Legislature(2017 - 2018)SENATE FINANCE 532
03/19/2018 09:00 AM Senate FINANCE
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| Start | |
| Presentation: Spring Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
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SENATE FINANCE COMMITTEE
March 19, 2018
9:02 a.m.
9:02:53 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Peter Micciche
Senator Gary Stevens
Senator Natasha von Imhof
MEMBERS ABSENT
Senator Donny Olson
ALSO PRESENT
Senator Cathy Giessel; Sheldon Fisher, Commissioner
Designee, Department of Revenue; Dan Stickel, Chief
Economist, Economic Research Group, Tax Division,
Department of Revenue.
SUMMARY
^PRESENTATION: SPRING REVENUE FORECAST
9:03:21 AM
Senator MacKinnon reviewed the agenda for the meeting and
acknowledged Senator Giessel in the audience. She invited
the testifiers from the Department of Revenue to the table.
SHELDON FISHER, COMMISSIONER DESIGNEE, DEPARTMENT OF
REVENUE, was pleased that the department had released the
Spring 2018 Revenue Forecast early. He introduced the
presentation, "Spring 2018 Revenue Forecast" (copy on
file).
Commissioner Fisher showed slide 2, "FORECASTING METHODS:
Timeline":
? Early April 2017: Spring 2017 Forecast
? Late April 2017: Spring 2017 Alternative Scenario
? 4% Production Decline Scenario, Letter to Co-Chairs
? Used in modeling by Department of Revenue, Office of
Management and Budget,
and Legislative Finance
? October 2017: Preliminary Fall 2017 Forecast
? Non-standard, provided to assist special session
? December 2017: Final Fall 2017 Forecast and
Revenue Sources Book
? March 2018: Spring 2018 Forecast
? December 2018: Fall 2018 Forecast and
Revenue Sources Book
Commissioner Fisher reported that the department was
continuing the discussion and the series of forecasts
produced by the department going back to the Spring of
2017. He indicated the department updated the production
and price forecasts and some other assumptions. He would
begin by talking about the production forecast, move to the
price forecast, then finish by pulling together some other
items.
Commissioner Fisher displayed slide 4, "PRODUCTION
FORECAST: ANS History and Forecast by Pool," which showed a
historical perspective of production in history. He noted
the leveling out and flattening of production, a positive
development for the state and for revenues.
Commissioner Fisher discussed slide 5, "PRODUCTION
FORECAST: ANS FY 2017 Versus FY 2018," containing a line
graph that showed the actual production represented in the
solid lines. Currently, the state averaged about 518,000
barrels per day of production against the forecast of
533,000 barrels per day. He highlighted the assumption for
the remaining months of the year. The department was
forecasting that production both in the last quarter and
for the year would be modestly below where it was in FY 17.
He indicated that in the last 10 years the fourth quarter
represented about 25.5 percent of the year's production.
The department's assumption was in line with that trend for
FY 18 actual production.
Senator von Imhof asked if the drop was attributed to a
particular field or a general decline on the North Slope.
Commissioner Fisher responded that the slide did not
reflect a long-term decline in the department's view of
production. The long-term production was largely in line
with what the department expected previously. There were a
couple of factors. Overall, the weather had been warmer
over the most recent winter. Production was usually
healthier in a colder climate, as the equipment operated
better allowing producers to accomplish more. Also, there
had been a couple of events that had affected specific
properties that resulted in a decline. He asked Mr. Stickle
to provide more detail.
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, expounded on what the
commissioner had stated. He reported that in looking at the
unit-by-unit analysis of the forecast versus the previous
year, Kuparuk Production was forecasted to increase.
Prudhoe Bay's production was down due to warmer weather
having a significant impact. There had also been some
technical issues at some of the other fields such as Point
Thompson and Alpine that were factored into the forecast.
9:08:20 AM
Commissioner Fisher referenced slide 6, "PRODUCTION
FORECAST: ANS Comparison," which looked at the long-term
forecast. It showed the expected production decline for
FY 18. Looking forward the forecast was in line with a
modest increase over the fall forecast. He asked if there
were questions about production.
Senator Micciche commented that the department leaned
toward the 33 percent mark and asked the commissioner to
explain.
Commissioner Fisher did not understand the reference to 33
percent.
Senator Micciche pointed to the Spring 2018 high case, the
forecast, and the spring 2018 low case. He commented that
some other entities predicted closer to the midpoint,
whereas, the department predicted in the lower third.
Commissioner Fisher responded that the production forecast
was primarily prepared by the Department of Natural
Resources (DNR). He stated that the mid-case was intended
to be a P50. In other words, it was 50 percent likely it
would be the forecast number, or 50 higher or lower. The
scenario suggested that DNR anticipated there was more
upside opportunity, the reason for a larger scale to the
upside rather than the downside. He explained that it was
about the probabilities in different scenarios in terms of
what DNR saw as opportunities versus risks in the forecast.
Co-Chair MacKinnon noted that the committee had considered
many revenue forecasts. She recalled a past forecast that
showed a 12 percent decline over the next ten years, which
had been changed to a flat projection.
Commissioner Fisher referred back to slide 2. He replied
that in the April 2017 forecast the administration came
forward with a 12 percent decline. Soon thereafter, the
department came forward with a 4 percent production decline
scenario. It was not a new forecast but a reduced decline.
In the special session and in the fall forecast the
forecast was revised to be flat.
Co-Chair MacKinnon appreciated the department being
conservative in its approach when presenting numbers.
However, it had an impact in terms of planning purposes.
She recalled that in April 2017 when the numbers were
published Senate finance pushed back significantly on the
12 percent decline when the state had seen increased
production. She was glad that the production level was
flat. She relayed that the document was available to the
public online.
9:13:29 AM
Commissioner Fisher continued to slide 8, "PRICE FORECAST:
Impact of Spare Capacity: Short Term," which showed the
Energy Information Agency (EIA) attempting to predict
supply and demand for oil into the future. He highlighted
the vertical orange [yellow] line representing the
difference between actuals and the forecast period. The oil
industry had been through a period where the demand had
been greater than the supply represented by the orange line
[brown] versus the blue line. The green bars were declining
suggesting that actual inventory was shrinking. The Energy
Information Agency anticipated in the following quarters it
would change and world production would again exceed
consumption. He noted the range was tight in either
direction. In the future EIA anticipated a growing
inventory for the coming few quarters which would start to
shrink as seen in the far right of the slide.
Commissioner Fisher moved to slide 9, "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: FY2018,"
which showed a line graph entitled 'Real Oil Prices and
Forecasts." The solid black line reflected the actual
numbers from the period. He noted that the price of oil was
approximately $50/bbl in July 2017 and climbed to almost
$70/bbl during the period. The average to-date was just
over $59/bbl. The department was assuming in nominal
dollars that the price of oil would stay above $64/bbl for
the remaining months of the year resulting in a forecast
price of about $61/bbl during FY 18. The red line
represented the New York Mercantile Exchange (NYMEX)
futures price. He explained that if someone wanted to buy
oil in the future, the red line reflected what a person
would pay. The red line on the chart represented real
dollars. The forecast was largely consistent (slightly
above) with what the NYMEX futures would predict for the
price of oil.
Co-Chair MacKinnon suggested that the revenue forecast set
the line for the calculation on credits due companies that
were owed money from the State of Alaska. She asked if the
threshold was correct at $60.
Commissioner Fisher indicated that part of the presentation
reviewed the credits calculation. He conveyed that $60 was
the difference between whether the pool of money set aside
to pay credits was 10 percent or 15 percent. If the price
of oil was above $60 the production tax due would be 10
percent. If the price of oil was below $60 the production
tax due would be 15 percent. He would be walking through
the calculation and how the forecast had changed.
Co-Chair MacKinnon noted that the legislature was in a
precarious situation between $59/bbl and $61/bbl. She was
looking at 25 percent production. She thought it was an
active choice to state a number. It appeared that the
administration was anticipating an average of about
$61/bbl. She asked if she was accurate.
Commissioner Fisher stated that the administration's
forecast assumed that oil would stay slightly above $64/bbl
between the present day and the end of the fiscal year
which would result in an average price for the fiscal year
of $61/bbl.
9:18:08 AM
Senator von Imhof referenced slide 8 and thought the
right-hand side of the graph represented the heart of the
matter. She thought the commissioner had been correct when
he stated that the ranges (seen at the height of the green
bars) were shorter than the ones seen in 2015. She thought
it had been a good thing when supply and demand had reached
an equilibrium to some degree. She noted that the moved up
and down on the chart. She asked if the Department of
Revenue's (DOR) research showed that, as the price crept up
past $65/bbl, fracking became more prevalent and banks
started lending again. She thought they were nimble and
quick and could have an impact on supply. She asked how
confident the commissioner was about the green bars.
Commissioner Fisher accepted that the price forecast was
one source of data. He thought as he reviewed the price
forecast, he would show the committee that there were
multiple views and opinions of which the department did not
try to duplicate. The department tried to do a broad survey
of the different intelligent and thoughtful organizations
that had a significant amount of resources behind them. He
suggested that the consensus around demand was narrower
than the consensus around supply. He elaborated that there
seemed to be a narrow range of what people thought about
how the demand curve could vary and change. There was a
substantial range in terms of how people viewed what the
supply of oil would be. He would try to walk through the
information. The department had tried to pick a case that
was reasonable. There were certain scenarios that could
change it meaningfully one way or the other.
Co-Chair MacKinnon asked if it was fair to say Oil
Producing and Exporting Countries (OPEC) trying to control
output had helped to globally stabilize the price. The
price was moving upwards because producers were producing
less.
Commissioner Fisher answered in the affirmative. He thought
that there was more discipline from Russia and other OPEC
nations.
Co-Chair MacKinnon explained that producers who could be
flexible in where they went and how fast they could drop
drills were influencing the increase in fracking. From the
perspective of Oil Producing and Exporting Countries
(OPEC), Alaska was starting to pull in a greater percent of
oil production in the world. She indicated that it might
not please those that were controlling and producing less.
It was benefiting Alaska on the price side and the
production side. She asked if her statement was fair.
Commissioner Fisher thought that Co-Chair MacKinnon had
made a perceptive comment. He elaborated that the dynamic
of how Shale or OPEC would react, how certain countries
like Venezuela, and other factors would determine where the
price of oil would land. There were several different
people interpreting the facts differently which lead to the
range in the forecast.
Co-Chair MacKinnon mentioned that Saudi Arabia was going to
a similar process as Alaska. The high price of oil had
benefitted the people of Saudi Arabia. However, in a low-
price environment the country struggled to produce revenue
to distribute or invest in communities. Saudi Arabia was
also looking at a sovereign wealth fund model. She asked if
the commissioner could provide any additional information
on the matter.
Commissioner Fisher affirmed that Saudi Arabia had
struggled to balance its budget at current oil prices. For
a time, the country thought it was in its interest to
produce additional oil to try to bring discipline into the
market place through lower prices. He surmised that the
country recognized that it was harmed when prices dropped
substantially. He thought that the country, as well as
other oil-dominant countries, were observing what was
happening in the U.S. and shale oil. He noted the comment
made earlier about one of the impacts of lower pricing on
the shale industry and how it had become more efficient and
capable of producing oil at declining oil prices. It would
continue to impact the supply of oil and how the world
would respond to different events. He indicated there was a
time when OPEC had more control over the price of oil, but
as shale had become a swing producer it was more difficult
to control. The department's view was that at slightly over
$60/bbl the various supplies, shale in particular, became
economical, and there was a meaningful amount of supply at
those prices. As he moved through the presentation, it
would be apparent that others saw things differently.
9:25:15 AM
Co-Chair MacKinnon asked if the presentation would address
cost. The commissioner had alluded to Americans stepping up
when things got tough. She pointed out that in the price
forecast, producers in Alaska had found a way to lower
costs. The state was seeing the benefit of flat production
or increased production as experienced in the previous 2
years. The state was also benefiting from lower costs to
extract some of the hydrocarbons on the North Slope. She
asked if she was accurate in her assessment.
Commissioner Fisher answered in the affirmative. He noted
that a portion of the presentation would discuss the cost
for Alaska. The department had not put together a
presentation that talked about other regions of the world
regarding their cost structures.
Senator Micciche thought it was fair to say that even
conventional players had brought down their costs of
production globally. He thought producers had become more
efficient. He wondered if the improvements seen in the
revenue forecast were the price of oil and the reduction of
what could be written off by the companies. He asked if the
topic would be covered in the presentation.
Commissioner Fisher indicated the senator was correct and
that the facts about Alaskan producers would be discussed
later in the presentation.
Commissioner Fisher reviewed slide 10, " PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: Short-
Term," which showed a line graph entitled "Real Oil Prices
and Forecasts." The slide showed a short-term forecast in
real dollars. The black line showed actuals, and the dotted
portion of the line reflected the forecast. The blue
portion of the line showed the analysts' forecast. The
department's forecast was in line with the analysts'
forecast. The green line on the slide was EIA short-term
energy outlook. The Energy Information Agency produced a
short-term energy outlook updated monthly as well as an
annual outlook. He pointed out that the price point for the
next couple of years was on the high end of the range of
the existing forecasts. He reminded members that the NYMEX
forecast represented long-term futures prices. In fairness,
there was not a significant amount of volume in long-term
futures beyond a year. Outside of a year or 18 months NYMEX
became a less reliable predictor of price.
Commissioner Fisher referenced slide 11, "SHORT-TERM PRICE
FORECAST," which displayed a data table that showed the
forecast in nominal prices. The forecast grew from $63/bbl
in FY 19 to about $75/bbl. He noted that the forecast
largely stayed flat in real terms. He reiterated that NYMEX
was slightly below the department's pricing in the short-
term. He began to comment on EIA short-term forecast but
referred back to slide 10. The Energy Information Agency's
prediction for calendar year 2018 and 2019 was $62/bbl. He
pointed out that Alaska's fiscal year falls into what EIA
was predicting on a monthly basis as a dip in oil prices.
Averaging EIA's monthly prices over FY 19, it predicted a
$60/bbl price for oil as reflected on slide 11.
Commissioner Fisher continued to discuss slide 11. In
looking at EIA's annual prediction, they were more bullish
expecting higher prices. He would discuss the underlying
assumptions in their numbers. He continued that the
analysts' average did not go beyond 3 years. Their average
price was in line with the department's forecast. They were
more optimistic in their numbers for FY 20 and FY 21. In
FY 22 the analysts saw another decline down to a nominal
amount of $64/bbl.
9:31:16 AM
Co-Chair MacKinnon asked if EIA's long-term forecast
considered China or the Asian markets switching over from
coal to a hydrocarbon or possibly natural gas.
Commissioner Fisher commented that what Co-Chair MacKinnon
suggested was part of it, and EIA was mindful of the
changes. He believed it had more to do with EIA's view of
what was happening with supply. He indicated that EIA
believed the world was under-investing in oil production
and that the investment would not keep up with demand. Over
time, an imbalance would result in driving up prices.
Co-Chair MacKinnon asked if it was reflective of renewable
energy or other energy production versus hydrocarbons.
Commissioner Fisher stated that renewables would impact
demand. Renewables would be a factor, but he also thought
demand would grow as economies expanded. He reiterated
there were different views around demand, but they tended
to be narrow in scope. He speculated that there was more of
a consensus about what would happen on the demand side.
Some believed there would be more growth and others
believed the growth would be slower. The difference in the
predictions was largely around supply.
Co-Chair MacKinnon clarified that the commissioner meant
"shale" rather than "shell." The commissioner responded in
the affirmative.
Senator Micciche thought EIA's considerations were across
all various probabilities. They discussed usage and
conversion probabilities with generation, transportation,
and manufacturing. It was a portion of their evaluation. He
suggested that those things affected their evaluations
particularly in the out years regarding their consideration
of renewables and other opportunities. He asked if he was
correct.
Commissioner Fisher agreed with Senator Micciche. He did
not intend to imply that analysts did not anticipate
impacts from renewables and other factors. He commented
that there seemed to be a narrower range of variability
around assumptions in demand than there was in supply.
9:34:45 AM
Commissioner Fisher turned to slide 12, "PRICE FORECAST:
Analyst Brent Forecasts Comparison to DOR ANS Forecast:
Short-Term," which showed a line graph entitled "Real Oil
Prices and Forecasts." The graph was focused on the short-
term analysts' forecasts. He pointed out that the analysts
did not like to predict beyond a few years forward. The
solid blue line was the average and the 2 dotted lines
represented 25 percent of the highest analysts and 25
percent of the lowest analysts. The span was between the
low $50 to high $70 range before settling in the mid $70
mark by the end of the forecast period. He pointed out that
the analysts forecasted a decline in the price of oil.
Whereas, the department saw the forecast remaining flat.
Commissioner Fisher turned to slide 13, "PRICE FORECAST:
Differences in Analyst Forecasts," which showed a table
with the detail of what was driving the differences in the
forecasts. He noted that analysts predicting low versus
high all predicted growing demand. Even the analysts that
believed the price would be low thought the demand for oil
would continue to grow. They saw it growing at a slower
rate. On the high side, analysts saw demand growing more
rapidly. The Energy Information Agency had its short-term
forecast being more steady or flat and their long-term
forecast being moderate in demand. He reported that EIA had
a reference case, a high case, and a low case, which he
would discuss further. He stated that the real difference
between analysts was on the supply side. Analysts that saw
a low price believed that there would be a supply blow-out
where there would be strong production in the U.S. market
as well as in OPEC countries. Analysts that saw a high oil
price saw the price of shale oil being flatter due to
discipline in the financial markets and access to capital.
They also saw disruptions in other parts of the world in
countries like Venezuela. The combination would drive the
price up in the near-term. He also mentioned that EIA had a
long-term thesis that the world was underinvesting in
production.
Co-Chair MacKinnon acknowledged that Senator Bishop had
joined the meeting.
9:38:04 AM
Senator Micciche thought analysts had become more
conservative over the last couple of years. He asked if the
commissioner could provide the portfolio of analysts to the
committee. Commissioner Fisher could provide the list as
well as the forecast from each analyst.
Commissioner Fisher displayed slide 14, "PRICE FORECAST:
Bullish Analyst Example: Guggenheim, Short-Term. He
explained that he had chosen a couple of analysts'
examples. Guggenheim was forecasting the price of oil
between $72 and $80 in the 2018-2019 period. Their view was
that India and China would add about 5.4 million barrels of
oil in terms of demand. They also believed electric vehicle
usage would be offset by demand growth in non-auto
consumption, and cold weather would increase the demand for
oil. In terms of supply, they viewed that OPEC had limited
spare capacity, shale production would not grow as expected
because of new exploration and production discipline, and
potential disruptions to Iran and Venezuela's exports would
push the world market higher.
Commissioner Fisher discussed slide 15, "PRICE FORECAST:
Bearish Analyst Example: Citi, Short-Term." The Bearish
analysts anticipated a price of between $49 and $57 in the
2018-2019 period largely driven by a blow-out of supply.
The demand assumptions were flat, and they did not see the
increase that the analysts from Guggenheim saw coming from
China and India. They saw a significant supply going into
the market place driven by U.S. production.
Commissioner Fisher referenced slide 16, "PRICE FORECAST:
Median Analyst Example: Deutsche Bank, Short-Term." The
analysts from Deutsche Bank saw a price comparable to the
state's prediction at $62 for the following few years. They
saw modest demand growth and supply that was largely able
to meet demand. They saw drivers that made it difficult for
OPEC to continue to maintain agreements as they had. There
might be a breakdown or production above agreed amounts as
well as a leveling out of production in the U.S. They saw a
steady state from where Alaska was currently.
9:41:46 AM
Commissioner Fisher advanced to slide 17, "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: Long-Term,"
which reviewed a long-term forecast rather than a short-
term forecast. The analysts started to fall off of the page
because they did not tend to predict long-term price
forecasts. He noted that the green line on the graph
represented EIA's reference case.
Commissioner Fisher continued to slide 18, "PRICE FORECAST:
EIA Brent Cases from 2018 Annual Energy Outlook: Long-Term
- Real Oil Prices and Forecasts," which showed a line graph
containing a low case, a reference case, and a high case
for EIA. The three EIA forecast cases had a wide range
between them. In the out years there was a low of about $30
and a high of about $140.
Commissioner Fisher spoke to slide 19, "PRICE FORECAST:
Differences in EIA Projection Cases," which showed a table
illustrating the difference between the forecast cases from
EIA. He noted that on the demand side the reference case
was a moderate demand versus the low case which was a
slowing global demand. The high case was a growing global
demand. The larger question was what would happen with
supply. In the low case, EIA saw higher OPEC production and
lower costs for non-OPEC exploration (mostly in the U.S.).
As a result, a lower price in the market place was adequate
to bring the supply necessary to meet demand. In looking at
the reference case, OPEC production was flat, and the U.S.
was the largest contributor for non-OPEC oil. However, a
price increase was required in order to meet the demand
requirement. In the high case scenario OPEC production was
falling and costs were growing substantially higher for
non-OPEC development. Therefore, a higher price was
necessary for the market to balance.
Commissioner Fisher reviewed slide 20, "PRICE FORECAST:
Nominal ANS Price Distribution," which showed a line graph
with colored lines showing P10 to P90 scenarios from the
fall forecast. The dotted black line represented the
department's current spring forecast. The graph showed that
in the near-term, the department was materially high than
what it predicted in the fall. In the long-term, the
department continued to believe that in 2028 the market
would be in the $75 range.
Commissioner Fisher referenced slide 21, "PRICE FORECAST:
Spring 2018 Forecast compared to Prior Forecast," which
showed a line graph entitled "Real Oil Prices and
Forecasts." He highlighted the dotted line which was the
fall forecast in real terms. The dashed line was the
department's spring forecast. The department continued to
have a long-term view that, in real terms, oil at about
$63/bbl worked for the world economy. There was enough
production to meet demand in real terms, and Alaska would
get there faster than the department expected in the fall.
Commissioner Fisher turned to slide 22, "PRICE FORECAST:
UGF Revenue Under Selected Price Paths," which showed a set
of alternative sensitivities for the committee's
consideration. Under each forecast was the undesignated
general funds (UGF) associated with that forecast. He would
not review all of the numbers but thought the chart
provided a perspective on what the alternative cases looked
like and their associated revenue impacts.
9:46:38 AM
Commissioner Fisher indicated the next portion of the
presentation was the cost forecast which would be presented
by Mr. Stickel.
Mr. Stickel displayed slide 24, "COST FORECAST: North Slope
Capital Lease Expenditures," which showed the North Slope
capital expenditure forecast for the spring forecast
compared to the fall forecast. It detailed some of the
comments made earlier in the presentation about cost
reductions in the oil patch. The department had reduced the
capital expenditure forecast for the next several years
compared to the fall forecast. There were 2 large
contributors. One was continued cost reductions by
producers on the slope, not necessarily a reduction in
activity by the producers. They had been able to bring down
costs and get concessions out of some of the service
providers. The second contributor was some delay in
projects by the non-producers. The department had seen very
little activity by non-producers in the most recent winter
compared to what the department expected. One major example
was that the Pikka unit announced that it cancelled its
drilling program for the following winter. The department
continued to forecast that activity would pick up again in
FY 19 and beyond as reflected in the chart.
Mr. Stickel advanced to slide 25, "COST FORECAST: North
Slope Operating Lease Expenditures," which showed the same
picture for operating expenditures. There was a slight
reduction for 2018 and 2019 primarily due to some of the
cost reductions at the existing units beyond FY 19. In
FY 23 there was an increase in the operating expenditures
from a little under $3 billion per year to about $3.5
billion per year when some of the new fields were expected
to come online including Pikka, Placer, Mustang, and
Moose's Tooth. Once those fields came on line there would
be an increase in operating expenditures.
Mr. Stickel indicated that slide 26, "COST FORECAST: North
Slope Transportation Costs," showed the largest change the
department made on the cost forecast from the fall
forecast. He referenced a settlement that had reduced
tariff rates by about $1/bbl. He pointed to the FY 18
tariff forecast which included a half-year of the change.
He continued that from FY 19 and beyond the department
reduced its transportation costs by about $1/bbl. For FY 19
the transportation cost change resulted in about a $46
million increase to the revenue forecast versus what it
would have been under the old tariff cost forecast.
Co-Chair MacKinnon asked who the developer was for the
Pikka project.
Mr. Stickel stated that the operator was Armstrong. His
understanding was that the operatorship was transferring to
Oil Search sometime in the current month.
Co-Chair MacKinnon asked if the state's failure to pay the
tax credits had possibly impacted the operator.
Mr. Stickel thought it was reasonable to assume that the
lack of tax credit payments was somehow associated with the
reduced activity during most recent fiscal year.
9:50:55 AM
Mr. Stickel moved to slide 28, "Explanation of Statutory
Appropriation":
? Statutory guidance in AS 43.55.028
? Appropriation is 10 or 15 percent of "taxes
levied by AS 43.55.011"
? Department calculates statutory appropriation based
on production tax before application of any credits
? Credits are not set out in AS 43.55.011, therefore
department adopted an interpretation based on tax
before credits
? Calculated and provided to Legislature in 2015-
2018 sessions
? Published in RSB beginning fall 2016
? Incorporated into Governor's budget beginning
2017
? Legislative Legal opinion: "ambiguous" as to whether
to calculate on tax before or after credits
? Court precedent to interpret ambiguous tax
statute in favor of taxpayer
? Department was aware that credits had been used
to secure loans and finance projects; awareness
influenced interpretation favoring taxpayer
? Interpretation consistent with spirit of the
program and intent of legislature to market
Alaska resource development with commitment to
pay credits within a short-term timeline
Mr. Stickel reported the department receiving questions
about the statutory appropriation, how it was calculated,
and why. He relayed that Alaska Statute (AS) 43.55.028 was
the section of the production tax statutes that referenced
tax credits. There were several subsections within
AS.43.55. The tax credit guidance mentioned either 10
percent or 15 percent of taxes levied under AS 43.55.011
for the statutory appropriation. He continued that when the
state's price forecast was $60 or greater it was 10 percent
of the taxes, and when the price forecast was below $60 it
was 15 percent of the taxes. He explained that when the
department was looking at it a few years prior,
AS 43.55.011 laid out the production tax calculation - the
minimum tax or the 35 percent net profits tax.
Mr. Stickel continued that other sections of statute,
particularly AS 43.55.023, AS 43.55.025, and AS 43.55.025,
laid out the different credits. The department's
interpretation was to calculate the statutory appropriation
based on the production tax before credits in AS 43.55.011
because there were no credits out of AS 43.55.011. The
department had provided the information to the legislature
and the administration beginning in 2015. The department
had published the statutory appropriation in the Revenue
Sources Book beginning in Fall 2016 and it was incorporated
into the 2017 governor's proposed budget. There had been
some question as to whether the appropriation should be
based on tax before or after credits. The department's
understanding was that there was a Legislative Legal
Services Opinion that the statutory guidance was ambiguous
and precedent. The department thought the best practice of
interpreting such an ambiguous statute would be in the
benefit of the tax payer.
Co-Chair MacKinnon asked if the department's current
calculation was consistent with past calculations. She
would be supporting the accepted practice that had been
used versus recalculating a percentage based on a new
interpretation. She thought that, although a new
calculation could be valid, it should be introduced in a
piece of legislation changing statute, rather than trying
to rewrite it on the fly.
Senator Micciche wondered if the administration's
consistent opinion was to calculate the tax before credits.
Commissioner Fisher responded affirmatively. He stated that
the administration had consistently taken that position. He
thought that until the current year, it had been the way
the legislature talked about the subject. He suggested that
the governor's proposed tax credit legislation (which
proposed to bond in order to pay tax credits) assumed that
the calculation was based on the tax before credits. The
administration believed that the right thing to do was to
maintain the current interpretation because it was right
and because it had been relied upon by industry and would
be the least disruptive to industry to continue with the
administration's interpretation.
9:55:30 AM
Senator Micciche assumed there was significant amount of
weight based on the court precedent of interpreting
ambiguous tax statute in favor of the tax payer in the
past. He asked if he was accurate.
Commissioner Fisher concurred. He added that there was some
deference given to the department assigned to interpret the
statute. He believed both weighed in favor of maintaining
the status quo.
Co-Chair MacKinnon reminded the audience that the
legislature was bicameral, and the other body had drafted a
new interpretation of the number the state should currently
pay for tax credits. As a result, it was creating
instability and uncertainty in an industry whose revenue
greatly affected Alaska. she understood not wanting to pay
the state's bills, but she did not support not paying what
the State of Alaska owed.
Mr. Stickel spoke to slide 29, "Illustration of Tax and
Credit Calculations," which showed how the department
arrived at its statutory appropriation calculation. The
department was estimating the appropriation for FY 19 to be
$184 million which consisted of primarily North Slope
production. It also included some calculation for Cook
Inlet and private land owner royalties. The slide showed
the calculation for the North Slope oil portion of the
statutory appropriation. He highlighted the estimated per
barrel tax of about $1.65 billion at the 35 percent tax
rate before application of the per barrel credit. At the 10
percent rate the FY 19 appropriation would be $165 million.
If Cook Inlet and some smaller pieces were added, the
amount would total $184 million.
Co-Chair MacKinnon asked if any of the unpaid tax credits
were owed to the largest three oil companies. She referred
to her earlier question regarding the Pikka project and the
state not living up to past obligations of planned payment
history.
Mr. Stickel replied that the credit statutes stated that
only companies with less than 50,000 barrels of oil
equivalent per day production qualified for state purchase
of credits. He confirmed that the big three oil companies
did not qualify.
Co-Chair MacKinnon opined that the Senate was belaboring
the subject because the investment in paying the state's
obligation increased production. She continued that while
she watched some projects languish, they did not have the
capital to move forward. Producers had anticipated being
paid based on Alaska's previous ability to pay 100 percent
of its tax credit obligation in a given year. The state
fell back to the statutory interpretation, which she
thought was understandable given the current fiscal
situation. The new calculation created instability.
Senator von Imhof commented that initially when the
governor's budget came out in the prior December, the tax
credit payment was estimated to be about $206 million. She
noticed $184 million in the footnote on the slide and
wondered if it was a new number.
Mr. Stickel answered in the affirmative and added that the
following slide provided greater detail on the change from
$206 million to $184 million.
Mr. Stickel reviewed slide 30, "FY 2019 Statutory Credit
Appropriation":
Key Changes from Fall 2017 to Spring 2018:
? Gross value increased
? $7 higher wellhead value .notdef $1.2 billion higher
gross value
? Tax before credits increased
? $1.2 billion more profit x 35% = $400 million
? Different Statutory Appropriation Multiplier
? Appropriation is 15% of tax before credits when
price forecast <$60, 10%when price forecast is
$60+
? Estimated Statutory Appropriation is $184 million
? Down from $206 million in Fall 2017
? Based on tax before credits for North Slope
plus Cook Inlet and private landowner royalty
Mr. Stickel relayed that the slide addressed the question
of why the department changed the statutory appropriation
estimate. He explained that with higher oil prices and
lower costs, the department estimated about $1.2 billion of
increased value for FY 19 versus what it had previously
forecasted. The amount was about $400 million in increased
tax before applying credits at the 35 percent rate.
However, although the profit increased, the department was
using a 10 percent rather than a 15 percent multiplier. The
multiplier change had to do with the $60 threshold that had
been discussed earlier. The price forecast had gone from
the high $50 range up to $63 and using the 10 percent
multiplier. Therefore, the statutory appropriation was
slightly less than the fall forecast.
10:00:57 AM
Senator Micciche was curious if the administration was
pushing the tax credit bonding bill conveying the effects
of it over the following several years.
Commissioner Fisher stated that the bill was a priority of
the administration. He spent more of his time trying to
advance the tax credit bill than most other subjects. He
thought that the bill made sense for the industry and for
Alaskans. Essentially, the state was paying for the cost of
the bonds through a discount that the producers or the
credit holders were willing to accept. The administration
saw the bill as a win-win. It would put Alaskans back to
work and bring additional production on line sooner
bringing in additional royalty and tax revenue for the
state. He thought that the administration had been clear
with credit holders that the fall forecast would change in
the spring, and the change would potentially impact the
offer that was made under the proposed bill. He indicated
that the department would have to redo the calculation with
the new numbers. He noted the department had shared with
credit holders the expected discount based on the fall
forecast. The department would provide the updated discount
amount once the calculations were done again. He believed
that producers would continue to see significant value in
the proposal. The forecast did not change his interest and
the administration's interest in seeing the bill move
forward.
Co-Chair Hoffman asked, as chairman of the operating
budget, how he should proceed should he continue to follow
the governor's path. He asked the commissioner if he felt
he was making headway in convincing the legislature to pass
the bill.
Commissioner Fisher was concerned about the bill, as the
House had not scheduled a hearing yet. He could not give
Co-Chair Hoffman assurance that the bill would pass. If the
bill did not pass, it would be the administration's
position that the legislature should appropriate an
additional $147 million. There was $27 million in the
current budget to cover interest costs.
Co-Chair Hoffman asked, with less than 30 days left of the
90-day session, when the commissioner would be able to
determine the success or failure of the legislation. He
thought it was necessary to know that information in order
to move forward with the budget process. He asked if
leaving $27 million as the only payment was an option. He
wondered, if the bill did not pass, whether the
administration planned to submit a supplemental request in
the following year.
Commissioner Fisher hoped that there would be more clarity
in the following two weeks. His goal would be to see that
the budget was either the full amount of $184 million, or
$27 million with the bill passed. He thought it would be
harmful to the industry and Alaska's economy to delay a
decision until a supplemental appropriation was approved.
10:06:05 AM
Co-Chair Hoffman thought the House was scheduled to act in
the immediate future - in the current or following week. He
believed the commissioner's timeline was stretched out too
far.
Co-Chair MacKinnon suggested that the committee might glean
whether the House intended to act on the piece of
legislation based on the operating budget that was sent
over to the Senate. She thought if the House sent over an
operating budget with only $27 million in it, it might be
fair to assume that they would be passing a bill. She did
not look favorably at tying pieces of legislation together
as a way of passing other legislation. She hoped that all
legislators would do what was best for Alaska rather than
playing games with pieces of legislation. She found that
the Senate would do what was right by stepping up to pay
the state's obligations based on what was owed and the
Alaska State Statute. She looked forward to negotiations
with the other body and their concerns. She was aware of
several concerns by the House. She hoped that everyone
would work together.
Senator Micciche thought it was unlikely that one of the
major companies would repurchase the credits being above
the minimum tax in the current price range. He asked if he
was correct.
Commissioner Fisher stated that Senator Micciche's comment
was largely correct. At the current price point, the major
companies were paying the tax at the alternative minimum.
The credits would not allow them to go below the minimum.
They did not see value to purchasing the credits at the
present time. He noted that Mr. Stickel had mentioned a
settlement around the Trans-Alaska Pipeline System (TAPS)
litigation. There would be some additional liability on
behalf of the major companies of about $150 million. The
department anticipated that the major companies might buy
between $100 mill and $125 million in credits. The state
had about $800 million of outstanding credits presently and
anticipated another $200 million in the next couple of
years. In the scheme of things, the major companies
purchasing $125 million in credits did not change the
dynamic for the state or the industry.
Senator Micciche referenced peripheral revenue changes the
legislature made over the previous several years. He did
not have any desire to change oil taxes further, as the
legislature had made some significant changes, including
the minimum tax. There were several different ways the
state benefited from the minimum tax change. He thought
there had been a diversification of revenues, some of which
were more peripheral than others.
Commissioner Fisher asked the senator to rephrase his
question.
Senator Micciche reiterated that the changes the
legislature made to the Cook Inlet and the North Slope
credit program and the change to the minimum tax provided
other peripheral revenue advantages that were not often
highlighted by the news or talked about amongst the public.
He argued that the legislature had made some significant
differences that were not realized.
Commissioner Fisher thought the senator was accurate. He
worried about the amount of change that had occurred in the
industry. It was difficult for businesses to plan when
there was a high degree of structural change.
10:11:00 AM
Mr. Stickel referenced slide 31, "CREDITS FORECAST:
Outstanding Tax Credit Obligations," which showed a bar
graph entitled "Ending balance of credits available for
repurchase, assuming statutory appropriation for FY 2019+."
He explained the slide showed a status quo view of how the
department saw the next several years playing out. If the
legislature made the statutory appropriation each fiscal
year but did not pass the bond purchase bill, the
department estimated about $946 million of tax credits
available for state purchase in FY 19 and beyond. He
continued that the department estimated that $125 million
would be purchased by the major producers to offset some of
the TAPS related liabilities for previous calendar years
leaving a balance of $821 million of credits available for
state purchase. If the statutory appropriation was made
each year, under the scenario on the slide, the balance of
credits would be exhausted in FY 23.
Commissioner Fisher would discuss the revenue forecast
specifically in the following portion of the presentation.
Vice-Chair Bishop referred back to slide 4. He noted the
production curve compared to the rest of the world. He
advocated getting the state's debt paid off as soon as
possible in order to keep production increasing rather than
decreasing. He believed production was the key to capturing
high prices.
Co-Chair MacKinnon noted that it also added 25 percent
royalty at a minimum, if not 33 percent to the corpus of
the Permanent Fund which would help in Alaska's future to
ensure a dividend could be paid under whatever statutory
language the state wound up with when the state came out of
the current fiscal situation. She was aware of people who
believed the state should not pay its bills if it could not
pay a full dividend. However, looking at the long-term
picture, she argued that the way the legislature ensured a
long-term dividend was to ensure that there was money in
the Earnings Reserve Account (ERA), the corpus of the
Permanent Fund continued to grow, and the corpus was
inflation-proofed over time. The Senate had passed two
different pieces of legislation to ensure the future of the
dividend to Alaskans and to move through paying of the
state's obligations.
10:14:43 AM
Commissioner Fisher turned to slide 33, "FORECAST CHANGE:
Comparison of Spring 2018 and Fall 2017 Forecasts," which
showed a table showing the changes between the spring and
fall forecast in terms of oil price, production, leases,
and transportation costs. It also depicted the difference
in terms of UGF petroleum revenue.
Commissioner Fisher displayed slide 34, "UGF Relative to
Price per Barrel, FY 2019," which showed a helpful chart.
The chart allowed observers to think about what happened to
UGF revenues as the price of oil changed. He noted that it
was interesting that the state's forecast was at an
inflection point. He considered that for every $1 increase,
the state would receive approximately $75 million of
additional revenue. Conversely, for every $1 decrease, the
state would receive about $30 less. The reason for the
difference in numbers was because at $63 companies were at
their inflection point between a profits tax and the
minimum tax. The math was slightly different. Below that
price point a change resulted in about a $30 million change
in revenue. Above the amount it was about $75 million.
Commissioner Fisher referenced slide 36, "REVENUE FORECAST:
2017 to 2019 Totals," which showed the revenue forecasts
between FY 17, FY 18, and FY 19. He pointed to the table
with a high-level view. The unrestricted general funds had
grown about $1 billion between FY 17 and FY 18 then a much
more modest growth. He pointed out the big difference under
'Other Revenue,' where the department's assumptions had
declined largely driven by the change of investment
revenue. He mentioned that the Permanent Fund had
experienced a very strong year in FY 17 in terms of
returns. He continued that FY 18 assumed 8 months of actual
returns and an expected return of 6 percent in the last 4
months of the year. He reported that FY 19 was more
consistent with the long-range PF assumption of 6.5 percent
return on investment.
10:17:56 AM
Commissioner Fisher reviewed slide 37, "WRAP-UP: Changes to
10-Year Unrestricted Revenue Outlook," which showed how
production, price, and UGF had changed from the fall
forecast to the current spring forecast. He pointed out
that for FY 18 the department was predicting a little over
$250 million of additional revenue. From FY 19 and beyond
revenue leveled out to about $200 million. The chart
provided a sense of the additional revenue that would be
available for the state. He did not believe that the
increase would completely address the fiscal challenges the
state faced without other measures, but thought the state
was moving in the right direction.
Co-Chair MacKinnon agreed that the state was moving in the
right direction. She noted additional revenue, a slight
decline in production, reduced operating expenses
benefiting the transportation charges along with the
lawsuit mentioned. She thought the department had brought
positive news since the prior forecast. She surmised that
the legislature had challenging times ahead for both
legislative bodies to reach an agreement in addressing
Alaska's fiscal challenges. However, she opined that the
state had the means to take care of itself should the
legislature choose to act. She thought several years ago
the Senate's message was that it was time to act. She
believed the same was true presently. She professed that
the sooner the legislature acted, the safer and more secure
the remaining reserves would be to produce interest to help
close the fiscal gap.
Vice-Chair Bishop complimented the administration for its'
comprehensive overview.
Co-Chair MacKinnon concurred with Vice-Chair Bishop. She
appreciated the timing of the forecast, as it allowed the
legislature to use it in consideration of the budget.
Co-Chair MacKinnon discussed the agenda for the following
day.
ADJOURNMENT
10:21:22 AM
The meeting was adjourned at 10:21 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 031918 Spring 2018 Revenue Forecast Presentation_03162018.pdf |
SFIN 3/19/2018 9:00:00 AM |
DOR Spring Revenue Forecast 2018 |
| 031918 DOR Response to Senate Finance_20180330.pdf |
SFIN 3/19/2018 9:00:00 AM |
Spring Revenue Forecast 2018 |
| 031918 Analyst Brent Price Forecast Backup_V2.pdf |
SFIN 3/19/2018 9:00:00 AM |
Spring Revenue Forecast 2018 |