University Lands FY20 Annual Report

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Fiscal Year 2020 Annual Report

Table of Contents

AT-A-GLANCE

1.3MM Acres Leased for Mineral Development

24,000 Oil & Gas Wells Drilled to-Date

79,000 Acres of Renewable Energy Leases

PUF Lands

2MM Acres of Grazing Lands

20,000 Miles of Pipeline & Powerline Easements

10,000 Producing Oil & Gas Wells

University Lands (UL) manages the surface and mineral interests of 2.1 million acres of land across 19 counties in West Texas for the benefit of the Permanent University Fund (PUF). The PUF is the largest public university endowment in the U.S. and benefits more than 20 educational and health institutions across both The University of Texas System and The Texas A&M University System.

BUSINESS LINES

Oil and Gas Resources

Solar and Wind

Water Resources and Logistics

Other Surface Activities

2

At-A-Glance

HISTORY

Mirabeau B. Lamar urges the Congress of the Republic of Texas to establish the foundation for a vast system of higher education 1838

1839 Fifty leagues (220,000 acres) of land are set aside by Congress for the establishment and endowment of a university

1876 The State of Texas Constitution appropriates 1 million acres of land in West Texas to the Permanent University Fund (PUF). These lands would become known as PUF Lands 1883

An additional 1 million acres are added to PUF Lands

Oil is discovered at the Santa Rita #1 well on PUF Lands in Reagan County, and the PUF endowment receives its first royalty check for $516.53 1923

1929 The Board for Lease of University Lands is created

2009 The Permian Basin shale boom begins

2019 University Lands records the highest production of oil and gas from PUF Lands in its history

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Fiscal Year 2020 Annual Report

History

TABLE OF CONTENTS

02 UL At-A-Glance 03 History 06 FY20 Highlights 07 FY20 Performance 08 CEO & Board Chair Message

10 Governance 12 Management 14 Mission & Goals 16 Financials 18 Oil & Gas Mineral Management 22 Surface Management 28 Environmental Stewardship 38 The PUF Fund Explained

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Table of Contents

FY20 HIGHLIGHTS

REVENUE Gross revenues totaled $849 million with PUF revenue coming in at $771 million and AUF revenue at $78 million. EXPENSES Annual expenses were 14% below budget at $22.3 million and represented 2.6% of gross revenue or $0.96 per barrel of equivalent production unit cost. PRODUCTION Production rates averaged around 290,000 gross barrels of oil equivalent (BOE) per day, down about 1% year over year. UL’s mineral royalty averaged 22.5% for both oil & gas, equaling a cumulative net royalty volume of 23 million BOE. ASSET VALUE Proved reserves were down 5% year-over-year primarily due to economic conditions, which have resulted in development delays and adjustments to commodity price projections. On a price neutral basis, the value-per-acre of proved reserves is up 11% year-over-year. VALUE CREATION Minerals: Five oil & gas development agreements were negotiated adding approximately 1 million lateral feet in increased potential drilling commitments. UL worked with several companies as the industry continued its period of consolidation and restructuring to protect and enhance our agreements. Surface: Surface activities included the execution of over 926 contracts which added over $78 million in revenue to the AUF. PUF surface activities include many ongoing environmentally-focused and conservation-minded projects such as water management, emissions and flare monitoring, invasive brush control, livestock and wildlife management and oilfield lease restoration. ENVIRONMENT UL performed 52 infrared camera inspections and 1,575 oil & gas inspections. UL’s Lease Evaluation team reviewed and terminated leases that returned 3,800 acres to inventory, and 155 unproductive oil & gas wells were plugged with the surrounding areas remediated and returned to pastureland. WATER Water revenue was up 41% year-over-year partially due to the introduction of a groundwater import/export fee which was established as part of the continued focus of water management and movement on PUF lands. Operators report 635 water well meter readings to UL monthly.

6

FY20 Highlights

FY19 PERFORMANCE 20

GROSS REVENUE

$849M

NET TOTAL RESOURCE

$78M Available University Fund Revenue (Surface)

$771M Permanent University Fund Revenue (Minerals)

2,095 MMBOE

237 MMBOE Net Proved Reserves

EXPENSES

$22M

LATERAL FEET DRILLED 1.65MM

2.6% of Gross Revenue

$.96 Expenses/BOE

190 Wells Put-on-Production

NET ROYALTY PRODUCTION

23,000 MBOE

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Fiscal Year 2020 Annual Report

Table of Contents

CEO & BOARD CHAIR MESSAGE

In 1839, a visionary investment was made when the Congress of the Republic of Texas set aside 50 leagues (eventually becoming 2.1 million acres) of West Texas land to establish an endowment and university. It is an intriguing story that carries through to the discovery of oil on the land in 1923 and the university systems borne of its fortunes. Today that endowment, aptly named the Permanent University Fund (PUF), supports Texas’ two preeminent university systems — The University of Texas and Texas A&M — and is the nation’s largest public university endowment. The PUF has proven to be a vital resource in helping more than 20 educational and health institutions achieve academic and research excellence. University Lands is the managing entity for the 2.1 million acres of West Texas land that fund that endowment. Our success results in funding that supports first-class state universities and medical facilities. As a native Texan and proud Aggie, it is personally rewarding to responsibly steward the natural resources of this great asset and generate revenue for the benefit of Texans. At the start of fiscal year 2020, which ran September 1, 2019, to August 31, 2020, we were coming off a record year for both oil and surface revenue. But the softening commodity prices and lack of access to capital for the upstream oil and gas industry—our primary revenue driver—caused concern early in FY 2020. In April and May, when the significant global economic impact of COVID-19 on energy demand and subsequent oil and natural gas prices became apparent, we worked closely with our oil and gas operators to slow activity, reducing oil production by 18% in one month. This provided much-needed activity relief to these operators and minimized production during a period of significantly lower oil prices. Even with the drastic change in market conditions that caused oil prices to be ~33% lower than last year, we were able to generate ~$850 million in revenue. As the energy markets normalized through the summer, the industry showed its resiliency and production was restored back to almost pre-COVID levels. After reassessing the energy markets and the potential for the PUF Lands going forward, we came to the following conclusions: • Worldwide energy demand will continue to grow, and oil and gas will be key to ensuring a worldwide supply of low-cost energy for years to come and the Permian Basin will remain one of the world’s most important oil and gas resources. • The available supply of renewable energy and its market share of energy demand will continue to grow globally. With its wind and solar conditions and existing power infrastructure, West Texas will provide an extremely attractive growth opportunity for renewables development. • All forms of energy development will be required to meet increasingly higher environmental stewardship and accountability standards. • The PUF Lands are well positioned to lead responsible energy development for a very long time. While there is much uncertainty as to exactly what “economic recovery” will look like over the next several years, University Lands is strategically working to ensure the energy industry increases its investment in developing the vast resources of the PUF lands, including oil and gas and renewable energy. We also will continue to lead the implementation of responsible water and grazing practices in West Texas. We are thankful that Texas is blessed with natural energy resources from the PUF Lands that will provide a long-term source of low-cost energy for the state, the country, and the world. These lands also will continue to provide significant revenues to the University of Texas and Texas A&M Systems to help future generations of Texans realize their dreams. So while there is much uncertainty as we say goodbye to 2020, and thankfully, head into 2021, we know there is much opportunity to continue generating unprecedented value from this significant asset.

Mark Houser Chief Executive Officer University Lands

James C. Weaver Chair University Lands Advisory Board Vice Chairman UT System Board of Regents

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CEO & Board Chair Message

which now lie idle...resources of incalculable industrial utility, of wealth and power. Smite the earth, smite the rocks with the rod of knowledge and fountains of unstinted wealth will gush forth.”

Ashbel Smith, M.D. First UT Board of Regents Chairman at the dedication of the University of Texas, 1881

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Fiscal Year 2020 Annual Report

Table of Contents

GOVERNANCE The University of Texas System Board of Regents manages the strategic direction, development activities and stewardship of the Permanent University Fund (PUF) Lands. Separately, the Board for Lease of University Lands, chaired by the Commissioner of the Texas General Land Office, provides statutory oversight and governance for agreements to develop oil and gas located under PUF Lands. The University Lands Advisory Board (ULAB) is charged with providing guidance to the University Lands leadership team to help determine strategy and provide guidance and recommendations to the UT System Board of Regents to ensure responsible stewardship of PUF Lands. The ULAB is made up of industry-savvy members appointed by both the University of Texas and Texas A&M University Systems, as well as a standing position for the Texas Land Commissioner.

UT SYSTEM BOARD OF REGENTS

UT SYSTEM ADMINISTRATION

UNIVERSITY LANDS ADVISORY BOARD 5 UT Representatives 3 Texas A&M Representatives Texas Land Commissioner

BOARD FOR LEASE 2 UT Regents 1 Texas A&M Regent

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Governance

BOARD FOR LEASE OF UNIVERSITY LANDS

George P. Bush Commissioner, Texas General Land Office

Christina Melton Crain Regent, The University of Texas System

Michael A. Hernandez III Regent, Texas A&M University System

Jodie Lee Jiles Regent, The University of Texas System

UNIVERSITY LANDS ADVISORY BOARD

David J. Beck Regent, UT System Partner, Beck Redden, LLP

George P. Bush Commissioner, Texas General Land Office

Thomas L. Carter, Jr. CEO & Chairman, Black Stone Minerals

Mark Albers Retired, Senior Vice President, Exxon Mobil (Departed Aug 2020)

Janeen Judah Independent Director, Patterson-UTI, Crestwood Equity Partners & Aethon (Joined Aug 2020)

Kirk Edwards President & CEO, Latigo Petroleum

Jay C. Graham Regent, TAMU System CEO & Chairman, Spur Energy Partners

Scott C. Kelley Executive Vice Chancellor for Business Affairs, UT System

John L. Zogg, Jr. Managing Director, Crescent Real Estate, LLC.

Jeff Spath Head, TAMU Harold Vance Department of Petroleum Engineering

James C. Weaver, Chair Regent, UT System CEO, McCombs Partners

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Governance

MANAGEMENT

UNIVERSITY LANDS EXECUTIVE LEADERSHIP TEAM

Mark Houser Chief Executive Officer

Brian Owen Senior Vice President, Land

Richard Brantley Senior Vice President, Operations

Maryam Schellstede Vice President, Natural Resource Development

Carrie Clark Executive VP, Chief Administrative Officer & Chief Legal Officer

UNIVERSITY LANDS MANAGEMENT TEAM

Cindy Brooks Director Accounting, Audit & Regulatory

Danielle Jeter Land Manager - Minerals

James Buice Sustainability Manager

Becky Martin Director of IT & Land Services

Sonya Csaszar Managing Counsel

Corey Means Manager - IT Infrastructure & Operations John Tackett Geoscience Manager & Chief Geologist Wil Vark Manager, Bus Solutions & App Development

Jenna Gibbins Senior Reservoir Engineer Amber Jackson Budget & Revenue Manager

Joseph Jarke, Jr. Land Manager-Commercial Surface

Jeff White Manager, Surface Interests

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Management

UNIVERSITY OF TEXAS AT DALLAS SCIENCE BUILDING Funded by the Permanent University Fund Opened in 2020, the UT Dallas Science Building is a 187,237 square foot, multi-story building with classrooms, laboratories, offices and support space for mathematics and physics and the UTeach program. The Science Building supports the students, faculty and staff in the Departments of Physics and Mathematical Sciences as they carry out their learning, teaching, advising, and research activities. The Science Building accommodates growth for 1,750 additional students, 50 tenured and tenure-track faculty members, 20 senior lecturers, and additional research funding of $7,500,000 per year.

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Fiscal Year 2020 Annual Report

MISSION Tomaximize the revenue fromthePermanentUniversityFund (PUF) Landsbyapplying intensivemanagement, accounting, conservation and environmental programs, which improve and sustain the productivity of the PUF Lands, protect the interests of The University of Texas System and promote awareness and sensitivity for the environment.

2020 GOALS

Implement measurable initiatives that increase the next

Improve organizational effectiveness and depth with an emphasis on project management and prioritization.

Grow revenue and continue to formalize UL water business.

10-year pace of oil and gas development.

Continue to prudently lease land for renewables development where it provides the highest and best use.

Expand data management

Enhance environmental policy and culture for operating on PUF Lands.

capabilities across all areas of business with specific emphasis on predictive analytics/ forecasting for oil and gas and surface activities.

14

Mission & Goals

UNIVERSITY OF TEXAS RIO GRANDE VALLEY SCHOOL OF MEDICINE TEAM BASED LEARNING CENTER Funded by the Permanent University Fund The UTRGV School of Medicine Team Based Learning Center opened in 2020 and is an extension of the Medical Education Building located on the Edinburg Campus. This facility accommodates current and expected growth in the School of Medicine while maintaining the mission of the school as a catalyst for education in health care. The building houses faculty and administrative offices, small group study spaces for the growing medical student population, flexible and general purpose classrooms, conference rooms, and support spaces.

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Fiscal Year 2020 Annual Report

FINANCIALS

FY 2019

FY 2020

VARIANCE

$ millions; subject to rounding

Actuals

Budget

YE Actuals Variance FY20 vs. FY19

ANNUAL VOLUMES Net Oil (MBBL)

14,973 52,136 23,662

14,798 51,649 23,406

14,850 50,012 23,185

0%

-1% -4% -2%

Net Gas + NGLs (MMCF)

-3% -1%

Net Millions Barrels of Oil Equivalent (MBOE)

COMMODITY PRICING West Texas Intermediate (WTI) Average Oil Price Received

$60.78 $53.15

$57.20 $55.71

$46.86 $45.22

-18% -19% -21%

-23% -15% -45%

Average Gas Price Received (including NGLs)

$3.05

$2.14

$1.68

PERMANENT UNIVERSITY FUND (Minerals) Oil Revenue

825 160

824 111

677

-18% -19% -24% -18%

-18% -44% -90% -25%

Gas Revenue

90

Bonuses, Unitization Payments

39

5

4

$1,024

$940

$771

AVAILABLE UNIVERSITY FUND (Surface) Water, Caliche, Damages

23

28

23

-16% -25% -14% -42% -16%

0% 2%

Grazing

4

6

5

Easements, Salt Water Disposal, Commercial

80

56

48

-40% -44% -30%

Interest, Penalty, Assignment Fees

3

3

2

$111

93

$78

$1,135

$1,033

$849

-18%

-25%

TOTAL REVENUE (Gross)

General & Administrative + Operating Costs $/Barrel of Oil Equivalent Production

22

25.8 1.12

22.3 0.96

-14% -14% -18%

1% 3%

0.93

$1,113

$1,007

$827

-25.70%

NET REVENUE

16

Financials

2020 P ermanent University Fund $771 MILLION

Gas 11.7%

Oil 87.8%

Lease Bonus 0.5%

Oil

Gas Lease Bonus

2020 Available University Fund $78 MILLION

Interest & Penalty 2.2%

Water, Caliche & Damages 30%

Surface Leases & Easements 62%

Grazing 5.8%

Surface Leases & Easements Water, Caliche & Damages

Grazing

Interest & Penalty

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Fiscal Year 2020 Annual Report

Financials

OIL & GAS MINERAL MANAGEMENT

NATURAL RESOURCE DEVELOPMENT

University Lands continues to focus on optimal development of its best-in-class oil and gas minerals by aligning a deep technical understanding of available resources and effective contracting strategies. The Mineral & Surface Land Team and Natural Resource Development Team – comprised of experienced land, geoscience, engineering, and data professionals – work together to apply innovative approaches for maximizing PUF value.

Pumpjack – Andrews County

WPX Felix Mega Pad

The team promotes optimized full-field development to retain and attract value to the PUF lands by:

• Identifying best practices in completion designs, landing depth and development strategies • Working with operators towards continuous and well-paced development • Performing comprehensive subsurface studies to understand recoverable resource potential • Improving compliance and accuracy of data retrieval, and the application of innovative data analytics • Working with operators where there exist opportunities for growth and/or improved economics, including the testing of new formations and the piloting of varying well spacing and completions methods • Negotiating agreements and other contracts that maximize the development value of the minerals • Ensuring rights under existing contracts and state statutes are being met • Identifying opportunities to repatriate acreage • Initiating and helping direct acreage swaps between operators to maximize horizontal development opportunities

18

Oil & Gas Mineral Management

FY2020 TOP PRODUCERS

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Fiscal Year 2020 Annual Report

Oil & Gas Mineral Management

KEY OIL & GAS DEVELOPMENT ACTIVITY The PUF Lands span the Delaware Basin, Northern Midland Basin, Southern Midland Basin, and the Central Basin Platform with more than 200 companies operating 10,000 producing wells. New development in FY2020 saw 190 wells come online and 1.65 million lateral feet drilled. Production from PUF Lands hit 290,000 million barrels of oil equivalent per day, and UL’s cumulative net royalty production for the fiscal year was 23 million barrels of oil equivalent. To ensure continued development and value creation, University Lands’ Oil & Gas Mineral Management team negotiated five significant agreements with operators to secure an additional 1 million feet of future lateral footage obligations.

DELAWARE BASIN

SOUTHERN MIDLAND BASIN FY2020 Wells Lateral Ft Hz Spud 27 293,000

FY2020

Wells

Lateral Ft

Hz Spud

84

582,,000

Hz 1 st Prod

52

470,000

Hz 1 st Prod

38

337,000

¯

Centra Basin Platform

Otero

Eddy

Lea

LOVING

WINKLER

EL PASO

HUDSPETH

Delaware Basin

WARD

CULBERSON

REEVES

JEFF DAVIS

BREWSTER

20

Oil & Gas Mineral Management

PRESIDIO

ACTIVITY SUMMARY • 5 major oil & gas agreements negotiated adding 1 million lateral feet in future obligations • ~190 wells began producing • ~1.65 million lateral feet drilled on PUF acreage

PERMIAN ACTIVITY ~29% in Delaware Basin

~43% Northern Midland Basin ~20% in Southern Midland Basin ~8% Central Basin Platform

NORTHERN MIDLAND BASIN FY2020 Wells Lateral Ft

CENTRAL BASIN PLATFORM FY2020 Wells Lateral Ft

Hz Spud

88

995,000

Hz Spud

7

48,,000

Hz 1 st Prod

70

709,000

Hz 1 st Prod

19

129,000

SCURRY

GAINES

BORDEN

DAWSON

al

DEVELOPMENT ACTIVITY

HOWARD

m

MARTIN

ANDREWS

MITCHELL

Parsley

Oxy (Anardarko)

Felix/WP/ Devon Elevation

Zarvona (PT/ Henry/Approach)

Hibernia

COKE

Piedra QEP

Pioneer Sequitur

STERLING

ECTOR

MIDLAND

GLASSCOCK

Midland Basin

TOM GREEN

CRANE

UPTON

WELL ACTIVITY

REAGAN

IRION

Drilled

Permited Producing

SCHLEICHER

PECOS

CROCKETT

SUTTON

1.3 million acres leased for oil and gas development

21

Fiscal Year 2020 Annual Report TE RELL

Oil & Gas Mineral Management

VAL VERDE

SURFACE MANAGEMENT WATER STEWARDSHIP

University Lands plays a key role in Permian Basin groundwater management. The PUF Lands’ geographic positioning over several of the region’s major and minor aquifers - coupled with University Lands’ long-term management horizon - necessitates that water use across PUF Lands be monitored and conserved. At the same time, University Lands works to promote prudent commercial opportunities and support the success of water-related commercial ventures on PUF Lands.

Reduce overall full- cycle water costs

University Lands monitors groundwater utilization by requiring all mineral developers to meter and report water sources from PUF lands and imported water. Collectively 635 operator owned water meters and 11 water import meters are reported monthly. Water revenue increased 41% year-over-year. In 2019 UL initiated a ground water import fee to encourage produced water recycling and maintain water market share.

Reduce traffic, infrastructure issues

Better for the environment

QEP Import Water Meter – Andrews County

Improve the sustainability of O&G development

Texland Great Plains Water Meter – Andrews County

Better for the people of West Texas

22

Surface Management

Smarter water disposal through connected networks

Decrease use of fresh water

UL’s Full-Cycle Water Management Initiative aims to increase commerciality of PUF Lands’ water resources while simultaneously promoting the conservation of fresh water

Increased seismicity monitoring

Increase recycling of produced water

Higher utilization of Dockum/Santa Rosa water

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Fiscal Year 2020 Annual Report

Table of Contents

PIPELINE EASEMENTS

Growth and expansion in pipeline easements on PUF Lands was a significant source of revenue and surface activity in FY2019 and continued into FY2020. Three new major gas pipelines were constructed on PUF lands in FY 2020 which will provide operators with additional options for takeaway throughout the Permian Basin.

PIPELINE IN WEST TEXAS

Active Proposed Construction

¯

GAINES

Seminole

Central Basin Platform

Andrews

ANDREWS

Otero

Eddy

Lea

Dell City

Goldsmith

LOVING

ECTOR

Kermit

El Paso

Odessa

WINKLER

EL PASO

Wink

Delaware Basin

HUDSPETH

Fabens

Monahans

Wickett

Pyote

Tornillo

WARD

Barstow

CULBERSON

Pecos

CRANE

Grandfalls

Crane

Toyah

REEVES

Imperial

Coyanosa

Sierra Blanca

Van Horn

Balmorhea

Fort Stockton

JEFF DAVIS

PECOS

Fort Davis

Valentine

Marfa

Alpine

BREWSTER

PRESIDIO

Marathon

Sanders

24

Surface Management

Whistler Gas Pipeline Installation

SCURRY

Lamesa

BORDEN

DAWSON

Snyder

Hermleigh

Ackerly

Westbrook

HOWARD

Colorado City

Coahoma

MARTIN

Big Spring

MITCHELL

Stanton

Forsan

Midland

COKE

STERLING

MIDLAND

a

GLASSCOCK

Garden City

Sterling City

Midland Basin

TOM GREEN

UPTON

REAGAN

IRION

Rankin

Mertzon

Big Lake

McCamey

SCHLEICHER

Iraan

CROCKETT

Ozona

Sheffield

SUTTON

Whistler Gas Pipeline Installation

TERRELL

son

VAL VERDE

0

250

500

1,000

25

Miles

Fiscal Year 2020 Annual Report

Surface Management

RENEWABLE ENERGY UL’s commitment to renewable energy development sets the foundation for our strategy of being one of the largest renewable lessors in the state. With the continuing maturity of wind and solar and UL’s desire to expand this business line, we began exploring opportunities for more renewable energy development on PUF Lands. In 2020, UL expanded its renewable energy portfolio with 3 new solar projects that began development. At the close of FY2020, UL had 13 active renewable energy leases on 79,000 acres with a combined capacity of 1,512 MWdc (megawatt direct current). This position makes us one of the largest single lessors of renewable energy in the state of Texas.

1. 1,824 Acres/200 MW Capacity 2. 1,200 Acres/150 MW Capacity 3. 1,423 Acres/150 MW Capacity 4. 3,775 Acres/250 MW Capacity 5. 123 Acres/15 MW Capacity 6. 69 Acres/10 MW Capacity 7. 1,900 Acres/150 MW Capacity 8. 2,469 Acres/200 MW Capacity SOLAR LEASES

Three wind farms in operation on University Lands 3 5 2 300,000 Five solar projects under construction on University Lands Two wind power projects in development phase as viability is being determined Renewable energy projects could power ~300,000 Texas houses ACTIVITY HIGHLIGHTS

WIND LEASES

9. 1,487 Acres/35 MW Capacity 10. 2,500 Acres/37 MW Capacity 11. 7,758 Acres/32.5 MW Capacity 12. 43,000 Acres/270 MW Capacity 13. 12,309 Acres/175 MW Capacity

26

Surface Management

PECOS COUNTY 2020 SOLAR CONSTRUCTION

Recurrent Energy 4600 Acres 350 MW

ANDREWS COUNTY 2020 SOLAR CONSTRUCTION

Longroad Energy 3840 Acres 250 MW

CULBERSON COUNTY 2020 SOLAR CONSTRUCTION

SoftBank Energy 4250 Acres 275 MW

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Fiscal Year 2020 Annual Report

Surface Management

ENVIRONMENTAL STEWARDSHIP

University Lands’ mission to manage the resources of the PUF Lands for the long-term benefit of Texans necessitates assertive and proactive environmental management.

UL continuously assesses and evaluates the risk of all commercial activity occurring on the Lands, including oil and gas development, renewable energy development, pipeline construction, ranching, retail, and industrial processes. Staff work to identify best practices and requires that these best practices be implemented by those companies doing business on PUF Lands. UL facilitates communications and compliance through its relationships with regulatory agencies that include the Texas Commission on Environmental Quality, Railroad Commission of Texas, Environmental Protection Agency, Texas Parks and Wildlife, Natural Resources Conservation Service, and U.S. Fish & Wildlife Service.

Staff coordinate and monitor the multiple uses of the Lands by performing inspections and overseeing prescribed corrective actions. All construction is monitored to ensure cooperative co-existence for all users of acreage.

Aerial Lease Inspection of Abandoned Gas Plant Before Reclamation – Ward County

Aerial Lease Inspection of Abandoned Gas Plant After Reclamation – Ward County

28

Environmental Stewardship

LEASE INSPECTIONS

OIL & GAS LEASE AUDIT

O&G lease inspections Commercial lease & easement inspections 1,575 372 10 Grazing lease inspections

26 12 26

Leases evaluated

Well tests completed

Low or no production leases terminated

Wells plugged 3,835 155

EMISSIONS

25% 52 635 69

Reduction / BOE 2018-2019

Acres returned to inventory

Infrared camera inspections

FLARING 2.1%

O&G water wells metered daily

% Gas flared/MCF produced

O&G water wells plugged

Table of Contents 29

Fiscal Year 2020 Annual Report

REMEDIATION & ENVIRONMENTAL RESTORATION

All spills, leaks or releases of crude oil, condensate, or produced water are reported to UL and to regulatory agencies. Our staff geologists provide remedial guidance and field oversight ensuring remediation is completed in a thorough and timely manner. UL staff geologists issue remedial standards exceeding or equivalent to regulatory requirements and provide final determination of completed remediation.

UL range management specialists reclaim abandoned caliche (borrow) pits by grading pit walls to an erosion-resistant gentle slope, reseeding, and returning to pastureland.

UL issues restoration demand letters for surface leases that have expired or terminated and monitors clean up activity to ensure the lease premises are reclaimed and returned to pastureland.

Pipeline Leak Discovery – Ward County

Pipeline Leak – Investigation/Delineation

Pipeline Leak – Removal of Contaminated Soil

Pipeline Leak – Site Restoration with Clean Soil

30

Environmental Stewardship

LEASE EVALUATION TEAM

Land and resource restoration on PUF lands is an extremely important part of the stewardship administered by the staff of University Lands. Multiple departments continuously survey and evaluate leasehold performance to ensure compliance with the terms of the lease. One example of this stewardship is UL’s Lease Evaluation Team, which is made up of multiple representatives from the Land, Surface, Regulatory and Production Accounting departments. This team continually identifies non-producing or low producing oil and gas leases and engages the operator to ensure that leases are not being held if they are not producing in paying quantities. When a non or low producing lease is identified, UL requires the operator to perform well tests which must be witnessed by UL staff. The well test demonstrates the production capabilities of the lease and/or individual wells. If the well test indicates the lease is no longer capable of producing in paying quantities, the lease is terminated. The operator is then required to plug the wells and remove all infrastructure associated with the terminated lease, including pump jacks, tank batteries, flowlines, powerlines, as well as all caliche from the well pads, tank battery location, and access road. The damaged areas are then reseeded to assist revegetation and return the land to near native conditions.

Lease Termination – Reagan County

Oil Well Test – Reagan County

Lease Termination After Remidiation – Reagan County

31

Environmental Stewardship

Fiscal Year 2020 Annual Report

EMISSIONS University Lands strives to be a leader in environmental stewardship and set the standard for best land and mineral management practices across the state. University Lands supports adopting and following strong environmental safeguards and policies and works continuously to promote production practices that reduce methane emissions. Active participation and sponsorship of the Department of Energy’s National Energy Technology Laboratory study titled “Quantification of Methane Emissions from Marginal (Small Producing) Oil and Gas Wells,” and the Methane Emissions Technology Evaluation Center (METEC), assures that University Lands is informed and aware of the best available technologies and practices to control and monitor greenhouse gas emissions. University Lands continues to promote and support the American Petroleum Institute’s “The Environmental Partnership,” which now includes more than 80 of the top US producers who are collectively committed to reducing emissions from oil and gas production facilities.

Since 2014, oil and gas production on PUF Lands has increased by 52%, while emissions are continuing to decrease. On a unit basis, emissions are down 61% per barrel of production during the same time period.

450

0.0160

400

0.0140

350

0.0120

300

0.0100

250

0.0080

200

0.0060

150

0.0040

100

0.0020

50

-

0.0000

2011

2012

2013

2014

2015

2016

2017

2018

2019

Emissions from PUF Lands per BOE

Emissions from PUF Lands

PUF Lands Avg Prod Rate (BOED)

Emissions data gathered from EPA’s 2019 GHGRP data set. EPA estimates that only 85-90% of GHGRP is reported. UL emission numbers were adjusted by a total of 30% to account for EPA’s estimates and additional lack of reporting from known operators in 2019.

32

Environmental Stewardship

CONTRACTUAL REQUIREMENTS AND STATE AND FEDERAL LAW Oil & gas operators on PUF Lands are required by contract to comply with all state and federal laws and regulations. UL also requires use of best operating practices to minimize releases to the environment. EMISSIONS INSPECTIONS UL performs routine leak detection inspections using an optical gas imaging camera and ensures corrective actions are completed when emissions are observed. NON-PRODUCTIVE/MARGINAL WELL INITIATIVE UL’s routine inspections of oil & gas operations ensures marginal wells are properly plugged and any associated emissions are eliminated. ROYALTY PAYMENTS REQUIRED ON ALL GAS Royalty is due and payable on flared gas, incentivizing operators to minimize the practice COLLABORATION WITH EXPERTS AND INDUSTRY UL engages in regular dialogue, collaboration and sharing of best practices with scientists and engineers and industry associations and shares these learnings with operators. COMMITMENT TO BEST PRACTICES AND TECHNOLOGY UL encourages operators’ adoption of reliable control technologies and proactive inspection and repair. COMMITMENT TO RESEARCH UL seeks opportunities to support and/or participate in government, industry, and academic collaborative research projects. BEST PRACTICES RECOMMENDATIONS UL publishes recommended best operating practices to help ensure reductions in emissions continue. REPORTING AND TRANSPARENCY UL publishes its environmental performance data online and in its annual report.

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Fiscal Year 2020 Annual Report

Table of Contents

FLARING University Lands supports the goal of minimizing overall flaring on the Lands and industry-wide. Through regular communications with operators and regulatory bodies, UL encourages best practices to safely reduce routine flaring. These include bringing wells online only when adequate takeaway capacity is online and shutting in production during prolonged upsets. UL recognizes the challenges associated with the complex systems of sustainable upstream gathering and processing facilities in a cost challenged environment. Nevertheless, UL monitors a real-time (in the sense of production reporting deadlines) graphical interface of flared volumes by lease and operator. UL contacts operators reporting atypical flared volumes to discuss contributing factors and corrective actions.

From January 2015 - July 2020, the volume of reported flared gas as a percent of total gas produced on PUF Lands was 2.2%. Reported flared gas as a percent of gas produced for FY20 was 2.1%.

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

2016

2017

2018

2019

2020

Production Date

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Environmental Stewardship

UL WORKS WITH ALL OPERATORS ON PUF LANDS TO MINIMIZE FLARING AND EMISSIONS

72

Air compliance inspections conducted

11

Flare inspections conducted

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Fiscal Year 2020 Annual Report

Table of Contents

RANGE & WILDLIFE CONSERVATION Range & wildlife management has been an integral part of UL since its inception. This aspect of managing the PUF Lands retains a rich history that spans many generations of ranching families who have settled the area and raised families on the lands.

In the last 50 years, UL has increased its awareness and purposeful management of range and wildlife. UL’s 110 grazing lessees maintain the rights to graze livestock and manage wildlife resources.

UL monitors livestock stocking rates to ensure grazing leases maintain good range conditions. Good grazing management helps maintain other natural processes including groundwater management and recharging aquifers for future consumption.

UL also encourages and enforces conservative management of PUF Lands wildlife. There are many huntable species on PUF Lands, including white-tailed and mule deer, pronghorn antelope, dove and quail.

UL conducts aerial surveys to monitor the wildlife population to determine the overall health of each species and to provide harvest recommendations to ensure the resource will be there for generations to come.

UL invests in these natural resources by putting money back into the lands. Various projects are completed annually such as installation of new fencing to protect our boundaries and new interior fencing to promote proper livestock grazing management. New water wells, pipelines, storage tanks and troughs are installed to increase water for livestock and grazing management. Different methods of brush control are implemented on the land to encourage more grass production, which also increases the water quantity and quality that is captured. Water improvements, along with brush control, aid in distributing livestock to all areas of the ranch, maximizing the full potential of all 2.1 million acres and increasing stocking capacity.

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Environmental Stewardship

Miles of fencing installed $2.3M 18,000 105

Invested back into PUF Lands by UL, grazing lessees and USDA-NRCS

Acres of brush control employed

22 15

Ranch water wells installed

Ranch water wells plugged

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Fiscal Year 2020 Annual Report

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THE PUF FUND EXPLAINED

P U F L A N D S M A N A G E R

2.1 million acres that produce two income streams: mineral income, which comes mainly from oil and gas bonuses, rentals and royalties, and surface income such as income from grazing leases, easements, wind power generation and a commercial vineyard and winery.

MINERAL INCOME

SURFACE INCOME

The constitution permits the UT System and Texas A&M University System to each sell a limited amount of bonds (a type of borrowing) to fund construction and other capital expenses at system institutions. The bonds are secured by the AUF, which gives the systems the lowest interest rates available, saving the state money. Bond proceeds may not be used for operational expenses.

PUF income and investment assets are managed by UTIMCO, a nonprot corporation operating under the authority of the UT System Board of Regents.

38

The PUF Fund Explained

U N D E R S T A N D I N G

Established in the Texas Constitution of 1876 through the appropriation of land.

PERMANENT UNIVERSITY FUND

CONST I TUT I ON S T A T E O F T E X A S

UTSYSTEM.EDU/PUF

A constitutional permanent endowment that supports excellence in the The University of Texas and Texas A&M University Systems.

KEY FACTS CONSTITUTION GIVESMANAGEMENT TO UT SYSTEM BOARD;

THE UN I VERS I TY OF T EXAS SYST EM

GROWS FROMOIL AND GAS PRODUCTION AND INVESTMENT INCOME;

SUPPORTS CONSTRUCTION AND CAPITAL EXPENSES AT INSTITUTIONS OF UT AND TAMU SYSTEMS; CORPUS IS NOT SPENT EXCEPT FOR EXPENSES OF MANAGING THE LAND AND THE INVESTMENT ASSETS; CONSTITUTION DOES NOT PERMIT UT SYSTEMTO USE AUF FOR OPERATIONAL EXPENSES AT INSTITUTIONS OTHER THAN UT AUSTIN;

CONSTITUTIONAL USES OF AUF:

Support and maintenance of UT System Administration

Support and maintenance of UT Austin

Payment of principal and

interest on PUF bonds

2020 VALUE OF ~$24 BILLION

AUF

T EXAS A&M UN I VERS I TY SYST EM

The Available University Fund is PUF surface income plus an annual distribution from the total return on PUF investments, constitutionally allocated 2/3 to UT System and 1/3 to Texas A&M University System.

The Texas A&M University System has similar constitutional restrictions on use of AUF. Some Texas A&M institutions are not eligible for PUF bonds.

39

Fiscal Year 2020 Annual Report

The PUF Fund Explained

UNIVERSITY LANDS FISCAL YEAR 2020 ANNUAL REPORT

Midland 704 W. Dengar Ave. Midland, TX 79705 432-684-4404

Houston 825 Town & Country Ln. Suite 1100 Houston, TX 77024 713-352-3808

www.universitylands.utsystem.edu

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