Legislature(2017 - 2018)HOUSE FINANCE 519
10/25/2017 01:00 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| 2017 Fall Production Forecast Presentation: Department of Natural Resources | |
| 2017 Fall Revenue Forecast Presentation: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
October 25, 2017
1:14 p.m.
FOURTH SPECIAL SESSION
1:14:36 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:14 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson (Via Teleconference)
MEMBERS ABSENT
None
ALSO PRESENT
Ed King, Special Project Assistant, Commissioner's Office,
Department of Natural Resources; Paul Decker, Acting
Director, Division of Oil and Gas, Department of Natural
Resources; Sheldon Fisher, Commissioner, Department of
Revenue; Dan Stickel, Chief Economist, Economic Research
Group, Tax Division, Department of Revenue; Representative
Collen Sullivan-Leonard; Representative Justin Parish;
Representative Delana Johnson.
SUMMARY
2107 FALL Production Forecast Presentation: Department of
Natural Resources
2017 FALL Revenue Forecast Presentation: Department of
Revenue
1:15:50 PM
Co-Chair Seaton Relayed the agenda for the meeting.
^2017 FALL PRODUCTION FORECAST PRESENTATION: DEPARTMENT OF
NATURAL RESOURCES
1:16:47 PM
ED KING, SPECIAL PROJECT ASSISTANT, COMMISSIONER'S OFFICE,
DEPARTMENT OF NATURAL RESOURCES, introduced himself.
PAUL DECKER, ACTING DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, introduced himself.
Mr. King introduced the PowerPoint Presentation
"Preliminary 2017 Fall Production Forecast" (copy on file).
He began with slide 2, "2 Years of Production Increases."
He stated that the FY 17 was not official, but it was
approximately 524,000 barrels. The number was up 9,000
barrels from the previous year. He stated that FY 18 was on
track to be the third consecutive year of production
increases.
Mr. King familiarized committee members with slide 3:
"Short-Term Forecast." He stated that the solid line was
the actual production for FY 17. The dashed line was the
forecast, with seasonality included, of what would occur in
the current fiscal year. The red dots were the preliminary
actual production numbers so far in the current year. He
remarked that the actual production in July was a slightly
lower forecast, and was slightly higher in August. The
preliminary numbers for September and October seemed to
track the forecast relatively well. He noted that the
production was slightly above the year prior. He shared
that, year-to-date, there was approximately 488,000 barrels
per day, which was nearly 4000 barrels above the prior
year. He stated that the forecast was 533,000 in the
current fiscal year, which was up approximately 9,000 year
over year.
Mr. King reviewed slide 4, "Where the Increases Came From."
He stated that the slide showed the year over year
increases in production. The FY 16 increase over FY 15 was
due to the Colville River accounted for approximately 7,000
or 8,000 barrels of additional production above their
previous year rate. He stated that most of the increase
could be attributed to the ConocoPhillips CD5 drill site.
He remarked that Prudhoe Bay had also increased its rate
year over year. He stated that the increase probably due to
operational efficiencies. He noted the slight increase in
Nikaitchuq, mainly from the continual well drilling. He
remarked that there were continual increases from those
sites in the current forecast. He remarked that everything
else was relatively flat.
1:22:00 PM
Mr. King moved to slide 5, "Impressive Industry
Performance." He remarked that the actual increase in
production was more impressive than one would believe. He
stressed that the operators were able to get more
production out of the units.
Representative Guttenberg wondered how much the production
out of Prudhoe Bay was due to operational efficiencies,
rework, and new wells within the field.
Mr. King responded that Prudhoe Bay was only running one or
two rigs. He stated that the production was probably not
coming from new well drilling. He stressed that it was due
to effective base rate management and deferral management.
Representative Guttenberg wondered whether there could be a
discussion about the expectation of production in Prudhoe
Bay.
Mr. King did not want to deflect the question. Furthermore,
he recommended the question be directed to the operator.
1:27:03 PM
Mr. King advanced to addressed slide 6, "10-Year Forecast."
He relayed that the slide was an illustrious. He thought
the range of outcomes shown on the slide was reasonable to
expect.
Co-Chair Seaton queried the high and low range.
Mr. King responded that it was an 80 percent confidence
range, so there was a 10 percent chance of it being higher
than the high and 10 percent chance of lower than the low.
Co-Chair Seaton wanted to make sure committee members
understand the dotted lines.
Co-Chair Seaton acknowledged Representative Garen Tarr in
the audience.
Mr. King discussed slide 7, "Lessons Learned":
• We assumed reduced capital expenditures and rig
laydowns would result in accelerated decline
• The operators outperformed expectations, doing more
with less
Mr. King advanced to slide 8, "Lessons Learned." He
remarked that the actual numbers came in higher than the
operators' expectations.
1:31:16 PM
Representative Kawasaki noted that there was a change in
the development of the production forecasts. He remarked
that there was the calculation of volumes under development
and volumes for projects that were under evaluation. He
surmised that the lesson was that it was not a predictive
model. He wondered whether the model was flawed, and
whether it needed to be refined going forward.
Mr. King replied that there would be further explanation
about the methodological changes in the previous year. He
shared that the prior year was the first year that
Department of Natural Resources (DNR) took over the
forecast. He stated that DNR made some changes in the
forecast model. He shared that the model incorporated some
economic testing to ensure that the projects would turn a
project before plugging them into the model. He stressed
that once the projects were sanctioned by the companies,
they would be developed regardless. He stated that the
previous year's model was slightly ambitious in attempting
to predict the operator behavior in pulling back on
capital. He remarked that the operators were able to
improve efficiencies within their existing assets. He
stated that that the lower price environment forced them
into finding efficiencies. He did not feel that the model
was flawed, but it was an evolution.
Representative Grenn wondered how often the actuals had
outperformed the forecasts in previous years.
Mr. King jumped to slide 17, to answer Representative
Grenn's question. He plotted every forecast versus the
actuals before the year prior. He noted that in all the
cases where the dot was above the zero line were cases
where the consultant had forecast higher than actual
production. He noted that the reason for the over-
forecasting was because the consultants were looking at
future projects that were under development or under
evaluation and were included in their forecasts. He stated
that, for various reasons, those projects would not
manifest. He stressed that there was a consistent bias
where the consultants were providing forecasts that did not
come to fruition. He stated that the Department of Revenue
(DOR) had attempted to use some risk methodology, because
it was unreasonable to assume that everything would work
out perfectly.
1:35:33 PM
Mr. Decker drew the committee's attention to slide 10,
"Changes - Fall 2016 to Fall 2017":
Fall 2016:
• 5 yr future projects outlook
- Beyond 5 yrs was treated as "Pot of Gold"
(outside official forecast, excluded from Revenue
Sources Book)
• Annualized rates without seasonal fluctuations shown
• Emphasized improving long term predictions
• Under Evaluation projects were not risked for chance
of occurrence
Fall 2017:
• 10 yr future projects outlook
- Beyond 5 yrs considered "Under Evaluation 2"
(part of official forecast, included in Revenue
Sources Book)
• Monthly rates with seasonal fluctuations shown
• Near term emphasis w/ attention to realistic long-
range outlook
• Under Evaluation projects risked for chance of
occurrence within ten-year forecast window, first oil
start date, and probabilistic range in production
profiles
1:39:45 PM
Representative Pruitt mentioned Armstrong oil and the
company's project, and whether it was included.
Mr. Decker responded that the speculative projects were not
included in the official forecast. The forecast, therefore,
would look more pessimistic.
Representative Pruitt indicated that in the prior year
there was concern about the outlook. He wondered if the
department was confident that the inclusion of projects
such as Armstrong's in the forecast going forward.
Mr. Decker was confident that the department had made
substantial improvements to the forecast. He thought the
department was doing a portfolio forecast rather than
focusing on individual projects.
Representative Kawasaki wondered where the future projects
were included in the new production prediction methodology.
Mr. King answered that the resources were evaluated, and
the profile that the resource could generate. He also
stated that there was a commercial team in the Division of
Oil and Gas, which would conduct economic analysis. He
stated that there was an analyst who did work on the
economics associated with the forecast. He stated that,
prior to the previous year, there was not an economic test
about whether a project or well would be included in the
forecast. He stated that the economic analysis was included
in the prior year for the first time. He stated that the
economic analysis was maintained in the current model, but
was not as heavily weighted on projects in the near-term. H
stated that a project must pass the economic tests in order
to be included in the forecast. He stated that if a project
does not work, it did not get included.
1:45:02 PM
Representative Kawasaki surmised that there was no link to
production increases and capital expenditures in the
previous year.
Mr. King replied that production did not come in the same
year as the initial investments. He remarked that the
capital expenditures occurred in years prior. He felt that
there was not a direct correlation, rather a lagged
correlation between the investment and the production. He
remarked that decreased capital expenditures in 2016
resulted in an expectation of a reduction in production.
1:46:32 PM
Representative Kawasaki stressed that there was a lag time
between capital expenditures and production. He wondered
why a lower expenditure was not reflected in the production
forecast.
Mr. King replied that the capital expenditures did not
always equal increases in production. He remarked that the
development of new projects would first see an increase in
capital expenditures. He remarked that the capital
expenditures were not happening, except for a few. He
remarked that the additional data would change the
trajectory of the decline.
Co-Chair Seaton referred to risk evaluations. He wondered
how the department evaluated a field's potential risk.
Mr. Decker replied that year an assessment would be made if
the same methodology was used in the future.
Co-Chair Seaton suggested that if there was a field given a
risk assessment of 50 percent probability, that there be an
elimination of that consideration.
Mr. Decker responded that the department did not have an
exact assessment criterion.
1:50:29 PM
Mr. King wanted to clarify that the department did not
evaluate projects based on a percentage of its chance of
development. He stated that there was a Monte Carlo
simulation, which considered a vast number of
uncertainties: price uncertainty, volume uncertainty,
timing uncertainty, and multiple other uncertainties. He
stated that the distribution would be around those
uncertainties, and the model would pick randomly different
scenarios. He stated that the model used the middle
scenario. He stressed there was not a subjective
assessment.
Co-Chair Seaton surmised that each assessment was a Monte
Carlo.
Mr. King agreed.
Representative Guttenberg stated that many assumed that an
outcome of a plan was entirely based on Alaskan activity.
He stressed that there were other factors such as
international markets, international competing projects,
alternative energies, and the change to using gas. He
queried the impact of the international factors on the
methodologies. He remarked that slide 6 showed a wave in
the high estimate and wondered whether that was due to the
unknown factors.
Mr. King responded that the international markets affected
the price forecast. He stated that a corporation's decision
to invest Alaska was because of their price expectations.
He agreed that there was not control over the entire
marketplace, but stressed that there was some control over
some considerations.
Representative Guttenberg wondered how many factors,
besides price, was figured into the methodology.
Mr. King responded that he did not forecast the
international markets. He furthered that there was an
appreciation in price uncertainty, and assume that the
price uncertainty captured all the other uncertainties.
Representative Guttenberg asked if the previous forecasters
take those things into consideration.
Mr. King replied that he could not speak for the previous
forecasters, but guessed that they did not take those
considerations.
1:55:17 PM
Co-Chair Seaton asked if Representative Wilson had any
questions.
Representative Wilson wondered whether DNR had an idea of
how much oil was still in the ground, and whether different
technology needed to be invented to extract heavier oil.
Mr. Decker responded that there were estimates of very
large quantities of undiscovered resource. He replied that
new technology was absolutely needed to extract the
resource.
Mr. Decker skipped to slide 13: "Methodology."
• Currently producing:
- Small uncertainty range due to established
behavior of production pools
- Quantitative probabilistic range of outcomes
for CP pools
• Projects Under Development:
- Applied quantitative probabilistic ranges using
type wells
- Some financial risk: Addressed using estimated
project breakeven price and Department of Revenue
oil price forecast
- Projects detailed in plans of development or in
confidential meetings with DOR
• Projects under Evaluation
- Projects that have been announced, but are
premature for sanctioning
- Applied quantitative probabilistic ranges using
type wells
- Financial risk using project breakeven price
and Department of Revenue oil price forecast
- Other uncertainties included
• Project chance of occurrence
• Project timing risk
1:59:50 PM
Mr. Decker moved to slide 14, "Fall 2017 Forecast Results."
He indicated that the slide was the most important because
it showed the best representation of the entire forecast.
He stated that it was the entire official ten-year forecast
statewide. He remarked that it had all three categories,
all included. He stated that there was approximately 3.5
years of history; the ten-year forecast; and the 80 percent
confidence bans.
Mr. Decker discussed slide 15, "Currently Producing
Forecast." He stated that the slide only showed the
currently producing pools, and did not include the activity
expected in the next first year. The slide also did not
show the seasonality. He stated that the slide showed that
the existing fields would decline if the work was to stop.
Mr. Decker reviewed slide 16, "Where Will the New Oil Come
From?" He stated that there were new pools, and some
expansion of production in the existing pools that were
slated to come on. He remarked that it should be considered
a full portfolio roll up.
2:04:47 PM
Co-Chair Seaton noted that the combination of slides 15 and
16 equaled the forecast of FY 17 on slide 14.
Mr. Decker agreed, and stated that there were also the
activities in the underdeveloped areas.
Representative Grenn requested actual numbers rather than a
colored chart on slide 16
Mr. Decker wondered whether the numbers would be totals or
by pool. Representative Grenn replied that he wanted the
numbers by pool
Mr. King indicated he could provide the final numbers when
DOR released their Revenue Sources Book.
Representative Pruitt felt that a slide that combined the
two slides would show forecast over ten years.
Mr. King replied that there was some growth in the out
years. He noted that much of the new production on slide 16
was offsetting the decline on slide 15. He understood that
it looked relatively flat. He stressed that the numbers on
slide 16 were risk-weighted numbers, and were not the
actual production profiles.
Co-Chair Seaton surmised that slide 6 would correspond
better with the forecast in slide 14.
Mr. King agreed.
Co-Chair Seaton asked whether it was an annual basis.
Mr. Decker responded in the affirmative.
Mr. King reported on discussed slide 18, "How Should We
Interpret This Forecast":
• There's a lot to be excited about
- but there is still a lot of uncertainty in
future projects
• The forecast is a probability weighted average of
many possible outcomes
- It is not a prediction of exactly which
scenario will come to be
• Each year in the forecast is its own best estimate
- The year to year changes are not actually
predictions of decline rates
2:09:20 PM
Vice-Chair Gara wondered whether the Caelus play was
included in the highest amount.
Mr. Decker responded that the company was included, and was
a very thin band.
Mr. King furthered that the project was very early in the
stage of development, so there were a significant number of
risks associated with the project.
Vice-Chair Gara recalled a conversation about the
accessibility of the wells.
Mr. King answered that it was still very early in the
process, so there were many risks associated with the
project.
2:11:54 PM
AT EASE
2:17:02 PM
RECONVENED
Co-Chair Seaton noted that Representative Ortiz had joined
the meeting.
^2017 FALL REVENUE FORECAST PRESENTATION: DEPARTMENT OF
REVENUE
2:17:16 PM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, introduced himself.
Commissioner Fisher discussed, "State of Alaska Department
of Revenue, Fall 2017 Preliminary Revenue Forecast
Presentation, Preliminary Forecast released October 25,
2017" (copy on file).
Commissioner Fisher looked at slide 2, "Forecasting Methods
Timeline":
December 2016: Fall 2016 forecast and Revenue Sources
Book
Early April 2017: Spring 2017 forecast
Late April 2017: Spring 2017 Alternative Scenario
4 percent Production Decline Scenario, Letter to Co-
Chairs
October 2017: Preliminary Fall 2017 forecast
non-standard, provided to assist special session
December 2017: Final Fall 2017 forecast and Revenue
Sources Book
March or April 2018: Spring 2018 forecast
Co-Chair Seaton recognized Representative Justin Parish in
the audience.
Commissioner Fisher moved to slide 3, "Forecasting Methods:
Introduction":
All data is based on the DOR Fall 2017 Preliminary
Forecast.
This is a preliminary forecast and some numbers will
change before the final submittal in December.
Changes to unrestricted revenue between the
preliminary and final forecast are expected to be
less than $100 million in any given year.
Note: This is a forecast. All figures and narratives
in this document that are not based on events that
have already occurred, constitute forecasts or
"forward-looking statements." These numbers are
projections based on assumptions regarding uncertain
future events and the responses to those events. Such
figures are subject to uncertainties and actual
results will differ, potentially materially, from
those anticipated.
He was confident that in any given year the errors would be
less than $100 million in range.
Commissioner Fisher turned to slide 4, "Forecasting
Methods: What Do We Forecast at DOR?":
We directly forecast Petroleum Revenue
Accounted for 65 percent of state unrestricted
revenue in FY 2017
Projected to be 70-72 percent in FY 2018 and FY
2019
Includes severance taxes, royalties, corporate
income tax, and all other revenue from oil
companies
We directly forecast Non-Petroleum Revenue
We use Alaska Permanent Fund Corporation and Treasury
Division forecasts for Investment Revenue
We use the Federal Revenue authorized for spending as
the forecast
It is typically 20 percent-30 percent more than
actually gets spent
Compile all of these into Revenue Sources Book once
the forecasts are finalized.
Commissioner Fisher continued to address forecasting
methods - specifically related to what the department
forecasted.
Commissioner Fisher looked at slide 5, " Fall 2017
Preliminary Petroleum Revenue Forecast."
Commissioner Fisher addressed slide 6, "Petroleum Revenue
Forecast: Factors":
Four Factors for Petroleum Revenue Forecast
1. Production
2. Price
3. Costs
Capital Expenditures
Operating Expenditures
Transportation Costs
4. Credits
Commissioner Fisher discussed slide 7, "Fall 2017
Preliminary Production Forecast."
Commissioner Fisher addressed the petroleum revenue
forecast on slide 8, "Production Forecast: ANS History and
Forecast by Pool." He shared that legacy fields still
accounted for a substantial portion of production.
2:22:51 PM
Commissioner Fisher advanced to slide 9, "Production
Forecast: ANS by Case", and continued to discuss the
production forecast with a chart related to ANS by case. He
turned to slide 10 and addressed ANS details for the North
Slope only. The projection assumed about 533,000 barrels
per day with a decline to just under 500,000 barrels.
Commissioner Fisher looked at slide 10, "Production
Forecast: ANS Details."
Commissioner Fisher discussed the ANS comparison to the
prior forecast. Over time the gap between prior and new
forecasts would widen. He advanced to slide 12 and provided
a National Petroleum Reserve-Alaska (NPRA) update.
Commissioner Fisher moved to slide 11, "Production
Forecast: ANS Comparison to Prior Forecast."
Commissioner Fisher looked at slide 12, "Production
Forecast: NPR-A Update":
Royalty Revenue and Volumes from NPRA
Alaska's share of revenues fund the Alaska Impact
Grant Program
Forecasted volumes from Moose's Tooth (GMT1 and
GMT2) and Willow
Vice-Chair Gara asked what portion of the royalty the state
received on federal lands.
Commissioner Fisher answered that the state received 50
percent of the royalty on federal lands.
Vice-Chair Gara was not aware the money had been dedicated.
He asked about the limitations with the money.
Mr. Stickel answered that most of the NPRA royalties were
one-sixth royalties.
2:27:50 PM
Vice-Chair Gara asked about the offshore fields, such as
Liberty Fields. He remarked that those fields did not yield
revenue for the state, but had an impact on the TAPS rate.
Mr. Stickel replied that Liberty fell in the three to six-
mile range, so the state had 27 percent of the federal
royalty within that range. He stated that beyond six miles
offshore, in that portion of the federal outer continental
shelf (OCS), there would be no state share in the royalty
production.
Vice-Chair Gara surmised that the state received one-
quarter of the federal royalty for Liberty and Northstar,
and no production tax. He recalled that Northstar was a
production tax field.
Mr. Stickel replied that Northstar was an offshore island,
but a portion of the reservoir extended into federal
waters. Therefore, approximately 80 percent of the
production was considered state waters. The production tax
was applied to that portion, and 20 percent of production
was in the federal portion.
Commissioner Fisher moved to slide 14, "Price Forecast:
Historical ANS West Coast, West Texas Intermediate (WTI)
and Brent Crude Prices 2009+." He addressed a chart showing
historical ANS West Coast, West Texas Intermediate, and
Brent Crude prices. The prices were relatively tight at
present. He pointed out the significant volatility.
Commissioner Fisher moved to slide 15, "Price Forecast:
Historical ANS West Coast Price 2016+." He addressed the
ANS West Coast price.
Commissioner Fisher moved to slide 16, "Price Forecast: Key
Drivers":
Supply, Demand and Spare Capacity in FY 2018
Global Supply - 99.08 million barrels per day
Global Demand - 99.05 million barrels per day
Supply / Demand roughly in balance
Current Events
Supply and demand balancing out
OPEC and Russia are maintaining decreased
production until at least March 2018
Compliance with this cut has been relatively
high
Recent unrest in the Middle East due to the
Kurdish independence vote may disrupt supply
Commissioner Fisher continued to slide 17, "Price Forecast:
Impact of Spare Capacity."
2:32:46 PM
Commissioner Fisher looked at slide 18, "Price Forecast:
Base Price Method":
Price forecast is based on Fall 2017 forecasting
session held on October 9th
Participants gave 10th, 50th, and 90th percentile
paths
Average of these paths used to derive distribution of
possible prices
Base case is the median of the distribution
Commissioner Fisher scrolled to slide 19, "Price Forecast:
Nominal ANS Price Distribution." He noted the range and
growth. He pointed out that the out years showed a wider
range and the closer years showed a consensus around where
the pricing range would fall.
Commissioner Fisher pointed to slide 20, "Price Forecast:
Historical ANS West Coast Price FY Oil Price Bands (Annual
Average and Fall 2017 Forecast)." He noted that the bands
had different meanings depending on either the actual or
the forecast phase.
Commissioner Fisher scrolled to slide 21, "Price Forecast:
Consensus View of Wide Distribution." He stated that the
slide represented a number of different sources for future
pricing.
Commissioner Fisher advanced to slide 22, "Price Forecast:
Brent Forecasts Comparison to DOR ANS Forecast." The
pricing was from January of the current year.
Commissioner Fisher looked at the comparison on slide 23,
"Price Forecast: ANS Comparison to Prior Forecast." He
remarked that there was a revision downward in expectations
in the longer term.
2:37:21 PM
Mr. Stickel explained slide 25, "Cost Forecast: North Slope
Capital Lease Expenditures." He reported that the capital
expenditures had decreased, and suggested that companies
were doing more with less money.
Mr. Stickel reviewed slide 26, "Cost Forecast: North Slope
Operating Lease Expenditures." On the operating side the
trend was similar in that there was much downward pressure
on cost by the operators.
Co-Chair Seaton referred to the note at the bottom of the
slide. He wondered if estimates included both the
expenditures by those with a tax liability and those that
did not have a tax liability.
Mr. Stickel responded in the affirmative. He elaborated
that there was a representation of the total lease
expenditures and deductible lease expenditures.
Representative Wilson wondered why there was a large
difference in the 2021 operating to 2023.
Mr. Stickel responded that the increase in the operating
costs was consistent with some of the new fields in the DNR
production profile.
Representative Guttenberg surmised that there was a
transition from capital expenditures to operating
expenditures.
Mr. Stickel agreed. He stated that the capital expenditure
slide showed spending in the 2020 to 2022 range, and as the
new fields came into production the ongoing costs would be
considered.
2:42:33 PM
Mr. Stickel discussed slide 28, "Credits Forecast: Compared
with Production Tax." He stated that the credits were
integral to the production tax calculation. He stressed
that a portion of tax credits had been historically
repurchased by the state by appropriation. He noted that
the first set of charts showed production tax, which was
the statutory production tax rate on the North Slope. That
rate was typically 35 percent of net profits before
subtracting out any tax credits. He stated that the orange
bar was net of any tax credits against liability. The gap
could be somewhat misleading, because some of the credits
were an integral part of the tax calculation. He explained
that the formula calculated the 35 percent and then
subtract the per taxable barrel credits to get the minimum
tax. He remarked that there were some slides that outlined
how the tax calculation worked. He explained that the grey
bar showed the net fiscal impact of the production tax
system to the state in a given fiscal year. He stated that
it took the actual tax collections and subtracting out the
appropriation for repurchased tax credits in the year. He
noted that FY 17 had approximately $700 million in
production tax at the statutory 35 percent rate,
subtracting $565 million in credits against liability to
achieve $134 million in actual tax receipts. He noted that
the state also paid out an addiction $33 million in
repurchased tax credits in FY 17 He noted that the state
expected to receive $285 million in production tax after
credits against liability in FY 18. The state had paid out
$77 million for the credits against liability, which left a
net balance of almost $200 million in FY 18. The projection
for FY 19 was that there would be approximately $1.2
billion of production tax before credits, subtracting $874
million of credits against liability, which left the state
with $300 million in actual receipts. He stated that there
was a projection of statutory appropriation of $175 million
for FY 19. He stated that under the Oil and Gas Tax Credit
Fund Language, either 10 or 15 percent of the tax levied
under the production tax statutes before applications of
credits was the statutory appropriation for the Tax Credit
Fund.
Mr. Stickel highlighted slide 29, "Credits Forecast:
Compared with Unrestricted Petroleum Revenue." He stated
that the slide included other unrestricted petroleum
revenue to give a more complete picture. The revenue
included unrestricted royalty, corporate income tax, and
property tax. He noted that after credits, the state was
still netting between $1 billion and $1.5 billion in
revenue from the oil industry in FY 19. He stated that
included the restricted portions of revenue such as the CBR
deposits and Permanent Fund royalties pushed the revenue
close to $2 billion.
2:47:01 PM
Co-Chair Seaton asked Mr. Stickel to return to the previous
slide, slide 28. He surmised that the difference between FY
18 and FY 19 was the same. He queried the reason that the
same percentage resulted in a $100 million increase.
Mr. Stickel answered that the appropriation for FY 18 was
based on the forecast when the budget was set. That was the
spring forecast, and the 4 percent decline scenario may
have factored into that adjustment. He remarked that, at
the time, there was an expectation of a lower production
amount in the forecast as well as higher company spending.
Co-Chair Seaton queried the appropriated amount.
Mr. Stickel replied that the estimated amount for FY 18 was
approximately $50 million. He announced that there were two
appropriations, which totaled $77 million. He stated that
there was an appropriation in the operating budget and an
additional supplemental appropriation in the capital
budget.
Co-Chair Seaton asked Mr. Stickel to review the estimate
for FY 19.
Mr. Stickel jumped to slide 31, "Illustration of Tax and
Credit Calculations." He remarked that the slide addressed
the reason for the increase to the statutory forecast
increase from the spring. He stated that the slide walked
through the production tax calculation for FY 19. He stated
that it was an illustration of the production tax
calculation with some simplifications for some of the
nuances in the tax code. He noted that there was an
expectation of approximately $140 million taxable barrels
in FY 19. He stated that it was a price of $60 per barrel,
subtracting transportation costs would equal a gross value
of approximately $50 per barrel. He furthered that
multiplying that $50 by the number of taxable barrels
expected approximately $7 billion in gross value at the
point of production, and approximately $5.6 billion in
deductible lease expenditures resulting in a production
value of $1.4 billion. He stated that the $1.4 billion
times the 35 percent statutory tax rate that would be the
basis for the statutory appropriation. The 35 percent tax
rate yielded approximately $490 million in base tax in the
spring forecast, which was multiplied by 10 percent under
the oil and gas tax credit fund statutes. The multiplier
was 10 percent of the levied tax if the price forecast was
$60 or higher. He stated that the price forecast was
exactly $60, so it initiated the 10 percent multiplier. The
result was in the $49 to $50 million range.
Mr. Stickel advanced to slide 32, "Illustration of Tax and
Credit Calculations." The currently preliminary fall
forecast showed an expectation of 169 million taxable
barrels of production in FY 19 at a market price of $56 per
barrel. He remarked that there was $7.8 billion in gross
value expected, which was up $800 million from the previous
forecast. He noted that it was slightly lower, but there
was a higher amount of production. He remarked that
companies had reduced other expenditures significantly. He
stated that there was an expectation of $4.5 billion in
deductible lease expenditures in FY 19, which would yield a
production tax value of approximately $3.3 billion.
Representative Pruitt wondered whether the statute required
that payment based on the final result. He asked whether
the estimate was lower than what the statute required, and
whether a supplemental was imminent.
Mr. Stickel did not want to make a definitive statement,
but understood that some of the language referenced the
forecast. He agreed to provide further technical
information.
2:53:42 PM
Mr. Stickel moved to slide 33, "FY 2019 Statutory Credit
Appropriation":
Key Changes Spring to Preliminary Fall:
Production forecast increased
29 million more taxable barrels
$800 million more gross value
Cost forecast decreased
$1.1 billion less deductible costs
Tax before credits increased
$1.9 billion more profit x 35 percent = $660
million
Different Statutory Appropriation Multiplier
Appropriation is 15 percent of tax before
credits when price forecast <$60, 10 percent
when price forecast is $60+
Representative Pruitt wondered whether there was fair
confidence from DOR in the spring that $60 would be the
average price for the year.
Mr. Stickel replied that the spring forecast impacted the
statutory appropriation for FY 18. He stated that there was
an
Representative Pruitt thanked Mr. Stickel for his
clarification.
Co-Chair Seaton directed Mr. Stickel to return to slide 30,
a slide that was skipped.
2:59:04 PM
Vice-Chair Gara mentioned that the state had a system of
companies buying other credits.
Mr. Stickel responded in the negative.
Vice-Chair Gara surmised that BP could purchase someone's
tax credit for 50 cents on the dollar, but deduct it from
their taxes as if the credit was purchased for 100 percent.
He stated that the state would lose tax revenue on that
transaction. He wondered whether that was the law, and why
that occurrence was not more frequent.
Mr. Stickel responded that it was still a law and the state
continued to provide guidance related to the regulations.
Representative Wilson wondered whether the $175 million was
the statutory amount after the calculation.
Mr. Stickel asked Representative Wilson to repeat her
question.
Representative Wilson restated her question.
Mr. Stickel responded that the $175 million was the current
estimate in the preliminary fall forecast of the statutory
appropriation for the Oil and Gas Tax Credit Fund. He
stated that the legislature could appropriate a different
amount.
Mr. Stickel looked at slide 35, "Forecast Change: FY 2017
Forecast vs Actuals":
About $125 million of "miss" due to transfers to the
CBRF from General Fund - prior-year adjustments
Remaining $170 million of "miss" due to Corporate
Income Tax forecast - primarily oil and gas
Mr. Stickel reviewed the highlights on the revenue forecast
on slide 36, "Forecast Change: Production Tax Revenue
Highlights":
Oil price forecasts decreased slightly from spring
forecast
Long-term prices (FY2022+) now expected to settle
around $60 real
Oil production forecast methods
Forecast process by technical experts at DNR
improved from last year.
Long term forecasts have stabilized.
Unrestricted revenue forecast increased somewhat
mostly due to higher oil production forecast
Lease expenditures expected to fluctuate over the
forecast period due to forecasted new production:
Companies have cut costs for existing fields, but new
fields will add costs
Companies cited Alaska investment instability and
uncertainty regarding the state fiscal system, as
factors impacting decision making
Mr. Stickel continued to slide 37, "Forecast Change:
Comparison from Spring 2017 Forecasts for FY 2018." He
stated that the comparison showed that production forecast
for FY 18 was up and lease expenditures were down. The
numbers put the unrestricted petroleum revenue at
approximately $40 million higher, versus the official
spring forecast. It was approximately $70 million below the
4 percent decline scenario. He stated that the reason for
the lower number versus the 4 percent decline scenario was
due to the corporate income tax. He stated that there was a
forecast of $235 million in corporate income tax for FY 18,
and reduced oil and gas to $130 million. He stated that the
expectation of production tax and royalties was slightly
higher than the spring.
3:04:50 PM
Mr. Stickel moved to slide 38: "Forecast Change: Comparison
from Spring 2017 Forecasts for FY 2019." He noted that
there was a higher production expectation with a lower
lease expenditure. The FY 19 price forecast was reduced
slightly, with a net result of a forecast that was slightly
higher than the official FY 19 spring forecast and slightly
lower than the 4 percent decline scenario due to corporate
income tax.
Vice-Chair Gara noted that there was a presentation that
stated that the budget should provide the previous year's
level of service due to statewide and unexpected expenses.
He stated that there would be an additional $300 million
extra cost at the previous year's level of service. He
stated that there was a miss on the corporate income tax of
approximately $170 million. He felt that there was a total
of $470 million needed. He wondered whether the $70.6
million was the fall forecast adjustment minus the miss in
corporate income taxes.
Mr. Stickel responded that the $70.6 million represented
the difference between the 4 percent decline scenario and
the current revised forecast.
3:06:50 PM
Vice-Chair Gara wondered whether the decline was because of
the corporate income tax.
Mr. Stickel replied in the affirmative.
Commissioner Fisher furthered that there would be a slide
related to the total revenue delta.
Mr. Stickel reviewed slide 40: "Revenue Forecast: 2017 to
2019 Totals." There were more modest expectations for
investment returns.
Co-Chair Seaton queried the encompassed investment returns.
Mr. Stickel detailed slide 41: "Revenue Forecast: By
Spending Category."
3:11:15 PM
Mr. Stickel scrolled to slide 42: "Revenue Forecast: 2017
to 2019 Petroleum Unrestricted Revenue."
Mr. Stickel explained slide 43: "Revenue Forecast: 2017 to
2019 Non-Petroleum Unrestricted Revenue."
Co-Chair Seaton asked about what from the previous session
changed the motor fuels from UGF to DGF.
Mr. Stickel responded that he did not have the reference.
He stated that DOR met with OMB and LFD in order to
determine how the various revenues were categorized.
Co-Chair Seaton thought he would need some explanation on
the topic.
Representative Pruitt believed in the budget.
Co-Chair Seaton asked Mr. King to clarify.
Representative Thompson reported that there had been
language that was not consistent with his understanding.
Co-Chair Seaton indicated his office would follow-up with
the department and get back to the members.
3:16:07 PM
Vice-Chair Gara felt that shifting money between pots made
it difficult to follow the budget.
Commissioner Fisher asked that he has time to investigate.
3:20:25 PM
Mr. Stickel reviewed slide 44: "Revenue Forecast: Corporate
Income Tax":
Challenging to forecast in changing price environment
Based on U.S. or worldwide profitability,
apportioned to Alaska.
Estimated payments - lower than expected
Expecting a rebound as companies return to
profitability
Refunds - higher than expected
Partially due to Net Operating Loss carry-backs
Expecting smaller impact going forward (if price
remains stable)
CBRF movement of funds in FY 2017 - unexpected
In consultation with Legislative Audit
Did not impact cash received but did impact
general fund / CBRF split
Preliminary Forecast: FY 18 $130 million oil, $150
million general; FY 19 $170 million oil, $155 million
general
3:23:58 PM
Mr. Stickel reported on slide 45: "Revenue Forecast:
Corporate Income Tax."
Co-Chair Seaton asked if the $50 million was for carry
back, or was there a negative tax implication.
Mr. Stickel replied that companies would make an estimated
payment.
Co-Chair Seaton wanted the public to understand that it was
not an additional expense.
Vice-Chair Gara felt that the state had a lose-lose
corporate tax system.
Mr. Stickel supposed that there was a reference to the lost
carry backs.
Co-Chair Seaton announced that there was separate
accounting. The request had been made to the department.
3:30:06 PM
Vice-Chair Gara wondered whether a tax based on profits
would be a positive number.
Mr. Stickel responded that there was work on that analysis.
He stated that an alternative to the corporate income tax
depended on the different provisions about the ability to
estimations.
Mr. Stickel further reviewed slide 46, "Revenue Forecast:
Revenue Available for Appropriation":
Useful for outside analysts not familiar with Alaska's
budget conventions
Better reflects ability of state to meet its
obligations
Alaska has a budget framework that restricts
certain revenue based on constitution, statute,
of customary practice
The ability of the state to meet its obligations
is not fully reflected by the General Fund
Unrestricted Revenue category
All revenues subject to appropriation for any purpose
can be used by the legislature to fund government
services or obligations, including:
Constitutional Budget Reserve Fund
Earnings Reserve of the Permanent Fund
3:32:42 PM
Mr. Stickel returned to slide 47, "Revenue Forecast: 2017
to 2019 Available for Appropriation."
Commissioner Fisher wanted to return to UGF. on slide 48:
"Wrap-up: Changes to 10 - Year Unrestricted Revenue
Outlook."
Representative Ortiz asked about the 4 percent decline.
Commissioner Fisher explained that the spring had a pricing
forecast with a production forecast from DOR that
represented a 12 percent decline year over year in oil
production. He remarked that there was concern that the
forecast was too conservative. He stated that there was a
change to a 4 percent decline in an alternative scenario.
3:40:08 PM
Vice-Chair Gara stated that he had heard a constituent say
that there would be so much money in the current year, so
there was no need for a fiscal plan.
Commissioner Fisher agreed.
Commissioner Fisher summarized the presentation as detailed
on slide 49: "Wrap-Up: Big Picture Takeaways for Forecast
Period":
Oil Prices for FY19+ decreased for the forecast period
Current prices trending slightly higher than
forecasted price for FY 2018
Oil Production is forecasted to be steady
Includes some new fields on a risked basis.
Current production on track with forecast so far
for FY 2018
Petroleum Revenue represents 65 - 74 percent of our
unrestricted revenues over the forecast period
Unrestricted revenue trend over forecast period (year-
over-year):
Increases of $483M in FY 2018 and $185M in FY
2019
Revenue grows 1-5 percent per year FY 2020-2024
then 7-10 percent in FY 2025-2027
In real terms, GFUR grows 2.5 percent per year
between FY 2018 and FY 2027
Structural budget deficit remains
3:44:30 PM
Representative Wilson asked when the numbers would be trued
up with actual numbers.
Mr. Stickel indicated the department had trued up. He was
fairly confident the numbers would not change much in the
final document.
Co-Chair Seaton asked Mr. Stickel to return to slide 41. He
asked about the forecast amount on the top purple line.
Mr. Stickel responded that the blue bar was the full PFD
according to the current statute.
Representative Pruitt asked that as it related to petroleum
income. He asked if it was a realistic outcome. He had not
made the calculation based on the forecast.
Co-Chair Seaton discussed committee business.
ADJOURNMENT
3:48:14 PM
The meeting was adjourned at 3:48 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DNR Production Forecast.pdf |
HFIN 10/25/2017 1:00:00 PM |
HFIN Presentation |
| Fall 2017 Preliminary Revenue Forecast Presentation_cmgds_201710125.pdf |
HFIN 10/25/2017 1:00:00 PM |
HFIN Presentation |
| 10 26 17 Motor Fuel taxes.pdf |
HFIN 10/25/2017 1:00:00 PM |
HFIN Additional Information |
| DOR Response Letter to House Finance Committee -11.2.17.pdf |
HFIN 10/25/2017 1:00:00 PM |
HFIN |