Issue date: 3/28/08 Section: Energy Special

With gas prices on the incline, rising to more than $3 dollars a gallon, it might seem odd to see Jack Rich smiling when discussing this topic. However, it might be even stranger to see a frown spread across his face.

Jack Rich, senior vice president and chief investment officer since 2005, oversees ACU's investment strategies, including the mineral rights owned by ACU.

Mineral ownership is the rights to what's under the surface of land, separate from the rights to owning the land surface. ACU owns an excess of 1,000 separate mineral rights, where the mineral ownership can be divided, whether all of the rights are owned or just a percentage owned by ACU. The value of these minerals rights makes up around 10-12 percent of ACU's endowment fund, which was valued at $289 million as of December 31, 2007.

"The income received fluctuates from year to year depending on market conditions, quantity produced and other factors," Rich said. "The income can range between $1 million and $9 million a year."

When a company wants to develop the mineral resources in an area, the individual or company has to secure a mineral lease agreement from the mineral owners. The mineral lease is a legal binding contract between the mineral owner and an individual or company, which allows for the exploration and extraction of the minerals under the land surface.

ACU has accumulated land and a large number of mineral rights donated by individuals as it has grown throughout the years. Mineral ownership ranges from Texas, Louisiana, Oklahoma and Colorado, but the vast majority of ownership is in Texas. During the 1950s, university president Don H. Morris and the chairman of the board traveled through West Texas looking for ranchers to give land and mineral ownership to ACU.

"The land was very beneficial, and we're reaping the benefits for that," Rich said.

Throughout the years, the board decided to retain the mineral rights whether they were producing or not. Even though some of these properties did not appear to have any value at the time, oil was discovered over the years because of the improvements in technology and partly because of the price of oil, making it more economical to drill on difficult properties. These lands now contribute to the funds ACU earns.

"The decision to retain mineral interests has been a long term policy with the board that has been very beneficial for the university," Rich said.

"The endowment gives more scholarships, and the bigger the endowment, the cheaper it costs students to attend here," said Terry Pope, professor of finance and associate dean of the college of business administration. "Plus, it enables you to offer enhancements and different upgrades for the school. If you take the endowment away, tuition would have to increase to fill in costs."

While ACU does not drill for oil itself, it does lease its properties so that other individuals or companies may find the oil. Operators use working interest, a term referring to a percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. After royalties are paid, the working interest entitles its owner to share in production revenues with other working interest owners, based on the percentage of working interest owned. "Royalties" is a common term referring to the routine payments made to the leaser for a proportionate share of the produced minerals.

"If there is property with activity around it, we will lease to somebody interested," Rich said. "When the market is high, we lease more than when the market is down."

One portion of land owned by ACU that has been very profitable is in the Barnett Shale. Exploration and drilling in the Barnett Shale has expanded to cover as many as 25 counties in North Texas, covering an excess of 5,000 square miles; in the last decade, the Barnett Shale has become the largest source of natural gas in Texas. As of 2007, bonuses paid to landowners in the southern counties range from $200-2,000 per acre with royalty payments in the 18-25 percent range. The Barnett Shale was responsible for over 55,000 jobs and contributed $491 million in revenues to the state of Texas in 2006.

The profits from these mineral interests go into ACU's endowment. The earnings off the endowment are paid out over the years for ACU to spend. These profits will in turn affect ACU students or future students. According to ACU's Web site, endowment funds are invested to produce usable income. ACU's endowment provides a substantial, sustainable and predictable flow of funds to the operating budget of the university. These funds had a 24.3 percent return on investment in 2007, ending on June 30; ACU recently ranked 16th out of 726 universities that report findings to a central database, and the first in Texas for its investment performance. ACU's endowment was developed throughout the years through donors and provides a reliable source of funds for current and future operations and scholarships.

Although it seems the profits from these funds are good, there can be a negative side to the rise in oil prices; while oil prices rise, other natural energy sources will rise in cost, such as gas, impacting the operating budget and producing higher expenses.

"With an increase in royalty prices, utility prices go up," Rich said. "Even though we're gaining benefits, it cost us in different ways."

Even with the downsides to owning a large quantity of mineral rights, the positives are overwhelming. As ACU continues to grow and develop, the funds from mineral rights will continue to contribute to the endowment fund, affecting students for the better.

When complaining about the prices of gas, remember you could be paying more for tuition.


E-mail Abston at: optimist@acu.edu