Legislature(2019 - 2020)SENATE FINANCE 532

01/16/2019 09:00 AM FINANCE

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Audio Topic
09:05:54 AM Start
09:05:54 AM Presentation: Committee Organization/introduction of Members and Staff
09:24:47 AM Presentation: Department of Revenue, Revenue Forecast
10:43:01 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Committee Organization/Introduction of Members & TELECONFERENCED
Staff
+ Dept. of Revenue, Revenue Forecast TELECONFERENCED
- Commissioner Bruce Tangeman
-- Presenters Below Postponed to 1/17/19 --
+ Dept. of Natural Resources: Production Forecast TELECONFERENCED
- Commissioner Corri Feige
- Division of O&G, Director Chantal Walsh &
Commercial Analyst Pascal Umekwe
                  SENATE FINANCE COMMITTEE                                                                                      
                      January 16, 2019                                                                                          
                          9:05 a.m.                                                                                             
                                                                                                                                
9:05:54 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:05 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator Cathy  Giessel; Senator Mia Costello;  Senator Chris                                                                    
Birch;  Senator  Shelley  Hughes;  David  Teal,  Legislative                                                                    
Finance Director; Senator  Lora Reinbold; Representative Ben                                                                    
Carpenter;  Bruce  Tangeman,   Commissioner,  Department  of                                                                    
Revenue; Ed King, Chief Economist,  Office of Management and                                                                    
Budget;  Dan  Stickel,  Chief Economist,  Economic  Research                                                                    
Group, Tax Division, Department  of Revenue; Colleen Glover,                                                                    
Director,  Tax  Division,  Department  of  Revenue;  Doniece                                                                    
Gott, Committee  Assistant to the Senate  Finance Committee,                                                                    
Legislative Finance Division.                                                                                                   
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION:    COMMITTEE   ORGANIZATION/INTRODUCTION    OF                                                                    
MEMBERS and STAFF                                                                                                               
                                                                                                                                
PRESENTATION: DEPARTMENT OF REVENUE, REVENUE FORECAST                                                                           
                                                                                                                                
^PRESENTATION:   COMMITTEE    ORGANIZATION/INTRODUCTION   OF                                                                  
MEMBERS and STAFF                                                                                                             
                                                                                                                                
9:05:54 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman noted  that the  committee table  had been                                                                    
extended to  accommodate the larger  size of  the committee.                                                                    
He  reminded members  and those  in the  gallery to  silence                                                                    
cell phones. He introduced the committee members.                                                                               
                                                                                                                                
Co-Chair  Stedman  explained  that the  committee  had  been                                                                    
increased  [from   seven  to  nine   members]  due   to  the                                                                    
complexity of  budget issues facing the  state. He commented                                                                    
on  the geographic  diversity of  the committee  members. He                                                                    
relayed that subcommittee work would  be assigned to members                                                                    
over  the following  several  days.  He acknowledged  Senate                                                                    
President  Cathy  Giessel,  Senator  Mia  Costello,  Senator                                                                    
Chris Birch, and Senator Shelley Hughes in the audience.                                                                        
                                                                                                                                
9:08:40 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman introduced his staff.                                                                                          
                                                                                                                                
Co-Chair von Imhof introduced her staff.                                                                                        
                                                                                                                                
Senator Bishop introduced his staff.                                                                                            
                                                                                                                                
Senator Wilson introduced his staff.                                                                                            
                                                                                                                                
Senator Olson introduced his staff.                                                                                             
                                                                                                                                
Senator Micciche introduced his staff.                                                                                          
                                                                                                                                
Senator Hoffman introduced himself and his staff.                                                                               
                                                                                                                                
Senator Shower introduced his staff.                                                                                            
                                                                                                                                
Senator Wielechowski introduced his staff.                                                                                      
                                                                                                                                
9:12:54 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman discussed  the function  of the  committee                                                                    
and  the   hiring  of  staff.   He  reported   that  finance                                                                    
information  would be  available  to all  members and  their                                                                    
staff  regardless of  party affiliation.  He introduced  the                                                                    
committee support staff.                                                                                                        
                                                                                                                                
DONIECE  GOTT, COMMITTEE  ASSISTANT  TO  THE SENATE  FINANCE                                                                    
COMMITTEE, LEGISLATIVE FINANCE  DIVISION, introduced herself                                                                    
and staff.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman discussed  committee decorum  and reminded                                                                    
the committee that  the passing of notes to  members must be                                                                    
done through the committee page.                                                                                                
                                                                                                                                
9:16:10 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  discussed  the role  of  the  Legislative                                                                    
Finance Division (LFD).                                                                                                         
                                                                                                                                
DAVID   TEAL,  LEGISLATIVE   FINANCE  DIRECTOR,   introduced                                                                    
himself  and discussed  the  role of  LFD.  He reminded  the                                                                    
committee  that  the  division   was  nonpartisan.  The  LFD                                                                    
analysts in the room introduced themselves.                                                                                     
                                                                                                                                
9:18:33 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman continued to  discuss committee decorum. He                                                                    
informed the committee that he  would be sending a letter to                                                                    
members to  relay information about committee  functions. He                                                                    
would endeavor to  give time to each member  with a question                                                                    
during   meetings,  while   conserving  the   time  of   the                                                                    
committee. He  strove to keep topics  moving without lengthy                                                                    
debate  that did  not work  towards resolution.  He did  not                                                                    
support delay  tactics or  political maneuvering.  He wanted                                                                    
to  ensure that  all members  had the  same information  and                                                                    
received  answers  to  questions.  He used  the  example  of                                                                    
information distributed by LFD.                                                                                                 
                                                                                                                                
Co-Chair  Stedman highlighted  that each  member had  a live                                                                    
microphone and  asked that everyone speak  clearly. He asked                                                                    
that members  not eat at  the committee table.  He suggested                                                                    
it was possible  to pass a note to the  chairman if a member                                                                    
needed to leave the room for any length of time.                                                                                
                                                                                                                                
9:22:17 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman continued to  discuss committee decorum and                                                                    
asked  that  members  refrain  from  reading  newspapers  or                                                                    
magazines at the table. He  asked that members be respectful                                                                    
of public  testimony. He requested  that members  leave cell                                                                    
phones in their offices.                                                                                                        
                                                                                                                                
Co-Chair  Stedman reported  that the  Department of  Natural                                                                    
Resources   presentation  had   been  rescheduled   for  the                                                                    
following day due to weather delays.                                                                                            
                                                                                                                                
^PRESENTATION: DEPARTMENT OF REVENUE, REVENUE FORECAST                                                                        
                                                                                                                                
9:24:47 AM                                                                                                                    
                                                                                                                                
BRUCE   TANGEMAN,  COMMISSIONER,   DEPARTMENT  OF   REVENUE,                                                                    
discussed  the  presentation  "Fall 2018  Revenue  Forecast"                                                                    
(copy  on file).  He  thought it  was  appropriate that  the                                                                    
first  committee discussion  of the  year was  pertaining to                                                                    
revenue. He remarked Governor  Michael Dunleavy was pursuing                                                                    
a  different  approach  to  the   budget  that  would  match                                                                    
expenditures to revenues.                                                                                                       
                                                                                                                                
Commissioner Tangeman  referenced the Revenue  Sources Book,                                                                    
a  non-partisan document  that  showed  the state's  revenue                                                                    
streams. He  noted that oil  revenue was one of  the largest                                                                    
drivers, several other revenue  sources were detailed in the                                                                    
book.  He  highlighted  that  Chapter  3  of  the  book  was                                                                    
informational and included a different  focus each year; the                                                                    
chapter  in  the  current publication  included  a  timeline                                                                    
showing  60  years  of  revenue from  1959  to  2018.  Other                                                                    
chapters included petroleum  revenue, non-petroleum revenue,                                                                    
federal   revenue,   investment  revenue,   credits,   state                                                                    
endowment  funds, and  public entities.  He  added that  the                                                                    
book was available online.                                                                                                      
                                                                                                                                
Co-Chair  Stedman  asked  that  the  presenter  avoid  using                                                                    
acronyms so those listening from  home could understand what                                                                    
was being discussed.                                                                                                            
                                                                                                                                
Commissioner  Tangeman  continued   discussing  the  Revenue                                                                    
Sources Book.  He reported that  the book had  been produced                                                                    
for many  years. He  noted that  he had  knowledgeable staff                                                                    
with him that could expand on committee questions.                                                                              
                                                                                                                                
9:28:16 AM                                                                                                                    
                                                                                                                                
Commissioner Tangeman  began with  a revenue  forecast table                                                                    
on  slide 3,  "REVENUE FORECAST:  2018 to  2020 Totals."  He                                                                    
drew attention to unrestricted general  fund (UGF) listed at                                                                    
the top of the table. He  noted that historically [in FY 18]                                                                    
oil revenue  had been  $1.9 billion;  the forecast  was $2.2                                                                    
billion for FY 19 and $1.7  billion for FY 20. He noted that                                                                    
the  oil price  was  the  primary driver.  He  spoke to  the                                                                    
fluctuations in oil price over  the years and recent months.                                                                    
The year  to date price  was currently over $70  per barrel,                                                                    
but the department  was officially forecasting a  FY 19 year                                                                    
end  price  of slightly  over  $67  per  barrel. The  FY  20                                                                    
forecast  was   $64  per  barrel.  He   noted  the  previous                                                                    
administration had originally anticipated  oil prices of $75                                                                    
per  barrel,  but due  to  large  fluctuations in  price  in                                                                    
October  through  December  [2018], the  new  administration                                                                    
believed  it was  more appropriate  to reduce  the forecast,                                                                    
especially through November.                                                                                                    
                                                                                                                                
Commissioner Tangeman  pointed to investment  earnings under                                                                    
the  UGF category,  which had  not been  shown in  the past.                                                                    
With  the  passage  of SB  26  [Permanent  Fund  legislation                                                                    
passed  in  2018]  including the  percent  of  market  value                                                                    
(POMV)  draw  from  the   Permanent  Fund  Earnings  Reserve                                                                    
Account   (ERA),  the   department  was   now  showing   the                                                                    
calculated amount  of investment earnings  for FY 19  and FY                                                                    
20. The calculation was currently  5.25 percent based on the                                                                    
ending balance  of the last five  years. Investment earnings                                                                    
was forecast at approximately $2.7  billion for FY 19 and $3                                                                    
billion for FY 20. The  slide also showed designated general                                                                    
funds  (DGF)   including  non-oil  revenue   and  investment                                                                    
earnings, which he noted were fairly stable.                                                                                    
                                                                                                                                
Commissioner  Tangeman stated  that other  than unrestricted                                                                    
oil  revenue, which  consisted of  production tax,  property                                                                    
tax,  corporate  income  tax,  the  department  also  showed                                                                    
excise  taxes (such  as tobacco,  marijuana, and  motor fuel                                                                    
taxes), royalties,  and federal revenues (which  were fairly                                                                    
consistent with DOR forecasts for FY 19 and FY 20).                                                                             
                                                                                                                                
9:31:56 AM                                                                                                                    
                                                                                                                                
Commissioner Tangeman  moved to  a table  on slide  4 titled                                                                    
"Unrestricted Petroleum Revenue Forecast:  2018 to 2020." He                                                                    
highlighted  petroleum  property  tax,  petroleum  corporate                                                                    
income tax,  and petroleum production tax.  The variation in                                                                    
petroleum corporate income tax in FY  18 through FY 20 was a                                                                    
result  of very  low  oil prices  from  several years  back,                                                                    
which  drove taxpayers  into net  operating loss  positions.                                                                    
The tax  revenue had stabilized  with oil prices of  $67 per                                                                    
barrel [in  FY 19] and  [the projected  FY 20 price  of] $64                                                                    
per  barrel,  which  would  increase  corporate  income  tax                                                                    
revenue.                                                                                                                        
                                                                                                                                
                                                                                                                                
Commissioner  Tangeman continued  to  discuss  slide 4,  and                                                                    
pointed out  the reduction in production  tax, primarily due                                                                    
to  oil   price.  He  noted  that   [Department  of  Natural                                                                    
Resources]  Commissioner   Corri  Feige  would   be  walking                                                                    
through   the  production   forecast  as   well.  He   noted                                                                    
excitement over  numerous oil plays (e.g.  Pikka and Willow)                                                                    
under  discussion.  He  explained  that  the  point  of  the                                                                    
production forecast was to risk  forecasts into the future -                                                                    
DOR was  hopeful but did  not want  to depend on  the fields                                                                    
starting on  a certain  date with  a certain  production and                                                                    
price. The  further out  the plays were,  the more  risk the                                                                    
state applied  in its forecast.  He noted  that Commissioner                                                                    
Feige could  provide further  detail. The  royalties section                                                                    
of the table included mineral  bonuses and rents, which were                                                                    
fairly stable; oil  and gas royalties (12.5  or 16.5 percent                                                                    
received by the state); and interest.                                                                                           
                                                                                                                                
9:34:14 AM                                                                                                                    
                                                                                                                                
ED KING,  CHIEF ECONOMIST, OFFICE OF  MANAGEMENT AND BUDGET,                                                                    
reviewed  a  graph  pertaining to  oil  market  movement  in                                                                    
relation to  DOR price forecasting  for FY 18 (slide  6). He                                                                    
explained  that  the  slide  showed  a  story  of  what  had                                                                    
occurred  over  the last  twelve  months.  In January  2018,                                                                    
prices had been fairly stable  around $65 to $70 per barrel.                                                                    
He noted that  the blue line represented  Brent crude prices                                                                    
and  the  white  line represented  West  Texas  Intermediate                                                                    
(WTI) prices. The graph showed  the differential between the                                                                    
two  market prices.  He detailed  that the  differential had                                                                    
been fairly  stable over the  past year, but there  had been                                                                    
substantial volatility.                                                                                                         
                                                                                                                                
Mr. King  referenced a decision  made by President  Trump in                                                                    
May  2018  to exit  the  Iran  nuclear  deal and  to  impose                                                                    
sanctions  on  Iran.  He  expounded that  at  the  time  the                                                                    
markets had  been trying  to figure  out how  supplies taken                                                                    
off  the  market would  be  introduced  into the  market  to                                                                    
satisfy global  demand. Consequently,  Saudi Arabia  and Oil                                                                    
Producing  and Exporting  Countries  (OPEC)  had decided  to                                                                    
increase   production;   however,  before   production   was                                                                    
increased the  market started to  react to the 1  million to                                                                    
1.5 million  barrels that would  come off the  market, which                                                                    
had resulted in  an increase in price. He  expounded that in                                                                    
late  summer/early fall  [of 2018]  oil prices  had exceeded                                                                    
$80  per  barrel, which  coincided  with  the time  DOR  had                                                                    
collected data  for its forecast  projection. He  noted that                                                                    
between January  and October, the  average price of  oil was                                                                    
in excess  of $70  to $75  per barrel,  while the  price was                                                                    
over $80  per barrel  when the  forecast had  been compiled.                                                                    
Immediately  after  the  forecast  had  been  compiled,  the                                                                    
waivers on  the Iran sanctions  had flooded the  market with                                                                    
production the market had anticipated  coming off, which had                                                                    
resulted a  slide in the  oil price. Oil prices  had dropped                                                                    
from  $85  per  barrel  in  early  October  to  $50  in  the                                                                    
beginning  of  January [2019].  He  believed  that with  the                                                                    
recent  events there  may have  been  an idea  that the  $64                                                                    
price looking forward  to FY 20 was  optimistic. He reported                                                                    
that oil prices  were currently about $60.50  per barrel. He                                                                    
noted the general idea was  that oil prices should be around                                                                    
that price, which  put into context the  price forecast into                                                                    
FY 20.                                                                                                                          
                                                                                                                                
9:37:57 AM                                                                                                                    
                                                                                                                                
Mr. King moved to slide  7 titled "PRICE FORECAST: Impact of                                                                    
Spare  Capacity:  Short  Term."  The slide  showed  a  chart                                                                    
titled  "World  Liquid   Fuels  Production  and  Consumption                                                                    
Balance,"  which  depicted  the supply  and  demand  balance                                                                    
[from 2013 to 2019 by  the Energy Information Agency (EIA)].                                                                    
He detailed that when supply  was above demand, prices fell,                                                                    
and when  demand was  above supply,  prices rise.  The chart                                                                    
showed that in  the past month supply had been  in excess of                                                                    
demand,  which  had put  downward  pressure  on prices.  The                                                                    
expectation  [of the  EIA] was  it would  take about  six to                                                                    
nine months  for the  supply glut to  clear and  that prices                                                                    
would  be suppressed  during that  time. Almost  immediately                                                                    
after  the  information  in the  chart  was  released,  OPEC                                                                    
decided to cut back on  fair production; therefore, the blue                                                                    
line  [representing  world  production]  shifted  down.  The                                                                    
shift  had resulted  in a  near balance  between supply  and                                                                    
demand, indicating that prices should be relatively stable.                                                                     
                                                                                                                                
Mr. King  continued that the  current $60 to $61  price felt                                                                    
like what prices should be.  He added that there were risks,                                                                    
especially  in the  next couple  of  months with  refineries                                                                    
turning over  to summer production. The  change would result                                                                    
in some inventory  builds that may put  downward pressure on                                                                    
price. Additionally,  there was  concern about  the accuracy                                                                    
of  the  demand  price;   therefore,  people  were  watching                                                                    
closely watching  earnings reports  as they were  coming out                                                                    
in the  current week. He communicated  that expectations had                                                                    
been  met  thus  far  and  the risk  had  not  yet  come  to                                                                    
fruition.  He believed  there should  be stability  over the                                                                    
next three  to six months  and moving forward  prices should                                                                    
be in the $65 range.                                                                                                            
                                                                                                                                
9:39:48 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof pointed to  slide 7 and remarked that the                                                                    
green bars showed the magnitude  of the difference in supply                                                                    
and  demand.  She  remarked   on  political  pressures  that                                                                    
impacted  oil price  via supply  and demand.  She noted  the                                                                    
slide  8 showed  the vast  difference in  opinions from  the                                                                    
world's best  analysts. She commended Mr.  King for arriving                                                                    
at the  $64 per barrel  oil price, which she  though sounded                                                                    
reasonable. She wondered about  the department's sources for                                                                    
global supply - she thought it would be the most accurate.                                                                      
                                                                                                                                
Mr. King pointed  out that the graph on slide  7 was updated                                                                    
every month by the EIA  and the current information had been                                                                    
released  the previous  day. He  detailed that  the market's                                                                    
projection  had changed  drastically  in the  past month  in                                                                    
response  to OPEC  coming back  on  production. He  asserted                                                                    
that it  was an  impossible task to  predict the  future. He                                                                    
explained that  everything occurring in the  marketplace was                                                                    
unpredictable.  The   best  that   could  be  done   was  to                                                                    
understand  the  nature  and   range  of  things  that  were                                                                    
predictable and things that were not.                                                                                           
                                                                                                                                
Co-Chair  Stedman  remarked  that the  legislature  expected                                                                    
commissioners to try to do the impossible task.                                                                                 
                                                                                                                                
9:42:19 AM                                                                                                                    
                                                                                                                                
Mr. King turned to slide  8, "PRICE FORECAST: Differences in                                                                    
Analyst  Forecasts," demonstrating  what analysts  looked at                                                                    
when considering  what oil prices  may do in the  future. He                                                                    
asserted that many  of the demand factors,  whether a person                                                                    
had  a  bullish or  bearish  opinion,  hinged on  what  they                                                                    
believed  would  happen  in   Asia.  He  explained  that  an                                                                    
increase in  personal wealth in  Asia, bringing  the ability                                                                    
to  travel and  own  a  car, increased  the  demand for  oil                                                                    
products. He elaborated that anyone  who believed oil prices                                                                    
would be  high also  believed there  would be  sustained and                                                                    
significant growth  in Asia.  Whereas, individuals  who were                                                                    
more bearish  about oil prices  tended to  believe sustained                                                                    
growth projections in Asia were over optimistic.                                                                                
                                                                                                                                
Mr. King discussed  supply on slide 8. The  big factors were                                                                    
what  was   taking  place   with  U.S.   midcontinent  shale                                                                    
producers and what  the marginal costs of  bringing oil into                                                                    
production were. He elaborated  that other factors impacting                                                                    
supply were  typically geopolitical. The Canadian  aspect on                                                                    
the chart related to heavy  oil that was typically mined and                                                                    
turned into oil  through a heating process  (the process was                                                                    
expensive  and required  a high  oil price).  Another factor                                                                    
were the  needs requirements for Russia,  Brazil, Venezuela,                                                                    
Iran, Iraq,  and other Middle Eastern  countries with access                                                                    
to  supply, to  meet their  own budgets  and optimize  their                                                                    
resources. Everyone  looking at  supply considered  the cost                                                                    
of supply, how and when  supply would be brought online, and                                                                    
what geopolitical factors could  disrupt bringing the supply                                                                    
online.  Overall, supply  and demand  depended  on how  much                                                                    
Asia  would  grow  and  how  much it  would  cost  to  bring                                                                    
production  online. There  were  currently  many more  known                                                                    
supplies  in the  world than  there was  need to  bring them                                                                    
online.  It was  not  a question  of  whether new  prospects                                                                    
would be discovered  to bring online, but a  question of the                                                                    
cost it took to bring production to development.                                                                                
                                                                                                                                
9:44:50 AM                                                                                                                    
                                                                                                                                
Mr.  King   moved  to  slide   9  titled    Brent  Forecasts                                                                    
Comparison as of  12/4/2018." The slide showed  a line graph                                                                    
entitled  "Real Oil  Prices  and  Forecasts," depicting  how                                                                    
financial analysts trading  in oil markets and  the New York                                                                    
Mercantile   Exchange  (NYMEX)   were  pricing   options  to                                                                    
purchase oil at a later date.  The red line showed the NYMEX                                                                    
price (the price traders were  trading at) and the blue line                                                                    
showed  what analysts  were projecting  the  future to  look                                                                    
like.  He elaborated  that  the green  line  showed the  EIA                                                                    
projection for oil  prices and the black  dotted line showed                                                                    
the  outcome of  the DOR  preliminary forecast  from October                                                                    
[2018]. He noted that NYMEX  and analysts had used the DOR's                                                                    
October  projection  in  the   Revenue  Sources  Book  as  a                                                                    
reference  in  December.  He  reported  that  when  the  new                                                                    
administration  had come  into  office, the  first thing  it                                                                    
looked  at was  whether the  projected price  made sense  in                                                                    
light of new information garnered since October.                                                                                
                                                                                                                                
Mr. King  explained that the new  administration had decided                                                                    
to  discard the  October price  forecast session  and revert                                                                    
back to the  [2018] spring forecast with an update  of FY 19                                                                    
actuals that were available.                                                                                                    
                                                                                                                                
Commissioner Tangeman  added it had been  very important for                                                                    
DOR to go  back to the most recent analysis  to arrive at an                                                                    
oil  price  to consider.  He  thought  it was  important  to                                                                    
consider that the numbers had  been contemplated and stress-                                                                    
tested. He  thought that the  most reasonable option  was to                                                                    
use the spring price forecast  due to the volatility between                                                                    
September  and   December  [2018].  He  remarked   that  the                                                                    
forecast happened to  be in the $64 range and  showed all of                                                                    
the volatility  seen over several months.  He clarified that                                                                    
the department  was not faulting  the work done  [in October                                                                    
2018],  but wanted  to use  a more  stable environment.  The                                                                    
department  believed the  spring forecast  numbers were  the                                                                    
most appropriate  to use for  the current and  future fiscal                                                                    
years.                                                                                                                          
                                                                                                                                
9:47:34 AM                                                                                                                    
                                                                                                                                
Senator  Micciche asked  whether the  latent or  reserve oil                                                                    
supply was  more significant  than ever  in terms  of future                                                                    
oil   prices.  He   referenced   earlier  discussion   about                                                                    
stability  and asked  for  verification  that a  significant                                                                    
amount  of production  could be  brought online  more easily                                                                    
than in the past.                                                                                                               
                                                                                                                                
Mr.  King  agreed  with Senator  Micciche's  assessment.  He                                                                    
expounded  that wells  associated with  shale production  in                                                                    
Texas and  North Dakota  could be drilled  and fracked  in a                                                                    
matter  of  weeks and  could  bring  vast production  online                                                                    
quickly. He elaborated that when  disruption occurred in the                                                                    
market that started  forcing prices up due  to an imbalance,                                                                    
those  producers had  access  to capital  and  were able  to                                                                    
crank out production quickly. He  explained it put a ceiling                                                                    
on how high  prices could rise. He detailed  that prices may                                                                    
exceed $80 to  $100 per barrel for a week  or possibly a few                                                                    
months, but if there was  capital ready to be deployed there                                                                    
were  resources  ready  to  be  produced,  which  would  put                                                                    
pressure back down.                                                                                                             
                                                                                                                                
Mr.  King believed  the idea  there could  be sustained  oil                                                                    
prices in  the $100  range was unrealistic.  He acknowledged                                                                    
that things  could change rapidly,  but it was not  the case                                                                    
based on present information. He  continued that when prices                                                                    
had been depressed, many fracking  operations had run out of                                                                    
capital  due to  bankruptcies, which  had enabled  prices to                                                                    
increase before  new investors  came in  and reconsolidation                                                                    
occurred.  He detailed  that consolidation  had taken  place                                                                    
and  the access  to  capital was  available; therefore,  the                                                                    
ability to see high oil prices was relatively low.                                                                              
                                                                                                                                
9:49:51 AM                                                                                                                    
                                                                                                                                
Commissioner  Tangeman added  that  back  in 2011/2012  when                                                                    
North Dakota  shale plays had  been coming online,  they had                                                                    
not understood what  the tails on the wells  looked like. He                                                                    
detailed  that operators  had believed  the breakeven  point                                                                    
would be  $70 per  barrel; however, presently  the breakeven                                                                    
point was  in the $30 range.  He relayed that the  state had                                                                    
learned a  significant amount about what  competition looked                                                                    
like around the  world and in the Lower 48  where they could                                                                    
react quickly to  oil prices. He explained  it was something                                                                    
the North Slope did not have the ability to do.                                                                                 
                                                                                                                                
Mr.  King pointed  out that  the constraints/collars  on the                                                                    
impact of shale production worked  in the other direction as                                                                    
well.  He elaborated  that the  specific  wells declined  so                                                                    
quickly that they required continual  investment; if the oil                                                                    
price fell too  far the investments dried  up, which allowed                                                                    
the price  to rise  again. Theoretically,  there was  a much                                                                    
narrower  band where  prices should  be more  stable between                                                                    
the $50  and $70 range,  and if the  price went too  high or                                                                    
low, the market would react relatively quickly.                                                                                 
                                                                                                                                
9:51:08 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   referenced  slide   11  and   asked  the                                                                    
presenters  to   discuss  why  Alaska  was   insulated  from                                                                    
specific West Coast basins and  why it followed Brent closer                                                                    
than WTI.                                                                                                                       
                                                                                                                                
Mr. King  asked to briefly  speak to slide 10  titled "Brent                                                                    
Forecasts Comparison  as of 1/3/2019." The  slide included a                                                                    
chart  titled "Real  Oil Prices  and Forecasts,"  which used                                                                    
the fall [2018] forecast. He  detailed that the black dotted                                                                    
line  represented the  DOR forecast  showing the  $64 rising                                                                    
with  inflation  that  had been  published.  The  blue  line                                                                    
represented the  analyst forecast  as of the  preceding week                                                                    
and  the  red  line  showed  the  NYMEX  trading  price  the                                                                    
preceding  week  as well.  Since  then,  prices had  already                                                                    
started ticking  up. He concluded  that the  published price                                                                    
seemed to be  a reasonable estimation of  what would happen,                                                                    
based current information.                                                                                                      
                                                                                                                                
Mr. King  displayed slide  11, "EIA  Cases from  2018 Annual                                                                    
Energy  Outlook," which  showed a  chart entitled  "Real Oil                                                                    
Prices  and   Forecasts."  He  noted  the   information  was                                                                    
slightly outdated as  it was published earlier  in 2018. The                                                                    
orange dotted  line represented the  EIA reference  case for                                                                    
the  long-term  forecast;  the red  dotted  line  was  EIA's                                                                    
extreme high; and the yellow  line was EIA's extreme low. He                                                                    
explained  that EIA  analyzed where  the options  market was                                                                    
trading and  looked at what  the strike price was  on prices                                                                    
that were on the high and  low ends of the spectrum to build                                                                    
a  confidence  range. The  data  was  informed by  what  the                                                                    
market participants  suggest the range of  possible outcomes                                                                    
looking forward would look like.  He remarked that the chart                                                                    
showed that  the market really  did not know -  prices could                                                                    
be $30  per barrel or  $100 per  barrel. He reported  it was                                                                    
necessary to  pick a number  somewhere in the  middle, which                                                                    
was more likely to be the case.                                                                                                 
                                                                                                                                
Mr. King  continued to  discuss slide  11, noting  that even                                                                    
one  year  in  the  future   could  show  a  great  deal  of                                                                    
volatility -  there were  numerous geopolitical  factors and                                                                    
other  factors  that  played  in  (e.g.  natural  disasters,                                                                    
terrorist attacks, and other) that  could happen in a hurry.                                                                    
The  price that  was most  reflective of  ANS was  the Brent                                                                    
price  because  Alaska  Brent  oil  was  shipped  through  a                                                                    
pipeline  to  Valdez  and shipped  primarily  to  Anacortes,                                                                    
Washington  or Los  Angeles, California.  He continued  that                                                                    
because  there  were no  pipelines  that  crossed the  Rocky                                                                    
Mountains,  the  only  other  place  those  refineries  were                                                                    
getting  oil from  were other  waterborne sources  (e.g. oil                                                                    
tankers from Saudi Arabia, Russia, South America).                                                                              
                                                                                                                                
Mr. King  explained that  ANS traded  at parity  or slightly                                                                    
below other waterborne crude oils,  which was what the Brent                                                                    
marker  represented. The  WTI  marker  represented what  was                                                                    
taking place  in the rest  of the U.S.  - it was  the Texas-                                                                    
based crude  marker where Texas,  North Dakota, and  Gulf of                                                                    
Mexico oil was  traded. He furthered that  because there was                                                                    
so  little   infrastructure  that  could  move   oil  around                                                                    
midcontinent  (the  shale  revolution about  10  years  back                                                                    
brought Texas  and North Dakota production  much higher than                                                                    
infrastructure   could   support),   the  price   had   been                                                                    
suppressed for the  past decade. He elaborated  that WTI had                                                                    
been selling at  a discount to Brent over the  past 12 or so                                                                    
years. Once  the infrastructure got worked  out, which would                                                                    
take numerous  years, the oil  was expected to find  its way                                                                    
to refineries in need of oil  or onto tankers in the Gulf of                                                                    
Mexico  if the  U.S. was  in an  export situation.  He would                                                                    
expect  the  WTI  and Brent  differential  would  close  and                                                                    
possibly revert back  to where it had  been before 2006/2007                                                                    
where  WTI had  sold at  a premium  to Brent.  Regardless of                                                                    
what  was taking  place  in the  WTI  markets, Alaska  cared                                                                    
about what was taking place  on the West Coast (i.e. Brent).                                                                    
The  state  did  not  expect  midcontinental  infrastructure                                                                    
taking place to impact prices in  Alaska as much as it would                                                                    
impact prices in Texas.                                                                                                         
                                                                                                                                
9:56:27 AM                                                                                                                    
                                                                                                                                
Mr.  King discussed  slide 12,  "Market Activity  Around RSB                                                                    
Publication."  He  noted  that  the  slide  illustrated  how                                                                    
quickly  the markets  had changed  in  the current  calendar                                                                    
year. He  elaborated that the  stock market  and commodities                                                                    
market  took  a  beating  between October  and  January  and                                                                    
market  sentiment had  followed what  had been  occurring in                                                                    
the marketplace. He continued that  as recently as 1.5 weeks                                                                    
earlier  the market  sentiment was  depressed, which  called                                                                    
into question  how high oil prices  would be able to  go and                                                                    
what  should be  expected. He  countered the  sentiment that                                                                    
the  current  forecast may  be  too  high and  asserted  the                                                                    
forecast was just about right based on current information.                                                                     
                                                                                                                                
9:57:34 AM                                                                                                                    
                                                                                                                                
Commissioner Tangeman addressed the  fall 2018 cost forecast                                                                    
beginning with  an overview on  slide 14. He noted  that Co-                                                                    
Chair Stedman had requested a  brief overview. The state had                                                                    
a  net tax  system where  operating and  capital costs  were                                                                    
deductible.  He   asked  a   colleague  to   provide  detail                                                                    
beginning on slide 14.                                                                                                          
                                                                                                                                
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT OF  REVENUE, showed  slide 14,  "Lease                                                                    
Expenditures   -   Overview."   He  explained   that   lease                                                                    
expenditures  were  important  for   two  reasons:  1)  they                                                                    
provided an important indicator  of company activity and the                                                                    
investment into  future oil and  gas production  expected to                                                                    
take  place;  and 2)  they  were  an  integral part  of  the                                                                    
production  tax  revenue  calculation. The  slide  addressed                                                                    
some of  the nuances of  the production tax  calculation and                                                                    
how lease expenditures were involved.                                                                                           
                                                                                                                                
Mr.   Stickel   reported    that   capital   and   operating                                                                    
expenditures were all allowed  to be immediately deducted in                                                                    
the  production  tax  calculation  (a net  profit  tax).  He                                                                    
explained  there  was  no depreciation  of  the  capital  or                                                                    
operating expenditures like there  was for certain other tax                                                                    
types. In  the case of a  net operating loss, a  company was                                                                    
allowed  to  carry  forward any  expenditures  not  deducted                                                                    
immediately on its tax calculation.  The production tax also                                                                    
had a  minimum tax (4  percent of gross value).  He detailed                                                                    
that at oil prices between  $40 and $60, companies would pay                                                                    
at the  gross minimum  tax and would  not receive  a benefit                                                                    
for lease expenditures.                                                                                                         
                                                                                                                                
10:00:16 AM                                                                                                                   
                                                                                                                                
Mr. Stickel turned to slide  15, "COST FORECAST: North Slope                                                                    
Capital Lease  Expenditures," which showed a  line graph. He                                                                    
noted  that  in  preparing   the  cost  forecast,  operators                                                                    
provided DOR with  a tax return with  a five-year projection                                                                    
of capital  and operating  costs for  each of  their fields.                                                                    
The department also met with  operators in the fall and held                                                                    
production forecast  meetings. Additionally,  the department                                                                    
reviewed  expenditures reported  on tax  returns and  public                                                                    
information.    There     was    substantial    information,                                                                    
documentation,  and analysis  that went  into preparing  the                                                                    
cost  forecasts.  He relayed  that  slide  15 and  slide  16                                                                    
focused  on the  North Slope  lease expenditures,  which was                                                                    
the primary driver of state revenues.                                                                                           
                                                                                                                                
Mr.   Stickel  considered   FY   18   North  Slope   capital                                                                    
expenditures  of  approximately  $1.7  billion,  which  were                                                                    
expected to increase over the  next several years. Companies                                                                    
had  communicated to  DOR their  anticipation of  spending a                                                                    
bit  more  on  capital  expenditures  pertaining  to  legacy                                                                    
fields,   primarily  in   response  to   some  of   the  new                                                                    
opportunities that had been discovered  and also in response                                                                    
to   the  rebound   in  prices.   Companies  had   cut  back                                                                    
significantly when prices  had been lower a  couple of years                                                                    
back - some of the  activity on existing fields was starting                                                                    
to come back online.                                                                                                            
                                                                                                                                
Mr.  Stickel  reported  the   department  was  expecting  an                                                                    
increase  in  spending  on new  developments  in  the  early                                                                    
2020s.  He noted  there were  some exciting  and significant                                                                    
new  production  opportunities  (the  committee  would  hear                                                                    
about the  following day) including Pikka  and Willow, which                                                                    
were a couple of the  largest in the group. The department's                                                                    
forecast showed  a bit  of a  reduction in  capital spending                                                                    
beginning  in  the mid-2020s.  The  department  had not  yet                                                                    
identified in  its production forecast  the next set  of new                                                                    
developments.  He  elaborated  that if  some  other  ongoing                                                                    
exploration  took   place  and   they  began  to   see  more                                                                    
developments   coming   into    production   forecast,   the                                                                    
department  would   anticipate  some   capital  expenditures                                                                    
associated with some additional new  fields later in the mid                                                                    
to late 2020s.                                                                                                                  
                                                                                                                                
Mr. Stickel compared the fall  and previous spring forecast.                                                                    
He noted that  there had been a shift in  the timing of some                                                                    
of the  new developments in consultation  with the operators                                                                    
and how  some of the  developments would come into  play. He                                                                    
relayed  that  a  greater  proportion  of  the  oil  in  the                                                                    
production forecast  was from new  developments in  the fall                                                                    
forecast  versus the  spring forecast.  There  was a  higher                                                                    
overall capital  expenditure in the forecast  going into the                                                                    
outyears as  a result of  needing to have the  investment to                                                                    
bring the production online.                                                                                                    
                                                                                                                                
10:03:56 AM                                                                                                                   
                                                                                                                                
Co-Chair von Imhof  referenced slide 15 and  remarked it was                                                                    
encouraging   to  see   new   investment   in  Alaska.   She                                                                    
highlighted  cross-collaboration   between  agencies   as  a                                                                    
result of the  new administration. She had  recently seen an                                                                    
article  from   the  Department   of  Labor   and  Workforce                                                                    
Development (DLWD)  indicating the  recession may be  on its                                                                    
tail  end  and there  were  new  jobs  on the  horizon.  She                                                                    
assumed there  had been conversations  between DOR  and DLWD                                                                    
because she suspected an increase  in investment would yield                                                                    
new jobs. She referenced 6,000 to  8,000 jobs in the oil and                                                                    
gas and mining  sector that were lost in 2015  and 2016. She                                                                    
thought   it  would   be  nice   to   know  what   potential                                                                    
opportunities there would be on the horizon.                                                                                    
                                                                                                                                
Co-Chair  von Imhof  looked at  the second  bullet point  on                                                                    
slide  14 and  noted there  had  been minimum  tax paid  for                                                                    
several  months to  one year  in  2016/2017. She  considered                                                                    
efforts  made  by companies  to  become  more efficient  and                                                                    
lowering  their costs  and asked  at what  price they  had a                                                                    
sense  of when  the minimum  tax may  kick in.  She recalled                                                                    
hearing the  range $45  to $47 the  previous year.  She used                                                                    
prices  of $52  and $42  as  examples and  wondered at  what                                                                    
price the tax would take effect.                                                                                                
                                                                                                                                
Mr. Stickel stated  that the minimum tax would  apply at any                                                                    
price. He  detailed that company breakevens  were being seen                                                                    
at  prices in  the  low  $40 range.  He  explained that  the                                                                    
cross-over point  between the  minimum tax  and the  net tax                                                                    
was the point  at which the 35 percent net  profits tax less                                                                    
allowable  credits  began  to exceed  the  4  percent  gross                                                                    
minimum tax.  The crossover point  was somewhere in  the $60                                                                    
to $65 per barrel range.                                                                                                        
                                                                                                                                
Co-Chair  Stedman noted  that  the forthcoming  presentation                                                                    
would address  a more detailed  look at an  income statement                                                                    
format  and how  the structure  worked with  changing prices                                                                    
and volumes.  He explained they  could identify  the trigger                                                                    
marks - where they had been  the last two or three years and                                                                    
where they  were in the  current year and going  forward. He                                                                    
relayed it  would be  the next step  of the  presentation in                                                                    
more  detail,  dealing  with  credits  and  other  potential                                                                    
impacts  and  how  the  legislature   wanted  to  deal  with                                                                    
potential bonds.                                                                                                                
                                                                                                                                
10:07:05 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  referenced  slide 15  and  Mr.  Stickel's                                                                    
discussion  about legacy  fields.  He asked  Mr. Stickel  to                                                                    
define legacy fields for the  public and explain the need to                                                                    
bifurcate  fields.  He looked  at  the  FY 20  forecast  and                                                                    
observed that expenditures were  shown as approximately $2.5                                                                    
billion. He thought  it appeared about $500  million to $600                                                                    
million of  the amount  was nondeductible.  He asked  for an                                                                    
explanation  of   why  there  would  be   deductible  versus                                                                    
nondeductible capital  expenditures. He asked if  there were                                                                    
any   future   implications   that   nondeductible   capital                                                                    
expenditures would have against the treasury.                                                                                   
                                                                                                                                
Mr.  Stickel  answered  DOR's  analysis  of  oil  production                                                                    
considered three  field categories.  Legacy fields  had been                                                                    
in operation  for several years (e.g.  Prudhoe Bay, Kuparuk,                                                                    
Endicott, and  Alpine). There was an  additional category of                                                                    
producing fields (that  had come online in  the past several                                                                    
years)  eligible   for  gross   value  reduction   (GVR),  a                                                                    
provision  of the  production tax  code (e.g.  Point Thomson                                                                    
and  GMT).  The  third  category  was  comprised  of  fields                                                                    
expected  to come  online over  the next  several years.  He                                                                    
explained that the fields would  initially qualify for GVR -                                                                    
a temporary tax benefit for  new fields and would eventually                                                                    
graduate into the legacy field category.                                                                                        
                                                                                                                                
Mr.  Stickel answered  that deductible  versus nondeductible                                                                    
lease expenditures  were terms of art.  The department broke                                                                    
out  lease expenditures  that could  be  applied against  an                                                                    
immediate tax  liability, which  included spending  by major                                                                    
producers.  The  department  also   broke  out  other  lease                                                                    
expenditures that were not  immediately applicable against a                                                                    
tax  liability  -  primarily   spending  by  new  developers                                                                    
developing  new  fields.   The  immediately  deductible  tax                                                                    
expenditures impacted  state tax revenue  immediately, while                                                                    
expenditures that  were not immediately deductible  could be                                                                    
carried forward and could affect  the state's tax revenue in                                                                    
the future.                                                                                                                     
                                                                                                                                
Co-Chair  Stedman noted  that the  net  system required  the                                                                    
state to  allow deductibility.  Allowing expenditures  to be                                                                    
carried forward  was a  standard procedure  just like  on an                                                                    
income tax where a loss could be carried forward.                                                                               
                                                                                                                                
10:10:14 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman referenced  a  previous  chart that  began                                                                    
with 2018 and remarked it would  be helpful for the chart to                                                                    
go  back a  couple of  decades to  show actual  expenditures                                                                    
alongside   the   forecast   showing   capital   and   lease                                                                    
expenditures. He suggested  asking DLWD to add  in the labor                                                                    
component because  of its significant  size. He  believed it                                                                    
would show  a large spike from  around 8,500 or 9,000  up to                                                                    
16,000 and  back down  to the current  number. He  asked the                                                                    
department to provide the information to the committee.                                                                         
                                                                                                                                
Senator  Wielechowski  asked  about  lease  expenditures  on                                                                    
slides 15 and  16. He asked whether oil  companies were able                                                                    
to deduct expenditures they incurred  on federal lands where                                                                    
the  state received  no royalties.  If  so, he  asked for  a                                                                    
breakdown of the information.                                                                                                   
                                                                                                                                
Mr. Stickel did  not have the information on  hand. He noted                                                                    
the  production  tax applied  on  federal  lands within  the                                                                    
state, meaning a company could  deduct expenditures and save                                                                    
the National Petroleum Reserve-Alaska  (NPRA) the same as it                                                                    
would on state land for production tax purposes.                                                                                
                                                                                                                                
Senator Wielechowski  asked for  a breakdown of  the amount.                                                                    
He used NPRA  as an example and  understood that development                                                                    
would cost  billions of dollars  in the next  several years.                                                                    
He  asked  how  much  a company  could  deduct  annually  on                                                                    
federal land such as NPRA if $1 billion was spent.                                                                              
                                                                                                                                
Mr. Stickel responded that if  $1 billion was spent in NPRA,                                                                    
the company would  be able to deduct the  $1 billion against                                                                    
its net profits tax calculation,  assuming it had revenue to                                                                    
offset the amount.                                                                                                              
                                                                                                                                
Co-Chair  Stedman  remarked  that  the  committee  would  be                                                                    
holding  separate  discussions  on  the  various  components                                                                    
related  to how  expenditures were  handled. He  noted there                                                                    
was  different  revenue  under  different  land  ownerships,                                                                    
meaning not all oil was equal,  as had been presented at the                                                                    
table in  the past.  He hoped that  the presentation  by DNR                                                                    
the following day would help.                                                                                                   
                                                                                                                                
10:13:09 AM                                                                                                                   
                                                                                                                                
Mr.  Stickel  considered  slide 16,  "COST  FORECAST:  North                                                                    
Slope  Operating  Lease  Expenditures."  He  explained  that                                                                    
major  producers   of  legacy   fields  had   reduced  their                                                                    
operating  expenditures  over  the  last  several  years  in                                                                    
response   to  lower   prices.  The   department  had   seen                                                                    
information  and had  heard  from  companies that  operating                                                                    
expenditures  on legacy  fields were  expected to  be fairly                                                                    
flat   over  the   next   several   years.  The   department                                                                    
anticipated  some  increase  in  operating  expenditures  in                                                                    
several  years as  new fields  started to  come online.  The                                                                    
major change from  the spring to the fall  forecast had been                                                                    
in  fine   tuning  some  of  DOR's   assumptions  about  the                                                                    
operating costs of new developments.                                                                                            
                                                                                                                                
Mr.  Stickel pointed  to the  orange  line representing  the                                                                    
spring forecast, which showed  a large increase in operating                                                                    
expenditures in the FY 23  timeframe. The increase was still                                                                    
included in the  fall forecast but was  less significant. He                                                                    
explained  that companies  developing  new  fields had  done                                                                    
substantial  work optimizing  the developments  - they  were                                                                    
expecting the new  developments would be operated  in a less                                                                    
costly way  than some  of the  existing developments  of the                                                                    
past.                                                                                                                           
                                                                                                                                
Co-Chair  Stedman   referenced  earlier  testimony   by  Mr.                                                                    
Stickel that DOR  met with companies once a  year to receive                                                                    
their expenditure  forecast. He asked for  verification that                                                                    
the  information   was  integrated  into   the  department's                                                                    
report.                                                                                                                         
                                                                                                                                
Mr. Stickel  replied that DOR  required companies  to submit                                                                    
lease  expenditure forecast  information twice  a year.  The                                                                    
department had a more formal  set of meetings with operators                                                                    
in the  fall as it produced  the fall forecast and  a follow                                                                    
up in  the spring  as it produced  the spring  forecast. The                                                                    
department met  with operators in  the October  timeframe to                                                                    
develop the  fall forecast  and would  touch base  with them                                                                    
again in February as DOR prepared its spring forecast.                                                                          
                                                                                                                                
10:15:27 AM                                                                                                                   
                                                                                                                                
Mr. Stickel looked at slide  17, "COST FORECAST: North Slope                                                                    
Transportation  Costs."  He   detailed  that  transportation                                                                    
costs were  deducted in the  net profits calculation  and in                                                                    
arriving  at the  gross value,  which was  the basis  of the                                                                    
gross minimum  tax for production  tax and  royalty payments                                                                    
to   the  state.   The  department   was  forecasting   that                                                                    
transportation cost would  drop of about $1  per barrel from                                                                    
FY 18 (when  netback costs averaged $9.52 per  barrel) to FY                                                                    
19  (when  netback costs  averaged  $8.53  per barrel).  The                                                                    
primary reason  for the decrease in  transportation cost was                                                                    
a settlement  of a methodology  for calculating  the tariffs                                                                    
of  the   Trans-Alaska  Pipeline  System  (TAPS).   The  new                                                                    
methodology  resulted in  a lower  tariff calculation  going                                                                    
forward.  Beyond  2019  there   was  moderate  increases  in                                                                    
netback costs, primarily to inflation.                                                                                          
                                                                                                                                
Co-Chair Stedman asked the  department to include historical                                                                    
information  for the  data on  slide 17  in addition  to the                                                                    
information he requested earlier.                                                                                               
                                                                                                                                
Mr. Stickel agreed.                                                                                                             
                                                                                                                                
10:16:59 AM                                                                                                                   
                                                                                                                                
Senator   Micciche  asked   for   an   explanation  of   the                                                                    
relationship on  the GVR and  lease expenditure  between the                                                                    
minimum tax at  the crossover point and  above the crossover                                                                    
point. He  asked if there  was a proportional  difference on                                                                    
the net to the state.                                                                                                           
                                                                                                                                
Mr. Stickel asked  if Senator Micciche was  asking about GVR                                                                    
versus non-GVR oil as it related to the crossover point.                                                                        
                                                                                                                                
Senator  Micciche  replied he  was  interested  in both.  He                                                                    
asked if  the benefit  was the  same for  the GVR  and lease                                                                    
expenditures when a minimum tax  was reached versus north of                                                                    
the crossover point.                                                                                                            
                                                                                                                                
Co-Chair Stedman asked for a  definition of GVR. He reminded                                                                    
the public that the  legislature got a consolidated snapshot                                                                    
of  the   industry  over  12   months  which   averaged  all                                                                    
producers. He  explained that the  view was an  aggregate of                                                                    
monthly reporting by multiple  companies. He elaborated that                                                                    
the  legislature  did  not  receive  a  clear  snapshot.  He                                                                    
furthered that some companies may  be profitable under a tax                                                                    
regime, while others may be losing money or breaking even.                                                                      
                                                                                                                                
Mr. Stickel replied there was  a great deal of complexity to                                                                    
the issue.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman asked  for a  snapshot  and thought  there                                                                    
would be  ample opportunity  to go  into greater  detail. He                                                                    
asked  Mr. Stickel  to highlight  that  the Revenue  Sources                                                                    
Book  now contained  a  separate  line showing  expenditures                                                                    
related to GVR fields.                                                                                                          
                                                                                                                                
Mr. Stickel explained  that the GVR was  a provision enacted                                                                    
in  SB  21  in  2013,   which  allowed  for  beneficial  tax                                                                    
treatment for new fields. A  new field qualified for the GVR                                                                    
for the first  seven years of production or  for three years                                                                    
of production if  oil prices exceeded $70  per barrel. There                                                                    
was a  graduation from GVR  eligible to the legacy  tax rate                                                                    
where the GVR  benefits no longer applied.  The GVR provided                                                                    
two benefits  to the field.  First, 20 percent of  the gross                                                                    
value was  excluded from  calculating production  tax value,                                                                    
part of the net profits tax calculation.                                                                                        
                                                                                                                                
10:20:34 AM                                                                                                                   
                                                                                                                                
Mr.  Stickel explained  the second  GVR benefit  for fields.                                                                    
There  was different  per taxable  barrel credit  applied in                                                                    
calculating the net profits tax instead  of a zero to $8 per                                                                    
barrel sliding scale credit for  legacy production (the GVR-                                                                    
eligible production got  a flat $5 per barrel  credit and in                                                                    
certain cases  the credit  could be used  to take  a company                                                                    
below the minimum  tax, which was a  distinction between the                                                                    
sliding scale  credit for legacy  production and the  $5 per                                                                    
barrel  credit  for  GVR-eligible production).  The  general                                                                    
calculation was  net profits tax  minus credits  (35 percent                                                                    
of  net   profits,  which  included   the  20   percent  GVR                                                                    
allowance) - the amount was  compared to the 4 percent gross                                                                    
minimum tax  and the higher  amount was paid.  He elaborated                                                                    
that whether a company received  a material benefit from the                                                                    
GVR  depended  on  the company's  economics  (its  portfolio                                                                    
projects) and the current oil price.                                                                                            
                                                                                                                                
Co-Chair Stedman  asked Mr. Stickel  to give a  general idea                                                                    
of the dollar amounts being referenced.                                                                                         
                                                                                                                                
Mr. Stickel  stated that DOR  was projecting a  total impact                                                                    
of the  per taxable barrel  credit of about $1.2  billion in                                                                    
FY 20.                                                                                                                          
                                                                                                                                
Co-Chair  Stedman clarified  he  was interested  in the  GVR                                                                    
reduction  amounts.  Mr.  Stickel   estimated  that  the  20                                                                    
percent  GVR reduction  estimated for  FY 20  excluded about                                                                    
$108 million from production tax value.                                                                                         
                                                                                                                                
Co-Chair Stedman asked  for the total for  the current year.                                                                    
Mr. Stickel  replied that DOR  was predicting  the exclusion                                                                    
would be about $134 million.                                                                                                    
                                                                                                                                
Co-Chair Stedman asked  about the $5 per  barrel credit. Mr.                                                                    
Stickel answered  that he did  not have the breakout  of the                                                                    
$5 per barrel  GVR credit versus the sliding  scale on hand.                                                                    
He offered to follow up with the information.                                                                                   
                                                                                                                                
10:23:16 AM                                                                                                                   
                                                                                                                                
Senator Wielechowski asked if there  could be a negative tax                                                                    
rate on a GVR field. Mr.  Stickel responded that the tax was                                                                    
calculated  on a  company basis,  and a  company as  a whole                                                                    
could not have a negative tax rate.                                                                                             
                                                                                                                                
Senator Bishop commented  that the state had one  of the top                                                                    
most complicated tax regimes worldwide.                                                                                         
                                                                                                                                
Co-Chair Stedman  agreed. He  cautioned against  drawing any                                                                    
conclusions on  the gross  dollar figures.  He spoke  to the                                                                    
necessity of looking at the  entire picture. He acknowledged                                                                    
that  the  magnitude of  dollars  was  large. He  noted  the                                                                    
information  would  be  put into  context  with  the  entire                                                                    
process  later  on.  He  added that  the  figures  were  $50                                                                    
million to $100 million or more, which was significant.                                                                         
                                                                                                                                
10:24:40 AM                                                                                                                   
                                                                                                                                
Commissioner  Tangeman reviewed  slide 19,  "Outstanding Tax                                                                    
Credits," which showed a bar  graph entitled "Ending balance                                                                    
of  credits available  for  repurchase, assuming  historical                                                                    
interpretation  of  statutory  formula  for  FY  2020+."  He                                                                    
discussed  cashable credits,  which were  credits earned  by                                                                    
companies without a  tax liability. Over the  past couple of                                                                    
years,  cashable credits  had been  eliminated. He  reported                                                                    
that  even two  years back  the  slide would  have shown  an                                                                    
increasing liability  into the  future. The state  had ended                                                                    
most   cashable  credits   for   purchase;  therefore,   the                                                                    
liability was a  finite amount. Slide 19  showed payoff plan                                                                    
for  credits owed  by the  state.  Historically the  credits                                                                    
were  paid  off as  they  were  earned  and turned  in.  The                                                                    
previous administration  "a more minimum amount,  due to oil                                                                    
prices" in the $30 range, had been paid.                                                                                        
                                                                                                                                
Commissioner  Tangeman  continued  discussing slide  19  and                                                                    
relayed that the state's liability  had been just under $800                                                                    
million  in  FY 19.  The  past  spring the  legislature  had                                                                    
appropriated $100  million for  the credits, which  had been                                                                    
in conjunction with  a tax credit bond. He  explained it had                                                                    
been anticipated  that the  state would be  able to  bond to                                                                    
pay off  the liability balance.  He expounded that  the bond                                                                    
issue  had  been delayed  and  was  currently in  the  court                                                                    
system. He  explained that  the slide  cut the  $100 million                                                                    
(appropriated  by   the  legislature)  loose   beginning  in                                                                    
December,  which brought  the liability  down to  under $700                                                                    
million.  The gray  bar  showed the  value  - reflective  of                                                                    
DOR's  historical interpretation  of what  a minimum  amount                                                                    
would  be. He  remarked  that the  figures  were subject  to                                                                    
appropriation.  He  believed  the data  reflected  that  the                                                                    
state could  wipe the liability  from its books in  the next                                                                    
couple of years.                                                                                                                
                                                                                                                                
10:27:34 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  asked if  the  state  did not  issue  the                                                                    
bonds, but  made the  statutory payout for  FY 20,  it meant                                                                    
there would be  three to four more years  of payments before                                                                    
the state was finished [paying off the liability].                                                                              
                                                                                                                                
Commissioner  Tangeman answered  that the  final amount  was                                                                    
projected to  be paid in FY  20, meaning the total  would be                                                                    
five years.  The forecast showed  the amount would  be about                                                                    
$175 million per year.                                                                                                          
                                                                                                                                
Co-Chair Stedman  stated that there  would be  a forthcoming                                                                    
discussion on issuing bonds versus  paying the liability off                                                                    
over time.                                                                                                                      
                                                                                                                                
Commissioner Tangeman  shared his intent to  provide a brief                                                                    
overview  on  the  topic  later   in  the  presentation.  He                                                                    
acknowledged the complexity of  the discussion and expressed                                                                    
the  department's  willingness  to   have  a  more  detailed                                                                    
discussion in the future.                                                                                                       
                                                                                                                                
10:28:39 AM                                                                                                                   
                                                                                                                                
Commissioner Tangeman showed slide 20, "Update on Tax                                                                           
Credit Bonding (HB 331)":                                                                                                       
                                                                                                                                
     ? Corporation  established last year in  House Bill 331                                                                    
     (HB 331).                                                                                                                  
     ? Purpose:                                                                                                                 
          "to finance under AS 43.55.028                                                                                        
          (1) the purchase of                                                                                                   
          (A) transferable tax credit certificates issued                                                                       
          under                                                                                                                 
          AS 43.55.023;                                                                                                         
          (B) production tax credit certificates issued                                                                         
          under AS                                                                                                              
          43.55.025; and                                                                                                        
          (2) the payment of refunds and payments claimed                                                                       
          under AS 43.20.046, 43.20.047, or 43.20.053."                                                                         
                                                                                                                                
     ? Authorized to issue  up to $1,000,000,000 in subject-                                                                    
     to-appropriation bonds.                                                                                                    
     ? FY  2019, $27  million appropriated for  debt service                                                                    
     on any  bonds issued by the  Corporation. Bond proceeds                                                                    
     to be appropriated from  Corporation to Commissioner of                                                                    
     Revenue for purchases.                                                                                                     
                                                                                                                                
Commissioner Tangeman noted the $27 million was part of the                                                                     
$100 million appropriated by the legislature.                                                                                   
                                                                                                                                
10:29:17 AM                                                                                                                   
                                                                                                                                
Commissioner Tangeman showed slide 21, "Update on Tax                                                                           
Credit Bonding (HB 331)":                                                                                                       
                                                                                                                                
     ?  The Corporation  has  not issued  any  bonds due  to                                                                    
     litigation.                                                                                                                
     ? Complaint  alleged that  the subject-to-appropriation                                                                    
     bonds authorized  in HB 331 violated  provisions of the                                                                    
     Alaska  Constitution on  state debt  and financing.  In                                                                    
     June,  the   State  filed  a  motion   to  dismiss  the                                                                    
     complaint.                                                                                                                 
     ?  The Superior  Court  granted the  State's motion  to                                                                    
     dismiss on January 2,                                                                                                      
     2019.                                                                                                                      
     ?  The State  has moved  for entry  of final  judgment.                                                                    
     Once the final judgment  is entered, the Plaintiff will                                                                    
     have 30 days to file an appeal to the Alaska Supreme                                                                       
     Court.                                                                                                                     
                                                                                                                                
Commissioner  Tangeman  elaborated  that if  an  appeal  was                                                                    
filed, the  case could stretch out  for 12 to 18  months. He                                                                    
explained that  the state would  be back in the  same fiscal                                                                    
situation it had  been in the previous year.  He thought the                                                                    
concept of  bonding was sound,  but the state  was currently                                                                    
in a "hurry up and wait mode."                                                                                                  
                                                                                                                                
10:30:04 AM                                                                                                                   
                                                                                                                                
Commissioner Tangeman  turned to  slide 23, "Changes  to 10-                                                                    
Year Unrestricted  Revenue Outlook."  He pointed to  the top                                                                    
section of  the slide and  noted that during the  fall price                                                                    
forecast session, oil prices had  been in the $80 range. The                                                                    
department had decided  to use the spring  2018 forecast for                                                                    
the  10-year forecast.  The change  had impacted  FY 19  and                                                                    
outyears were  similar to FY  19. The middle section  of the                                                                    
table  showed  UGF  revenue  excluding  the  Permanent  Fund                                                                    
transfer.   He  noted   it  was   something  that   required                                                                    
discussion.  The  bottom section  of  the  slide showed  UGF                                                                    
revenue (fall  2018 versus spring  2018). He  considered the                                                                    
fall forecast  and pointed out  a slight increase in  FY 19,                                                                    
stable  revenue in  FY 20  and  FY 21,  and slight  declines                                                                    
going  forward. He  added that  the bottom  section included                                                                    
the Permanent Fund transfer. The  very bottom line beginning                                                                    
with $3.2 billion  reflected the (5.25 percent  of the total                                                                    
ending balance of  the last five years)  calculation from SB                                                                    
26 [Permanent Fund legislation passed in 2018].                                                                                 
                                                                                                                                
10:31:50 AM                                                                                                                   
                                                                                                                                
Commissioner   Tangeman  showed   slide  24,   "Oil  &   Gas                                                                    
Production (OGP)  Tax Audit Status Report."  He reported the                                                                    
issue had been substantial for  DOR and taxpayers. The state                                                                    
had  gone  through  various tax  iterations  over  the  past                                                                    
decade,  which   has  slowed  things  down   from  an  audit                                                                    
standpoint. He stated the issue  was difficult for the state                                                                    
and taxpayers  when working to understand  the different tax                                                                    
structures.  Fortunately, the  tax  regime  had been  fairly                                                                    
stable since  2014. He  believed the  bottom line  was there                                                                    
was a  light at the  end of the  tunnel. He remarked  on the                                                                    
complexity  of the  issue, but  explained DOR  and taxpayers                                                                    
understood how  to calculate, which  would enable  audits to                                                                    
catch up over the next  couple of years. Statutorily DOR had                                                                    
six  years  to  audit  a   tax  return  and  he  anticipated                                                                    
completing audits within  three years in the  next couple of                                                                    
years.                                                                                                                          
                                                                                                                                
Commissioner  Tangeman reviewed  slide  25,  "OGP Tax  Audit                                                                    
Update":                                                                                                                        
                                                                                                                                
     ? Thorough audits completed through 2012                                                                                   
          o Previously reviewed all sections of a                                                                               
          taxpayer return                                                                                                       
          o Some sections were 100% audited                                                                                     
          o Time consuming, but deemed to be necessary with                                                                     
          new tax and new staff                                                                                                 
          o Scope was wide and materiality was low  it was                                                                      
          a learning process                                                                                                    
     ? Stable tax law provides time to get caught up, plan,                                                                     
     and develop better procedures.                                                                                             
     ? Tax system in place provides better transparency and                                                                     
     organization of data.                                                                                                      
                                                                                                                                
10:33:25 AM                                                                                                                   
                                                                                                                                
COLLEEN  GLOVER,  DIRECTOR,   TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE, turned  to slide 26, "OGP  Audit Improvement Plan."                                                                    
She  reported there  was  good news  going  forward and  the                                                                    
state  had   gotten  through  the   worst  from   the  audit                                                                    
perspective. She  elaborated that difficult audits  had been                                                                    
concluded. She explained there had  been some years with two                                                                    
different  tax  policies  in a  calendar  year,  which  made                                                                    
things   more  complicated.   The   department  had   stable                                                                    
employees and  was getting  ready to  finalize all  the 2013                                                                    
audits at the end of  the quarter. The department planned to                                                                    
get on  track and  have a three-year  cycle for  audits. She                                                                    
detailed DOR had been working  with taxpayers and soliciting                                                                    
feedback on how to improve.                                                                                                     
                                                                                                                                
Ms. Glover  explained that the two-way  relationship between                                                                    
the department  and taxpayers factored in  perspectives from                                                                    
both  sides.  She highlighted  DOR  had  developed an  audit                                                                    
improvement plan that had been  communicated to taxpayers in                                                                    
regard to  oil and  gas taxpayers. The  plan looked  at data                                                                    
sharing and considered  taxpayer confidentiality agreements.                                                                    
She  noted that  many  operators had  cost information  that                                                                    
went to  multiple taxpayers.  The interpretation  of statute                                                                    
and regulations, which could be  ambiguous, was also a focus                                                                    
for  the  division. Work  included  looking  at areas  where                                                                    
regulations  could be  cleaned up  for clarity,  which would                                                                    
result in fewer audit assessments, appeals, and litigation.                                                                     
                                                                                                                                
Ms. Glover discussed that the  Tax Revenue Management System                                                                    
(TRMS) implemented  in 2014/2015 meant the  2014 tax returns                                                                    
were in a  computerized system, which had not  been the case                                                                    
in the past. The system  provided consistency to returns and                                                                    
data.  She   concluded  the  new  system   would  result  in                                                                    
efficiencies within the oil and gas audit group.                                                                                
                                                                                                                                
10:36:39 AM                                                                                                                   
                                                                                                                                
Senator  Micciche relayed  the  legislature  had received  a                                                                    
letter regarding  audits for 2011  and several  other years.                                                                    
The letter had  shown the audits had resulted  in a positive                                                                    
assessment of $275  million to the state. He  asked if there                                                                    
was  any  difference  in  the  2012  audits  that  were  now                                                                    
complete.  He stated  that a  positive assessment  was nice,                                                                    
but he was concerned about  a scenario where the state would                                                                    
owe money.                                                                                                                      
                                                                                                                                
Commissioner Tangeman  replied that one of  the requests for                                                                    
the current  presentation was to  provide back  tax assessed                                                                    
values. The  department had the  letters prepared  and would                                                                    
distribute them to members' offices.                                                                                            
                                                                                                                                
Ms.  Glover believed  the letters  had  been distributed  to                                                                    
committee  members. The  referenced  a  packet of  documents                                                                    
that included  a letter  as well as  information on  oil and                                                                    
gas production tax audits for  2011 and 2012 tax years (copy                                                                    
on file).                                                                                                                       
                                                                                                                                
Co-Chair Stedman  remarked that  the committee  had received                                                                    
the documents immediately before  the meeting started, which                                                                    
made it difficult  for members to prepare.  He reported that                                                                    
members  would  read the  letters  and  the committee  would                                                                    
provide  a list  of questions  to DOR.  He communicated  the                                                                    
committee  would  likely  have a  separate  presentation  on                                                                    
credits  due  to  the  complexity   of  the  issue.  He  was                                                                    
interested  in information  going  forward  about where  net                                                                    
losses were generated versus where revenue was generated.                                                                       
                                                                                                                                
Ms. Glover noted that the  packet included a 2012 assessment                                                                    
that was similar to the  2011 audit assessment of about $270                                                                    
million. The packet included  detailed tables showing actual                                                                    
taxes  paid for  2018. She  highlighted that  taxes paid  in                                                                    
2018  were significantly  higher than  those in  2017, which                                                                    
was reflected in the revenue forecast.                                                                                          
                                                                                                                                
Senator Micciche  asked about the  probability of  the state                                                                    
owing money  after the  completion of  an assessment  of the                                                                    
2013 audits. He surmised the probability was low.                                                                               
                                                                                                                                
Ms. Glover  answered she  did not  have the  information but                                                                    
would follow up. She clarified  the 2013 audits were not yet                                                                    
complete.                                                                                                                       
                                                                                                                                
10:39:19 AM                                                                                                                   
                                                                                                                                
Commissioner Tangeman concluded  the presentation with slide                                                                    
27, "UGF  Relative to  Price per  Barrel (without  POMV), FY                                                                    
2020."  The slide  showed a  graph  depicting the  crossover                                                                    
point  and  provided  a  scale showing  the  effect  on  UGF                                                                    
revenue as ANS prices increased.  He thought the slide was a                                                                    
good visual representation of how  the price change impacted                                                                    
the state's bottom line.                                                                                                        
                                                                                                                                
Co-Chair   Stedman   asked   for   verification   that   the                                                                    
probability of prices reaching $130  per barrel was close to                                                                    
zero. Commissioner Tangeman agreed.                                                                                             
                                                                                                                                
Co-Chair  Stedman asked  to  have the  slide  redone with  a                                                                    
price  range  between  $40  and  $80  per  barrel.  He  also                                                                    
requested  information  showing  the trigger  point  on  the                                                                    
minimum tax.  He stated  it would be  helpful for  people to                                                                    
remember the  state had a gross  tax and net tax  running at                                                                    
the same time, with one dominating the other.                                                                                   
                                                                                                                                
Commissioner Tangeman agreed to provide the information.                                                                        
                                                                                                                                
Co-Chair   Stedman   thanked    the   testifiers   for   the                                                                    
presentation.  The  committee  was looking  forward  to  the                                                                    
department's operating budget  presentation. He remarked the                                                                    
committee  was  anticipating   substantial  changes  in  the                                                                    
governor's   proposed  budget.   He   wanted   to  see   the                                                                    
commissioner  testify before  the  committee and  encouraged                                                                    
him to bring any needed support staff.                                                                                          
                                                                                                                                
Co-Chair  Stedman discussed  the  agenda  for the  following                                                                    
day.                                                                                                                            
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:43:01 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:42 a.m.                                                                                         

Document Name Date/Time Subjects
011619 Fall 2018 Revenue Forecast Presentation.SFC.pdf SFIN 1/16/2019 9:00:00 AM
011619 Audit Update to Senate Finance Packet.pdf SFIN 1/16/2019 9:00:00 AM
Operating Budget
011619 DOR Table 1.pdf SFIN 1/16/2019 9:00:00 AM
Fall Forecast 2019
011619 DOR letter to S FIN 1.25.2019.pdf SFIN 1/16/2019 9:00:00 AM
Fall Forecast