Drilling rigs, frac ponds and pump jacks dot the land that the University of Texas System oversees in the Permian Basin. Videographer: Jordan Vonderhaar/Bloomberg
Green

Harvard’s Status as Wealthiest School Faces Oil-Rich Contender in the University of Texas

The Texas university system is unlike other colleges because of its oil-rich land that’s driving record revenue this year.

Every day, the University of Texas System makes about $6 million off a mineral-rich swath of land it manages in the US’s largest oil field. Crude and natural gas, not fundraising or investing prowess, have positioned the school’s endowment to overtake Harvard University’s as the richest in US higher education.

The University of Texas oversees 2.1 million acres—almost the size of Delaware and Rhode Island combined—in the Permian Basin. While other universities are shedding their fossil fuel holdings in the name of eco-consciousness, the Texas college system is leasing its land to drillers including ConocoPhillips, Continental Resources, Inc. and nearly 250 other operators.

Land operated by the University of Texas System is on track to post its best-ever annual revenue in fiscal 2022 because of soaring oil prices and production on its property in the Permian Basin. Oil reached a high of $120 a barrel earlier this year as a result of a war-induced energy crunch. The revenue is expected to help narrow the gap between the Texas system’s $42.9 billion endowment and Harvard’s $53.2 billion as of June 2021.

“The University of Texas has a cash windfall when everyone is looking at a potential cash crunch,” said William Goetzmann, a professor of finance and management studies at Yale University’s School of Management. “Adjusting your portfolio for social concerns is not costless.”

The oil and gas revenue will help insulate the University of Texas System from all that. It’ll stem concerns about liquidity and help investment managers hunting deals in a down market. It also represents hard cash, instead of gains tied up in investments like private equity and venture capital, which is more typical for the richest college endowments and drove record returns in the prior year. Meanwhile, even if the Texas system shows negative investment returns, the revenue could help protect the endowment value.

It’s likely that Harvard’s endowment, like many other universities’ this year, will show losses. The school’s annualized 10-year returns as of June 2021 are among the lowest of its peers in the eight-school Ivy League, according to Bloomberg data. The University of Texas System last overtook Yale’s endowment in 2018 as the second-richest US university because of rising oil prices.

Race to the Top

College endowments are typically fueled by investment gains and donations. In the unusual case of the UT system, oil revenue could help its endowment surpass Harvard’s

Source: University financial reports

With the world adopting cleaner energy sources to tamp down on climate change, there’s some question about how long UT can count on that oil cash flow.

And in Texas, where energy is one of the biggest industries, the environmental damage has been drastic. In addition to the polluting industry practice of burning off excess natural gas known as “flaring,” the state is poised to become the earthquake capital of the US due to the disposal of oilfield wastewater.

“We recognize this is a huge source of revenue for UT and higher education that is sorely needed, but at what cost?” said Luke Metzger, the executive director of advocacy group Environment Texas. “We’re right here in Texas, experiencing some of the worst impacts of global warming with record high temperatures, wildfires and drought.”

But the UT system has a built-in hedge: Its vast land holdings in West Texas are also primed for wind and solar projects.

“These lands host extensive wind and solar power generation,” said William R. Murphy, Jr., the chief executive officer of University Lands, a division of UT that manages its land. The university “expects considerable growth in these areas and other emerging energies,” he said.

How University of Texas’s Oil Land Makes Money

Some universities have had idiosyncratic sources of wealth: Coca-Cola Co. stock at Emory University, the blockbuster drug Lyrica at Northwestern University and real estate at George Washington University. Harvard, the oldest US college, is historically known for its investment management and prolific long-term fundraising—at least $1 billion each year since fiscal 2014. Still, oil-rich land is an unusual asset for the University of Texas to control or manage, one brought about by an accident of history.

In the 1800s, the state of Texas set aside land to help fund public higher education. At first it seemed like a worthless gift: The dry, rugged acres bestowed to the university were supposed to generate some money from grazing rights for cattle. But that changed when wildcatters struck oil in May 1923.

A black and white historical image of the Santa Rita oil well, pipes are laying in the foreground, and a tall wooden structure over the well shows a plume of oil spilling out.
A black and white historical photo of a large group of men standing in front of the wooden well structure wearing slacks and button down shirts
The Santa Rita #1 was the first oil well to directly fund the University of Texas with its first royalty payment to the Permanent University Fund made on Aug. 24, 1923, in the amount of $516.53. Source: The Dolph Briscoe Center for American History/The University of Texas at Austin

Now, drilling rigs, frac ponds and pump jacks dot the flat, brown expanse, which measures 375 miles east to west and 185 miles north to south.

Texas Treasure Chest

Most of the university’s land happens to sit atop the nation’s most-productive oil basin

Sources: Texas Department of Transportation, University Lands

The lands are on track to have the highest oil production in their history, Murphy told the state Board of Regents in May.

The productivity is “not an accident,” Murphy said. Over the last six years, University Lands brought on teams of engineers, geologists, geophysicists and other experts to make extraction as efficient as possible, leaving very little oil in the ground.

Oil doesn’t need to be $100 a barrel for the system to generate revenue, which funds the endowment. The Texas system collects a royalty no matter how much it costs an operator to produce oil. Its royalties average 22.3% per barrel.

The lands produce the equivalent of roughly 300,000 barrels of crude oil per day, according to energy data firm Enverus. That’s roughly a fifth of what Exxon Mobil Corp. pumps worldwide.

Where the Money Goes

The university’s oil and gas revenue flows into the Permanent University Fund, known as the PUF. That money fuels the endowment, which since 1996 has been professionally managed by the University of Texas/Texas A&M Investment Management Co. Known as UTIMCO, it also manages the A&M system’s separate endowment.

A Growing Pot

The Permanent University Fund (PUF) comes from minerals like oil, while the Available University Fund (AUF) comes from surface rights such as wind and solar.

Source: University Lands

A Volatile Market

West Texas Intermediate crude oil topped $120 per barrel this year

Source: Nymex

Two-thirds of the PUF goes to the UT system, and one-third goes to the Texas A&M University system, supporting a combined 27 institutions and almost 350,000 students.

Texas House of Representatives member Jarvis Johnson, who represents Houston, argues that the fund should also provide for even more state schools outside of those systems.

Revenue from oil and gas is invested with UTIMCO, and then an annual payout is made to support the UT campus in Austin, A&M’s flagship in College Station and Prairie View A&M, the historically Black college founded the same year as A&M.

The state constitution allows for those mineral funds to be spent on capital expenses like the construction of classrooms, hospitals and labs, all of which helps keep pace with increasing enrollment. For most of the schools, the funds cannot be spent on daily operations or providing tuition assistance and scholarships.

The average cost of undergraduate tuition for 2021-22 at UT-Austin for in-state residents was $11,752, compared to the average of $10,740 for in-state residents at US public four-year colleges, according to data from the College Board.

‘Dirty Money’

High oil prices are creating a windfall now, Murphy said. But the boom and bust cycle of the industry has stung the university in the past, most memorably during the 1986 oil bust where prices fell as low as $10 a barrel and during the coronavirus pandemic, when oil prices briefly went negative and drilling activity plummeted.

For all the worry that oil is being pushed aside for cleaner energy, fossil fuels will be needed for at least three more decades, said Kenneth Medlock, an economist and senior director at the Center for Energy Studies at Rice University in Houston. As he explains to his students, gasoline-run cars purchased today will be on the road for 13 years on average.

Today’s oil demand stands at 100 million barrels per day globally, including roughly 20 million in the US alone.

University Lands has proved oil and natural gas reserves equivalent to 326 million barrels of crude. For context, that puts the size of the school’s reserves on par with some publicly traded oil and gas companies, such as Laredo Petroleum, Inc. and Matador Resources Co., figures from Bloomberg Intelligence show.

Workers drill for oil on university-managed land in Andrews County, Texas.
Workers drill for oil on university-managed land in Andrews County, Texas. Photographer: Jordan Vonderhaar/Bloomberg

The university has identified about 25,000 sites where new wells could be drilled. Its calculations found that 1.7 billion barrels could be accessible, without accounting for future improvements in oil-drilling technology.

Some of the Permian Basin’s biggest drillers such as Chevron Corp., Exxon, Occidental Petroleum Corp. and Pioneer Natural Resources Co. have all made pledges to bring their greenhouse gas emissions down to zero over the next three decades. But critics say flaring and equipment leaks remain a problem that the university system needs to address by adding stricter conditions to leases for state-owned lands.

“This is money that’s helping to fuel the climate crisis,” Environment Texas’s Metzger said of UT’s oil revenue. “I think that many students and faculty don’t know where the money is coming from. And when they find out, I think they will be shocked and very much opposed to this dirty money. It’s not something we should be celebrating.”

The Austin-based environmental group launched a 2016 campaign named “UT’s Dirty Little Secret” detailing the high level of methane emissions and other forms of pollution on University Lands.

An aerial view of a drilling rig and waste water pit in a dusty dirt landscape
An aerial view of three circular pools of water in a dusty dirt landscape
A horizontal drilling rig, left, and tanks full of water in the process of being recycled and reused for drilling oil wells on university-managed land in Andrews County, Texas. Photographer: Jordan Vonderhaar/Bloomberg

In the face of criticism and pressure from students, University Lands bought an infrared camera that detects methane leaks to improve inspections and set up a grant program to help some operators upgrade equipment to reduce their emissions.

But Environment Texas said University Lands needs to go further by enacting stricter methane standards, mandating wastewater recycling and developing a long-term plan to end its dependence on oil and natural gas.

“We are actively working to reduce methane emissions and conduct hundreds of emissions inspections annually,” Murphy said in an emailed statement. “We have also invested significant resources in groundwater conservation strategy that is designed to protect and prevent the waste of groundwater on UL acreage.”

Riding the Energy Transition

With all its land, the University of Texas System is poised to see other revenue sources as the world turns to cleaner energy: Texas ranks number one for wind power and number two for solar, according to the American Clean Power Association’s 2021 annual report.

University Lands has eight solar leases and pre-leases encompassing about 24,000 acres and seven wind leases and pre-leases encompassing almost 170,000 acres. Revenue from renewable energy is expected to reach $5.2 million in the fiscal year, up from $281,000 a decade prior.

The Green Transition

University Lands has some of the best acreage in the country for wind and solar energy production

Sources: Solargis, Global Wind Atlas

“We’re in the energy business. We’ve been in wind for a long time,” Murphy said in an interview. “We’re on track to be as smart with wind and solar and geothermal and hydrogen as we are with oil and gas.”

The money from the solar and wind leases flow into the Available University Fund, a sister fund to the PUF.

And as green technology advances, other revenue opportunities will present themselves, according to Rice University’s Medlock. The Inflation Reduction Act will broaden tax credits to private companies seeking carbon capture and sequestration, he said.

One barrier is making sure there are enough transmission power lines, said Amy Myers Jaffe, a professor at the Fletcher School at Tufts University and managing director of the Climate Policy Lab.

Still, “they’re lucky three ways around,” she said of the school system. “They hit it with shale, and they’ll also have solar irradiation and windy West Texas.”

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