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Longhorns, Aggies Could Benefit from Forward Sale of Oil, Gas

Regents of The University of Texas System last Thursday authorized system officials to pursue contracts to sell future oil and natural gas production from 2.1 million acres managed by the system in West Texas. Such deals would give the system access to up-front cash in exchange for future production sold at a fixed price.

"Current market conditions have given us this opportunity to take advantage of relatively high oil and gas prices and low interest rates," said Scott C. Kelley, system executive vice chancellor for business affairs. "This move gives us the potential to significantly enhance the revenue stream for the institutions in the near term."

In addition to boosting revenue, forward sales would allow the system to invest proceeds for potentially greater returns, Kelley noted. By state constitutional mandate, proceeds from the sale of oil and gas on the 2.1 million acres, which cover 19 counties, are deposited into the Permanent University Fund (PUF) endowment, which in turn supports 18 institutions and six agencies in the UT System and the Texas A&M University System.

In February, the UT System Board of Regents set the current distribution policy of the PUF to 5%. The board's move to increase the payout this year was prompted by several years of impressive investment returns facilitated by The University of Texas Investment Management Co. and increasing annual oil and gas revenues from operations on the West Texas lands, the system said.

UT System officials would initiate a competitive bid process to select a company or companies to enter into the forward sale agreements. The Board for Lease of University Lands, composed of the commissioner of the General Land Office and regents from the UT System and Texas A&M University System, has final authority to approve the agreements following a formal recommendation by the UT System Board of Regents.

In fiscal 2007, revenue from oil and gas production on the West Texas land was $272.68 million, up roughly $57 million from the previous fiscal year. The nearly $273 million deposited in fiscal 2007 is expected to generate approximately $13.6 million in additional distributions from the PUF, two-thirds of which ($9.1 million) supports 13 UT System institutions, while the other third ($4.5 million) goes to the Texas A&M System.

The Texas Constitution of 1876 established the PUF through the appropriation of land grants previously designated to The University of Texas, as well as an additional one million acres. Another state grant of one million acres was made in 1883. The lands are managed to produce two income streams: one from oil, gas and mineral interests, and the other from surface interests, such as grazing.

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