Legislature(1997 - 1998)
10/23/1997 10:37 AM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE LABOR AND COMMERCE COMMITTEE
Anchorage, AK
October 23, 1997
10:37 a.m.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Jerry Mackie, Vice Chairman
Senator Tim Kelly
MEMBERS ABSENT
Senator Mike Miller
Senator Lyman Hoffman
ALSO IN ATTENDANCE
Representative Norman Rokeberg, Chairman of House
Labor & Commerce Committee
COMMITTEE CALENDAR
PRESENTATION ON OIL PRICE HEDGING
WITNESS REGISTER
Michael Rothman, First Vice President, Global Commodity
Research/Merrill Lynch
Joined Merrill Lynch in 1984. As Senior Energy Analyst, he is
responsible for the hedging and trading strategies for the
petroleum and natural gas markets, as well as customized risk
management research. Merrill Lynch's primary representative at the
OPEC Conferences since 1986; served as an outside consultant on oil
market matters to government and quasi-governmental organizations.
He holds a BS in Agricultural and Business Economics and an MS in
Applied Economics from Rutgers University. He is a member of the
National Association for Petroleum Investment Analysis.
Ronald F. Lawson, Resident Manager, Pacific Coast Futures
Center/Merrill Lynch
Fifth-generation Californian with long background in commodities
and risk control. Received a BS in Livestock Production Management
from UC Davis, he joined Merrill Lynch in 1982. After several
years of specialization in agricultural and base metals hedging, he
headed up the Cotton Trading Desk, handling approximately 10% of
the world's hedged cotton. Named as the Western Division's
Resident Manager for Commodities in 1994, he now supervises all of
the firm's futures trading activities in the 17 Western-most
states. In 1995, he established the Pacific Coast Futures Energy
Desk which handles most, if not all, of the West Coasts major oil
companies. He and his staff bring more than 100 years of
experience when advising the world's largest corporations and
governments on their risk management programs.
Steven J. Brantner, Vice President, Private Client Group/Merrill
Lynch
Born in Juneau, Alaska, he received his BS in Mathematics from the
U.S. Coast Guard Academy and served 17 years as a commissioned
Coast Guard officer, including several tours of duty in Alaska as
a foreign fisheries boarding officer and Acting Chief, Search and
Rescue. He commanded a CG cutter homeported in San Francisco and
he commanded one of the busiest rescue stations in nation. After
receiving his MBA (Quantitative Analysis) from the University of
Alaska Southeast, he left the Coast Guard to stay in Alaska and
join a major financial services firm. With Merrill Lynch since
1995, he serves individuals, businesses, municipalities and non-
profit organizations throughout Alaska.
Brian C. Andrews, Financial Consultant, Private Client
Group/Merrill Lynch
A lifelong resident of Alaska, with 22 years of in-state financial
management, portfolio management, and accounting experience with
banks, credit unions, state government, and financial services
firms. He received his BS from Colorado State University with
majors in finance and accounting. He returned to Alaska with
assignments in the financial community as a branch manager for
National Bank of Alaska and as the general manager of the Alaska
State Employees Federal Credit Union. He became Comptroller,
Investment Officer, and Deputy Commissioner in the Department of
Revenue for the state of Alaska. He joined Merrill Lynch in
January 1994 and is responsible for development of institutional
and retain financial services and products to new and existing
clients in Alaska.
Jeffrey V. Dikeman, Commercial Energy Specialist, Pacific Coast
Futures Center/Merrill Lynch
Began developing commercial futures hedge business and related
administrative services for institutional clients in 1987. He was
an integral member of an institutional team that developed
customized commercial hedge programs based on technical and
fundamental analysis. His commercial clients include major
integrated oil companies, crude oil resellers, independent energy
producers, mass-transit utilities, airlines, and energy trading
groups. He has helped guide clients through the most tumultuous
and volatile oil market events of the last 15 years. He joined the
West Coast Energy Desk in 1995 and continues to advise commercial
risk managers on their hedging strategies for oil and gas.
ACTION NARRATIVE
TAPE 97-25, SIDE A
Number 001
CHAIRMAN LEMAN called the Senate Labor and Commerce Committee
meeting to order in the Anchorage Legislative Information Office
Conference Room at 10:37 a.m., and noted the presence of Senators
Kelly, Mackie and Leman.
Chairman Leman commented that it has taken several months to put
the meeting on oil price hedging together, and he thinks there is
merit in looking at the issue. He said he likes the concepts of
stabilizing the state's revenues and to have a net gain in
increasing the state's revenues. He then invited the individuals
from Merrill Lynch to begin their presentations.
Number 019
BRIAN ANDREWS, a financial consultant in the Juneau office of
Merrill Lynch, stated it is time for us as a state to take a look
at controlling the price of our oil as opposed to letting market
conditions dictate the price of oil to us.
Mr. Andrews then introduced Michael Rothman who has been with
Merrill Lynch for 14 years. He said for the past 11 years Mr.
Rothman has been attending the OPEC meetings, and he has the
longest standing attendance of anyone at OPEC.
Number 031
MICHAEL ROTHMAN, First Vice President, Global Commodity Research,
Merrill Lynch, said that, in general, when he looks at the oil
market fundamentals or the key driving factors, there has been, in
his opinion, a very distinct shift in the underlying pressures in
the oil bands. He added he thinks these underlying pressures are
bullish.
In looking at oil prices there tend to be two basic
characteristics: one is prices staying within a band; and the
other is the actual band itself. Oil price movements within a
given price band are a function of supply and demand fundamentals.
The oil price band is a function of geopolitical considerations
which include the desires of OPEC's key members.
Mr. Rothman said in the last 20 years there have been four basic
oil price bands, and that he would talk briefly about each of those
periods. It is his opinion that 1996 marked the beginning of a new
higher oil price range.
He said 1979 saw the fall of the Shah of Iran, and Iran's oil
production went from 7 million a barrels a day down to zero. Then
in September 1980, Iraq invaded Iran. The loss of supplies from
both of these countries and concerns about additional interruptions
in flows from the Persian Gulf, pushed oil prices up from about $15
a barrel, before the crisis, to $40 a barrel. Prices essentially
stayed in a range of between $28-$40 for the next three years.
Mr. Rothman noted that between 1975 and 1985 there were about 10
million barrels a day of non-OPEC supply, not the least of which
was the development of Alaska's reserve and production. Between
new output, a contraction in demand globally between 1980 and 1983,
there was pressure on the oil price structure which resulted in a
meeting in London called the OPEC Marathon Meeting. At that
meeting the OPEC countries set up an overall quota of 17.5 million
barrels a day with Saudi Arabia's share set at 5.5 million barrels
a day. The decision at that meeting was that the Saudis would act
as the balance wheel within OPEC; they would let their production
vary in order to defend OPEC's target price which was $28 a barrel.
Those conditions transpired into a range of about $25 to $30 a
barrel for two years.
Addressing the third oil price band, Mr. Rothman said it evolved
following a number of events in 1985. In May 1985, the King of
Saudi Arabia made a pronouncement that the Saudis could no longer
afford to be the OPEC "swing supplier." Their production went from
about 5.5 million barrels a day in March of '83 down to about 2.5
million barrels a day at that time, and the average price of oil
actually declined, so daily oil receipts fell by about 70 percent.
The King's decision led directly to OPEC's policy change at the
December 1985 meeting to "defend marketshare."
In a four-month period of time, oil prices went from about $34 a
barrel down to $10 a barrel. In the summer of '86, then Vice
President George Bush was visiting Saudi Arabia and he uttered a
very famous comment that oil prices are too low. That meeting
signaled an understanding between the United States and Saudi
Arabia about trying to find the right price, something which would
be good for producers and something which would be good for
consumers. At the December '86 meeting, there was a decision to
adopt an $18 reference price as the target. Quotas were shifted
around, and this notion of the right price essentially created a
10-year band of $15-$20. The only time prices really went out of
this range for any appreciable period of time was in the aftermath
of Irag's invasion of Kuwait in the Gulf War, and even that spike
in oil prices, which took it up to over $41 a barrel, only lasted
for five months.
Mr. Rothman said it is a little difficult for people to understand
that the arguments about having that oil price band have really
changed, but they have. The notion of a right oil price in 1986
was that it would allow for sufficient revenues to the OPEC
countries, it would allow for continued healthy economic growth in
the developing and industrialized economies of the world, and it
was supposed to limit non-OPEC supplies. As time wore on, the
arguments essentially lost most all of their validity. Refined
products are taxed at a very high rate which eroded OPEC's
"economic rent"; the non-OPEC producers learned how to live with
the low oil price; and there was deterioration in the last five
years between the American administration and the Saudi leadership.
He said the reality of this relationship having come under some
pressure in the last few years has essentially made the Saudis feel
less compelled to keep oil prices at what they believe is an
artificially low level.
Mr. Rothman said in looking forward, his opinion is that underlying
oil balance itself has fostered increasingly greater pressure on
available supply. OPEC's key members, and Saudi Arabia in
particular, feel that if the average price of oil were to be
elevated a few dollars per barrel higher than what was witnessed
during the 1986 to 1995 period, that it will not derail global
economic activity. Non-OPEC supply is unlikely to change much if
oil prices were to average a few dollars per barrel higher. There
is pressure within the OPEC countries, particularly Saudi Arabia,
for more fiscally conservative measures and pressures for higher
oil revenues. He said the Saudis are not inclined to keep it at a
level which they think is "too low."
Speaking to the new oil price band he referred to earlier, Mr.
Rothman said the key end of it is that he thinks the bottom end of
the band that occurred between '86 and '95 has been elevated by
about $3 per barrel. The bottom end of the band for West Texas
International (WTI) crude oil is now $20 per barrel and the top end
of the range is somewhere between $25 and $27. He said he has had
indications that the Saudis really don't care how high oil prices
go so long as they don't go over $30 a barrel.
Mr. Rothman said global economic activity and demand pretty much
move hand in hand. The ratio of the growth in oil demand to global
economic activity ranges somewhere between 0.55 and 0.6, meaning
that for every 1% increase there is in global economic activity,
global oil demand will go up 0.55% to 0.6%. In terms of the
projections for this year and next year, global economic activity
is expected to be about 4.5% and oil demand growth rates will be
about 2.5% He said this ratio tends to be very stable, and short
of a global economic recession, they expect to see continued health
economic gains.
Mr. Rothman said a question raised by a lot of people is what is
happening with the currency debacle developing in Asia that is
going to affect Asian economic growth and, therefore, oil demand
growth in the region. He said the question merits a lot of
attention because if you look at the total increase in global oil
demand this decade, two-thirds of it came out of the developing
Asian economies. The four countries that are the focus of currency
devaluations are Malaysia, Philippines, Thailand and Indonesia.
There is expected to be some slippage, but it is still healthy
economic growth on balance. Oil demand in these areas is projected
to grow about 7% next year.
The other side of the equation is what is happening on supply. Mr.
Rothman predicted that next year there will be about a 1.2 million
barrels per day gain in total amount of OPEC supply, and this is
the scenario he expects to be repeated for the next several years.
He said there is a risk when we look at prices and the question
raised is where is this gap going to be made up from, questions
such as: is it going to be from Iraq returning to the market; and
is there going to be competition with an OPEC for those additional
barrels because of expansion plans from certain countries. This is
where the downside risk in the outlook over the next couple of
years comes from.
Mr. Rothman said the reality of doing oil balance analysis is that
a lot of the data is very problematic. Once you get outside the
OECD group of countries, the quality of the information breaks
down, not only on a timeliness element but on an accuracy element.
He said they talk to the International Energy Agency regularly, and
they get updates now for countries that are lagging by three and
four years. The numbers that they rely on are the available data
which come out for the OECD countries.
The non-OECD inventories are not part of this picture for two
reasons. The first and foremost is that there is no inventory data
for countries like Russia or China. He said that if you talk to
the main international oil companies that have large marketing
presences in different regions of the world, they will tell you
that developing countries basically go hand to mouth with oil;
there is no discretionary oil in storage. For example, South Korea
was struggling to try to get enough oil into their inventories in
order to meet the minimum OECD requirements.
Mr. Rothman noted there was a story that there was this tremendous
stock overhang created during the second and third quarters of the
year, which was supposed to be approximately 260 million barrels,
however, he said he and others can only find 62 million barrels of
it. The reason this has significance is that winter inventories
are going to be at a level which are fairly lean, and he believes
this will result in pressure on available supply. Last winter,
which was the warmest winter on record, oil prices declined down to
about $20 a barrel despite ups and downs with Iraqi oil exporters
and other developments which people thought would lead to more
supply. He said this whole notion of a higher high is testimony to
the oil companies themselves believing that the Saudis want a
higher band and the fact that the balance itself is not burdensome
with extra oil.
Number 342
SENATOR KELLY asked how there could be a discrepancy in the amount
of oil available. MR. ROTHMAN explained that when you work on an
oil balance, by definition it is a simplification of reality. Most
people, including himself, rely on the International Energy Agency
for historical data, but much of this data is lagging by three to
four years so there is this lack of timeliness in the data
received. He has found that the inventory data is simply not
available outside the 22 nations in the OECD so it is a guesstimate
on what's out there.
Number 413
CHAIRMAN LEMAN commented that so many of the actions, especially
with some of the major players are either calculated, and we may
not know what they are, but they have big effects on the
marketplace and how to manage within those actions. He said it has
got to be a difficult task in making sense out of all of this. MR.
ROTHMAN said his fiduciary responsibility to Merrill Lynch and its
clients is to essentially lay out what he sees as the higher
probability scenarios looking forward. It is not an exact science,
but the notion is where the pressure is going to be greatest.
There is an element of keeping your finger on the pulse of what's
happening and trying to stay on top of issues, which may not mean
anything right now, but they may have a certain amount of
significance on either impact and supply or impact and demand at
some point in time.
Number 548
REPRESENTATIVE ROKEBERG asked why the Saudis wouldn't lift more oil
than they are presently lifting if they were able to keep the price
stable in the existing band rather than jump to a higher band. MR.
ROTHMAN responded that the Saudi's spare capacity right now is
about 2 million barrels a day. For them the question has not been
why not produce more oil, instead, if they want a higher price, why
not just cut back. For them their considerations are not just the
idea of getting the higher price. The Saudis don't think they have
to cut their production to get a higher price because of underlying
pressures within the oil balance.
TAPE 97-25, SIDE B
Number 020
RONALD LAWSON, Resident Manager, Pacific Coast Futures Center,
Merrill Lynch, said he thinks everyone agrees philosophically that
there appears to be a need in some way to even out the humps and
valleys of the revenues generated by the oil sales out of the
state. There are a number of events that could or could not affect
the price of oil. He suggested that supply and demand generally
shape the band of prices of any given commodity, and what they try
to do is give their best estimate of price given the statistics,
however, they have to look at the things that could or could not
affect the market. There are things that can affect the oil
market, and he thinks those are the things that the state needs to
be concerned with, such as an unwarranted or temporary drop in
prices.
Mr. Lawson introduced Jeff Dikeman, who, he said, was one of the
top world traders on the west coast for Merrill Lynch, and who
would be presenting ideas on how the state of Alaska can take some
precautionary moves to protect against the bad times and the
downsides without limiting the upside potential of the market
moving higher.
Number 055
JEFFREY DIKEMAN, Commercial Energy Specialist, Pacific Coast
Futures Center, Merrill Lynch, said one thing that is always of a
concern is the volatility of the market, and the way they like to
address volatility is to try to manage it with the use of options.
Options act like insurance and have the following key components:
the strike price (the insurance deductible); the premium (the
insurance premium); calls (right to buy a futures contract) and
puts (right to sell a futures contract); and volatility (the degree
of risk or reward).
He directed attention to a chart showing a call option versus a put
option. He said buying a put option in what are the utilities of
the state guarantees a floor area, but it is not ultimately locked
into the prices if the market comes back to a higher level.
Mr. Dikeman then explained some examples of previous oil hedges and
discussed the type of organization that took place in these trades.
Number 182
MR. LAWSON noted that he can develop a hedging program quite simply
with three pieces of information: how much you are trying to
protect; how long is the window of risk; and which way the market
is going. As an oil purchaser, the market moving up generally
helps, unless that production has already been sold. He said the
ultimate cost is not the initial expense, it is the net result of
when you purchase the option and then sell it back.
SENATOR KELLY asked who the money is paid to. MR. LAWSON explained
that when you purchase the option you are buying an option on a
futures contract and the money that is spent on that option is then
forwarded to those that sell the option.
STEVE BRANTNER, Vice President, Private Client Group, Merrill
Lynch, said what they are suggesting as a strategy for the state is
to take the more conservative tactic, which is just ensuring that
it gets a minimum price under any scenario, with no cap to the
upside. If the oil prices track upward, the state will obviously
capture that as well. The state is essentially, in this case,
purchasing insurance that says that no matter what happens, the
state's revenue will be guaranteed at this certain floor.
MR. LAWSON explained that the state will continue to sell its oil
the way it does now. This is an attempt to take the risk out of
the market price fluctuating on the cash side of the ledger, and
the goal is to put profits on the other side of the ledger for
losses on the wet barrel side. In order to do that, it will cost
the state in the form of an insurance premium. If the market goes
up, the state will get all the profits on the wet barrel side of
the ledger, just like it does now. The only cost will be is what
that insurance premium was on the other side of the ledger. If the
market comes down and the state is receiving less for its wet
barrels, the insurance premium grows offsetting that loss on the
other side of the ledger. They are suggesting that the state lock
in at a higher price for the same amount of money spent.
Number 375
SENATOR KELLY asked what kind of people can take those kinds of
downside risks. MR. LAWSON clarified that of all the puts and
calls that are bought and sold, 85% go away worthless. The idea is
that people will be buying protection or they will be taking in
money to give somebody else the right to have that protection.
When you buy insurance, insurance companies sell you an option
because on the bulk the money that comes in offsets the risk that
they're giving up. Almost anybody in the market is willing to take
that risk because they may be selling one option while buying
another. MR. DIKEMAN added that this is the function of the New
York Stock Exchange. They can go to the Exchange and find out what
they'll give them for a floor at a certain price, and they will
monitor that to find out where the best available insurance premium
is guaranteeing that they can get a $20 floor. MR. ROTHMAN pointed
out that the integrity of the Exchange is backed up by the clearing
house members, of which Merrill Lynch is the largest. If one
clearing house member has a problem, all other clearing house
members have to make good on it.
Number 425
Responding to a question from Senator Mackie, MR. DIKEMAN said the
key to the overall program is to find out where they can insure and
the state can budget to have a good steady stream of revenue
without much of a downside risk. MR. ROTHMAN added that there is
some risk if the price of Alaska North Slope oil and WTI oil move
out of step with one another. MR. LAWSON advised that if Alaska
North Slope oil dropped precipitously and the New York prices,
which are based on West Texas oil, don't follow it, or if the
difference between the two should widen greatly, you may not get as
much protection from the put option as you were losing because of
the Alaska price dropping faster.
SENATOR MACKIE asked if there is way to zero in on a particular
number regardless of what happens with West Texas or anything else.
MR. ROTHMAN responded it might be plus or minus a small percent.
MR. LAWSON said they are not trying to lock in an absolute fixed
price for what the state sells its product at for the next year.
The risk that the state takes for the difference between the two
prices is paid for with a little bit of upside potential.
SENATOR KELLY asked if the state wanted to hedge its entire
production, say it is 400 million barrels a year, does Merrill
Lynch deal in those kinds of numbers. MR. LAWSON acknowledged that
they do it now.
SENATOR KELLY inquired as to the amount of the current production
contract. CHUCK LOGSDON, Chief Petroleum Economist, Department of
Revenue, informed him that this year the amount will be about 475
million barrels, and the state's royalty share will be 100 million
barrels.
TAPE 97-26, SIDE A
Number 004
SENATOR MACKIE said the biggest fear is the bottom falling out and
what we are having to do after we've written our budget based on
prices a year in advance. He asked if there was any way to
guarantee a floor but to get a portion of the upside. MR. LAWSON
replied that is what you are doing because when you buy a put, if
the market goes up, the price of oil goes up and it can be sold at
the higher price.
MR. DIKEMAN commented that if the market was right at $20, the
protection to sell at $20 is going to be more expensive than if the
market was at $24 and you were trying to protect $20. MR. LAWSON
noted that they are looking at 50 cents a barrel as what the state
should spend on protection. If it happens that the market allows
buying a $22 floor for 50 cents, that's what should be done. MR.
ROTHMAN added that if the state can lock in as high a price as
possible, it would want to do so.
SENATOR KELLY said if the state wanted to lock in its production
this year, that is in the neighborhood of $240 million. He asked
what the rule of thumb is now on a dollar in the price of oil for
state revenues. MR. LOGSDON responded that the state is getting
close to $100 million for every dollar. SENATOR KELLY concluded
that the state's cost for protection would be $50 million a year.
MR. LAWSON clarified that $50 million may be the cost to purchase
that protection, but he said you are going to sell that insurance
as you price your oil.
Number 083
SENATOR KELLY inquired if there has been legislation introduced
that relates to this topic. CHAIRMAN LEMAN responded that this was
a background meeting and that he was not aware of any such
legislation, or if it would even be necessary. MR. ANDREWS advised
that when he worked for the Department of Revenue, they reviewed
the statutes on this and concluded it could be handled within the
existing statutes. SENATOR KELLY then concluded that the governor
could probably arbitrarily make a decision to do this. MR. ANDREWS
acknowledged that was their belief, but he suggested that from a
practicality standpoint a resolution from the Legislature would
also be in order.
Number 141
SENATOR KELLY asked if the premium would be paid up front or can it
wait until the end of the transaction. MR. LAWSON responded that
he doesn't believe it is necessary, but, as a firm, Merrill Lynch
can finance the purchase instead of putting up the state's money.
If cash flow constraints are restrictive, they can finance the
purchase, which they do for quite a few international companies.
What would be seen on the balance sheet is purchase and sales of
the options at either a loss or profit and then there is cost in
the form of commission.
In response to an inquiry from Senator Kelly, MR. LAWSON clarified
that New York and Chicago are the two areas where the commodity
markets trade the greatest volume domestically in the United
States. He said the best analogy is that the New York Stock
Exchange is where to go to buy and sell stocks, and in this case,
the New York Mercantile Exchange is where to go to buy and sell
oil.
MR. LAWSON also explained that their company helps corporations set
up their "hedging team" and typically it is compiled of a number of
different areas from within the structure that already exist such
as the oil and gas division and treasury. Usually the transfer of
benefit from the hedge to the risk in the oil and gas, the actual
wet barrels, occurs at the treasury level. Merrill Lynch's bylaws
mandate that whenever a coporation or an entity such as a state or
a municipality has a trading relationship with the firm, they have
reporting levels in three separate area of the firm so that there
is a constant flow of information back and forth.
Number 335
CHAIRMAN LEMAN invited Mr. Logsdon to give his response on behalf
of the Department of Revenue.
CHUCK LOGSDON, Chief Petroleum Economist, Department of Revenue,
said in terms of their experience at the Department of Revenue with
the whole concept of hedging the oil, they've been down this road
on quite a number of occasions over the last 10 years with a lot of
formal presentations and a number of workshops.
Mr. Logsdon related that under the department's projections, even
with withdrawing for the next three years, the state will have $3.5
billion in the Constitutional Budget Reserve, so the state is
effectively self-insuring. When a price goes up like it did this
last year, they went over budget so they put back in, and when they
go under budget, they take out.
Mr. Logsdon said Commissioner Condon is very aware of risk
management, which they do all the time in the treasury. Right now
they are managing about a $7.7 million cash flow, and that doesn't
include the permanent fund which is a $25 billion asset. He said
Revenue is trying to diversify a lot of the financial risks that
the state has.
Mr. Logsdon pointed out that a hedging program is hard to sell to
a public entity because it is dealing with public money, and it
very difficult to put together a consensus among the people that
need to make the decisions. Also, there is the cost factor because
a hedging program is going to cost money and the Legislature will
have to appropriate the money to put it into place.
Mr. Logsdon related that at a workshop held at the University of
Alaska, a lady from Texas, who set up their pilot hedging program,
told them it worked out pretty well for them, but when it came to
justifying their program every year to the Finance Committee
against other important programs, it was tough because state
budgets are under pressure everywhere.
Mr. Logsdon acknowledged that hedging is an issue that the state
should be revisiting and that it is a very attractive and sort of
logical thing to do, but he cautioned there are a lot of elements
to it that have to be considered. He said Commissioner Condon
wanted him to relate that this is something that the department is
looking at periodically, and, at this point in time, they think
they are doing the right thing by going down the self-insuring
route.
Number 437
SENATOR KELLY asked if the department can institute a hedging
program on their own, or would they need permission from the
Legislature. MR. LOGSDON did not have an opinion on that, but he
does know that they have specific guidelines that give them
flexibility in managing a lot of different funds through the
treasury. He added that Commissioner Condon has spent a great deal
of time over the two last years developing investment policy
guidelines for managing the state's revenues, but he does not
believe hedging is a part of those guidelines. MR. LAWSON said
Merrill Lynch, as a firm, would not allow the state to trade
without full disclosure to the Legislature and every interested
department within the state.
MR. ANDREWS pointed out that the program, as it would be
envisioned, doesn't necessarily mean that all the trade would go to
Merrill Lynch. He also noted that when he was working in the
Department of Revenue they did put a hedge on gold at about $500 an
ounce. When the price of gold went to between $400 to $425, they
unwrapped the hedge and came out of it, so the state lost money on
it. MR. LAWSON suggested that at that time if they had used
options instead of futures, the results would have different.
Number 524
SENATOR KELLY asked if the permanent fund has title to the 25% to
50% oil royalty it receives or does the state collect all the
royalties and give them a check. MR. LOGSDON explained there is a
process for the royalty barrels by which the state can take title
(in-kind) to the barrels, and those barrels are sold to the
refineries. The permanent fund gets a share of the proceeds from
the sale of the in-kind barrels, or they get a share of what the
state takes from the companies when they pay them in value. So all
of the royalty money comes into the state treasury, but the share
that goes to the permanent fund goes into their pot and is managed
by them. MR. LAWSON pointed out that you can't hedge the
production; you can simply hedge the value of production.
Number 567
MR. LOGSDON related that the department will be coming out with
their forecasts in approximately three weeks, and they are looking
at about the same kind of revenue stream that they expected this
last year when they brought in about $2.5 billion in unrestricted
general funds. They expect this year the price will be back down
to around $18 ANS.
There being no further comments or questions, CHAIRMAN LEMAN
thanked all of the participants and adjourned the meeting at
approximately 12:20 p.m.
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