Legislature(2019 - 2020)SENATE FINANCE 532
01/23/2020 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Revenue Forecast - Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 23, 2020
9:01 a.m.
9:01:37 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Mike Barnhill, Acting Commissioner, Department of Revenue;
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Colleen Glover, Director,
Tax Division, Department of Revenue; Senator Cathy Giessel;
Senator Gary Stevens.
SUMMARY
^REVENUE FORECAST - DEPARTMENT OF REVENUE
9:04:38 AM
MIKE BARNHILL, ACTING COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself. He stated that he was available to
answer questions, specifically about the bonding issues in
the Department of Revenue (DOR). He discussed his
background. He shared that he was a lawyer by trade, and
had worked for the state since 1998. He continued to share
his work history with the state.
9:06:10 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, introduced himself, and
discussed his background.
Co-Chair Stedman shared his work relationship with Mr.
Stickel.
9:07:32 AM
COLLEEN GLOVER, DIRECTOR, TAX DIVISION, DEPARTMENT OF
REVENUE, introduced herself, and shared her work history
with the state.
Acting Commissioner Barnhill noted that he worked the year
prior for the Office of Management and Budget (OMB).
Co-Chair Stedman stated that he was glad that Acting
Commissioner Barnhill was in his current position.
Mr. Stickel discussed the presentation, "Fall 2019 Revenue
Forecast" (copy on file). He stated that the goal of the
presentation was to give a high level overview of the
revenue forecast of the state. He stated that there were
some additional slides at the end of the presentation.
Mr. Stickel highlighted slide 3, "Revenue Forecast: 2019 to
2021 Totals." He shared that the total state revenue was
forecast-stable at around $11 billion per year. He
explained that state revenue was presented in four broad
categories consistent with budget documents. He shared that
unrestricted general fund (UGF) revenue was available for
appropriation by the legislature for any purpose, and was
the subject of most budget discussions. He shared that UGF
was approximately $5.4 billion in FY 19, and was forecasted
just over $5 billion in both FY 20 and FY 21. He announced
that most of the forecast presentation, and most of the
budget debate centered on the UGF category. He stated that
designated general funds (DGF) was technically available
for appropriation, but those revenues were customarily
appropriated for different sources. He shared that the
alcohol tax revenue was customarily appropriated for
alcohol and drug abuse treatment and prevention. He
remarked that the other restricted revenue category, which
were revenues that were less discretionary in nature,
because of debt covenants, constitutional provisions, or
other provisions that put a firmer restriction on using the
revenue. He stated that there was also the federal revenue
category. He explained that all federal receipts had some
provisions from the federal government in how those
revenues could be used.
9:11:18 AM
Mr. Stickel looked at slide 4, "Relative Contributions to
Total State Revenue: FY 2019":
Total State Revenue: $11.1 billion
Investment Earnings: 36.2 percent
Federal Revenue: 29.9 percent
Petroleum: 23.7 percent
Other Revenue: 6.5 percent
Non-Petroleum Corporate Income: 1.1 percent
Fisheries: 1.1 percent
Tourism: 0.9 percent
Mining: 0.5 percent
Co-Chair Stedman asked for more insight of the investment
earnings.
Mr. Stickel replied that the 36.2 percent represented the
share of the $11.1 billion of total revenue that was
attributed investment. He pointed to slide 3, which showed
that investment earnings fell into a few different
categories. He noted that the unrestricted portion, which
was $2.8 billion in FY 19, was primarily the Permanent Fund
transfer to the general fund. He shared that the $1.1
billion of other restricted investment revenue represented
both earnings on the constitutional budget reserve (CBR),
and any Permanent Fund earnings above the transfer to the
general fund.
Co-Chair Stedman wondered whether the transfers used the
POMV.
Mr. Stickel replied in the affirmative, and shared that
there was a slide that would examine the Permanent Fund
calculation.
Mr. Stickel addressed slide 5, "Unrestricted Petroleum
Revenue Forecast: 2019 to 2021 Totals." He stated that the
slide focused on the petroleum revenue. The category of
revenue took in $2 billion in FY 19, but would decrease
over the next two years.
9:16:39 AM
Co-Chair Stedman asked for a brief explanation about the
royalty deposit to the Permanent Fund. He explained that
there was a statute and a constitutional obligation.
Mr. Stickel replied that, under the state constitution, the
Permanent Fund received 25 percent of all royalties and
related revenues from minerals. The minerals included oil,
gas, and any mining royalties. He stated that there was a
statute that provided for leases issued after 1980 would
have an additional 25 percent of royalties deposited to the
Permanent Fund. He explained that those leases under
statute, 50 percent of the royalties were deposited to the
Permanent Fund. He furthered that following the statute
results in approximately 30 percent of petroleum royalties
were deposited into the Permanent Fund. He stated that
following the constitutional dedication would result in 25
percent of royalties deposited into the Permanent Fund. He
noted that the difference amounted to approximately $75
million in FY 20; and $68 million in FY 21.
Co-Chair Stedman remarked that the issue would come back to
the table later in the budgetary process, and possibly in
order of operations. He shared that there was a struggle
with the funding through the statutory obligation of the
royalties.
Mr. Stickel stressed that only the constitutional deposit
was made in FY 19. He furthered that the full statutory
deposit was made in the FY 20 budget. The forecast assumed
that the statutory deposit would be made in FY 21 and
beyond.
Senator Wielechowski looked at the corporate income tax,
and wondered how the number would change if BP transferred
its assets to Hillcorp.
Mr. Stickel responded that the BP - Hillcorp transaction
was incorporated into the forecast, but that was as much
detail as could be given.
Senator Wielechowski queried the transaction number.
Acting Commissioner Barnhill explained that there were two
statutes in law that required the Department of Revenue
(DOR) Tax Division to keep the particulars of taxpayer
information and tax rate of returns confidential. He stated
that DOR was advised by the Department of Law (LAW) that
all that could be said with respect to the transaction was
that it had been modeled and included in the Revenue
Sources Book, but they could not give specific numbers,
because it would violate the statute.
Co-Chair Stedman shared that the model would be shared, and
there was a rough percentage of ownership known. Therefore,
there could be some estimated numbers to measure the impact
without using any confidential information.
9:21:28 AM
Acting Commissioner Barnhill stressed that DOR would be
available to provide explanation and fiscal impact on
proposed legislation that may change the tax law.
Co-Chair Stedman stated that the committee would work with
the department.
Senator Hoffman expressed concern that it would drastically
change the landscape to the state, and was worried about
the blueprint that would devastate the revenue stream to
the state.
Co-Chair Stedman stated that the corporate tax rate had
changed from 34 percent to 21 percent since the
implementation of the structure. He expected significant
changes in cash-splitting arrangements. He noted that the
applied corporate structure could show significant
movements in cash.
Senator Wielechowski pointed out that the experts had
asserted that the lack of transparency in the state was
"shocking." He noted that the finance committee did not
know the impact of the BP - Hillcorp transfer. He queried
the impact of a worldwide apportioning of the corporate
income tax opposed to separate accounting.
Co-Chair Stedman felt that the question was not a germane
subject, but that the discussion could be had in the
future.
9:25:56 AM
Acting Commissioner Barnhill replied that he would be
willing to present on the subject.
Co-Chair Stedman stressed that the committee would not ask
the department to breach confidentiality.
Acting Commissioner Barnhill would provide appropriate
information.
Co-Chair Stedman stressed that there would not be a debate
of the oil tax structure.
Senator Wielechowski wondered whether Acting Commissioner
Barnhill would support changes to the transparency laws, so
the information could be disclosed to Alaska.
Acting Commissioner Barnhill replied that the would not
express support nor opposition. He stressed that it was a
deep policy discussion.
Senator Bishop noted that the revenue was decreasing when
there was an increase to the annual rents. He wondered
whether the mining rent increase was factored into the
Revenue Sources Book. He stated that he did not need an
answer immediately.
Mr. Stickel looked at slide 6, "Changes to Two-Year
Unrestricted Revenue Outlook." The slide highlighted some
of the key changes in the revenue forecast compared to the
spring forecast. He shared that Alaska North Slope (ANS)
oil prices averaged 56 cents per barrel higher than what
was forecasted in the spring, however unrestricted revenue
came in approximately $50 million below the forecast. The
primary reason for the revenue shortfall was due to the
production tax revenue, which came in $140 million below
the spring forecast for unrestricted revenue. He explained
that it had to do with higher than expected refunds for the
2018 tax year. He furthered that, attributing some
production tax payments to the CBR at the end of the year,
which reduced the unrestricted portion. He explained that
for FY 20, the forecast of ANS oil price was reduced by
$2.46 per barrel. He stated that for FY 21, the forecast of
ANS oil price was reduced by $7 per barrel to $59 per
barrel. The lower oil price forecast was the primary reason
for reductions to the revenue forecast in both years.
Co-Chair Stedman stressed that the forecast for FY 21 would
be updated in the spring, and may change from the fall
forecast.
9:30:19 AM
Mr. Stickel highlighted slide 7, "Total Percent of Market
Value (POMV) Transfer Forecast":
?The statutory POMV rate changes to 5 percent
beginning FY 2022.
?For FY 2019 FY 2021 this rate is 5.25 percent.
?Forecast assumes Permanent Fund's long-term total
return expectation of 7 percent.
?Differing Permanent Fund returns and petroleum
deposits could significantly alter actual POMV.
Co-Chair Stedman announced that the discussion could
continue in a meeting with the Permanent Fund Corporation.
Mr. Stickel agreed.
Mr. Stickel addressed slide 9, "Price Forecast
Methodology":
?In prior years, the price forecast was formed based
on input from an annual price forecasting session.
o Depending on the year, the projections were
used directly, altered based on market factors,
or discarded entirely. This decision would be
made in an ad-hoc manner.
?Beginning with the Fall 2019 Revenue Sources Book,
the oil price forecast is based on the most recent
futures market projections.
?For current and next fiscal year, using Brent crude
oil futures traded on the Intercontinental Exchange
(ICE).
o Premium applied to Alaska North Slope crude for
FY 2020
?New method allows for a more timely and transparent
forecast.
Senator Wielechowski wondered whether there was a back test
of the new methodology to determine its accuracy over the
last 20 or 30 years.
Mr. Stickel replied that there was some back testing, and
it showed that the futures market methodology was at least
as accurate as the previous methodology.
Mr. Stickel highlighted slide 10, "Brent Forecasts
Comparison as of 1/16/2020." He stated that the page showed
four years of historical oil prices and projections from
various sources. The price projections were shown in real
terms, so not including inflation. He explained that in the
month and a half since the preparation of the price
forecast, the forecast was still in line with the futures
prices. He announced that the futures market was examined
in the morning, and running the prices today would still
result in $59 per barrel for FY 21. He noted that, over the
long term, the forecast was slightly higher than the
futures market, because of the decision to hold prices
constant after the budget year. The forecast was slightly
below the average of oil market analysts, and several
dollars below the Federal Energy Information Agency
projections. He reiterated that there was a range of prices
forecasts available, and the DOR forecast looked reasonable
and conservative.
Mr. Stickel addressed slide 11, "UGF Relative to Price per
Barrel (without POMV): FY 2021." He asserted that the
forecast would probably be wrong. He stated that the slide
showed how unrestricted revenues would change based on
different oil prices for FY 21. The forecast was $59 per
barrel, resulting in just under $2 billion of unrestricted
revenue that did not could the Permanent Fund transfer. He
shared that each once dollar change to the oil price,
resulted in approximately $30 million to $35 million change
in unrestricted revenue over the course of the year.
Co-Chair Stedman asked about the switch between gross and
net tax.
Mr. Stickel stated that a slide would address that
question.
Mr. Stickel discussed slide 13, "Production Forecast
Methodology":
?Ten-year oil production forecast for the Revenue
Sources Book is developed internally by DOR and DNR.
?Official forecast is most likely value taken from a
range of possible outcomes consistent with industry
best practice.
?Consists of oil volumes produced from three
categories of wells/fields:
o Currently Producing
o Under Development
o Under Evaluation
Mr. Stickel highlighted slide 14, "North Slope Petroleum
Production Forecast." The official case was used for the
revenue forecast, which had production declining slightly
over the next few years, and recovering to the $500,000
barrels per day. He noted the slight difference in treating
natural gas liquids, which were used in enhanced oil
recovery. The barrels were produced at Prudhoe Bay and
injected in the Kuparuk reservoir to support oil
production. The slide assumed 10,000 barrels per day of the
natural gas liquids. The projection numbers in the Revenue
Sources Book did not include the barrels, because they were
not delivered into the Trans-Alaska Pipeline System (TAPS)
Mr. Stickel looked at slide 16, "Allowable Lease
Expenditures: Overview":
? Costs of production (i.e. allowable lease
expenditures) are deductible against gross revenues to
calculate net taxable revenues.
o Includes both operating and capital costs.
o If a company has insufficient revenues (i.e.
net operating loss), remaining (or excess) lease
expenditures can be carried forward into a future
tax year.
o Capital costs are not depreciated for
production tax purposes.
This means that taxes are reduced by development
costs prior to production, but are then higher
once production starts.
? If 35 percent of the net taxable revenues are less
than 4 percent of the gross revenues, the minimum tax
is due.
9:40:04 AM
Mr. Stickel addressed slide 17, "North Slope Allowable
Lease Expenditures." He stated that the slide showed a ten-
year history and forecast of the allowable lease
expenditures are for the North Slope. The cost forecasts
were developed using several sources, including detailed
projections provided by the operators of every unit. He
stated that he also examined historical spending trends and
public information. He explained that when dealing with
some of the new fields, there was a risk factor applied to
the costs of those fields in agreement with the production
forecast. He noted that, looking back over the last decade,
both operating and capital expenditures peaked in FY 15 and
declined with falling prices in the following years. He
announced that allowable operating expenditures were $2.9
billion in FY 19, and there was an expectation that it
would remain fairly stable with a slight decline in the
upcoming year. He stated that it would level out around $3
billion by FY 24 as new fields come online. He shared that
allowable capital expenditures were $2.2 billion on the
North Slope in FY 19, which was the first year of increases
after three down years in a row. He remarked that there was
an expectation of capital expenditures to peak at $3.6
billion in FY 22, with spending on large new developments
like Pikka and Willow. He shared that it would then taper
off later in the decade. He noted that in the out years
that showed capital expenditures declining, there was
significant opportunity to increase those forecasts as new
developments enter into the forecast.
Co-Chair Stedman asked how the numbers were determined.
Mr. Stickel replied that the historical information came
from production tax returns.
Co-Chair Stedman surmised that the forecasted expenditures
could change according to changing economic conditions. He
stated that the forecast should be considered a best guess.
Mr. Stickel agreed. He stated that it was only pertaining
to projects included in the production forecast.
Co-Chair Stedman felt that the committee would revisit the
slide, and have a discussion with the Department of Labor
and Workforce Development (DLWD).
Senator Hoffman queried the correlation between capital
expenditures and investment for exploration.
Mr. Stickel replied that exploration costs were included in
the capital expenditure numbers.
Senator Hoffman assumed that after 2022 to 2029, there
would be a $1.5 billion reduction, and potentially a large
portion of that would be less exploration in Alaska.
9:45:31 AM
Mr. Stickel replied that the forecast assumed a level of
ongoing exploration, which was fairly similar to the recent
couple of years. The reduction in capital expenditures in
the forecast had to do with the expectation of significant
spending on several new developments over the upcoming two
years. He noted that there were no large new developments
in the forecast to take up the level of spending in the
later years.
Co-Chair Stedman requested a breakdown of Senator Hoffman's
request on the capital expenditures and its components.
Mr. Stickel stated that there was a slide in the addendum
that provided additional detail, and agreed to provide
further information.
Mr. Stickel looked at slide 18, "North Slope Transportation
Costs." He explained that the slide showed the costs of
pipelines, including TAPS and marine transportation to move
oil from the North Slope to market on the west coast. He
shared that transportation costs were deducted from the
gross value calculation for both tax and royalty purposes.
He explained that, in general, transportation costs varied
with production. He furthered that as volume decreased,
costs on a per barrel basis increased. He noted the cost
increase from FY 10 to FY 14, as production declined,
before leveling off as production held around 500,000
barrels per day. He noted the changes in how the pipeline
tariffs were calculated, which contributed to the reduction
shown in FY 19.
Senator Bishop wondered whether Alyeska was still in their
strategic reconfiguration in FY 10 to FY 14, which added to
part of the increased cost that should be lower than the
transportation costs going forward.
Mr. Stickel replied in the affirmative.
Co-Chair Stedman noted the difference in the percentage and
the actual dollars, at roughly $1.5 billion spent in
shipping. He requested a breakdown on that information to
understand the underlying total cost without the additional
capital expenditures.
Mr. Stickel agreed to provide that information.
Ms. Glover highlighted slide 20, "Tax Credits for Purchase
Status." She stated that the slide showed the credits that
could be purchased by the state.
9:51:01 AM
Co-Chair Stedman surmised that the credits were created
several years prior over a period of time, but had mostly
since been terminated. He noted that there was a bill
pending of roughly $740 million in liability. He queried
the required statutory amount, if the bill was paid in FY
20.
Acting Commissioner Barnhill replied that, for purposes of
the forecast, the economics research group assumed that the
state would take a break in FY 20. The state would issue
debts with a payoff of the outstanding balance on the books
in FY 21.
Co-Chair Stedman shared that, in the current year, there
was nothing in the budget for the liability. He queried the
amount of the statutory payment in the current year.
Mr. Stickel replied that it was approximately $100 million
to $200 million, but agreed to provide that information.
Co-Chair Stedman offered the concept of $150 million. He
stressed that the bill had not yet been paid.
9:55:33 AM
Acting Commissioner Barnhill remarked that the legislature
and past administrations developed an idea to try to
attract smaller producers to come to Alaska to do business.
He stated that there were multiple programs imbedded in
that idea. He shared that the state would pay some portion
of the business's expenses in cash. He noted that, since
the inception of the program, the state had a practice of
paying off those credits in cash in a timely manner.
Co-Chair Stedman stressed that it was not a discussion of
credits, rather it was a discussion of liability. He
remarked that there was an open ended question about
resolution before the end of the current legislative
session.
Co-Chair von Imhof noted that, like other statutes,
sometimes the legislature ignores them. She stressed that
the legislature was the appropriating body. She looked at
the $750 million in outstanding liability, and shared that
she was part of the 2017 effort to end the cash credit
program. She shared that the bill made available allowances
for a robust secondary market to purchase the credits. She
noted that the certificates had been purchased in the
secondary market at a steep discount. She wondered whether
it had affected some of the $750 million balance.
Acting Commissioner Barnhill replied in the affirmative,
and deferred the details to Ms. Glover.
Ms. Glover continued that she did not know the price of the
credits that were being sold on the secondary market. She
stated that the balance was dynamic, so the credits could
be used against a production tax liability. She did not
have the exact number of what had been transferred or sold.
She remarked that there was a requirement in statute to
provide which credits the state purchased in the previous
calendar year. She agreed to provide that draft soon.
10:01:35 AM
Co-Chair von Imhof wondered whether a possible $150 million
tax certificate would be removed if it was satisfied on the
secondary market.
Ms. Glover replied that it would reduce what would be
available for purchase.
Co-Chair Stedman surmised that it would not be available
for purchase if it was used against their tax liability.
Ms. Glover agreed, but it would not be available for
purchase.
Senator Bishop appreciated the conversation, because he had
constituents that were owed the money.
Senator Wielechowski remarked that the tax credit statute
was a discretionary statute. He wondered whether the unpaid
Permanent Fund Dividend (PFD), which was a mandatory
statute, be considered a debt.
Co-Chair Stedman felt that it was not a germane question.
Acting Commissioner Barnhill replied that the dynamic and
context of the discussions had been about how to deal with
the statutes that suggested payments of certain amounts. He
stressed that there was not enough money to pay all of
them, so there was always a conversation about how to move
forward. He stressed that the administration's view was
that Governor Dunleavy believed that the state should
follow the law with respect to computation of PFDs. He
stressed that Governor Dunleavy was not opposed to a change
in the PFD statutes, but he wanted it to be approved by the
vote of the people.
10:05:48 AM
Co-Chair Stedman stressed that the committee would stay on
the revenue source subject. He remarked that if there was a
desire to have a meeting on policy calls and policy
differences, there would be a scheduled meeting to go into
great depths on those differences.
Ms. Glover displayed slide 21, "Tax Credit Bonding Update":
? House Bill 331 created a Corporation that would
purchase outstanding oil and gas tax credits at a
discount, and spread the funding out over several
years through issuance of bonds.
? The Corporation has not issued any bonds due to
pending litigation.
? The Alaska Supreme Court heard oral arguments on
September 12, 2019. The court has not committed to a
decision date.
? If court rules in favor of state, Corporation will
issue bonds up to $700 million in FY 2020 to finance
purchase of tax credit certificates
? No funds appropriated in FY 2020 operating budget
for purchase of tax credits outside of bonding
program.
Ms. Glover discussed slide 23, "Oil and Gas Production Tax
Audit Update":
? Audit Status Update:
o 2013 audits completed in 1stquarter 2019
o On track for backlog reduction timeline:
.notdef 2014 audits complete by 3rdquarter 2020
.notdef 2015-2017 audits complete by 3rd quarter
2021
.notdef 2018-2019 audits complete by end of 2022
.notdef Maintain 3-year audit cycle on go-forward
basis
? Procedural Improvements:
o Documented audit plans approved by taxpayer
o Scheduled routine communications during all
phases of the audit
o Leveraging Tax Revenue Management System (TRMS)
o Work papers generated from TRMS
10:10:23 AM
Co-Chair Stedman wondered whether there was a difference in
the workload of the audit when there is a price below the
trigger point of the net profits in the gross tax
calculation. He asked whether it accelerated the ability
for the department to conduct audits.
Ms. Glover replied in the affirmative. She noted that there
was a plan to do the FY 15 and FY 16 audits together.
Co-Chair Stedman wondered whether the department saved the
data on capital and operating expenditures for future use
in keeping track of the activities in the basin when the
industry was in the minimum tax calculation.
Ms. Glover replied that the information was reported to the
department on a monthly basis.
Co-Chair Stedman wondered whether the department would
consider shortening the audit timeline to three years.
Acting Commissioner Barnhill replied that, from a policy
perspective, three years was appropriate. He understood
from a legislative perspective, there could be a discussion
about the subject.
Senator Wilson queried the amount from the last year's
audits had been deposited into the CBR.
Ms. Glover referred to the Revenue Sources Book (copy on
file). She explained that the information was on table 2-3.
She noted that for FY 19, there was $181 million deposited
into the CBR, which was primarily tax and some royalty. She
stated that the forecast for FY 20 was $200 million for tax
and royalty settlements for the CBRF.
Senator Wilson stressed that he wanted to examine the
potential outstanding balance of the CBR.
Co-Chair Stedman noted that the auditor would address some
of those issues.
10:15:57 AM
Acting Commissioner Barnhill thanked the committee for the
conversation, and felt that all the questions were good
questions. He looked forward to supporting the committee's
efforts.
Co-Chair Stedman shared that he had a preliminary
conversation with a consultant.
Mr. Stickel looked at slide 26, "Alaska North Slope
Transportation Costs: FY 1996 FY 2019." He noted that the
blue line showed the average transportation costs in real
terms, excluding inflation. He stated that the
transportation costs were fairly stable from the 1990s to
2011. Those costs increased from 2011 to 2014, and had
decreased since then. He remarked that transportation as a
share of the ANS price from 2005 through 2014, which were
the higher oil price years, accounted for less than 10
percent of the ANS price. He stressed that now that prices
were in a lower price regime, the state had been above that
level for the last several years.
Senator Wielechowski queried the reason for the large spike
from 2014 to 2016.
Mr. Stickel replied that part of the increase in cost was
reduced production.
10:20:18 AM
Mr. Stickel highlighted slide 27, "Capital Expenditures
History Compared to Past Forecasts." He stated that the
chart showed thirteen years of historical North Slope
capital expenditures and the two-year forecast of capital
expenditures made each fall. He shared that capital
expenditures tended to come in lower than projected, as
projects were scaled back. He noted that capital spending
was a budget allowance.
Mr. Stickel addressed slide 28, "Operating Expenditures
History Compared to Past Forecasts." He remarked that
operating costs tended to come in higher than projections.
Co-Chair Stedman felt that the department could work to
show the projection versus reality.
Mr. Stickel discussed slide 29, "North Slope Oil Patch
Historical Employment." He stated that slide showed
employment in the North Slope oil patch.
Mr. Stickel looked at slide 30, "GVR Eligible Units versus
Non-GVR Eligible Units":
? Gross Value Reduction (GVR) allows a company to
exclude 20 percent or 30 percent of the Gross Value at
the Point of Production (GVPP) from the net tax
calculation.
? Areas that qualify for GVR include North Slope
leases and property:
1. Unitized after January 1st, 2003
2. Unitized before January 1st, 2003 and meet
certain conditions
3. Added to existing participating areas after
January 1st, 2014 and whose production can be
distinguished from the rest of the participating
area's production
Only available for the first seven years of
production, ends early if ANS prices average above $70
per barrel for any three years.
Oil qualifying for GVR also receives a flat $5 Per-
Taxable-Barrel Credit rather than the Sliding-Scale
Credit available for most other North Slope
production.
As a further incentive, this $5 Per-Taxable-Barrel
Credit can be applied to reduce tax liability below
the minimum tax floor, assuming that the producer does
not seek to apply any Sliding-Scale Credit.
10:25:04 AM
Co-Chair Stedman shared that there would be more detail at
a future meeting.
Mr. Stickel looked at slide 31, "North Slope Allowable
Lease Expenditures Breakout." He stated that the slide may
address some earlier questions from Senator Hoffman.
Mr. Stickel highlighted slide 32, "Forecasted Impact of IMO
2020 Regulations":
? Alaska North Slope (ANS) crude oil is currently
trading at a $2 premium compared to Brent.
? Reasons for the premium include:
o Low production of Iranian and Venezuelan crudes
o Low production of ANS crude in recent months
o IMO 2020, new low-sulfur marine fuel standards
beginning January 2020
? International Maritime Organization (IMO) 2020 has
significant and relatively foreseeable effect on ANS
prices, so our ANS price includes a premium for FY
2020.
? We anticipate the component of the ANS premium due
to IMO 2020 will subside by FY 2021.
10:31:10 AM
Mr. Stickel addressed slide 33, "Minimum Tax Net Tax
Crossover: FY 2021." He remarked that the exact crossover
point varied for each company, but the slide represented an
aggregated calculation.
Co-Chair Stedman requested a break over point with a
comparison slide with the production tax value.
Mr. Stickel agreed to provide that information.
Co-Chair von Imhof queried a model that showed what would
occur if expenditures and other assumptions would affect
the blue line. She noted that there was a relatively
consistent slope, so she inferred that the current tax
structure allowed for some space for expenditures. She
wondered whether the line would be affected by different
assumptions.
Mr. Stickel replied in the affirmative, and agreed to
provide further information.
10:35:02 AM
Co-Chair Stedman noted that there was conversation about
the breakeven point. He requested some sensitivity tables
to see what factors would alter that breakeven point.
Mr. Stickel agreed to provide that information.
Co-Chair von Imhof stressed that the state was in a zone of
preproduction.
Co-Chair Stedman felt that the sensitivity tables should be
provided in a timely manner.
Senator Wielechowski remarked that the initiative only
applied to the three legacy fields, so should not affect
the internal rate of return of any of the new developments.
He asked for the impacts of the non-legacy fields.
Co-Chair Stedman felt that the response should be provided
during that specific subject.
Mr. Stickel discussed slide 34, "'Count the Cash':
Petroleum Net Fiscal Impact." The slide should the net to
the state treasury by removing tax credits and the
potential value of any carry-forward earned lease
expenditures.
10:40:06 AM
Co-Chair Stedman explained that he requested the chart,
because there was a desire to examine the impact of the
credits.
Senator Hoffman felt that there could be an addition that
addressed what would occur after the petroleum revenue to
the state was considered "net", because there was a
difference of the profit per barrel.
Co-Chair Stedman wanted to see the impact of all the
expenditures and all the revenue, and the cash available.
Mr. Stickel agreed to provide that information.
Mr. Stickel highlighted slide 35, "FY 2021 "Count the Cash"
Petroleum Breakdown." The slide showed the addition of
various sources of cash coming into the state, and the
illustration of the value of potential offsets to that
cash.
Co-Chair Stedman assumed that the chart reflected the final
column on the previous slide.
Mr. Stickel agreed.
Co-Chair Stedman expressed concern, because he could not
take the $330 million that was owed in the previous tax
credits, because it would result in a distortion.
Mr. Stickel looked at slide 36, "State Petroleum Revenue by
Land Type." He stated that the slide showed the state
revenue from different land types.
Co-Chair Stedman discussed the following day's agenda.
ADJOURNMENT
10:48:01 AM
The meeting was adjourned at 10:47 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012320 Fall 2019 Revenue Fcst Presentation_20200122_1130a.pdf |
SFIN 1/23/2020 9:00:00 AM |
Fall Revenue Forecast DOR |
| 030320 DOR Response to Senate Finance 012320.pdf |
SFIN 1/23/2020 9:00:00 AM |
2020 DOR Fall Forecast |