Oil = education: the alchemy of Texas’ university system fund

A little-known auction in a dusty west Texas town made a splashy oil strike last week. It didn’t find the black stuff in the ground, but the Texas state university system headquartered there stands to reap a financial bonanza from the latest of its twice-yearly lease sales.

University Lands, the lease sale sponsor that administers 2.1 million acres of west Texas lands granted over 120 years ago to support the university, said the September 22 sale in Midland, Texas, took in a record $207 million from 346 tracts leased on 190,600 acres. That is a stunning four times the previous record of $52 million in 1980.

Officials connected with the sale said Permian oil plays were clearly the lure of the auction, and expect the magic to continue into the next sale in early 2011. That’s not surprising, given industry’s frenzied pursuit of “liquids rich” plays that contain a mix of oil, natural gas and gas liquids. The chase is driven by oil prices that persist around $75/barrel which, while down recently, remains high enough to make most global plays economic, say industry observers.

But apart from the large purse for the University of Texas and Texas A&M institutions that will reap the dollars from the lease sales, it was the Permanent University Fund — where the money is deposited — that was the backstory of the day. Those who think the oil industry is a big, bad wolf may be surprised that the wolf has funded a not-inconsiderable chunk of Texas’ higher education.

The PUF was established by the 1876 Constitution of the State of Texas which appropriated 1 million acres of mostly west Texas land to the fund. An additional 1 million acres was added in 1883. Since then, roughly $5 billion has been deposited into PUF from oil and gas lease bonuses, royalties and rentals, according to University Lands’ website.

PUF was an ingenious, far-sighted and ultimately lucky solution to higher education. The discovery of oil at Corsicana, Texas, in 1894 and at Spindletop (near Beaumont) in 1901 began an oil boom in the state, and the state’s higher education system enjoyed the benefits. But it wasn’t until 1923 that the first oil find was made on university lands in Reagan County, southeast of the city of Odessa.

In 1900, PUF earned about $40,000, mostly from grazing leases, according to Wikipedia. Last year, $340 million went into the fund from surface revenues, oil and gas royalties and bonuses, Steve Hartmann, executive director of University Lands, said.

This year, $181 million will come to PUF from leases won in this week’s lease sale by energy company El Paso Corporation alone; that is what the upstream/midstream operator paid in high bids for 203 tracts at the sale, making it the auction’s clear winner. Many of the other bidders were small privately-held oil companies or lease brokers, Hartmann said.

As for PUF, it just keeps on truckin’ — and oilin’ the educational wheels, helped along by increasing Permian Basin oil and gas exploration and production. Wikipedia said the fund held around $8.8 billion in investments in 2008.

It’s not immediately clear how much of that had its roots in oil and gas E&P. No matter what, it’s sure a lot of pay.

Platts