UT Sys­tem funds, kills oil in­sti­tute

Af­ter two years and mil­lions of dol­lars, the sys­tem will close the ini­tia­tive at the end of this month.

Austin American-Statesman Sunday - - FRONT PAGE - By Ralph K.M. Hau­r­witz

When a blue-rib­bon task force rec­om­mended that the Univer­sity of Texas Sys­tem es­tab­lish an en­ergy in­sti­tute with re­search and aca­demic chops rem­i­nis­cent of Se­mat­ech, the com­puter chip con­sor­tium that helped spark Austin’s high-tech ex­pan­sion, the sys­tem’s Board of Re­gents rose to the chal­lenge.

“This is a great ini­tia­tive, with­out ques­tion, and one crit­i­cal to the state and the univer­sity sys­tem,” then-Chair­man Paul Fos­ter said in Au­gust 2014 as the re­gents voted unan­i­mously to es­tab­lish the in­sti­tute. Fran­cisco Ci­gar­roa, who was chan­cel­lor at the time, said it was “at least a 10-year plan,” adding, “We will get the very best per­son in the United States or the world to lead this ef­fort.”

The UT Sys­tem hired Jef­frey Spath, whose cre­den­tials in­clude a doc­tor­ate in en­gi­neer­ing, a stint as pres­i­dent of the So­ci­ety of Petroleum En­gi­neers and a 32-year ca­reer with oil­field ser­vices gi­ant Schlum­berger Ltd. that saw him take on as­sign­ments around the world and rise to one of its vice pres­i­dents.

But the sys­tem’s sunny am­bi­tions for what came to be known as the Texas Oil and Gas In­sti­tute soon wilted, an Amer­i­can-States­man in­ves­ti­ga­tion has found.

Not long af­ter Spath was hired in Septem­ber 2015 as the in­sti­tute’s chief ex­ec­u­tive di­rec­tor, UT of­fi­cials be­gan scal­ing back his mis­sion. And, by Novem­ber 2017, they qui­etly de­cided to shut­ter the Hous­ton-based in­sti­tute, telling him in a let­ter that it no longer re­flected “cur­rent strate­gic pri­or­i­ties” but prais­ing his “ex­cel­lent and pro­duc­tive ser­vice.”

Spath was ter­mi­nated Dec. 31. Be­cause he had a three-year con­tract, he re­ceived $7.1 mil­lion in base salary, re­ten­tion pay, bonuses and de­ferred com­pen­sa­tion for the full three years, al­though his em­ploy­ment lasted two years and four months, ac­cord­ing to doc­u­ments ob­tained by the States­man through the Texas Pub­lic In­for-

ma­tion Act. The fig­ure in­cludes $1.3 mil­lion that he would have re­ceived from Jan. 1 through Au­gust of this year.

The oil in­sti­tute, which had just six em­ploy­ees other than Spath, has been in wind-down mode for sev­eral weeks and of­fi­cially closes at the end of this month. All told, the UT Sys­tem has spent $12.8 mil­lion from en­dow­ment pro­ceeds on the in­sti­tute, in­clud­ing Spath’s com­pen­sa­tion.

“When they hired me, there was a lot of sup­port from the board,” Spath said in an in­ter­view. “That di­min­ished over a two-year pe­riod. I fought up­hill bat­tles from day one on staffing and per­form­ing re­search. It just kept get­ting smaller and smaller in scope.”

Spath will be­come a pro­fes­sor and de­part­ment head at Texas A&M Univer­sity next month, mak­ing a frac­tion of what the UT Sys­tem paid him.

Big in­vest­ments, and se­cond thoughts

This is not the first time in re­cent years that the UT Sys­tem, which over­sees 14 aca­demic and health cam­puses, in­clud­ing the Austin flag­ship, has pulled back abruptly on an ini­tia­tive launched with fan­fare and mil­lions of dol­lars in fund­ing from the Per­ma­nent Univer­sity Fund, a higher-ed­u­ca­tion en­dow­ment con­trolled by the Board of Re­gents.

Last month, the sys­tem closed its In­sti­tute for Trans­for­ma­tional Learn­ing, which worked to ex­pand on­line classes and com­pe­tency-based ed­u­ca­tion, af­ter spend­ing $75 mil­lion on the project since 2012. A year ago, Chan­cel­lor Bill McRaven, fac­ing push­back from law­mak­ers and even some re­gents, scut­tled plans for a data sci­ence in­sti­tute in Hous­ton af­ter the sys­tem spent more than $200 mil­lion to ac­quire about 300 acres.

As in those cases, the clos­ing of the Texas Oil and Gas In­sti­tute re­flects a po­lit­i­cal cal­cu­la­tion, a shift in spend­ing and strate­gic pri­or­i­ties, and per­haps a fail­ure to think through what it would take to achieve the goals in the first place. It comes as the Board of Re­gents, re­spond­ing in part to crit­ics in the Leg­is­la­ture, has been work­ing to trim the head­count and bud­get of the sys­tem’s var­i­ous ad­min­is­tra­tive of­fices.

For Spath, a tell­tale sign that the re­al­ity of the in­sti­tute might not live up to its orig­i­nal prom­ise came soon af­ter he started work in Septem­ber 2015 when sys­tem of­fi­cials told him that it would not be per­mit­ted to con­duct re­search. That came as a sur­prise con­sid­er­ing that re­search had been listed as an “es­sen­tial func­tion” in the job de­scrip­tion posted for his po­si­tion.

The Texas Con­sti­tu­tion does not per­mit the UT Sys­tem to use pro­ceeds from the per­ma­nent fund for re­search, but its staff mem­bers can get fac­ulty ap­point­ments and col­lab­o­rate with cam­puses to con­duct re­search, said Karen Adler, a sys­tem spokes­woman.

Spath had such an ap­point­ment, as an un­paid ad­junct pro­fes­sor in the de­part­ment of petroleum and geosys­tems en­gi­neer­ing at UT-Austin, for the first nine months of his time at the UT Sys­tem. A UT-Austin spokesman said it’s not un­usual for ad­junct ap­point­ments to be short-term.

“I was told we would be com­pet­ing with the cam­puses” if the in­sti­tute con­ducted re­search, Spath said. “I wasn’t in­formed un­til I was on board that there was a con­sti­tu­tional re­stric­tion on re­search by a sys­tem-cre­ated in­sti­tute” funded with per­ma­nent fund pro­ceeds. “Plus, there was no ca­pac­ity to per­form re­search with our lim­ited staff.”

Sys­tem of­fi­cials soon stopped re­fer­ring to the in­sti­tute by the name it was orig­i­nally given by the re­gents — the En­ergy Re­search, En­gi­neer­ing and Ed­u­ca­tion In­sti­tute — and be­gan call­ing it the Texas Oil and Gas In­sti­tute, or TOGI for short.

Scott Kel­ley, the sys­tem’s ex­ec­u­tive vice chan­cel­lor for busi­ness af­fairs, ac­knowl­edged that re­search as­pi­ra­tions for the in­sti­tute were sharply cur­tailed. “At one time, it was even thought maybe they would create their own re­search fa­cil­i­ties,” he said. “That ex­pense just didn’t seem to make sense” be­cause of re­search tak­ing place at var­i­ous de­part­ments and units at UT-Austin, in­clud­ing the Bureau of Eco­nomic Ge­ol­ogy, and at Texas A&M Univer­sity.

It’s not clear why these is­sues weren’t sorted out be­fore the in­sti­tute was cre­ated. Af­ter all, it had a long ges­ta­tion pe­riod, be­gin­ning in Novem­ber 2012 when Ci­gar­roa and Gene Pow­ell, then chair­man of the re­gents, an­nounced the for­ma­tion of the Task Force on En­gi­neer­ing Ed­u­ca­tion for Texas in the 21st Cen­tury.

The panel — whose mem­bers in­cluded en­gi­neer­ing deans, in­dus­try of­fi­cials and re­gents — de­liv­ered a re­port in De­cem­ber 2013 that rec­om­mended stepped-up ef­forts to grad­u­ate more en­gi­neers and com­puter sci­en­tists, as well as cre­ation of an oil and gas in­sti­tute in Hous­ton for re­search and ed­u­ca­tion.

An im­ple­men­ta­tion com­mit­tee of the task force spent months fine-tun­ing those con­cepts be­fore the re­gents’ Au­gust 2014 meet­ing, at which $2 mil­lion in en­dow­ment pro­ceeds was al­lo­cated to create the En­ergy Re­search, En­gi­neer­ing and Ed­u­ca­tion In­sti­tute.

The UT Sys­tem de­clined the States­man’s re­quest to in­ter­view one or more cur­rent re­gents for this story, in­clud­ing for­mer Chair­man Fos­ter and Jef­fery Hilde­brand, an oil­man who was also a re­gent when the in­sti­tute was es­tab­lished.

Another “es­sen­tial func­tion” in Spath’s job de­scrip­tion that didn’t pan out was to de­velop a busi­ness model fea­tur­ing en­ergy firms, es­pe­cially those in the oil and gas in­dus­try, as “mem­ber com­pa­nies” pay­ing for tech­ni­cal anal­y­sis of en­gi­neer­ing and ge­o­log­i­cal data.

Kel­ley said a sharp de­cline in oil and gas prices left com­pa­nies with less cap­i­tal to in­vest in such anal­y­sis. And Spath said his ef­forts to raise do­na­tions from in­dus­try play­ers were thwarted.

“I said I’d go talk to en­ergy min­is­ters and CEOs around the world,” Spath said. “I got push­back from the sys­tem on al­low­ing me to travel and meet with these clients. I made one trip to Bo­gota, and it was re­ally frowned on.”

Also un­der­min­ing the in­sti­tute’s prospects was the de­ci­sion to can­cel plans for the data sci­ence in­sti­tute in Hous­ton, said Alex Cran­berg, a for­mer UT re­gent who chairs the sys­tem’s Univer­sity Lands Ad­vi­sory Board. En­ergy data would have been a ma­jor fo­cus of it, and of­fi­cials had in­tended for the oil in­sti­tute to play a sig­nif­i­cant role in de­vel­op­ing the data unit.

Anal­y­sis re­vealed rich­ness of UT oil lands

The in­sti­tute wound up fo­cus­ing on two other charges: con­duct­ing tech­ni­cal anal­y­sis to help in­crease pro­duc­tion and rev­enue from 2.1 mil­lion acres of sys­tem-owned lands in West Texas that are rich in oil and nat­u­ral gas, and pro­vid­ing in­tern­ships for stu­dents. The sys­tem leases to oil and gas com­pa­nies and re­ceives roy­al­ties and other pay­ments that are de­posited in the per­ma­nent fund, whose pro­ceeds ben­e­fit cam­puses in the UT and A&M sys­tems.

Kel­ley and Mark Houser, CEO of the sys­tem’s Univer­sity Lands unit, said that in its short life the in­sti­tute more than paid for it­self.

Its ge­ol­o­gists and en­gi­neers con­ducted a com­pre­hen­sive anal­y­sis of ge­o­log­i­cal, en­gi­neer­ing, pro­duc­tion and other data that had been col­lected over the years by Univer­sity Lands but never stud­ied, Kel­ley and Houser said. That work pointed the way to in­creased ef­fi­cien­cies in drilling, such as a bet­ter un­der­stand­ing of how far apart to space wells. The in­sti­tute’s anal­y­sis also showed that re­serves were greater than pre­vi­ously thought.

“The com­bined work of the tech­ni­cal staffs of TOGI and Univer­sity Lands has sig­nif­i­cantly en­hanced the cur­rent and fu­ture per­for­mance of de­vel­op­ment ac­tiv­ity from the (oil and gas) lands through in­creased un­der­stand­ing of reser­voir per­for­mance and through the in­creased abil­ity to lever­age op­er­a­tors into more creative de­vel­op­ment pro­grams,” sys­tem spokes­woman Adler said. The re­sult­ing in­creases in pro­duc­tion, along with the drilling of ad­di­tional wells, boosts rev­enue for the per­ma­nent fund.

The sys­tem’s oil and gas lands are a mas­sive op­er­a­tion, with 9,000 op­er­at­ing wells, in­clud­ing many drilled in re­cent years into shale for­ma­tions that are es­pe­cially pro­duc­tive. Oil and gas rev­enues peaked at $1.1 bil­lion in the 2014 bud­get year, dipped to $512 mil­lion by 2016 and have risen steadily since then and are pro­jected to reach $942 mil­lion in the cur­rent bud­get year.

Houser said that Spath also saved the UT Sys­tem mil­lions of dol­lars in li­cens­ing fees by us­ing his con­tacts to ac­quire so­phis­ti­cated soft­ware for man­ag­ing oil and gas re­sources. Spath said he ob­tained the soft­ware from Schlum­berger, his for­mer em­ployer, for free.

The Univer­sity Lands staff didn’t have the level of ex­per­tise needed to con­duct the sort of anal­y­sis that the in­sti­tute un­der­took, Houser said, adding that a few of the in­sti­tute’s em­ploy­ees might well be ab­sorbed by his de­part­ment.

“A sig­nif­i­cant ben­e­fit of the TOGI ini­tia­tive, in ad­di­tion to their as­sis­tance in our tech­ni­cal eval­u­a­tion, is that we are now po­si­tioned to man­age our data with a smaller staff,” Houser said.

UT Sys­tem of­fi­cials and Spath say that his com­pen­sa­tion pack­age was war­ranted given the broad goals ini­tially en­vi­sioned for the in­sti­tute. But as time went on, it be­came ev­i­dent that “I just wasn’t needed,” Spath said.

Sys­tem of­fi­cials no doubt were also con­cerned about ap­pear­ances, inas­much as Spath’s com­pen­sa­tion was sim­i­lar to that of Houser, whose Univer­sity Lands unit has 50 em­ploy­ees. Houser, who also came from the oil in­dus­try, has re­ceived a to­tal of $4.2 mil­lion in base salary, re­ten­tion pay and bonuses in the past three years, and he be­comes el­i­gi­ble for $1.1 mil­lion in de­ferred com­pen­sa­tion later this month, ac­cord­ing to records.

Spath will be­come a pro­fes­sor and head of the petroleum en­gi­neer­ing de­part­ment at A&M in April. Un­der his agree­ment with the UT Sys­tem, he is ob­li­gated to pay back what­ever he earns this year through Au­gust, but no more than the $1.3 mil­lion the sys­tem paid him to cover those eight months. His to­tal an­nual com­pen­sa­tion at A&M will be $351,550, ac­cord­ing to en­gi­neer­ing Dean M. Kather­ine Banks’ let­ter of­fer­ing him the job.

The Oil and Gas In­sti­tute had a ro­bust in­tern­ship pro­gram, av­er­ag­ing 18 stu­dents for each of five semesters, with a to­tal of 48 stu­dents in­volved, many work­ing more than one se­mes­ter. The stu­dents hailed mainly from UT-Austin, with smaller num­bers from UT-Per­mian Basin and A&M. Some were placed with com­pa­nies that op­er­ate on the sys­tem’s West Texas lands to help boost pro­duc­tion, ben­e­fit­ing the per­ma­nent fund.

In­tern­ships will con­tinue at Univer­sity Lands, Houser said. “Frankly, that’s value,” he said. “We can ed­u­cate these young peo­ple, and they can help us solve prob­lems.”

Jef­frey Spath, a for­mer VP for Schlum­berger Ltd., was hired to lead Oil and Gas In­sti­tute.

RALPH K.M. HAU­R­WITZ / AMER­I­CAN-STATES­MAN 2014

The in­sti­tute helped con­duct tech­ni­cal anal­y­sis to in­crease pro­duc­tion and rev­enue from 2.1 mil­lion acres of sys­tem-owned lands in West Texas.

RALPH BARRERA / AMER­I­CAN-STATES­MAN

Scott Kel­ley, a UT Sys­tem ex­ec­u­tive vice chan­cel­lor, said re­search as­pi­ra­tions for the in­sti­tute were sharply cur­tailed.

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