Record-low oil prices could cost a fund that supports the University of Texas and Texas A&M systems at least $300 million in revenue.

State-operated University Lands, a company that oversees oil leases on land owned by Texas, expects to send $700 million to the Permanent University Fund this fiscal year, down from $1 billion in 2019 after oil prices plunged to about $20 per barrel this year during a price war and the coronavirus pandemic.

With prices that low, University Lands is not issuing new leases on the 2 million acres in the Permian Basin it manages and is telling the roughly 250 oil companies operating on state leases to delay drilling and wait for higher prices, if they can.

“Our primary strategy right now is to work with operators and, where prudent, to delay new activity,” University Lands CEO Mark Houser said. “We encourage them to delay new activity right now. In our mind, there’s no sense in selling these hydrocarbons at such a low price.”

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Created by the Legislature in 1876, the Permanent University Fund provides the state’s portion of the budgets for the 21 schools that make up the UT and A&M systems. The fund, which had an estimated $23.3 billion at the beginning of March, is managed by the Austin-based University of Texas/Texas A&M Investment Co., or UTIMCO.

More Information Top 10 Oil Producers on University Lands (Jan through Dec 2019) University Lands, a state-owned company based in Houston, oversees oil leases on more than 2 million acres of state-owned land in the Permian Basin of West Texas. The top 10 operators accounted for nearly a third of production on those lands. Company (Barrels) Felix Energy (7,012,239) Pioneer Natural Resources (6,655,849) Shell (5,968,618) Diamondback Energy (5,533,022) EP Energy (3,636,772) Sable Permian Resources (3,075,524) QEP Resources (2,381,545) Parsley Energy (2,343,500) Occidental Petroleum (1,620,161) Apache Corp (1,180,265) Source: University Lands; Houston Chronicle Research Public Money for State Universities Created by Texas lawmakers in 1876, the Permanent University Fund provides the state’s portion of the budgets for the 21 schools that make up the UT and Texas A&M systems. Here’s a look at the funds that fund has provided the two university systems over the past five fiscal years. Fiscal Year (Fund disbursement) 2016 ($772.9 million) 2017 ($839.4 million) 2018 ($887.3 million) 2019 ($1 billion) 2020 ($1.3 billion) Source: University of Texas/Texas A&M Investment Company

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Karen Adler, a spokeswoman for the UT System and UTIMCO, said the money the funds distributes to universities is not tied to mineral investments. Although taking a temporary hit on oil and natural gas royalties, the fund is still expected to distribute more than $1.3 billion to the two university systems this fiscal year and an additional $1.1 billion in fiscal year 2021.

Combined, the two university systems have nearly 400,000 students. The drop in oil prices will not affect a program that provides free tuition to thousands of UT-Austin students, Adler said. The $160 million used to create that program, she said, was already distributed and used to create an endowment last summer.

“Our distribution policy is designed to insulate the institutions we serve from short- and medium-term volatility in the financial markets and energy markets,” Adler said.

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It’s not the first time in the fund’s nearly 150-year history that oil prices have collapsed. An oil price crash in 2015 also resulted in University Lands sending less money to the fund.

Over the past nine fiscal years, oil and gas royalties from the state-owned leases ranged from $500 million to $1.1 billion per year.

“While we continue to assess the changing market conditions, our current projections are that revenue generated from PUF mineral investment in fiscal year 2020 and fiscal year 2021 to be within this historical range,” Adler said.

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Created by the Legislature in 1929, University Lands operates like a royalty company that generates revenue by leasing its mineral rights to oil and gas companies, receiving an average of 22 percent on what the companies sell. Those lands are located in the largest and most active oil fields in the U.S.

Leases owned by University Lands produced an average of 181,000 barrels of oil and 626 million cubic feet of natural gas per day in 2019, state records show.

Out of the 250 companies that operate leases owned by University Lands, the top three producers — Felix Energy, Pioneer Natural Resources and Shell — accounted for nearly a third of that production, state figures show. It remains to be seen how far drilling activity and production will drop this year, but CEO Houser said University Lands intends to cooperate with operators during the downturn.

“Some companies need to drill a certain amount for their own reasons,” Houser said. “They can do some of that, but our general preference is for them to delay and defer new development where they can and where it makes sense.”

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Over the past few years, University Lands has branched out into renewables, but they are nowhere near making up for the lost oil and natural gas revenue.

More than 60,000 acres of land have been leased to wind farms and 8,000 acres to solar farms. Combined and at peak efficiency, they can make more than 1 gigawatt of power. And with the state of Texas consuming as much as 71 gigawatts on a hot summer day, that’s enough electricity for nearly 700,000 homes.

Although that amount of power is not insignificant, it does not generate revenue equal to oil and natural gas.

University Lands lumps revenue from renewables along with other surface activities such as selling freshwater, caliche mining, cattle grazing, leasing land to vineyards and oil field wastewater disposal. Combined, those activities accounted for $88 million of revenue in fiscal year 2019.

“The view we have about renewables is that they’re a nice complement to what we do in terms of generating low-cost energy through oil and gas,” Houser said. “However, the amount of energy generated from these solar and wind farms will never move the needle for us compared to the amount of energy generated from oil and gas production.”

sergio.chapa@chron.com

@SergioChapa on Twitter