The CEO of University Lands is asking state regulators to order Texas oil producers to cut production by 20% in an effort to help save the cash cow that has made the University of Texas endowment the second biggest in the United States.
Declining oil prices are threatening the oil revenue so much that University Lands only expects to send $700 million to the Permanent University Fund this fiscal year, down from $1 billion last year. By 2021, revenue to the permanent fund could drop to $500 million if oil prices don’t move significantly, University Lands estimates show.
“I believe it is imperative that every effort be made to ensure the viability of oil and gas operators and oilfield service companies as their existence is imperative to sustained oil and gas development,” said Mark Houser, CEO of University Lands in testimony to the Railroad Commission of Texas.
The three-member commission, which regulates oil and gas companies in Texas, is scheduled to decide on May 5 whether to order the production cuts. One of the three commissioners, Ryan Sitton, supports the production cuts, but the other commissioners, Wayne Christian and Christi Craddick, have expressed doubts about interfering with the free market.
The price of West Texas Intermediate, the US oil benchmark, was down to $11.02 on Monday, its lowest price in two decades. Most oil companies need to make $30 or $40 or more per barrel to make a profit.
The Permanent University Fund has more than $30 billion in assets and Houser, in written testimony to the railroad commission, said royalty income yielded $8.2 billion over the past 10 years. He said approximately 1.4 million of 2.1 million university-owned acres in West Texas are leased for oil and gas, spanning 4,000 individual oil and gas leases.
Houser cited a recent survey by the Federal Reserve Bank of Kansas City which found almost 40% of oil and natural gas producers would face insolvency within the year if crude prices remain below $30 a barrel.
“This implies that 100 companies operating on University Lands could become insolvent if there aren’t significant and quick improvements in commodity prices,” he said.
Big oil companies such as Exxon Mobil, Chevron, and Occidental Petroleum have lined up against the railroad commission ordering cuts, arguing that the free market will sort things out eventually. The companies also have the capital to survive the current low oil environment, putting them at an advantage over smaller companies.
But Houser has joined with smaller oil companies in arguing that the cuts could help inch oil prices back up. Houser wants the Texas cuts to be made concurrently with other US states, arguing that cuts must be made jointly if they are to have an effect. Regulators in two other big oil-producing states, Oklahoma and South Dakota, have also been examining cuts.
The coronavirus pandemic has resulted in a global oversupply of oil as much of the world has shut down. Motorists aren’t driving and air passengers aren’t flying, sapping the need for crude.
Russia and Saudi Arabia reached an agreement last week to end a price war that had left production spigots wide open, cutting nearly 10 million barrels of oil a day from the 100 million barrel daily global supply.
But analysts have said that is not enough because there is still a global oversupply of oil of more than 10 million barrels a day.
Texas produces 5 million barrels of oil a day, about 40% of all US oil production but the debate in the Lone Star State is whether cutting production would be enough to bring prices up, even if other states joined.
In his testimony, Houser detailed how the future price of oil will depend on how much University Lands can contribute to the Permanent Fund.
“Our latest revenue projections for the next decade indicate that revenue could range anywhere from $5 billion to $6 billion assuming $35-45/barrel oil to $8 billion to $10 billion in a $50-$60/barrel price environment. This demonstrates the need for stability and consistent development,” he said.
The university has owned the land in the Permian Basin in West Texas since 1876. An oil boom in the early 1900s lead to the Texas legislature permitting the land to be leased to oil and gas companies and began the free flow of cash that is now in jeopardy.