Legislature(2021 - 2022)ADAMS 519
03/16/2022 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB281 || HB282 | |
| Presentation: Spring Forecast by the Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 281 | TELECONFERENCED | |
| += | HB 282 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 281
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs; capitalizing funds; amending
appropriations; making reappropriations; making
supplemental appropriations; making appropriations
under art. IX, sec. 17(c), Constitution of the State
of Alaska, from the constitutional budget reserve
fund; and providing for an effective date."
HOUSE BILL NO. 282
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; making capital
appropriations and supplemental appropriations; and
providing for an effective date."
9:06:12 AM
^PRESENTATION: SPRING FORECAST BY THE DEPARTMENT OF REVENUE
9:06:16 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, provided a PowerPoint
presentation titled "Spring 2022 Forecast Presentation:
House Finance Committee," dated March 16, 2022 (copy on
file). He reviewed Slides 2 and 4. Slide 2 was titled
Agenda:
1.Forecast Background, Economic Indicators, and Key
Assumptions
2.Spring 2022 Revenue Forecast
Total State Revenue
Unrestricted Revenue
3.Petroleum Forecast Assumptions Detail
Oil Price
Oil Production
Oil and Gas Lease Expenditures
Oil and Gas Transportation Costs
Oil and Gas Credits
Mr. Stickel addressed Slide 4 titled Background: Spring
Revenue Forecast:
1.Historical, current, and estimated future state
revenue
2.Updates key data from Fall Revenue Sources Book
3.Official revenue forecast used for final budget
process
4.Located at tax.alaska.gov
Mr. Stickel informed the committee that the spring forecast
updated the Fall Revenue Sources Book that was only
published once a year.
9:07:58 AM
Mr. Stickel moved to slide 5 titled Key Alaska Economic
Indicators. He reported that although the focus of the
Department of Revenue (DOR) was on state revenue, they
analyzed the broader Alaskan economy. He discussed the
table on the slide representing Alaskas economic
indicators that was updated on March 14, 2022. He noted
that the state Gross Domestic Product (GDP) slightly
increased in the third quarter of 2021. He elaborated that
since the end of 2020, GDP was flat and was down 6 percent
when compared to the same period in 2019. The data
indicated that the value of the economy was holding steady,
but it was not fully recovered from the pandemic. He added
that the fourth quarter data would begin to reflect the
higher oil prices and would be available on March 31.
Representative Wool cited the real GDP of $53 million in
2019 compared to $50 million in 2020 and noted DORs
expected increase in the next quarter. He asked what
percentage of oil comprised GDP. Mr. Stickel answered that
he did not have the number on hand. He elaborated that
typically oil was the significant contributor to the state
economy and GDP through its production and associated
benefits to other industries. The industry breakdown was
available in the GDP data, and he offered to provide it to
the committee. Representative Wool pointed to the 2021
third quarter and noted the significantly lower GDP. He
inquired whether it reflected the calendar year and what
the price of oil was in the third quarter of 2021. Mr.
Stickel referenced a chart later in the presentation and
estimated the price of oil had been about $70 at the time
and had steadily increased as well as a broader opening of
the economy and possible increases due to tourism.
9:11:13 AM
Mr. Stickel continued to review slide 5. He relayed that
employment had increased by 2.7 percent or 8,000 jobs but
remained lower than the 12,000 jobs in the same quarter of
2019. The state had rebounded to an increase of 24,000 jobs
since the lows of the pandemic recession and was still down
by over 53 thousand jobs compared to July 2019. He noted
that transportation, oil and gas, and hospitality sectors
were the largest contributors to the lower job numbers. He
commented that wages and salaries had recovered from the
pandemic lows. He ascribed it to a combination of some job
increases and strong wage increases due to the tight labor
market. He indicated that bankruptcies and foreclosures
were both lower than in pre-pandemic levels. He attributed
the decrease to government and industry programs that
helped people pay their bills and remain in their homes.
He offered that housing starts increased from 2020 to 2021
and ended the year at pre-pandemic levels. He reported that
mortgage delinquency rates continued to decline due to the
strong labor market, robust growth in housing prices, and
programs by lenders that offered borrowers payment
flexibility.
Representative Carpenter asked how Mr. Stickel would
characterize GDP and real wages in relation to inflation in
2021. Mr. Stickel answered that the total wages were in
nominal terms and were increasing therefore, the cost of
employing people was increasing. He observed that the GDP
was flat indicating income and cost growth in nominal terms
but in real terms the economic activity was flat.
9:14:28 AM
Mr. Stickel spoke to Slide 6 titled Spring Forecast
Assumptions:
The economic impacts of COVID-19 and geopolitical
events are uncertain; DOR has developed a plausible
scenario to forecast these impacts.
?Key Assumptions:
Investments: Stable growth in investment markets,
5.86% for FY 2022 and 6.20% for FY 2023+.
Federal: The forecast incorporates stimulus
funding as of March 1, 2022, includes updated
estimates of IIJA funding.
Petroleum: Alaska North Slope oil price of $91.68
per barrel for FY 2022 and $101.00 per barrel for
FY 2023.
Non-Petroleum: Continued economic growth. 75% of
capacity assumption for 2022 cruise season,
minerals prices based on futures markets.
Mr. Stickel characterized the slide as demonstrating
uncertainty. He related that COVID-19 was still a source of
uncertainty and another major uncertainty pertained to
geopolitical events and the war in Eastern Europe. He
communicated that DOR was not predicting a recession. The
division estimated 1.5 million cruise ship passengers as
the long term annual capacity and predicted continued
growth. He noted that mining activity revenues had
increased slightly.
9:17:04 AM
Representative Johnson referred to slide 6 and asked how
the investment projection had been calculated. Mr. Stickel
answered that the estimates were prepared by Callan
Associates that were contracted by the Alaska Permanent
Fund Corporation (APFC). The department worked with APFC to
generate the investment returns data.
Representative Wool cited the FY 22 average price of oil.
He asked what the price need to be for the remainder of the
year to maintain the average. Mr. Stickel replied that the
monthly outlook was over $100 per barrel of oil.
Representative Wool asked if he had the exact number. Mr.
Stickel responded that he did not have the detailed monthly
breakout but offered to provide it to the committee.
Representative Wool guessed that a number had been
generated and assumed that Mr. Stickel had forgotten the
numbers. Mr. Stickel replied that the estimate was
calculated using real prices through the end of February
2022 and estimated the prices for the remaining four
months. He recalled that Slide 18 did portray the monthly
data. Representative Wool pointed out that oil prices had
been $140 per barrel, and it was now below $100 per barrel.
Mr. Stickel maintained that the forecast addressed
uncertainty.
Co-Chair Foster referenced Mr. Stickel's statement that the
price would need to be over $100 per barrel to maintain the
forecasted price of $91.68. He relayed that he had heard
the price would need to be $115 per barrel. Mr. Stickel
answered that the number was in the realm of accuracy.
9:20:04 AM
Representative Edgmon asked if they did any standard
deviation analysis. He conveyed that in looking at a stock
market analysis, statistical modeling was performed to
ascertain the probability of the prediction actually
happening versus offering a flat number. He voiced that the
legislature had to build a budget around the number. He
noted that some analysts thought the price was going to
increase and others did not. He noted the uncertainty of
oil prices and its relation to current world events. He
wondered what the probability of the predicted price of oil
maintained at $101 per barrel was. Mr. Stickel replied that
the department paid attention to volatility and the range
of potential outcomes. He could share some slides related
to price volatility he prepared for another committee. He
expounded that one of the slides examined the implied range
of oil prices from the options market and based on that
demonstrated a range of potential oil prices. He also could
provide a straight sensitivity analysis that examined a
range of oil prices from $10 per barrel to $150 per barrel
and the amount of revenue for each level.
9:22:46 AM
Mr. Stickel turned to Slide 7 titled Relative
Contributions to Total State Revenue: FY 2021. He reported
that total state revenue was $29.8 billion in FY 21. He
noted that investment earnings provided the largest share
of revenue at 65.8 percent. He detailed that the number was
driven by some unusually high returns for the Alaska
Permanent Fund (PF) at 30 percent combined with robust
federal revenue due to the stimulus packages.
9:23:42 AM
Mr. Stickel moved to slide 8 titled "Relative Contributions
to Total State Revenue: FY 2023.He pointed out that the
total state revenue was expected to change [$16.4 billion]
and oil and gas, federal revenue and investment earnings
were the largest and equal sources [Approximately 30
percent each]. He noted that oil and gas was predicted to
be the largest source of income at 31.4 percent.
Representative Wool looked at federal revenue of 31.2
percent. He asked if it included the Infrastructure
Investment and Jobs Act (IIJA) funding and COVID stimulus
money. Mr. Stickel responded that the division worked with
the Office of Management and Budget (OMB) on the number and
confirmed that it included the last of the COVID stimulus
funding and the IIJA money.
Representative Edgmon remarked that the petroleum and
revenue ratios were like those in 2013 and 2014 and the
investment earnings were minimal. He asked for a comparison
to prior years. Mr. Stickel referenced a figure from the
Fall Revenue Sources Book (Figure 2-B) that depicted a
graphic of the 10-year comparison to the slides numbers.
He confirmed that petroleum revenue was the largest share
and investment revenue could be volatile where it was high
in 2021 and modest in 2015. Representative Edgmon pointed
out that the price of oil had dropped precipitously in 2016
to $26 per barrel and the state had a $4 billion deficit.
9:27:21 AM
Vice-Chair Ortiz referenced federal revenue at 31.2
percent. He wondered how the current percentage compared to
historical averages. Mr. Stickel replied that federal
revenue had been a stable revenue source. He delineated
that it typically was around one-third of state revenue,
and the current number was on par with historical averages.
Mr. Stickel moved to slide 10 Titled Unrestricted Revenue
Forecast: FY 2021 and Changes to Two-Year Outlook. He
offered that the slide compared the key changes in
unrestricted revenue, forecast for the current and next
fiscal year. He related that the oil price had
significantly increased by $15.96 in FY 22 and by $30 in FY
23. He expounded that the increases were attributed to a
continued recovery in the oil market based on the futures
market and the Russian invasion of Ukraine had caused
prices to spike rapidly. The PF transfer did not change and
the entire change in unrestricted revenue was ascribed to
the increased price of oil. He remarked that the forecast
was increased by $1.2 billion in FY 22 and $2.4 billion in
FY 23. The slide did not show Alaska North Slope (ANS) oil
production - it was essentially unchanged from the fall
forecast.
9:30:36 AM
Co-Chair Foster noted Representative Rasmussen had joined
the meeting.
Representative Carpenter inquired what impact the current
instability in Eastern Europe had on the price of oil and
if there were some other events that had impacted the price
of oil even more.
9:31:22 AM
Mr. Stickel responded that broadly speaking since the
middle of 2020 the oil demand had rebounded strongly since
the lows of the COVID recession and production had been
slower to catch up therefore, demand had been increasing
faster than supply leading to higher prices. The
instability was layered on top of an already tight oil
market.
Vice-Chair Ortiz asked if the FY 23 oil price forecast of
$101 per barrel was derived using a variety of national
forecasting models or was there a specific model. Mr.
Stickel answered that a future slide had detailed data. He
indicated that the division used futures market data for
Brent Crude Oil and based it on the median 5 day futures
ending on March 9, 2022. Vice-Chair Ortiz inquired whether
it was the historical method. Mr. Stickel responded that
DOR used oil futures in projections for the last several
forecasts.
Representative Wool referenced the five-day window and
thought it was narrow. He asked if they used a model based
on a broader view. He speculated that 5 days seemed
inadequate. Mr. Stickel replied in the affirmative. He
delineated that the division used several other sources and
had more detail in a future slide. He explained that the
goal of the 5 day window was to offer a current forecast
and not based on a month ago or longer. He added that if
there had been a particular day where oil prices spiked or
dropped significantly due to a transient event it was
filtered out of the forecast. He exemplified an attack on
oil infrastructure in Saudi Arabia in a prior year that
substantially increased prices for only one day.
9:35:21 AM
Representative Wool argued that the price of oil recently
dropped from $140 per barrel to $100 per barrel in a
couple days, and would considerably affect the forecast if
it was near that time. Mr. Stickel agreed with the
statement and spoke to the environment of high volatility
in the oil market.
9:36:09 AM
AT EASE
9:36:31 AM
RECONVENED
Mr. Stickel moved to slide 11 titled Total Revenue
Forecast: FY 2021 to FY 2023 Totals. He discussed that in
the forecasted budget revenues were categorized into 4
types: Unrestricted General Funds (UGF) that were available
for any purpose; Designated General Funds (DGF) were
customarily appropriated for specific purpose such as
alcohol taxes used for treatment and prevention; Other
Restricted Revenue appropriations were dedicated to a
specific use and were not available for general use like
the Constitutionally dedicated portion of royalties that
were deposited into the PF. Lastly, federal revenue was
considered restricted and were subject to the provisions of
the federal government. He relayed that in total the state
received $29.8 billion in revenue in FY 21 and was expected
to be $15.8 billion in FY 22 and $16.4 in FY 23.
Representative Edgmon shared that the average rate of
return for the PF was 11.37 percent over the last 5 years,
the year to date was 3.9 percent, and lost $2 billion in
value. He advised that it was an important source of
revenue to focus on.
Representative Carpenter cited the non-petroleum revenue in
the DGF category and noted the decline in non-petroleum
revenue between FY 22 and FY 23 compared to increases in
other categories. He wondered why the portion of revenue
was deceasing. Mr. Stickel did not have the detail on hand.
He recounted that the non-petroleum revenue in the DGF
category included corporate income tax and mining license
tax. He was unable to answer regarding the other categories
and would follow up.
Representative Carpenter wanted to focus on non-petroleum
revenue and deduced that it reflected jobs in oil versus
non-oil and how money was flowing into the state. He
believed that it was a focus of the majority of Alaskans
and how they live and work. He thought that was a
recognition of the states economy growing. He requested
data aimed at the number of people working in non-petroleum
jobs.
Representative Edgmon remarked that the state was
significantly tied to oil. He guessed that it had to
reflect at least one-third of the states revenue. He
ascertained that as the state transformed to an endowment
driven budget where the Permanent Fund Percent of Market
Value (POMV) provided 50 percent of UGF income, Alaska was
still largely tethered to the oil industry.
9:43:32 AM
Representative Josephson referenced the $16 billion in
investment revenue. He asked where the money would be
reflected. He asked if it would come into the Earnings
Reserve Account (ERA) over time as unrealized became
realized earnings. Mr. Stickel explained that the
approximately $16.3 billion in FY 21 represented earnings
of the PF beyond the 5.25 POMV transfer ( $3.1 billion in
FY 21) to the PF and represented a nearly 30 percent return
on investments. The investment earnings were included in
other restricted revenue and the earnings would be in
either unrealized or realized earnings. He offered that
some of the earnings were unrealized. Representative
Josephson asked if everything that was unrealized
eventually became realized. Mr. Stickel replied by saying,
not necessarily. He indicated that a gain in an
investment that declined would not be realized. Stable
returns and stable gains would eventually become realized
gains.
Representative Wool asked whether the investment earnings
could be considered revenue. He maintained that it was an
increase in value, not all was realized, and therefore, was
not really revenue. Mr. Stickel answered that unrealized
gains of the PF were considered revenue in accordance with
the Governmental Accounting Standards Board (GASB)
principles. However, the gains were not available to spend,
which was why it was designated as other restricted revenue
versus UGF revenue.
9:47:23 AM
Mr. Stickel turned to slide 12 titled Unrestricted Revenue
Forecast: FY 2021 to FY 2023 Totals. He shared that
investment revenue was one of the largest sources of
unrestricted revenue. He noted that the largest source of
revenue in FY 22 and FY 23 was expected to come from
petroleum revenue. He noted that in FY 23 investment
revenue was expected to total $3.4 billion. He added that
petroleum revenue was anticipated at $4.4 billion and about
$500 million of non - petroleum revenue for a total revenue
of $8.3 billion and just under $7 billion in FY 22.
9:48:46 AM
Mr. Stickel discussed slide 13 titled Unrestricted
Investment Revenue: FY 2021 to FY 2023. The chart depicted
total UGF. He pointed out that the POMV transfer accounted
for 40 percent and 62 percent of unrestricted revenue over
the 10-year forecast. He delineated that DOR anticipated
investment earnings increasing and oil prices moderating.
He pointed to the small portion of investment revenue from
the general fund that was forecasted at -$4.7 million for
FY 22 but expected it to return positive in FY 23.
Representative Rasmussen asked for the predicted rate of
return over the next 10 years for the PF. Mr. Stickel
answered they were expecting a 5.86 percent rate of return
for FY 22 and a 6.2 percent for FY 23 and beyond based on
Callan and Associates projections.
Representative Edgmon mentioned the $1.5 billion of federal
money for broadband as well as other large infusions of
federal dollars. He asked whether any of the modeling
included the federal funding.
Mr. Stickel responded that to the extent federal revenues
flowed through the state it was included in the revenue
forecast. He detailed that all the federal revenues were
considered restricted. The department forecasted the
infrastructure funding from FY 23 through FY 27 and was
included in the restricted portion of revenue.
9:51:27 AM
Representative Edgmon understood that there was no way to
forecast the total amount of federal funding coming to
Alaska. He deemed that the federal funding was a supplement
to the current revenue forecast, but also unknowable and
could be significant.
Mr. Stickel looked at Slide 14 titled Unrestricted
Investment Revenue: Percent of Market Value (POMV) Transfer
Forecast:
Permanent Fund total return for FY 2021 of 29.7%.
The statutory POMV rate changed to 5% beginning FY
2022.
For FY 2019 FY 2021 this rate was 5.25%.
Forecast assumes Permanent Fund's long-term total
return expectation of 6.20% for FY 2023+; 5.86% for FY
2022.
Differing Permanent Fund returns, and petroleum
deposits could significantly alter actual POMV
amounts.
Mr. Stickel delineated that the graph portrayed the POMV
transfer to the general fund over the next 10 years,
expected to be over $3 billion every year, growing to $4.7
billion by FY 2032. He reported that the fiscal year to
date return, as of the end of January was 3.95 percent. The
PF was a stable source of income for the state based on the
trailing market average calculation used for the POMV
transfer that filtered out year to year volatility in the
value of the fund. The baseline was based on the POMV draw
and did not account for any ad hoc draw or potential
contributions beyond the mandated royalty contributions.
Co-Chair Foster relayed the meeting would recess until
1:30 p.m.
9:54:07 AM
RECESSED
1:33:59 PM
RECONVENED
Co-Chair Foster called the meeting back to order.
Mr. Stickel continued with slide 14 to address questions
from earlier in the meeting. He addressed a question
regarding slide 5 and the percentage of GDP from oil
revenue. He communicated that in calendar year 2020, the
most recent full year of data, about 21 percent of total
GDP was derived from the oil and gas industry and it was 26
percent if excluding government. The transportation and
warehousing industry comprised 10 percent of GDP and 13
percent if excluding government and mostly represented
pipeline transportation.
1:36:38 PM
Representative Wool asked what the GDP percentage of oil
and gas industry was comprised of. Mr. Stickel had stated
that the amount represented the value of the oil itself and
not the taxes paid.
Mr. Stickel responded to an earlier question raised
concerning slide 5. He voiced that the price of oil in the
third quarter of 2021 was $73 per barrel of oil.
1:37:35 PM
Mr. Stickel addressed a question regarding slide 6 and the
average price of oil necessary in the remainder of FY 22 to
hit the forecasted price. He divulged that the average
price necessary was $114.57 per barrel of oil and broke
down the average price by remaining months as follows:
$113.80 for March, $113.32 for April, $117.24 for May, and
$113.91 for June.
1:38:07 PM
Mr. Stickel answered a question about volatility
assumptions on slide 6 and shared some statistics. He
reported that for FY 22 the department used a 10 percent
and 90 percent probability ranging from $80.76 bbl. to
$110.26 in FY 22 and in FY 23 the range was $62.50 bbl. up
to $163.43 bbl.
1:39:06 PM
Mr. Stickel moved to slide 11 to answer the question
concerning why non-petroleum DGF was decreasing. He
responded that it had to do with two one-time impacts in
the FY 21 and FY 22 numbers. He explained that in FY 21 a
larger than usual transfer was taken from the Alaska
Capital Income Fund that was invested concurrently with the
PF and reflected the strong PF earnings in FY 21. The FY 22
budget included some one-time revenue from refinancing the
Tobacco Securitization Fund and reflected a return to
normal rather than a decrease.
Representative Josephson asked if the petroleum revenue on
slide 11 reflected a 50 percent royalty or 25 percent
royalty to the corpus of the PF. Mr. Stickel responded that
the 25 percent Constitutionally required deposit to the PF
was included in other restricted revenue. The other 25
percent for certain leases issued in 1980 and beyond was
included in DGF. He furthered that there were 2 elements of
royalties deposited into the PF, the constitutionally
required 25 percent denoted as other restricted revenue and
an additional 25 percent deposited via statute signified as
DGF.
1:41:26 PM
Mr. Stickel moved to slide 15 titled Unrestricted
Petroleum Revenue: FY 2021 to FY 2023 Totals. The chart
detailed the unrestricted general fund petroleum revenue.
He noted the four main sources of unrestricted petroleum
revenue: Petroleum Property Tax; Petroleum Corporate Income
Tax; Oil and Gas Production Tax; and Royalties. He
elaborated that property tax was levied on all oil and gas
production property in the state and was a stable source
generation over $1 million each year. He elucidated that in
addition to the state share a municipal share generated
over $400 million. The state levied a corporate income tax
and applied to the profits of almost all the oil producers.
In FY 21, the state paid out $19 million in refunds due to
losses caused by COVID 19. In FY 22, oil revenue was
expected to increase to $190 million and $340 million in FY
23. Included in the estimates was a federal provision from
the Coronavirus Aid, Relief, and Economic Security (CARES)
Act that allowed the oil companies to carry back losses
from calendar year 2018 to 2020 and receive refunds. The
estimated impact was $2.4 million for FY 21 and $79.4
million in FY 22, which was included in the forecast. The
production tax on oil and gas was anticipated to
significantly increase due to the forecasted higher prices
at $1.9 billion in FY 22 and $2.5 billion in FY 23.
Finally, royalties from the production of oil and gas on
state land was no longer the largest source of petroleum
revenue but remained a significant source of revenue
forecast at $1.3 billion in FY 22 and $1.l5 billion in FY
23.
1:44:01 PM
Mr. Stickel continued to slide 16 titled Unrestricted Non-
Petroleum Revenue: FY 2021 to FY 2023. He explained that
non-petroleum taxes represented the largest share. The non-
petroleum corporate income taxes generated $102 million in
revenue in FY 21 and was impacted by the COVID related loss
carry forwards that refunded $6.7 million in FY 21 and was
estimated at just under $80 million in FY 22, which was the
reason for the decline in non-petroleum revenue. He
elucidated that other significant taxes included mining
license taxes, insurance premium taxes, fisheries taxes,
and excise taxes. He pointed to mining licenses taxes and
expected significant increases in FY 22 and FY 23 due to
higher prices. In total, non-petroleum taxes would generate
roughly $220 million and $370 million in FY 23. He noted
that the Other Unrestricted Non-Petroleum Revenue
category included: Charges for Services, Fines and
Forfeitures, Licenses and Permits, Rents and Royalties, and
Miscellaneous Revenue and Transfers.
1:45:55 PM
Mr. Stickel announced that the last section of the
presentation addressed the petroleum forecast assumptions
in detail. He began with slide 18 titled Petroleum Detail:
Changes to Long-Term Price Forecast. The graph portrayed
how the Fall 2021 forecast increased in the Spring 2022
forecast. He indicated that the department changed its
methodology in the fall of 2021 and began employing oil
futures markets predicted through 2029. He delineated that
the shift was from a prior methodology that used the first
two years of futures predictions and then assumed a
constant real price. The change was made to provide a more
useful revenue forecast for long range fiscal planning. He
reiterated that for the spring forecast they used the
median futures outlook for the 5 trading days ending March
9, 2022, which resulted in a price increase of roughly $16
per barrel for FY 22, $30 bbl. for FY 23, and an estimated
$8 to $9 per barrel increase through 2029.
1:47:51 PM
Mr. Stickel moved to slide 19 titled Petroleum Detail:
Nominal Brent Forecasts Comparison as of March 14, 2022
that showed a comparison to other forecasts. He noted that
the graph was updated on March 14, 2022. The graph depicted
a comparison of DORs revenue forecast to the Futures
Market as of March 14, 2022, as well as the Analysts
Forecast, and the U.S. Energy Information Administration
(EIA) forecast from their March 2022 Short-Term Energy
Outlook (STEO). He observed that DORs forecast was higher
than the other forecast due to the timing of March 9, 2022,
prior to the decline over the last week. Even with the
decline in price, the forecast remained within the general
range of the other forecasts.
1:49:09 PM
Representative Carpenter thought it was interesting to see
like minds coming up with the same trends. He asked if the
other entities were making the same predictions or
assessments regarding the effects of the war between Russia
and Ukraine. He wondered if there was an agreement on the
outcome of the war and whether it was reflected in the
predictions. Mr. Stickel suggested that the oil market
impact was concentrated on the short-term and the EIA STEO
Forecast relied heavily on the Futures Market for its
outlook. In terms of analyst predictions, he considered it
a median consensus forecast; some analysts had much
different outlooks.
1:50:57 PM
Representative Wool commented that the state was currently
using the futures market forecast. He wondered if the
states predictions were higher because of basing it on the
earlier week in March when prices were higher. Mr. Stickel
responded in the affirmative. He noted that the data on
Slide 19 was pulled from closing future prices on March 14,
2022 and demonstrated a shift in the futures market since
the states forecast.
1:51:43 PM
Representative Wool guessed the difference in a couple of
days played out for years. He referenced that earlier Mr.
Stickel mentioned that the spike in oil was due to the war
in the Ukraine and a shortage due to COVID. He inquired
whether the refineries and production facilities would
catch up to the demand and offset the spike increase. Mr.
Stickel thought the world was in a period of undersupply
trying to catchup to demand. He elaborated that high prices
would impact future supply and demand. As prices remained
high, companies would look to increase production while
consumers would reduce demand. The prediction was that the
process would play out in future years resulting in the
longer term price of approximately $70 per barrel range.
1:53:46 PM
Mr. Stickel continued to slide 20 titled Petroleum Detail:
UGF Relative to Price per Barrel (without POMV): FY 2023.
He referenced the discussion regarding volatility and
uncertainty and felt that it was an important slide which
showed how unrestricted revenue in FY 23 would change with
different levels of oil prices. The graph depicted the $101
bbl. forecast generating $5 billion in unrestricted
revenue. He qualified that the data did not include the
POMV transfer from the PF. He reported that near the
forecasted ANS price, a $1 increase or decrease in price
led to an approximately $80 to $85 million change in UGF
revenue.
1:54:53 PM
Mr. Stickel moved to slide 21 titled Petroleum Detail:
North Slope Petroleum Production Forecast. He shared that
the production forecast was developed in collaboration with
the Department of Natural Resources (DNR). He conveyed that
production would decrease in FY 22 followed by modest
increases over the next several years with oil production
averaging 535 thousand barrels per day by 2030. The stable
to slightly increasing production was due to a couple of
factors, including resumption in drilling from the COVID
period. There was also the anticipation of additional new
production. He noted that the high and low predictions
represented the uncertainty in the forecast.
1:56:32 PM
Mr. Stickel presented slide 22 titled Petroleum Detail:
Changes to North Slope Petroleum Production Forecast that
showed the changes from the Fall FY 21 forecast to the
Spring 22 forecast. There were not significant changes in
the production forecast.
1:57:14 PM
Mr. Stickel advanced to slide 23 titled Petroleum Detail:
North Slope Allowable Lease Expenditures. He indicated
that the graph showed how the North Slope allowable lease
expenditures changed over the prior decade and forecasted
the next 10 years. In addition, historical data regarding
oil and gas employment was included to show the correlation
between spending and jobs. He reported that in FY 21, North
Slope capital expenditures were $1.5 billion and had $2.4
billion in operating expenditures with significant cutbacks
due to the COVID pandemic. The state was anticipating some
slight increases in spending in FY 22 and significant
increases in FY 23 to FY 25. There was a possibility that
final investment decisions would be made in the current
year leading to higher capital spending.
1:58:49 PM
Representative Wool brought up operating expenditures. He
asked if the payroll stayed higher than the number of
employees and deduced that capital expenditures tracked the
number of employees more than operating expenditures. He
asked whether he was correct. Mr. Stickel responded that
the ongoing cost of employees in the field was reflected in
operating expenses. The larger driver for employment was
capital spending. He detailed that many of the fields had
become automated, but a certain baseline number of
employees was required. Certain activities related to
drilling and building a pad were labor intensive. The
projection for increased capital costs in FY 23 and beyond
for development of new fields was the potential driver for
increased employment. Representative Wool understood that
capital expenses tracked employment better than operating
expenses in the oil industry. Mr. Stickel indicated that he
was correct.
2:00:57 PM
Representative Josephson asked if the qualified expenses
would meet the requirements for credits against profits
under the carry forward lease expenditure program of HB 111
[ Oil & Gas Production Tax;Payments;Credits / CHAPTER 3
SSSLA 17/ 07/27/2017]. He argued that the state had a hand
in paying for some of the industry expenses. Mr. Stickel
replied in the affirmative. He purported that the allowable
lease expenditures were important because they indicated
industry activity and were deductible against production
tax. To the extent that a company had production and
available gross value, the expenses were subtracted against
the gross value of oil or gas to determine the production
tax value similar to the net profit value. He furthered
that if a company lacked sufficient gross value or was in
the development stage, the expenses turned into carry
forward lease expenditures and once the company came into
production the expenses could be applied towards future tax
liability.
2:02:33 PM
Mr. Stickel advanced to slide 24 titled Petroleum Detail:
North Slope Transportation Costs. The slide reviewed the
transportation costs of getting the oil to market per
barrel of oil. The costs were based on tanker costs, Trans
Alaska Pipeline (TAPS) tariffs, and other costs. He relayed
that in FY 21, the average transportation cost was $9.19
bbl. The department forecasted $9.71 bbl. in FY 22, and
$9.40 bbl. in FY 23. The expectation was that
transportation costs would stay under $10 per barrel in the
10-year forecast due to stable and slightly increased
production.
2:03:27 PM
Representative Johnson asked Mr. Stickel to remind her
generally how the transportation costs were calculated. She
recalled that they did not fluctuate as much as oil prices.
She deduced that a direct correlation between
transportation costs and the price of oil did not exist.
Mr. Stickel spoke to the drivers of the transportation
costs. He explained that marine or tanker costs were partly
related to the price of oil; increased oil prices increased
fuel costs and increased the cost of operating the tankers.
It was one of the reasons for the increase in
transportation costs on slide 24. Pipeline costs and tariff
costs were based on the costs of pipeline operations plus
an allowable return to the pipeline operator. The costs
were divided by the number of barrels of oil transiting the
pipeline. The more barrels transiting TAPS the per barrel
cost decreased due to its fixed operating costs.
2:06:28 PM
Representative Carpenter asked if the reason why there were
decreased transportation costs on slide 24 was due to the
predicted increase in production. Mr. Stickel responded
that TAPS costs and other costs were driven by the
increased production forecast. The marine transportation
costs were driven by lower oil prices that reduced the
operating costs for the tankers. Representative Carpenter
asked what the expectation of inflation was. Mr. Stickel
indicated the revenue forecast included a 2.4 percent
assumption for inflation.
2:07:50 PM
Representative Josephson thought it was good to be more
conservative even with the forecasted increase in the price
of oil. He returned to slide 19 and referred to the $1 bbl.
change reflecting $85 million and relying on data on March
9, 2022. He asked what differential the state would see if
they based the forecast on March 16, 2022. Mr. Stickel
deduced that looking at the futures market in the present
day the forecasted price would be about $90 per barrel in
FY 23.
2:09:15 PM
Representative LeBon was trying to understand the 5 day
window in which prices were based. The student base
allocation (BSA) number was based on a 30-day period. He
asked why the forecast would not use a 30-day count. Mr.
Stickel responded that using a 5-day window was to offer
the timeliest forecast using the most recent outlook while
still employing a mechanism to filter out any one specific
day with a large price swing. Representative LeBon
suggested that a 30-day average would have more of a
smoothing effect. He thought a 30-day average was more
conservative. He assumed that the spring and fall
forecasts, based on a 6-month forecast, might be self-
correcting.
2:11:08 PM
Representative Johnson cited the drop reflected on slide 19
of the analysts prediction. She wondered what the reason
was for the decline.
Mr. Stickel replied that there were a few different
possibilities and it depended on the specific analyst. He
speculated that the longer-term prices might not reflect
some of the more recent market activity. Representative
Johnson asked Mr. Stickel if he was more comfortable with
the curve of the graph rather than the numbers on the
graph. Mr. Stickel noted that in the last month or so there
had been a significant amount of volatility in near term
oil prices. The long-term prices had remained in the mid
$60s bbl. to mid-$70s bbl. He ascertained that the
anchoring of a long-term price was more reliable. Much of
the volatility was around the short-term price.
Representative Wool referenced slide 19 and asked if the
futures market line used a 5 day window and whether it was
a different 5 day window. Mr. Stickel replied that the
futures number reflected only 1 day - March 14, 2022.
Representative Wool noted that on the DOR forecast line the
price remained around $100 bbl. for 2023 and if the 5 day
window was based on today at $98 bbl. the entire graph
would look much different, and the curve would be below the
futures market. He asked if he was accurate.
2:14:54 PM
Mr. Stickel replied that if the graph was updated in the
current day, the chart would be similar to the futures
market price listed. He emphasized that the department was
releasing monthly revenue updates based on the prevailing
prices.
2:15:50 PM
Representative Josephson suggested that if the calculation
was made in the present day and the DOR forecast line was
the same as the futures market line the difference would be
multiple hundreds of millions of dollars. Mr. Stickel
reiterated the rule of thumb that for FY 23; each $1
change equated to about $80 million to $85 million in UGF
revenue.
Vice-Chair Ortiz offered that the committee was tasked with
budgeting for FY 23 and the oil price forecast was $101
bbl. He asked that if the goal was to be protective and
conservative in the appropriations process. He wondered if
basing the budget on $85 bbl. oil prices take a more
conservative approach. Mr. Stickel responded that $85 would
be conservative based on the current forecast and relative
to the markets. He voiced that it was a policy decision.
2:17:31 PM
Representative Carpenter favored a conservative approach.
He brought up the current war in Eastern Europe. He deduced
that the forecast suggested that the effect of the war
would not result in a high price of oil in the future. He
guessed that many forecasters believed that the situation
would resolve itself and did not include an escalation
resulting in higher oil prices. However, regarding
inflation, it was estimated to only increase by 2.5
percent. He opined that a more conservative approach would
use a higher inflation assumption based on the oncoming
influx of federal stimulus money. He favored the
conservative approach to forecasting the price of oil but
was lacking in consideration of rising costs and inflation.
2:19:17 PM
Representative Edgmon asked about DORs monthly forecast.
He wondered if it had ever been done. Mr. Stickel responded
that it had been done internally for years. However, in
February 2022, the department decided to publish the
monthly forecast if there was greater than a 10 percent
difference from the official forecasts. Representative
Edgmon did not understand why the forecast would be done
monthly because of the volatility in prices. Mr. Stickel
deferred the answer.
2:20:48 PM
BRIAN FECHTER, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
answered that the department was acknowledging volatility
and was attempting to provide policy makers the most up to
date information. Representative Edgmon was skeptical about
the motivation by the department. He suggested it was about
policy to justify paying a higher Permanent Fund Dividend
(PFD). He stated that he did not see the utility in monthly
updates given a spring and fall forecast. He noted the
spring forecasts had been the guidepost in developing the
budget and the fall acted as course correction. He thought
the intent of making the information public was a
motivation to influence policy makers regarding the PFD. He
voiced that he was not comfortable with the decision to
issue monthly updates. Mr. Fechter responded that the
Alaska Permanent Fund Corporation (APFC) provided monthly
projections and posted it on their website. He furthered
that the monthly update would be released if a 10 percent
change occurred in either direction. The intent was to
provide the most up-to-date information in any direction.
Representative Edgmon remarked that it was a departure from
the way the legislature previously received the
information. He argued that the APFC did not depend on oil
production, and it had a diversified portfolio. He
reiterated his skepticism.
2:24:15 PM
Co-Chair Foster shared Representative Edgmon's concerns. He
was also concerned with the low estimate of inflation and
wondered how that would affect the budget in the future.
2:24:46 PM
Representative LeBon asked if Mr. Fechter would agree that
a 30-day projection would be a more conservative approach
when calculating the futures price. Mr. Fechter responded
that it would depend on the market conditions at the time.
He could think of plenty of periods of time when oil prices
were very volatile in a 30 day period. He surmised that it
depended on present market conditions.
2:25:47 PM
Representative LeBon asked Mr. Stickel if it would be easy
to do a 30-day look back and provide the information to the
committee. Mr. Stickel replied in the affirmative.
2:26:04 PM
Representative Wool asked about the monthly projection. He
expressed confusion regarding what information would be
included and asked for clarification. Mr. Stickel responded
that the information would be provided if either the
projection for the current or next fiscal year UGF revenue
was more than 10 percent above or below the official
forecast. The document was released on its website, and
anyone could be added to a distribution list. The document
provided an updated outlook for oil prices and UGF revenue
for FY 22 and FY 23.
2:27:23 PM
Representative Wool wondered whether the update was based
on a 5-day or 30 day window. Mr. Stickel responded that the
past few updates were based on a single day futures market
outlook. Representative Wool asked if it was based on a
predictable day. Mr. Stickel replied that typically it was
based on or around the 15th of the month.
2:28:18 PM
Mr. Stickel continued to the final slide of his
presentation; Slide 25 titled Petroleum Detail: Tax
Credits for Purchase Detail. He explained that the graph
depicted the various tax credits available prior to 2016
that were applied to a tax liability or turned into a tax
credit certificate for the state to purchase. In 2016 and
2017 the legislature sunset the program and all credits
eligible for state purchase were completely phased out.
However, there was an outstanding credit balance of
approximately $532 million. Based on the statutory formula,
which was either 10 percent or 15 percent of production tax
levied, he estimated a statutory appropriation of $349
million for FY 23 and a final statutory payment in 2024;
the payments retired the statutory obligation.
Representative Josephson asked if the operating budget
would include the statutory appropriation of $349 million.
Mr. Stickel replied in the affirmative. Representative
Josephson asked if the administration took a position on
whether to retire all the credits in the current fiscal
year. Mr. Fechter responded that the administration did not
have an official position. He suggested that the position
was to refund the entire statutory amount through to
retirement of the credits.
Mr. Stickel concluded his presentation.
Co-Chair Foster thanked the presenters.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Spring 2022 Revenue Forecast Presentation HFIN 2022.03.15.pdf |
HFIN 3/16/2022 9:00:00 AM |