Legislature(1997 - 1998)
01/20/1998 01:40 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 20, 1998
1:40 P.M.
TAPE HFC 98 - 2, Side 1.
TAPE HFC 98 - 2, Side 2.
TAPE HFC 98 - 3, Side 1.
CALL TO ORDER
Co-Chair Hanley called the House Finance Committee meeting
to order at 1:40 P.M.
PRESENT
Co-Chair Hanley Representative Kelly
Co-Chair Therriault Representative Kohring
Representative J. Davies Representative Martin
Representative G. Davis Representative Moses
Representative Foster Representative Mulder
Representative Grussendorf
ALSO PRESENT
Dr, Charles Logsdon, Chief Petroleum Economist, Division of
Oil & Gas Audit, Department of Revenue; Wilson Condon,
Commissioner, Department of Revenue; Anne Louise Hittle,
(testified via teleconference), Director, World Oil Product
Line, Cambridge Energy Research Associates, Boston, Mass.;
Representative J. Allen Kemplen; Representative Bill
Williams; Representative Brian Porter; Speaker Gail
Phillips; Representative Gene Kubina.
SUMMARY
STATE REVENUE FORECAST PRESENTATION
Co-Chair Hanley called the House Finance Committee meeting
to order at 1:40 P.M. He questioned if there currently
exists a fundamental shift in oil prices and if so, what
would that projection be. He pointed out that this
analysis could cause the Legislature to make budget
changes.
ANNE LOUISE HITTLE, (TESTIFIED VIA TELECONFERENCE),
DIRECTOR, WORLD OIL PRODUCT LINE, CAMBRIDGE ENERGY RESEARCH
ASSOCIATES (CERA), BOSTON, MASS., provided background
information on CERA, a consulting firm which makes
independent and objective analysis on what is occurring in
the world energy industry. CERA has offices based
throughout the world.
Ms. Hittle presented four factors, which if they occurred
could place the present market at risk. Between September
and October 1997, three of the four did occur.
1. A prolonged and worsening outcome to the
Asian currency crisis.
2. Mild winter weather in key regions of the
world.
3. A weakening of the key consuming nations
economy.
4. An increase in the volume of oil Iraq is
allowed to export under the Limited Oil
Sales Plan with the United Nations.
Ms. Hittle reiterated that unfortunately, three of the
above four factors have currently unfolded in the world.
The only one, which did not, was #3 creating a big dent to
the oil demand. The market has factored in the possibility
of a fifty percent increase in the amount of oil allowed
Iraq. That would mean an additional 400 thousand barrels
of oil per day coming into the market. The unfolding of
these points has helped to drive the oil prices down.
At the Organization of Petroleum Exporting Countries (OPEC)
meeting in November, 1997, the Saudi's, Kuwait and UAE
gained higher quota's receiving an increased market share
from 8 million to 8.7 million barrels per day.
Representative Martin questioned the impact of production
from Russia, Venezuela, Columbia and Viet Nam. Ms. Hittle
responded that those countries would be affected by the
non-OPEC supply, a projected increase of 1.2 million
barrels per day. She added, a large amount of that
increase would result from Venezuela, Algeria and Gutar.
The former Soviet Union (FSU) production was up in 1997
because of the political situation happening in that area.
In 1998, the FSU capacity will increase by 100 thousand
barrels a day, resulting from production in the Caspian
Region. She believed that by the year 2002, the capacity
out of the former Soviet Union would be a 600 thousand-
barrel per day increase.
Representative John Davies asked if the FSU numbers had
been included in the non-OPEC totals. Ms. Hittle replied
that in 1998, FSU would not be a big contributor to the
increase in the non-OPEC production. The areas affecting
that market will be the North Sea and Columbia. A large
increase to production has not been factored in the
"capacity" numbers. Speculation suggests that the
projected North Sea production will be peaking out around
the year 2002.
Representative John Davies questioned the "reduction in
demand" number was arrived at. Ms. Hittle noted that
adjustments had been made indicating actions taken. At
this time, loosing the Asian demand allowed the supply to
pull ahead. The outlook for growth takes the current crisis
in the Asian-Pacific area into consideration, moving
downward 380 thousand barrels per day since the middle of
1997. CERA will readdress the demand outlook for that
region numbers on the downhill side because of the
volatility of that market. She continued, China has not
been revised downward, as there are no signs of slowdown in
the oil growth in that Asian market. Japan and the Asian
Pacific market have been revised downward 50 thousand
barrels per day with an expected growth of 100 thousand
barrels per day.
Ms. Hittle provided the Committee with a handout titled:
The 1995-99 Oil Price Environment: ANS. (Attachment #1 -
Copy on File). The outlook indicates an increase for Iraq
and assumes that OPEC will total about 29 million barrels
per day. OPEC could decide to take action later this year,
an action that should be watched. Ms. Hittle explained
that the handout indicates even with a modified good
sweating, Iraq will be in and out as the currency crisis
deepens.
Co-Chair Hanley asked if Cambridge Energy Research
Associates (CERA) provided future forecasting and if they
saw a long-term fundamental shift affecting prices from
last year. Ms. Hittle acknowledged that her firm has
provided a projected scenario outlook into the year 2010.
1997 is a time of transition given the scenario occurring
in Asia. Projected numbers indicate that in the year 2000,
the picture should improve with a price moving closer to
$18.50 per barrel based on the assumption that the Asian
currency crisis will start to recover in 1999. There will
most likely continue to be an over supply. The production
outlook for 1999 is 80.6 million barrels per day.
Currently, there is 78.5 million barrels per day being
pumped. Present predictions indicates that sometime
between the years 2002 - 2003, the market will become
tighter and there will be an over-supply. Ms. Hittle
summarized that CERA strongly believes in the volatility of
the current market, although, higher levels could occur
depending on the Iraq situation. Next year there will be
a surplus amount of oil.
(Tape Change, 98-2, Side 2).
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, noted
that the Department made their annual long term revenue
forecast in November, 1997, as 75% of the State's
unrestricted general fund revenue derives from oil and gas
production price and volume. In November, the Department
predicted an average for FY98 of $18.11 cents per barrel
and in FY99, $18.22 per barrel. He added that since the
November forecast, the world situation has changed which
will affect projected prices. To date, there has been a $5
dollar per barrel drop from the Alaska North Slope oil
(ANS) price. Based on this outlook, the Department is
predicting that prices for FY98 will average out at about
$16.65 per barrel. The Department does not think that
today's lower prices indicate a longer-term decline in the
ANS trading range.
Commissioner Condon provided Committee members with
Attachment #2, a list of charts pertaining to the Alaska
North Slope projection. (Copy on File). He provided a
brief review of Pages 1 and 2, pointing out that prices
have ranged between $14.00 and $20.50 per barrel.
DR. CHARLES LOGSDON, CHIEF PETROLEUM ECONOMIST, DIVISION OF
OIL & GAS AUDIT, DEPARTMENT OF REVENUE, referenced Page 3,
the ANS West Spot (May 1987 - Jan 1998). He pointed out
that in previous years, the prices have dropped below
$14.00 per barrel and that this scenario will most likely
occur again, adding however, that Alaska has recovered from
every slump. He provided a brief history of the crash and
rise of oil prices. Dr. Logsdon acknowledged that the
financial trouble in Asia could have echo effects across
world economy, and would show up as a reduced demand for
crude oil in those countries.
Page 4 indicates how the forecast illustrates what the
future market prices will be. Co-Chair Hanley understood
that the spring forecast projections for last year were
$18.70 per barrel. Last year's budget was based on an
amount higher than $18.11. He pointed out that there has
been a fundamental shift between the fall forecast and the
spring forecast. Dr. Logsdon agreed and noted that in the
fall, there had been 10 months of declining prices, which
will show in the FY98 and the FY99 forecast numbers.
Dr. Logsdon continued, Page 5 provides three scenarios for
the unrestricted general fund revenues for the different
oil prices. The decline results from a production decline
mode. The average price from 1987 through 1997 was $17.35
per barrel. Page 6 illustrates the long-term forecast of
base price in the year 2000.
When compiling the fall forecast, the State reviewed a
couple of long term trends. The first trend being the
growth demand. There has been a tremendous rate of growth
throughout the world, however, there is an additional
scenario associated with that kind of a demand. Given the
rapid expansion and increase in the consumption of oil also
means a rapid increase pumped into the atmosphere affecting
global warming. Dr. Logsdon stressed that the issue of
atmospheric pollution is not going away. The other concern
affecting the current price scenario is the supply. At
this time, there exists a tremendous evolution in
technology allowing the oil reserve base to increase
dramatically. The combination of demand and supply will
determine the "call" on the oil price.
Page 6 provides the long run forecast provided by world
entities in October 1997. In the year 2000, the expected
range appears to be between $15 - $19 dollars. The
Department of Energy has predicted the highest price
forecast. Dr. Logsdon continued, Page 7 provides a graphed
illustration of the 2005-forecasted ANS price. Prices at
this time appear to have flattened out resulting from the
International Energy Administration high scenario prices.
He pointed out that the Department of Revenue projection
was at the low end. He agreed that current events in Asia
are "big" enough to change the field of play, and at this
time the outcome is not clear.
Dr. Logsdon noted that Page 8 illustrates the long-term oil
production forecast. He stated that 1989 was at peak with
a production of 2 million barrels per day. Currently, the
State of Alaska is producing 1.35 million barrels per day.
There is need to produce a higher amount as a result of low
summer month production. Beginning in FY2000, we should be
up in production to 1.355 million barrels per day after
having bottomed out in FY99 at 1.3 million barrels per day.
An increase has resulted from development of new fields.
Page 9 illustrates the Alaska North Slope decline rates at
three fields in Prudhoe Bay, Kuparuk and Endicott. Page 10
charts a rough diagram of how those changes affect decline
curves.
Co-Chair Hanley advised that the charts indicate that in
the future there will be a decline in the oil income,
stating that there will be problems keeping up with the
decline. Co-Chair Therriault added that with this decline,
cash flow to the treasury would decline. He emphasized
that the statement "No decline after `99", refers to the
production of a barrel of oil, not equating to funds in the
State Treasury. He believed that there will be a problem
for the future because of the declining curve.
Representative J. Davies asked if the determination made on
Page 10 assumed that there would be no new wells. Dr.
Logsdon replied that there has been assessed oil in other
places although the Page 10 indication does not include
those wells. The forecast only contains wells which the
Department of Revenue is comfortable guaranteeing. In
response to Representative J. Davies, Dr. Logsdon stated
that there would not be large shift opportunity in the
State.
Commissioner Condon amplified previous comments noting that
in 1991 the Department modified the way in which it
undertook volume forecasting. In 1999, the Department
predicts that there will be a higher rate of production
growth than that in 1991. Reviewing the past seven years,
the production rates will most likely to be steady and will
require new discoveries.
(Tape Change HFC 98-3, Side 1).
In response to Representative Grussendorf, Commissioner
Condon explained that product prices nationwide are down as
compared to crude oil prices resulting from the "squeeze"
on the refiners rather than the "squeeze" to producers.
Representative Martin stated that oil production is the
most important key to Alaska's future. Dr. Logsdon spoke
to the oil projects currently on target noting that Pt.
Thompson is a long distance from the pipeline and that
Endicott has declined capacity. Representative Martin
suggested the need for more incentive programs.
Commissioner Condon commented that the Legislature has
taken measures to encourage incentives by fashioning the
production tax so that it imposes a low or no tax on
marginal operations. Gas development incentives on the
North Slope will also be considered by the Legislature this
year and that a final decision on North Star is pending.
Representative Mulder asked how long the State could ride
the current crisis before reevaluating. Commissioner
Condon stressed that at all times it is important to be
accountable, reevaluating the State's position. Dr.
Logsdon noted that it takes a while before a consensus can
be determined. A year could provide the necessary amount
of time to ascertain adjustments in the longer term
outlook.
ADJOURNMENT
The meeting adjourned at 3:00 P.M.
H.F.C. 7 1/20/98
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