Legislature(2017 - 2018)SENATE FINANCE 532

03/19/2018 09:00 AM FINANCE

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Audio Topic
09:02:53 AM Start
09:03:21 AM Presentation: Spring Revenue Forecast
10:21:22 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Spring Revenue Forecast TELECONFERENCED
Commissioner Sheldon Fisher, Department of
Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 19, 2018                                                                                            
                         9:02 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:02:53 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:02 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Peter Micciche                                                                                                          
Senator Gary Stevens                                                                                                            
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Donny Olson                                                                                                             
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator   Cathy   Giessel;  Sheldon   Fisher,   Commissioner                                                                    
Designee,   Department  of   Revenue;  Dan   Stickel,  Chief                                                                    
Economist,   Economic   Research    Group,   Tax   Division,                                                                    
Department of Revenue.                                                                                                          
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATION: SPRING REVENUE FORECAST                                                                                        
                                                                                                                                
9:03:21 AM                                                                                                                    
                                                                                                                                
Senator MacKinnon  reviewed the  agenda for the  meeting and                                                                    
acknowledged Senator  Giessel in  the audience.  She invited                                                                    
the testifiers from the Department of Revenue to the table.                                                                     
                                                                                                                                
SHELDON   FISHER,  COMMISSIONER   DESIGNEE,  DEPARTMENT   OF                                                                    
REVENUE, was  pleased that the  department had  released the                                                                    
Spring  2018  Revenue  Forecast  early.  He  introduced  the                                                                    
presentation,  "Spring  2018   Revenue  Forecast"  (copy  on                                                                    
file).                                                                                                                          
                                                                                                                                
Commissioner  Fisher showed  slide 2,  "FORECASTING METHODS:                                                                    
Timeline":                                                                                                                      
                                                                                                                                
     ? Early April 2017: Spring 2017 Forecast                                                                                   
    ? Late April 2017: Spring 2017 Alternative Scenario                                                                         
     ? 4% Production Decline Scenario, Letter to Co-Chairs                                                                      
     ? Used in modeling by Department of Revenue, Office of                                                                     
     Management and Budget,                                                                                                     
     and Legislative Finance                                                                                                    
     ? October 2017: Preliminary Fall 2017 Forecast                                                                             
    ? Non-standard, provided to assist special session                                                                          
     ? December 2017: Final Fall 2017 Forecast and                                                                              
     Revenue Sources Book                                                                                                       
     ? March 2018: Spring 2018 Forecast                                                                                         
     ? December 2018: Fall 2018 Forecast and                                                                                    
     Revenue Sources Book                                                                                                       
                                                                                                                                
Commissioner  Fisher   reported  that  the   department  was                                                                    
continuing  the  discussion  and  the  series  of  forecasts                                                                    
produced  by the  department  going back  to  the Spring  of                                                                    
2017.  He indicated  the department  updated the  production                                                                    
and  price forecasts  and some  other assumptions.  He would                                                                    
begin by talking about the  production forecast, move to the                                                                    
price forecast,  then finish by pulling  together some other                                                                    
items.                                                                                                                          
                                                                                                                                
Commissioner   Fisher   displayed   slide   4,   "PRODUCTION                                                                    
FORECAST: ANS History and Forecast  by Pool," which showed a                                                                    
historical perspective  of production  in history.  He noted                                                                    
the leveling  out and flattening  of production,  a positive                                                                    
development for the state and for revenues.                                                                                     
                                                                                                                                
Commissioner   Fisher   discussed   slide   5,   "PRODUCTION                                                                    
FORECAST: ANS  FY 2017  Versus FY  2018," containing  a line                                                                    
graph that  showed the actual production  represented in the                                                                    
solid  lines. Currently,  the state  averaged about  518,000                                                                    
barrels  per  day  of production  against  the  forecast  of                                                                    
533,000 barrels  per day. He highlighted  the assumption for                                                                    
the  remaining  months  of  the  year.  The  department  was                                                                    
forecasting  that production  both in  the last  quarter and                                                                    
for the year would be modestly  below where it was in FY 17.                                                                    
He indicated  that in the  last 10 years the  fourth quarter                                                                    
represented  about 25.5  percent of  the year's  production.                                                                    
The department's assumption was in  line with that trend for                                                                    
FY 18 actual production.                                                                                                        
                                                                                                                                
Senator  von Imhof  asked if  the drop  was attributed  to a                                                                    
particular field or a general decline on the North Slope.                                                                       
                                                                                                                                
Commissioner  Fisher  responded  that   the  slide  did  not                                                                    
reflect  a long-term  decline in  the  department's view  of                                                                    
production.  The long-term  production was  largely in  line                                                                    
with what  the department expected previously.  There were a                                                                    
couple  of factors.  Overall, the  weather  had been  warmer                                                                    
over  the   most  recent  winter.  Production   was  usually                                                                    
healthier  in a  colder climate,  as the  equipment operated                                                                    
better allowing  producers to  accomplish more.  Also, there                                                                    
had  been a  couple  of events  that  had affected  specific                                                                    
properties that resulted in a  decline. He asked Mr. Stickle                                                                    
to provide more detail.                                                                                                         
                                                                                                                                
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT  OF  REVENUE, expounded  on  what  the                                                                    
commissioner had stated. He reported  that in looking at the                                                                    
unit-by-unit analysis  of the  forecast versus  the previous                                                                    
year,  Kuparuk   Production  was  forecasted   to  increase.                                                                    
Prudhoe  Bay's production  was down  due  to warmer  weather                                                                    
having  a  significant  impact. There  had  also  been  some                                                                    
technical issues at  some of the other fields  such as Point                                                                    
Thompson and Alpine that were factored into the forecast.                                                                       
                                                                                                                                
9:08:20 AM                                                                                                                    
                                                                                                                                
Commissioner   Fisher   referenced  slide   6,   "PRODUCTION                                                                    
FORECAST:  ANS Comparison,"  which looked  at the  long-term                                                                    
forecast.  It showed  the  expected  production decline  for                                                                    
FY 18.  Looking forward  the  forecast was  in  line with  a                                                                    
modest increase  over the fall  forecast. He asked  if there                                                                    
were questions about production.                                                                                                
                                                                                                                                
Senator  Micciche  commented   that  the  department  leaned                                                                    
toward the  33 percent  mark and  asked the  commissioner to                                                                    
explain.                                                                                                                        
                                                                                                                                
Commissioner Fisher  did not understand the  reference to 33                                                                    
percent.                                                                                                                        
                                                                                                                                
Senator Micciche pointed  to the Spring 2018  high case, the                                                                    
forecast, and  the spring 2018  low case. He  commented that                                                                    
some  other  entities  predicted  closer  to  the  midpoint,                                                                    
whereas, the department predicted in the lower third.                                                                           
                                                                                                                                
Commissioner Fisher  responded that the  production forecast                                                                    
was  primarily   prepared  by  the  Department   of  Natural                                                                    
Resources (DNR).  He stated that  the mid-case  was intended                                                                    
to be  a P50. In  other words, it  was 50 percent  likely it                                                                    
would be  the forecast  number, or 50  higher or  lower. The                                                                    
scenario  suggested  that  DNR anticipated  there  was  more                                                                    
upside opportunity,  the reason  for a  larger scale  to the                                                                    
upside rather  than the downside.  He explained that  it was                                                                    
about the  probabilities in different scenarios  in terms of                                                                    
what DNR saw as opportunities versus risks in the forecast.                                                                     
                                                                                                                                
Co-Chair MacKinnon  noted that the committee  had considered                                                                    
many revenue  forecasts. She recalled  a past  forecast that                                                                    
showed a 12  percent decline over the next  ten years, which                                                                    
had been changed to a flat projection.                                                                                          
                                                                                                                                
Commissioner  Fisher referred  back to  slide 2.  He replied                                                                    
that  in the  April  2017 forecast  the administration  came                                                                    
forward  with a  12  percent decline.  Soon thereafter,  the                                                                    
department came forward with a  4 percent production decline                                                                    
scenario. It was  not a new forecast but  a reduced decline.                                                                    
In  the  special  session  and  in  the  fall  forecast  the                                                                    
forecast was revised to be flat.                                                                                                
                                                                                                                                
Co-Chair   MacKinnon   appreciated  the   department   being                                                                    
conservative  in  its   approach  when  presenting  numbers.                                                                    
However, it  had an  impact in  terms of  planning purposes.                                                                    
She  recalled  that in  April  2017  when the  numbers  were                                                                    
published Senate  finance pushed  back significantly  on the                                                                    
12  percent  decline  when  the  state  had  seen  increased                                                                    
production.  She  was glad  that  the  production level  was                                                                    
flat. She  relayed that  the document  was available  to the                                                                    
public online.                                                                                                                  
                                                                                                                                
9:13:29 AM                                                                                                                    
                                                                                                                                
Commissioner Fisher  continued to slide 8,  "PRICE FORECAST:                                                                    
Impact  of Spare  Capacity: Short  Term,"  which showed  the                                                                    
Energy  Information  Agency   (EIA)  attempting  to  predict                                                                    
supply and  demand for oil  into the future.  He highlighted                                                                    
the   vertical  orange   [yellow]   line  representing   the                                                                    
difference between actuals and  the forecast period. The oil                                                                    
industry  had been  through a  period where  the demand  had                                                                    
been greater than the supply  represented by the orange line                                                                    
[brown] versus the blue line.  The green bars were declining                                                                    
suggesting that  actual inventory was shrinking.  The Energy                                                                    
Information Agency anticipated in  the following quarters it                                                                    
would  change  and  world   production  would  again  exceed                                                                    
consumption.  He  noted  the   range  was  tight  in  either                                                                    
direction.  In   the  future   EIA  anticipated   a  growing                                                                    
inventory for the  coming few quarters which  would start to                                                                    
shrink as seen in the far right of the slide.                                                                                   
                                                                                                                                
Commissioner  Fisher  moved  to slide  9,  "PRICE  FORECAST:                                                                    
Brent  Forecasts Comparison  to DOR  ANS Forecast:  FY2018,"                                                                    
which  showed a  line graph  entitled 'Real  Oil Prices  and                                                                    
Forecasts."  The  solid  black  line  reflected  the  actual                                                                    
numbers from the period. He noted  that the price of oil was                                                                    
approximately  $50/bbl in  July 2017  and climbed  to almost                                                                    
$70/bbl  during the  period. The  average  to-date was  just                                                                    
over  $59/bbl.  The  department   was  assuming  in  nominal                                                                    
dollars that the  price of oil would stay  above $64/bbl for                                                                    
the remaining  months of  the year  resulting in  a forecast                                                                    
price  of  about   $61/bbl  during  FY  18.   The  red  line                                                                    
represented  the   New  York  Mercantile   Exchange  (NYMEX)                                                                    
futures price.  He explained that  if someone wanted  to buy                                                                    
oil  in the  future, the  red line  reflected what  a person                                                                    
would  pay.  The red  line  on  the chart  represented  real                                                                    
dollars.  The  forecast  was  largely  consistent  (slightly                                                                    
above) with  what the  NYMEX futures  would predict  for the                                                                    
price of oil.                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon  suggested that the revenue  forecast set                                                                    
the line for  the calculation on credits  due companies that                                                                    
were owed money  from the State of Alaska. She  asked if the                                                                    
threshold was correct at $60.                                                                                                   
                                                                                                                                
Commissioner Fisher indicated that  part of the presentation                                                                    
reviewed the  credits calculation. He conveyed  that $60 was                                                                    
the difference between  whether the pool of  money set aside                                                                    
to pay  credits was 10 percent  or 15 percent. If  the price                                                                    
of oil  was above  $60 the  production tax  due would  be 10                                                                    
percent. If  the price of  oil was below $60  the production                                                                    
tax due  would be  15 percent. He  would be  walking through                                                                    
the calculation and how the forecast had changed.                                                                               
                                                                                                                                
Co-Chair  MacKinnon  noted that  the  legislature  was in  a                                                                    
precarious situation  between $59/bbl  and $61/bbl.  She was                                                                    
looking  at 25  percent production.  She thought  it was  an                                                                    
active  choice  to state  a  number.  It appeared  that  the                                                                    
administration   was  anticipating   an  average   of  about                                                                    
$61/bbl. She asked if she was accurate.                                                                                         
                                                                                                                                
Commissioner   Fisher  stated   that  the   administration's                                                                    
forecast assumed that oil would  stay slightly above $64/bbl                                                                    
between  the present  day and  the  end of  the fiscal  year                                                                    
which would result  in an average price for  the fiscal year                                                                    
of $61/bbl.                                                                                                                     
                                                                                                                                
9:18:08 AM                                                                                                                    
                                                                                                                                
Senator  von  Imhof  referenced  slide  8  and  thought  the                                                                    
right-hand side  of the graph  represented the heart  of the                                                                    
matter. She  thought the commissioner had  been correct when                                                                    
he stated that  the ranges (seen at the height  of the green                                                                    
bars) were shorter  than the ones seen in  2015. She thought                                                                    
it had been a good thing  when supply and demand had reached                                                                    
an equilibrium to  some degree. She noted that  the moved up                                                                    
and  down on  the  chart.  She asked  if  the Department  of                                                                    
Revenue's (DOR) research showed that,  as the price crept up                                                                    
past  $65/bbl,  fracking  became more  prevalent  and  banks                                                                    
started  lending again.  She thought  they  were nimble  and                                                                    
quick  and could  have an  impact on  supply. She  asked how                                                                    
confident the commissioner was about the green bars.                                                                            
                                                                                                                                
Commissioner  Fisher accepted  that the  price forecast  was                                                                    
one  source of  data. He  thought as  he reviewed  the price                                                                    
forecast,  he  would  show the  committee  that  there  were                                                                    
multiple views and opinions of  which the department did not                                                                    
try to duplicate. The department  tried to do a broad survey                                                                    
of  the different  intelligent and  thoughtful organizations                                                                    
that had a  significant amount of resources  behind them. He                                                                    
suggested  that the  consensus  around  demand was  narrower                                                                    
than the  consensus around supply. He  elaborated that there                                                                    
seemed to  be a  narrow range of  what people  thought about                                                                    
how  the demand  curve could  vary and  change. There  was a                                                                    
substantial range  in terms  of how  people viewed  what the                                                                    
supply of  oil would be.  He would  try to walk  through the                                                                    
information. The  department had tried  to pick a  case that                                                                    
was  reasonable. There  were  certain  scenarios that  could                                                                    
change it meaningfully one way or the other.                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  asked  if  it   was  fair  to  say  Oil                                                                    
Producing and  Exporting Countries (OPEC) trying  to control                                                                    
output  had  helped to  globally  stabilize  the price.  The                                                                    
price was  moving upwards  because producers  were producing                                                                    
less.                                                                                                                           
                                                                                                                                
Commissioner Fisher answered in  the affirmative. He thought                                                                    
that there  was more discipline  from Russia and  other OPEC                                                                    
nations.                                                                                                                        
                                                                                                                                
Co-Chair  MacKinnon explained  that producers  who could  be                                                                    
flexible in  where they  went and how  fast they  could drop                                                                    
drills were  influencing the increase in  fracking. From the                                                                    
perspective  of   Oil  Producing  and   Exporting  Countries                                                                    
(OPEC), Alaska was starting to  pull in a greater percent of                                                                    
oil production  in the  world. She  indicated that  it might                                                                    
not please  those that were controlling  and producing less.                                                                    
It  was  benefiting  Alaska  on   the  price  side  and  the                                                                    
production side. She asked if her statement was fair.                                                                           
                                                                                                                                
Commissioner  Fisher  thought  that Co-Chair  MacKinnon  had                                                                    
made a  perceptive comment. He  elaborated that  the dynamic                                                                    
of  how Shale  or OPEC  would react,  how certain  countries                                                                    
like Venezuela, and other factors  would determine where the                                                                    
price  of  oil  would  land. There  were  several  different                                                                    
people interpreting the facts  differently which lead to the                                                                    
range in the forecast.                                                                                                          
                                                                                                                                
Co-Chair MacKinnon mentioned that  Saudi Arabia was going to                                                                    
a  similar process  as Alaska.  The  high price  of oil  had                                                                    
benefitted the  people of Saudi  Arabia. However, in  a low-                                                                    
price environment  the country struggled to  produce revenue                                                                    
to  distribute or  invest in  communities. Saudi  Arabia was                                                                    
also looking at a sovereign  wealth fund model. She asked if                                                                    
the  commissioner could  provide any  additional information                                                                    
on the matter.                                                                                                                  
                                                                                                                                
Commissioner   Fisher  affirmed   that   Saudi  Arabia   had                                                                    
struggled to balance  its budget at current  oil prices. For                                                                    
a  time, the  country  thought  it was  in  its interest  to                                                                    
produce additional oil  to try to bring  discipline into the                                                                    
market  place through  lower prices.  He  surmised that  the                                                                    
country recognized  that it was  harmed when  prices dropped                                                                    
substantially.  He  thought that  the  country,  as well  as                                                                    
other  oil-dominant  countries,   were  observing  what  was                                                                    
happening in  the U.S. and  shale oil. He noted  the comment                                                                    
made earlier  about one of  the impacts of lower  pricing on                                                                    
the shale industry and how  it had become more efficient and                                                                    
capable of producing  oil at declining oil  prices. It would                                                                    
continue  to impact  the supply  of  oil and  how the  world                                                                    
would respond to different events.  He indicated there was a                                                                    
time when OPEC  had more control over the price  of oil, but                                                                    
as shale had  become a swing producer it  was more difficult                                                                    
to control. The department's view  was that at slightly over                                                                    
$60/bbl the  various supplies,  shale in  particular, became                                                                    
economical, and there  was a meaningful amount  of supply at                                                                    
those  prices.  As he  moved  through  the presentation,  it                                                                    
would be apparent that others saw things differently.                                                                           
                                                                                                                                
9:25:15 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  asked if the presentation  would address                                                                    
cost. The commissioner had alluded  to Americans stepping up                                                                    
when things  got tough.  She pointed out  that in  the price                                                                    
forecast,  producers in  Alaska  had found  a  way to  lower                                                                    
costs. The state  was seeing the benefit  of flat production                                                                    
or  increased production  as experienced  in the  previous 2                                                                    
years. The  state was  also benefiting  from lower  costs to                                                                    
extract some  of the  hydrocarbons on  the North  Slope. She                                                                    
asked if she was accurate in her assessment.                                                                                    
                                                                                                                                
Commissioner Fisher  answered in  the affirmative.  He noted                                                                    
that a  portion of the  presentation would discuss  the cost                                                                    
for  Alaska.   The  department  had   not  put   together  a                                                                    
presentation that  talked about  other regions of  the world                                                                    
regarding their cost structures.                                                                                                
                                                                                                                                
Senator  Micciche  thought it  was  fair  to say  that  even                                                                    
conventional  players  had  brought   down  their  costs  of                                                                    
production globally.  He thought  producers had  become more                                                                    
efficient.  He  wondered if  the  improvements  seen in  the                                                                    
revenue forecast were the price  of oil and the reduction of                                                                    
what could be written off by  the companies. He asked if the                                                                    
topic would be covered in the presentation.                                                                                     
                                                                                                                                
Commissioner Fisher  indicated the  senator was  correct and                                                                    
that the  facts about  Alaskan producers would  be discussed                                                                    
later in the presentation.                                                                                                      
                                                                                                                                
Commissioner  Fisher reviewed  slide 10,  " PRICE  FORECAST:                                                                    
Brent  Forecasts  Comparison  to DOR  ANS  Forecast:  Short-                                                                    
Term," which showed  a line graph entitled  "Real Oil Prices                                                                    
and Forecasts."  The slide showed  a short-term  forecast in                                                                    
real dollars. The black line  showed actuals, and the dotted                                                                    
portion  of  the  line  reflected  the  forecast.  The  blue                                                                    
portion  of  the line  showed  the  analysts' forecast.  The                                                                    
department's  forecast  was  in   line  with  the  analysts'                                                                    
forecast. The  green line  on the  slide was  EIA short-term                                                                    
energy  outlook. The  Energy Information  Agency produced  a                                                                    
short-term  energy outlook  updated  monthly as  well as  an                                                                    
annual outlook. He pointed out  that the price point for the                                                                    
next couple  of years was  on the high  end of the  range of                                                                    
the existing  forecasts. He reminded members  that the NYMEX                                                                    
forecast represented long-term  futures prices. In fairness,                                                                    
there was  not a significant  amount of volume  in long-term                                                                    
futures beyond a year. Outside of  a year or 18 months NYMEX                                                                    
became a less reliable predictor of price.                                                                                      
                                                                                                                                
Commissioner Fisher  referenced slide 11,  "SHORT-TERM PRICE                                                                    
FORECAST,"  which displayed  a  data table  that showed  the                                                                    
forecast in  nominal prices. The forecast  grew from $63/bbl                                                                    
in  FY 19  to  about  $75/bbl. He  noted  that the  forecast                                                                    
largely stayed flat in real  terms. He reiterated that NYMEX                                                                    
was slightly  below the department's  pricing in  the short-                                                                    
term. He  began to  comment on  EIA short-term  forecast but                                                                    
referred back  to slide 10. The  Energy Information Agency's                                                                    
prediction for calendar  year 2018 and 2019  was $62/bbl. He                                                                    
pointed out  that Alaska's fiscal  year falls into  what EIA                                                                    
was predicting  on a monthly basis  as a dip in  oil prices.                                                                    
Averaging EIA's  monthly prices over  FY 19, it  predicted a                                                                    
$60/bbl price for oil as reflected on slide 11.                                                                                 
                                                                                                                                
Commissioner  Fisher  continued  to  discuss  slide  11.  In                                                                    
looking at  EIA's annual prediction, they  were more bullish                                                                    
expecting  higher prices.  He would  discuss the  underlying                                                                    
assumptions  in   their  numbers.  He  continued   that  the                                                                    
analysts' average did  not go beyond 3  years. Their average                                                                    
price was in line with  the department's forecast. They were                                                                    
more optimistic  in their numbers  for FY  20 and FY  21. In                                                                    
FY 22 the  analysts saw  another decline  down to  a nominal                                                                    
amount of $64/bbl.                                                                                                              
                                                                                                                                
9:31:16 AM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon   asked  if  EIA's   long-term  forecast                                                                    
considered China  or the Asian  markets switching  over from                                                                    
coal to a hydrocarbon or possibly natural gas.                                                                                  
                                                                                                                                
Commissioner Fisher  commented that what  Co-Chair MacKinnon                                                                    
suggested  was  part of  it,  and  EIA  was mindful  of  the                                                                    
changes. He  believed it had more  to do with EIA's  view of                                                                    
what  was  happening  with supply.  He  indicated  that  EIA                                                                    
believed  the world  was under-investing  in oil  production                                                                    
and that the investment would  not keep up with demand. Over                                                                    
time, an imbalance would result in driving up prices.                                                                           
                                                                                                                                
Co-Chair MacKinnon  asked if it was  reflective of renewable                                                                    
energy or other energy production versus hydrocarbons.                                                                          
                                                                                                                                
Commissioner  Fisher  stated  that renewables  would  impact                                                                    
demand. Renewables  would be a  factor, but he  also thought                                                                    
demand  would  grow  as economies  expanded.  He  reiterated                                                                    
there were  different views around  demand, but  they tended                                                                    
to be narrow in scope. He  speculated that there was more of                                                                    
a  consensus about  what would  happen on  the demand  side.                                                                    
Some  believed  there  would  be   more  growth  and  others                                                                    
believed the growth  would be slower. The  difference in the                                                                    
predictions was largely around supply.                                                                                          
                                                                                                                                
Co-Chair  MacKinnon clarified  that  the commissioner  meant                                                                    
"shale" rather  than "shell." The commissioner  responded in                                                                    
the affirmative.                                                                                                                
                                                                                                                                
Senator  Micciche thought  EIA's considerations  were across                                                                    
all   various  probabilities.   They  discussed   usage  and                                                                    
conversion  probabilities  with generation,  transportation,                                                                    
and manufacturing. It was a  portion of their evaluation. He                                                                    
suggested  that  those  things  affected  their  evaluations                                                                    
particularly in the out  years regarding their consideration                                                                    
of renewables  and other opportunities.  He asked if  he was                                                                    
correct.                                                                                                                        
                                                                                                                                
Commissioner  Fisher agreed  with Senator  Micciche. He  did                                                                    
not  intend  to  imply  that  analysts  did  not  anticipate                                                                    
impacts  from renewables  and  other  factors. He  commented                                                                    
that  there seemed  to be  a narrower  range of  variability                                                                    
around assumptions in demand than there was in supply.                                                                          
                                                                                                                                
9:34:45 AM                                                                                                                    
                                                                                                                                
Commissioner  Fisher turned  to slide  12, "PRICE  FORECAST:                                                                    
Analyst  Brent Forecasts  Comparison  to  DOR ANS  Forecast:                                                                    
Short-Term," which  showed a line  graph entitled  "Real Oil                                                                    
Prices and Forecasts."  The graph was focused  on the short-                                                                    
term analysts'  forecasts. He pointed out  that the analysts                                                                    
did  not like  to predict  beyond a  few years  forward. The                                                                    
solid  blue line  was the  average  and the  2 dotted  lines                                                                    
represented  25  percent  of the  highest  analysts  and  25                                                                    
percent of  the lowest  analysts. The  span was  between the                                                                    
low $50  to high $70  range before  settling in the  mid $70                                                                    
mark by the end of the  forecast period. He pointed out that                                                                    
the  analysts forecasted  a  decline in  the  price of  oil.                                                                    
Whereas, the department saw the forecast remaining flat.                                                                        
                                                                                                                                
Commissioner  Fisher turned  to slide  13, "PRICE  FORECAST:                                                                    
Differences  in Analyst  Forecasts,"  which  showed a  table                                                                    
with the detail  of what was driving the  differences in the                                                                    
forecasts.  He noted  that  analysts  predicting low  versus                                                                    
high all  predicted growing demand.  Even the  analysts that                                                                    
believed the price  would be low thought the  demand for oil                                                                    
would  continue to  grow. They  saw it  growing at  a slower                                                                    
rate. On  the high  side, analysts  saw demand  growing more                                                                    
rapidly. The  Energy Information  Agency had  its short-term                                                                    
forecast  being  more steady  or  flat  and their  long-term                                                                    
forecast being moderate in demand.  He reported that EIA had                                                                    
a reference  case, a  high case,  and a  low case,  which he                                                                    
would discuss  further. He stated  that the  real difference                                                                    
between analysts was  on the supply side.  Analysts that saw                                                                    
a low price  believed that there would be  a supply blow-out                                                                    
where there  would be strong  production in the  U.S. market                                                                    
as well as  in OPEC countries. Analysts that saw  a high oil                                                                    
price  saw the  price  of  shale oil  being  flatter due  to                                                                    
discipline in  the financial markets and  access to capital.                                                                    
They also  saw disruptions  in other parts  of the  world in                                                                    
countries like  Venezuela. The  combination would  drive the                                                                    
price up in the near-term. He  also mentioned that EIA had a                                                                    
long-term  thesis  that  the  world  was  underinvesting  in                                                                    
production.                                                                                                                     
                                                                                                                                
Co-Chair  MacKinnon  acknowledged  that Senator  Bishop  had                                                                    
joined the meeting.                                                                                                             
                                                                                                                                
9:38:04 AM                                                                                                                    
                                                                                                                                
Senator   Micciche   thought   analysts  had   become   more                                                                    
conservative over the last couple  of years. He asked if the                                                                    
commissioner could provide the  portfolio of analysts to the                                                                    
committee.  Commissioner Fisher  could provide  the list  as                                                                    
well as the forecast from each analyst.                                                                                         
                                                                                                                                
Commissioner  Fisher displayed  slide  14, "PRICE  FORECAST:                                                                    
Bullish   Analyst   Example:  Guggenheim,   Short-Term.   He                                                                    
explained  that   he  had  chosen  a   couple  of  analysts'                                                                    
examples.  Guggenheim  was  forecasting  the  price  of  oil                                                                    
between $72 and $80 in  the 2018-2019 period. Their view was                                                                    
that India and China would  add about 5.4 million barrels of                                                                    
oil in terms of demand.  They also believed electric vehicle                                                                    
usage  would   be  offset  by  demand   growth  in  non-auto                                                                    
consumption, and cold weather  would increase the demand for                                                                    
oil. In terms  of supply, they viewed that  OPEC had limited                                                                    
spare capacity, shale production  would not grow as expected                                                                    
because of  new exploration  and production  discipline, and                                                                    
potential disruptions to Iran  and Venezuela's exports would                                                                    
push the world market higher.                                                                                                   
                                                                                                                                
Commissioner  Fisher discussed  slide  15, "PRICE  FORECAST:                                                                    
Bearish  Analyst  Example:  Citi, Short-Term."  The  Bearish                                                                    
analysts anticipated a  price of between $49 and  $57 in the                                                                    
2018-2019  period largely  driven by  a blow-out  of supply.                                                                    
The demand assumptions  were flat, and they did  not see the                                                                    
increase that  the analysts from Guggenheim  saw coming from                                                                    
China and  India. They saw  a significant supply  going into                                                                    
the market place driven by U.S. production.                                                                                     
                                                                                                                                
Commissioner  Fisher referenced  slide 16,  "PRICE FORECAST:                                                                    
Median  Analyst  Example:  Deutsche Bank,  Short-Term."  The                                                                    
analysts from  Deutsche Bank saw  a price comparable  to the                                                                    
state's prediction at $62 for  the following few years. They                                                                    
saw modest  demand growth and  supply that was  largely able                                                                    
to meet demand. They saw  drivers that made it difficult for                                                                    
OPEC to continue  to maintain agreements as  they had. There                                                                    
might be a  breakdown or production above  agreed amounts as                                                                    
well as a leveling out of  production in the U.S. They saw a                                                                    
steady state from where Alaska was currently.                                                                                   
                                                                                                                                
9:41:46 AM                                                                                                                    
                                                                                                                                
Commissioner Fisher  advanced to slide 17,  "PRICE FORECAST:                                                                    
Brent Forecasts Comparison to  DOR ANS Forecast: Long-Term,"                                                                    
which  reviewed a  long-term forecast  rather than  a short-                                                                    
term forecast. The analysts started  to fall off of the page                                                                    
because  they  did  not  tend  to  predict  long-term  price                                                                    
forecasts.  He  noted  that  the green  line  on  the  graph                                                                    
represented EIA's reference case.                                                                                               
                                                                                                                                
Commissioner Fisher continued to  slide 18, "PRICE FORECAST:                                                                    
EIA Brent  Cases from 2018 Annual  Energy Outlook: Long-Term                                                                    
- Real Oil Prices and  Forecasts," which showed a line graph                                                                    
containing a  low case,  a reference case,  and a  high case                                                                    
for  EIA. The  three EIA  forecast  cases had  a wide  range                                                                    
between them. In the out years  there was a low of about $30                                                                    
and a high of about $140.                                                                                                       
                                                                                                                                
Commissioner  Fisher spoke  to  slide  19, "PRICE  FORECAST:                                                                    
Differences in  EIA Projection Cases," which  showed a table                                                                    
illustrating the difference between  the forecast cases from                                                                    
EIA. He  noted that  on the demand  side the  reference case                                                                    
was  a moderate  demand  versus  the low  case  which was  a                                                                    
slowing global  demand. The high  case was a  growing global                                                                    
demand.  The  larger question  was  what  would happen  with                                                                    
supply. In the low case,  EIA saw higher OPEC production and                                                                    
lower costs  for non-OPEC exploration (mostly  in the U.S.).                                                                    
As a result, a lower price  in the market place was adequate                                                                    
to bring the supply necessary  to meet demand. In looking at                                                                    
the reference case,  OPEC production was flat,  and the U.S.                                                                    
was  the largest  contributor for  non-OPEC oil.  However, a                                                                    
price  increase was  required in  order to  meet the  demand                                                                    
requirement. In  the high case scenario  OPEC production was                                                                    
falling  and costs  were  growing  substantially higher  for                                                                    
non-OPEC   development.  Therefore,   a  higher   price  was                                                                    
necessary for the market to balance.                                                                                            
                                                                                                                                
Commissioner  Fisher  reviewed  slide 20,  "PRICE  FORECAST:                                                                    
Nominal ANS  Price Distribution," which showed  a line graph                                                                    
with colored  lines showing  P10 to  P90 scenarios  from the                                                                    
fall  forecast.  The  dotted   black  line  represented  the                                                                    
department's current spring forecast.  The graph showed that                                                                    
in the  near-term, the department  was materially  high than                                                                    
what  it  predicted  in  the fall.  In  the  long-term,  the                                                                    
department  continued to  believe  that in  2028 the  market                                                                    
would be in the $75 range.                                                                                                      
                                                                                                                                
Commissioner  Fisher referenced  slide 21,  "PRICE FORECAST:                                                                    
Spring  2018 Forecast  compared  to  Prior Forecast,"  which                                                                    
showed  a   line  graph  entitled   "Real  Oil   Prices  and                                                                    
Forecasts."  He highlighted  the dotted  line which  was the                                                                    
fall  forecast  in  real  terms. The  dashed  line  was  the                                                                    
department's  spring forecast.  The department  continued to                                                                    
have  a long-term  view that,  in real  terms, oil  at about                                                                    
$63/bbl  worked  for the  world  economy.  There was  enough                                                                    
production to  meet demand in  real terms, and  Alaska would                                                                    
get there faster than the department expected in the fall.                                                                      
                                                                                                                                
Commissioner  Fisher turned  to slide  22, "PRICE  FORECAST:                                                                    
UGF Revenue Under Selected Price  Paths," which showed a set                                                                    
of   alternative    sensitivities   for    the   committee's                                                                    
consideration.  Under  each  forecast was  the  undesignated                                                                    
general funds (UGF) associated with  that forecast. He would                                                                    
not  review  all  of  the  numbers  but  thought  the  chart                                                                    
provided a perspective on what  the alternative cases looked                                                                    
like and their associated revenue impacts.                                                                                      
                                                                                                                                
9:46:38 AM                                                                                                                    
                                                                                                                                
Commissioner  Fisher  indicated  the  next  portion  of  the                                                                    
presentation was the cost forecast  which would be presented                                                                    
by Mr. Stickel.                                                                                                                 
                                                                                                                                
Mr. Stickel displayed slide 24,  "COST FORECAST: North Slope                                                                    
Capital Lease  Expenditures," which  showed the  North Slope                                                                    
capital  expenditure   forecast  for  the   spring  forecast                                                                    
compared  to the  fall  forecast. It  detailed  some of  the                                                                    
comments  made  earlier  in   the  presentation  about  cost                                                                    
reductions in the oil patch.  The department had reduced the                                                                    
capital  expenditure forecast  for  the  next several  years                                                                    
compared  to   the  fall  forecast.   There  were   2  large                                                                    
contributors.   One  was   continued   cost  reductions   by                                                                    
producers  on  the slope,  not  necessarily  a reduction  in                                                                    
activity by the producers. They  had been able to bring down                                                                    
costs  and  get  concessions  out of  some  of  the  service                                                                    
providers.  The   second  contributor  was  some   delay  in                                                                    
projects by the non-producers.  The department had seen very                                                                    
little activity  by non-producers in the  most recent winter                                                                    
compared to what the department  expected. One major example                                                                    
was  that the  Pikka unit  announced that  it cancelled  its                                                                    
drilling program  for the  following winter.  The department                                                                    
continued to forecast  that activity would pick  up again in                                                                    
FY 19 and beyond as reflected in the chart.                                                                                     
                                                                                                                                
Mr.  Stickel advanced  to slide  25,  "COST FORECAST:  North                                                                    
Slope Operating  Lease Expenditures," which showed  the same                                                                    
picture  for  operating  expenditures. There  was  a  slight                                                                    
reduction for  2018 and  2019 primarily due  to some  of the                                                                    
cost  reductions at  the  existing units  beyond  FY 19.  In                                                                    
FY 23 there  was an increase  in the  operating expenditures                                                                    
from  a little  under  $3  billion per  year  to about  $3.5                                                                    
billion per year  when some of the new  fields were expected                                                                    
to  come  online  including   Pikka,  Placer,  Mustang,  and                                                                    
Moose's Tooth.  Once those fields  came on line  there would                                                                    
be an increase in operating expenditures.                                                                                       
                                                                                                                                
Mr. Stickel  indicated that slide 26,  "COST FORECAST: North                                                                    
Slope Transportation  Costs," showed the largest  change the                                                                    
department  made   on  the  cost  forecast   from  the  fall                                                                    
forecast.  He  referenced  a  settlement  that  had  reduced                                                                    
tariff  rates by  about  $1/bbl.  He pointed  to  the FY  18                                                                    
tariff forecast  which included a  half-year of  the change.                                                                    
He  continued that  from  FY 19  and  beyond the  department                                                                    
reduced its transportation costs by  about $1/bbl. For FY 19                                                                    
the  transportation  cost change  resulted  in  about a  $46                                                                    
million  increase to  the revenue  forecast  versus what  it                                                                    
would have been under the old tariff cost forecast.                                                                             
                                                                                                                                
Co-Chair  MacKinnon  asked who  the  developer  was for  the                                                                    
Pikka project.                                                                                                                  
                                                                                                                                
Mr.  Stickel stated  that the  operator  was Armstrong.  His                                                                    
understanding was that the  operatorship was transferring to                                                                    
Oil Search sometime in the current month.                                                                                       
                                                                                                                                
Co-Chair MacKinnon asked  if the state's failure  to pay the                                                                    
tax credits had possibly impacted the operator.                                                                                 
                                                                                                                                
Mr. Stickel  thought it  was reasonable  to assume  that the                                                                    
lack of tax credit payments  was somehow associated with the                                                                    
reduced activity during most recent fiscal year.                                                                                
                                                                                                                                
9:50:55 AM                                                                                                                    
                                                                                                                                
Mr.  Stickel moved  to slide  28, "Explanation  of Statutory                                                                    
Appropriation":                                                                                                                 
                                                                                                                                
     ? Statutory guidance in AS 43.55.028                                                                                       
          ?  Appropriation is  10 or  15  percent of  "taxes                                                                    
          levied by AS 43.55.011"                                                                                               
     ? Department calculates statutory appropriation based                                                                      
    on production tax before application of any credits                                                                         
     ? Credits are not set out in AS 43.55.011, therefore                                                                       
     department adopted an interpretation based on tax                                                                          
     before credits                                                                                                             
          ? Calculated and provided  to Legislature in 2015-                                                                    
          2018 sessions                                                                                                         
          ? Published in RSB beginning fall 2016                                                                                
          ?  Incorporated into  Governor's budget  beginning                                                                    
          2017                                                                                                                  
     ? Legislative Legal opinion: "ambiguous" as to whether                                                                     
     to calculate on tax before or after credits                                                                                
          ?  Court  precedent  to  interpret  ambiguous  tax                                                                    
          statute in favor of taxpayer                                                                                          
          ? Department was aware that  credits had been used                                                                    
          to  secure loans  and finance  projects; awareness                                                                    
          influenced interpretation favoring taxpayer                                                                           
          ?  Interpretation consistent  with  spirit of  the                                                                    
          program  and  intent   of  legislature  to  market                                                                    
          Alaska  resource  development with  commitment  to                                                                    
         pay credits within a short-term timeline                                                                               
                                                                                                                                
Mr.  Stickel  reported  the department  receiving  questions                                                                    
about the  statutory appropriation,  how it  was calculated,                                                                    
and why. He  relayed that Alaska Statute  (AS) 43.55.028 was                                                                    
the section  of the production tax  statutes that referenced                                                                    
tax   credits.  There   were   several  subsections   within                                                                    
AS.43.55.  The  tax  credit  guidance  mentioned  either  10                                                                    
percent or  15 percent  of taxes  levied under  AS 43.55.011                                                                    
for the statutory appropriation.  He continued that when the                                                                    
state's price forecast was $60  or greater it was 10 percent                                                                    
of the taxes,  and when the price forecast was  below $60 it                                                                    
was  15 percent  of the  taxes. He  explained that  when the                                                                    
department   was  looking   at   it  a   few  years   prior,                                                                    
AS 43.55.011 laid  out the production tax  calculation - the                                                                    
minimum tax or the 35 percent net profits tax.                                                                                  
                                                                                                                                
Mr.  Stickel  continued  that  other  sections  of  statute,                                                                    
particularly  AS 43.55.023, AS 43.55.025,  and AS 43.55.025,                                                                    
laid   out   the   different   credits.   The   department's                                                                    
interpretation was to  calculate the statutory appropriation                                                                    
based on  the production tax before  credits in AS 43.55.011                                                                    
because  there  were no  credits  out  of AS 43.55.011.  The                                                                    
department had  provided the information to  the legislature                                                                    
and  the administration  beginning in  2015. The  department                                                                    
had  published the  statutory appropriation  in the  Revenue                                                                    
Sources Book beginning in Fall  2016 and it was incorporated                                                                    
into  the 2017  governor's proposed  budget. There  had been                                                                    
some  question as  to whether  the  appropriation should  be                                                                    
based  on  tax before  or  after  credits. The  department's                                                                    
understanding  was  that  there   was  a  Legislative  Legal                                                                    
Services Opinion  that the statutory guidance  was ambiguous                                                                    
and precedent.  The department thought the  best practice of                                                                    
interpreting  such  an ambiguous  statute  would  be in  the                                                                    
benefit of the tax payer.                                                                                                       
                                                                                                                                
Co-Chair  MacKinnon   asked  if  the   department's  current                                                                    
calculation  was  consistent  with  past  calculations.  She                                                                    
would  be supporting  the accepted  practice  that had  been                                                                    
used  versus  recalculating  a percentage  based  on  a  new                                                                    
interpretation.   She   thought   that,   although   a   new                                                                    
calculation could  be valid,  it should  be introduced  in a                                                                    
piece of  legislation changing  statute, rather  than trying                                                                    
to rewrite it on the fly.                                                                                                       
                                                                                                                                
Senator   Micciche   wondered    if   the   administration's                                                                    
consistent opinion was to calculate the tax before credits.                                                                     
                                                                                                                                
Commissioner Fisher responded  affirmatively. He stated that                                                                    
the administration had consistently  taken that position. He                                                                    
thought that  until the  current year, it  had been  the way                                                                    
the legislature talked about the  subject. He suggested that                                                                    
the  governor's  proposed   tax  credit  legislation  (which                                                                    
proposed to bond  in order to pay tax  credits) assumed that                                                                    
the calculation  was based  on the  tax before  credits. The                                                                    
administration believed  that the right  thing to do  was to                                                                    
maintain  the current  interpretation because  it was  right                                                                    
and because  it had been  relied upon by industry  and would                                                                    
be the  least disruptive  to industry  to continue  with the                                                                    
administration's interpretation.                                                                                                
                                                                                                                                
9:55:30 AM                                                                                                                    
                                                                                                                                
Senator  Micciche assumed  there was  significant amount  of                                                                    
weight  based   on  the  court  precedent   of  interpreting                                                                    
ambiguous  tax statute  in favor  of  the tax  payer in  the                                                                    
past. He asked if he was accurate.                                                                                              
                                                                                                                                
Commissioner Fisher concurred. He  added that there was some                                                                    
deference given to the department  assigned to interpret the                                                                    
statute. He  believed both weighed  in favor  of maintaining                                                                    
the status quo.                                                                                                                 
                                                                                                                                
Co-Chair   MacKinnon   reminded   the  audience   that   the                                                                    
legislature was bicameral, and the  other body had drafted a                                                                    
new interpretation of the number  the state should currently                                                                    
pay  for  tax   credits.  As  a  result,   it  was  creating                                                                    
instability  and uncertainty  in an  industry whose  revenue                                                                    
greatly affected  Alaska. she understood not  wanting to pay                                                                    
the state's bills,  but she did not support  not paying what                                                                    
the State of Alaska owed.                                                                                                       
                                                                                                                                
Mr.  Stickel spoke  to slide  29, "Illustration  of Tax  and                                                                    
Credit  Calculations,"  which   showed  how  the  department                                                                    
arrived  at  its  statutory appropriation  calculation.  The                                                                    
department was estimating the appropriation  for FY 19 to be                                                                    
$184  million  which  consisted  of  primarily  North  Slope                                                                    
production.  It  also  included some  calculation  for  Cook                                                                    
Inlet  and private  land owner  royalties. The  slide showed                                                                    
the  calculation for  the  North Slope  oil  portion of  the                                                                    
statutory  appropriation. He  highlighted the  estimated per                                                                    
barrel  tax of  about $1.65  billion at  the 35  percent tax                                                                    
rate before application of the  per barrel credit. At the 10                                                                    
percent rate the FY 19  appropriation would be $165 million.                                                                    
If  Cook  Inlet and  some  smaller  pieces were  added,  the                                                                    
amount would total $184 million.                                                                                                
                                                                                                                                
Co-Chair MacKinnon  asked if any  of the unpaid  tax credits                                                                    
were owed to  the largest three oil  companies. She referred                                                                    
to her earlier question regarding  the Pikka project and the                                                                    
state not living  up to past obligations  of planned payment                                                                    
history.                                                                                                                        
                                                                                                                                
Mr.  Stickel replied  that the  credit statutes  stated that                                                                    
only  companies  with  less   than  50,000  barrels  of  oil                                                                    
equivalent per  day production qualified for  state purchase                                                                    
of credits.  He confirmed that  the big three  oil companies                                                                    
did not qualify.                                                                                                                
                                                                                                                                
Co-Chair  MacKinnon opined  that the  Senate was  belaboring                                                                    
the  subject because  the investment  in paying  the state's                                                                    
obligation  increased production.  She continued  that while                                                                    
she watched  some projects languish,  they did not  have the                                                                    
capital  to move  forward. Producers  had anticipated  being                                                                    
paid based on  Alaska's previous ability to  pay 100 percent                                                                    
of  its tax  credit obligation  in a  given year.  The state                                                                    
fell  back  to  the   statutory  interpretation,  which  she                                                                    
thought   was  understandable   given  the   current  fiscal                                                                    
situation. The new calculation created instability.                                                                             
                                                                                                                                
Senator  von   Imhof  commented  that  initially   when  the                                                                    
governor's budget  came out in  the prior December,  the tax                                                                    
credit payment was  estimated to be about  $206 million. She                                                                    
noticed  $184  million in  the  footnote  on the  slide  and                                                                    
wondered if it was a new number.                                                                                                
                                                                                                                                
Mr. Stickel answered  in the affirmative and  added that the                                                                    
following slide  provided greater detail on  the change from                                                                    
$206 million to $184 million.                                                                                                   
                                                                                                                                
Mr.  Stickel reviewed  slide 30,  "FY 2019  Statutory Credit                                                                    
Appropriation":                                                                                                                 
                                                                                                                                
     Key Changes from Fall 2017 to Spring 2018:                                                                                 
     ? Gross value increased                                                                                                    
          ? $7 higher wellhead value .notdef $1.2 billion higher                                                              
          gross value                                                                                                           
     ? Tax before credits increased                                                                                             
          ? $1.2 billion more profit x 35% = $400 million                                                                       
     ? Different Statutory Appropriation Multiplier                                                                             
          ? Appropriation is 15% of tax before credits when                                                                     
          price forecast <$60, 10%when price forecast is                                                                        
          $60+                                                                                                                  
    ? Estimated Statutory Appropriation is $184 million                                                                         
          ? Down from $206 million in Fall 2017                                                                                 
          ? Based on tax before credits for North Slope                                                                         
          plus Cook Inlet and private landowner royalty                                                                         
                                                                                                                                
Mr. Stickel  relayed that the  slide addressed  the question                                                                    
of why  the department  changed the  statutory appropriation                                                                    
estimate.  He  explained that  with  higher  oil prices  and                                                                    
lower costs, the department estimated  about $1.2 billion of                                                                    
increased  value for  FY 19  versus what  it had  previously                                                                    
forecasted. The  amount was about $400  million in increased                                                                    
tax  before  applying  credits   at  the  35  percent  rate.                                                                    
However, although  the profit increased, the  department was                                                                    
using a 10 percent rather  than a 15 percent multiplier. The                                                                    
multiplier change had to do  with the $60 threshold that had                                                                    
been  discussed earlier.  The price  forecast had  gone from                                                                    
the  high $50  range  up to  $63 and  using  the 10  percent                                                                    
multiplier.  Therefore,  the   statutory  appropriation  was                                                                    
slightly less than the fall forecast.                                                                                           
                                                                                                                                
10:00:57 AM                                                                                                                   
                                                                                                                                
Senator  Micciche  was  curious if  the  administration  was                                                                    
pushing the  tax credit bonding  bill conveying  the effects                                                                    
of it over the following several years.                                                                                         
                                                                                                                                
Commissioner Fisher stated  that the bill was  a priority of                                                                    
the  administration. He  spent more  of his  time trying  to                                                                    
advance the  tax credit  bill than  most other  subjects. He                                                                    
thought that  the bill made  sense for the industry  and for                                                                    
Alaskans. Essentially, the state was  paying for the cost of                                                                    
the  bonds through  a  discount that  the  producers or  the                                                                    
credit holders  were willing  to accept.  The administration                                                                    
saw the  bill as a  win-win. It  would put Alaskans  back to                                                                    
work  and   bring  additional  production  on   line  sooner                                                                    
bringing  in  additional royalty  and  tax  revenue for  the                                                                    
state.  He thought  that the  administration had  been clear                                                                    
with credit holders  that the fall forecast  would change in                                                                    
the  spring, and  the change  would  potentially impact  the                                                                    
offer that  was made under  the proposed bill.  He indicated                                                                    
that the department would have  to redo the calculation with                                                                    
the new  numbers. He  noted the  department had  shared with                                                                    
credit  holders  the expected  discount  based  on the  fall                                                                    
forecast. The department would  provide the updated discount                                                                    
amount once  the calculations were  done again.  He believed                                                                    
that producers  would continue to  see significant  value in                                                                    
the proposal. The  forecast did not change  his interest and                                                                    
the  administration's  interest  in  seeing  the  bill  move                                                                    
forward.                                                                                                                        
                                                                                                                                
Co-Chair  Hoffman  asked,  as   chairman  of  the  operating                                                                    
budget, how he  should proceed should he  continue to follow                                                                    
the governor's  path. He asked  the commissioner if  he felt                                                                    
he was making headway in  convincing the legislature to pass                                                                    
the bill.                                                                                                                       
                                                                                                                                
Commissioner  Fisher was  concerned about  the bill,  as the                                                                    
House had  not scheduled  a hearing yet.  He could  not give                                                                    
Co-Chair Hoffman assurance that the  bill would pass. If the                                                                    
bill  did  not  pass,   it  would  be  the  administration's                                                                    
position   that  the   legislature  should   appropriate  an                                                                    
additional  $147  million.  There  was $27  million  in  the                                                                    
current budget to cover interest costs.                                                                                         
                                                                                                                                
Co-Chair Hoffman asked,  with less than 30 days  left of the                                                                    
90-day  session,  when the  commissioner  would  be able  to                                                                    
determine  the success  or failure  of  the legislation.  He                                                                    
thought it was  necessary to know that  information in order                                                                    
to  move  forward  with  the budget  process.  He  asked  if                                                                    
leaving $27  million as the  only payment was an  option. He                                                                    
wondered,   if  the   bill  did   not   pass,  whether   the                                                                    
administration planned  to submit a supplemental  request in                                                                    
the following year.                                                                                                             
                                                                                                                                
Commissioner Fisher  hoped that there would  be more clarity                                                                    
in the  following two weeks. His  goal would be to  see that                                                                    
the budget  was either the  full amount of $184  million, or                                                                    
$27 million  with the  bill passed. He  thought it  would be                                                                    
harmful  to the  industry and  Alaska's economy  to delay  a                                                                    
decision until a supplemental appropriation was approved.                                                                       
                                                                                                                                
10:06:05 AM                                                                                                                   
                                                                                                                                
Co-Chair Hoffman thought  the House was scheduled  to act in                                                                    
the immediate future - in  the current or following week. He                                                                    
believed the  commissioner's timeline was stretched  out too                                                                    
far.                                                                                                                            
                                                                                                                                
Co-Chair MacKinnon suggested that  the committee might glean                                                                    
whether  the  House   intended  to  act  on   the  piece  of                                                                    
legislation  based on  the operating  budget  that was  sent                                                                    
over to  the Senate. She thought  if the House sent  over an                                                                    
operating budget  with only $27  million in it, it  might be                                                                    
fair to  assume that they would  be passing a bill.  She did                                                                    
not look  favorably at tying pieces  of legislation together                                                                    
as a  way of passing  other legislation. She hoped  that all                                                                    
legislators would  do what was  best for Alaska  rather than                                                                    
playing  games with  pieces of  legislation. She  found that                                                                    
the Senate  would do what  was right  by stepping up  to pay                                                                    
the  state's obligations  based  on what  was  owed and  the                                                                    
Alaska  State Statute.  She looked  forward to  negotiations                                                                    
with the  other body  and their concerns.  She was  aware of                                                                    
several  concerns  by the  House.  She  hoped that  everyone                                                                    
would work together.                                                                                                            
                                                                                                                                
Senator Micciche  thought it  was unlikely  that one  of the                                                                    
major  companies would  repurchase the  credits being  above                                                                    
the minimum tax  in the current price range. He  asked if he                                                                    
was correct.                                                                                                                    
                                                                                                                                
Commissioner Fisher  stated that Senator  Micciche's comment                                                                    
was largely correct.  At the current price  point, the major                                                                    
companies were  paying the tax  at the  alternative minimum.                                                                    
The credits  would not allow  them to go below  the minimum.                                                                    
They  did not  see value  to purchasing  the credits  at the                                                                    
present  time. He  noted that  Mr. Stickel  had mentioned  a                                                                    
settlement  around the  Trans-Alaska Pipeline  System (TAPS)                                                                    
litigation.  There would  be  some  additional liability  on                                                                    
behalf of  the major  companies of  about $150  million. The                                                                    
department anticipated  that the  major companies  might buy                                                                    
between $100  mill and  $125 million  in credits.  The state                                                                    
had about $800 million  of outstanding credits presently and                                                                    
anticipated  another  $200 million  in  the  next couple  of                                                                    
years.  In  the  scheme  of   things,  the  major  companies                                                                    
purchasing  $125  million  in  credits did  not  change  the                                                                    
dynamic for the state or the industry.                                                                                          
                                                                                                                                
Senator Micciche  referenced peripheral revenue  changes the                                                                    
legislature  made over  the previous  several years.  He did                                                                    
not  have any  desire to  change oil  taxes further,  as the                                                                    
legislature  had made  some  significant changes,  including                                                                    
the  minimum  tax. There  were  several  different ways  the                                                                    
state  benefited from  the minimum  tax  change. He  thought                                                                    
there had been a diversification  of revenues, some of which                                                                    
were more peripheral than others.                                                                                               
                                                                                                                                
Commissioner  Fisher  asked  the  senator  to  rephrase  his                                                                    
question.                                                                                                                       
                                                                                                                                
Senator   Micciche   reiterated   that   the   changes   the                                                                    
legislature  made to  the  Cook Inlet  and  the North  Slope                                                                    
credit program  and the change  to the minimum  tax provided                                                                    
other  peripheral revenue  advantages  that  were not  often                                                                    
highlighted by the news or  talked about amongst the public.                                                                    
He  argued that  the legislature  had made  some significant                                                                    
differences that were not realized.                                                                                             
                                                                                                                                
Commissioner  Fisher thought  the senator  was accurate.  He                                                                    
worried about the amount of  change that had occurred in the                                                                    
industry.  It  was difficult  for  businesses  to plan  when                                                                    
there was a high degree of structural change.                                                                                   
                                                                                                                                
10:11:00 AM                                                                                                                   
                                                                                                                                
Mr.   Stickel  referenced   slide  31,   "CREDITS  FORECAST:                                                                    
Outstanding  Tax Credit  Obligations,"  which  showed a  bar                                                                    
graph  entitled "Ending  balance  of  credits available  for                                                                    
repurchase, assuming statutory  appropriation for FY 2019+."                                                                    
He explained the  slide showed a status quo view  of how the                                                                    
department saw  the next several  years playing out.  If the                                                                    
legislature  made the  statutory  appropriation each  fiscal                                                                    
year  but  did   not  pass  the  bond   purchase  bill,  the                                                                    
department  estimated  about  $946 million  of  tax  credits                                                                    
available  for  state  purchase  in FY  19  and  beyond.  He                                                                    
continued that  the department  estimated that  $125 million                                                                    
would be purchased by the  major producers to offset some of                                                                    
the  TAPS related  liabilities for  previous calendar  years                                                                    
leaving a balance  of $821 million of  credits available for                                                                    
state  purchase. If  the  statutory  appropriation was  made                                                                    
each year, under  the scenario on the slide,  the balance of                                                                    
credits would be exhausted in FY 23.                                                                                            
                                                                                                                                
Commissioner  Fisher  would  discuss  the  revenue  forecast                                                                    
specifically in the following portion of the presentation.                                                                      
                                                                                                                                
Vice-Chair Bishop  referred back  to slide  4. He  noted the                                                                    
production  curve compared  to  the rest  of  the world.  He                                                                    
advocated  getting the  state's  debt paid  off  as soon  as                                                                    
possible in order to keep  production increasing rather than                                                                    
decreasing. He believed production  was the key to capturing                                                                    
high prices.                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  noted that  it  also  added 25  percent                                                                    
royalty at  a minimum, if  not 33  percent to the  corpus of                                                                    
the Permanent  Fund which would  help in Alaska's  future to                                                                    
ensure  a dividend  could be  paid under  whatever statutory                                                                    
language the state wound up with  when the state came out of                                                                    
the current  fiscal situation. She  was aware of  people who                                                                    
believed the state should not pay  its bills if it could not                                                                    
pay  a  full dividend.  However,  looking  at the  long-term                                                                    
picture, she argued  that the way the  legislature ensured a                                                                    
long-term dividend  was to  ensure that  there was  money in                                                                    
the  Earnings  Reserve  Account (ERA),  the  corpus  of  the                                                                    
Permanent  Fund  continued  to  grow,  and  the  corpus  was                                                                    
inflation-proofed  over  time.  The Senate  had  passed  two                                                                    
different pieces of legislation to  ensure the future of the                                                                    
dividend  to Alaskans  and  to move  through  paying of  the                                                                    
state's obligations.                                                                                                            
                                                                                                                                
10:14:43 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher  turned to  slide 33,  "FORECAST CHANGE:                                                                    
Comparison of  Spring 2018 and  Fall 2017  Forecasts," which                                                                    
showed a  table showing the  changes between the  spring and                                                                    
fall  forecast in  terms of  oil price,  production, leases,                                                                    
and transportation  costs. It  also depicted  the difference                                                                    
in terms of UGF petroleum revenue.                                                                                              
                                                                                                                                
Commissioner  Fisher displayed  slide 34,  "UGF Relative  to                                                                    
Price per  Barrel, FY 2019,"  which showed a  helpful chart.                                                                    
The chart allowed observers to  think about what happened to                                                                    
UGF revenues as  the price of oil changed. He  noted that it                                                                    
was  interesting  that  the  state's   forecast  was  at  an                                                                    
inflection point. He considered  that for every $1 increase,                                                                    
the  state  would  receive   approximately  $75  million  of                                                                    
additional revenue.  Conversely, for every $1  decrease, the                                                                    
state  would receive  about  $30 less.  The  reason for  the                                                                    
difference in numbers  was because at $63  companies were at                                                                    
their  inflection  point  between  a  profits  tax  and  the                                                                    
minimum  tax. The  math was  slightly different.  Below that                                                                    
price point a change resulted  in about a $30 million change                                                                    
in revenue. Above the amount it was about $75 million.                                                                          
                                                                                                                                
Commissioner Fisher referenced  slide 36, "REVENUE FORECAST:                                                                    
2017  to 2019  Totals," which  showed the  revenue forecasts                                                                    
between FY  17, FY 18,  and FY 19.  He pointed to  the table                                                                    
with a  high-level view. The unrestricted  general funds had                                                                    
grown about $1  billion between FY 17 and FY  18 then a much                                                                    
more modest growth. He pointed  out the big difference under                                                                    
'Other  Revenue,'  where  the department's  assumptions  had                                                                    
declined  largely   driven  by  the  change   of  investment                                                                    
revenue.   He  mentioned   that  the   Permanent  Fund   had                                                                    
experienced  a  very  strong  year  in FY  17  in  terms  of                                                                    
returns. He continued that FY  18 assumed 8 months of actual                                                                    
returns and  an expected return of  6 percent in the  last 4                                                                    
months  of  the  year.  He  reported that  FY  19  was  more                                                                    
consistent with the long-range PF  assumption of 6.5 percent                                                                    
return on investment.                                                                                                           
                                                                                                                                
10:17:56 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher reviewed slide  37, "WRAP-UP: Changes to                                                                    
10-Year  Unrestricted  Revenue  Outlook," which  showed  how                                                                    
production,  price,  and  UGF  had  changed  from  the  fall                                                                    
forecast  to the  current spring  forecast.  He pointed  out                                                                    
that for FY  18 the department was predicting  a little over                                                                    
$250 million  of additional revenue.  From FY 19  and beyond                                                                    
revenue  leveled  out  to  about  $200  million.  The  chart                                                                    
provided a  sense of  the additional  revenue that  would be                                                                    
available  for  the  state.  He did  not  believe  that  the                                                                    
increase would completely address  the fiscal challenges the                                                                    
state faced  without other measures,  but thought  the state                                                                    
was moving in the right direction.                                                                                              
                                                                                                                                
Co-Chair MacKinnon agreed  that the state was  moving in the                                                                    
right  direction. She  noted  additional  revenue, a  slight                                                                    
decline   in   production,    reduced   operating   expenses                                                                    
benefiting  the   transportation  charges  along   with  the                                                                    
lawsuit mentioned.  She thought  the department  had brought                                                                    
positive news  since the prior  forecast. She  surmised that                                                                    
the  legislature  had  challenging   times  ahead  for  both                                                                    
legislative  bodies  to  reach an  agreement  in  addressing                                                                    
Alaska's  fiscal challenges.  However, she  opined that  the                                                                    
state  had the  means  to  take care  of  itself should  the                                                                    
legislature  choose to  act. She  thought several  years ago                                                                    
the  Senate's message  was  that  it was  time  to act.  She                                                                    
believed  the same  was true  presently. She  professed that                                                                    
the sooner the legislature acted,  the safer and more secure                                                                    
the remaining reserves would be  to produce interest to help                                                                    
close the fiscal gap.                                                                                                           
                                                                                                                                
Vice-Chair Bishop  complimented the administration  for its'                                                                    
comprehensive overview.                                                                                                         
                                                                                                                                
Co-Chair  MacKinnon concurred  with  Vice-Chair Bishop.  She                                                                    
appreciated the  timing of the  forecast, as it  allowed the                                                                    
legislature to use it in consideration of the budget.                                                                           
                                                                                                                                
Co-Chair MacKinnon discussed the agenda for the following                                                                       
day.                                                                                                                            
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
10:21:22 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:21 a.m.                                                                                         

Document Name Date/Time Subjects
031918 Spring 2018 Revenue Forecast Presentation_03162018.pdf SFIN 3/19/2018 9:00:00 AM
DOR Spring Revenue Forecast 2018
031918 DOR Response to Senate Finance_20180330.pdf SFIN 3/19/2018 9:00:00 AM
Spring Revenue Forecast 2018
031918 Analyst Brent Price Forecast Backup_V2.pdf SFIN 3/19/2018 9:00:00 AM
Spring Revenue Forecast 2018