SPR.

Combine that with the story I posted last week about the growing motivation to see a slow transition of the Gulf Coast moving from a major energy exporter to not only increasing internal consumption of its production but reorienting the transportation infrastructure to shipping inbound as opposed to outbound. Part of this dynamic is the slow but measurable movement of population and business to the region…especially to Texas. The current estimate is that the growth in energy demand in Texas will match that of the entire country (excluding CA and a few other states). In a way it might mimic how the US has had the financial capability to consume a very disproportionate share of global energy… we’ve been able to use our economic strength to outbid many other economies. Between what oil/NG Texas owns and what it can pay for it in the future there could be a disturbing dynamic for the rest of the nation to deal with in a decade or two.

george on Sun, 23rd Mar 2014 10:13 pm 



so why are the majors pulling out of tight oil production ?

Nony on Sun, 23rd Mar 2014 10:41 pm 



Maybe they’re scared of prices crashing to 50? 🙂

rockman on Mon, 24th Mar 2014 11:24 am 



George – the majors never had a chance to make the shales work. Much the same reason they pulled out of US exploration (with the same exception of the DW GOM) decades ago. It doesn’t fit their basic business model and much too labor intensive for the reserves per individual well.