Legislature(2019 - 2020)SENATE FINANCE 532
01/16/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Committee Organization/introduction of Members and Staff | |
| Presentation: Department of Revenue, Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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 |