Legislature(2003 - 2004)
01/27/2004 02:51 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 27, 2004
2:51 P.M.
TAPE HFC 04 - 13, Side A
TAPE HFC 04 - 13, Side B
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 2:51 P.M.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Mike Chenault
Representative Eric Croft
Representative Hugh Fate
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Carl Moses
Representative Bill Stoltze
MEMBERS ABSENT
None
ALSO PRESENT
William Corbus, Commissioner, Department of Revenue; Tom
Boutin, Deputy Commissioner, Department of Revenue; Brett
Fried, Economist, Tax Division, Department of Revenue
PRESENT VIA TELECONFERENCE
Chuck Logsdon, Chief Petroleum Economist, Tax Division,
Department of Revenue, Anchorage
GENERAL SUBJECT(S):
Department of Revenue
Oil Price Projections
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 23rd Legislative Session, contact 465-
2156. After the 23rd Legislative Session they will be
available through the Legislative Library at 465-3808.
LOG SPEAKER DISCUSSION
TAPE HFC 04 - 13, SIDE A
000 Co-Chair Harris Convened the House Finance Committee
meeting at 2:51 p.m. in order to discuss
the Department of Revenue's oil price
projections.
Department of Revenue
Oil Price Projections
048 WILLIAM CORBUS, Provided the Committee with a handout:
COMMISSIONER, "ANS Spot Price and Forecast Prices Fall
DEPARTMENT OF 2003 & January NYMEX Future Implied" &
REVENUE the "Alaska Department of Revenue Tax
Division Source Book". (Copy on File).
He stated that the price of oil on
1/26/04 was $43.44. The price of gas was
$5.71 per million BTU. He introduced
Deputy Commissioner Tom Boutin and Brett
Fried, Economist.
150 Commissioner Corbus Stated that the revenue forecast was
prepared last fall and made public on
December 12th, 2003. For FY04, it is
estimated that the price of oil will be
at $27.50; FY05 estimated at $24.65;
FY06-FY15 estimated at $22 per barrel,
which is at the low end of the
Organization of Petroleum Exporting
Countries (OPEC) price range. Production
forecast estimates a modest increase in
daily production between 2004-2007 to
978.0 thousand barrels per day.
400 Commissioner Corbus Continued, in 2011, about 20% of the
production of oil will come from
identified reserves but not yet developed
reserves.
447 Commissioner Corbus According to the revenue picture, for
FY04 revenues are estimated at $2.2
billion dollars. That number compares to
$1.946 billion dollars for FY03. For
FY05, it is estimated that oil revenues
will be $1.427 billion dollars. Excluded
from the FY05 estimate are any revenue
enhancements that the Governor may
propose. He estimated the Constitutional
Budget Reserve (CBR) will run out in May
2007.
547 Commissioner Corbus The major change in fall forecast is
potential production from new sources
including Central North Slope, Beaufort
Sea, NPRA, & ANWR.
628 CHUCK LOGSDON, CHIEF Referenced the Revenue Sources Book, and
PETROLEUM ECONOMIST, chart "ANS Spot Price and Forecasted
DEPARTMENT OF Prices Fall 2003." He mentioned the oil
REVENUE price alternatives. Page 1 of the ANS
Spot Price provides a "snap shoot" of the
closing futures prices on the New York
exchange on 1/27/04. In 1995, there was
a lot of volatility. Between 1995 and
2000, there was an average around $17
dollars per barrel and the crash of 1999
@ $12 dollars per barrel. Since 1999,
the chart indicates that the price has
averaged over $20 dollars per barrel.
The State is doing better.
913 Mr. Logsdon Discussed OPEC actively managing a price
band between $22 & $28. There have been
8 or 9 quota changes, which resulted from
an agreement in 1999 to get the price
moving again. Since 2000, there have
been concerns with the uncertainty about
political stability in Iraq. Iraq is
currently producing about 2 million
barrels a day. The third big factor in
this decade is the economic growth in
China. By next year, China will have
surpassed Japan in petroleum consumption.
1044 Mr. Logsdon He provided information regarding the
peak and decline of very large oil
reserve discovered during the 1970's.
Mr. Logsdon outlined the fundamentals in
preparing price forecast. The demand has
been far more robust than was
anticipated. The economic growth in the
U.S. came in strong in the 3rd quarter
and accompanying that was the oil
consumption in China. Also, the past
month has been very cold weather on East
Coast creating a stronger than expected
demand growth. OPEC offered to cut their
quota as of November 1st, 2003 outside of
Iraq. Actual production fell and is now
back up.
1256 Mr. Logsdon Stated that Iraq is back up at 2 million
barrels per day. They are having trouble
getting oil out of their northern fields.
They are unable to ship through pipeline
they normally use through Turkey to the
Mediterranean. OPEC will meet on Feb. 10
to discuss quota, keeping the price
between $22-28 dollars per barrel - they
have been outside that range since
October.
1421 Mr. Logsdon Since mid-December, the supply has been
outweighing the demand. In the U.S., we
are still at the lowest inventory levels
we have ever been.
1509 Mr. Logsdon Commented that currently, the U.S. is
watching:
* Global economic growth
* U.S. currency deflation
* OPEC's production decisions
* Iraq and the stabilization there
1628 Mr. Logsdon Russia and West Africa are two of the big
areas that have had rapid expansion.
Russia is increasing their production by
approximately 10% a year for the past
three years. It is expected that West
Africa is going to be one of biggest
producers in world next year. It is
anticipated that oil could be as high as
$30 dollar per barrel this year depending
on what OPEC does and the transition
between heating and motor fuel tax.
1811 Mr. Logsdon Spoke to the success of OPEC insuring a
price between $22 to $28 dollars per
barrel. Last week, BP raised it price
assumption from $16 to $20 per barrel for
ANS oil.
1920 Mr. Logsdon Commented on production. Referenced the
chart on Page 2, indicating a drop in
production. From 1995 to 2000, averaging
the drop was at about 8% a year. That
has now changed because of the new fields
and production in heavy oil. Forecasting
a slight decline over the next ten years
around 1%.
2035 Mr. Logsdon Referenced Page 3,the actual and
forecasted revenue from 1995 to 2000,
with the lower oil prices and higher
production. As a result, prices went up
in 2000 after the crash in 1999.
Currently, the prices are heading down to
the $2 billion dollars per year mark. He
suggested that the next plateau revenue
could be $1.5 billion and the slide down
lower than that in the next decade.
2240 Mr. Logsdon Referenced Page 4 of the handout, the
U.S. Crude Oil Stocks. The chart helps
interpret the price forecast. The shaded
area is the average range of U.S. crude
oil stock for the last 15 years. Right
now, there are some of the lowest crude
oil stocks since 1973 as tracked by the
Department of Energy. When that
inventory number moves up, the State can
expect oil prices to begin to weaken.
2402 Mr. Logsdon People are holding low inventories, which
means that demand stays up and supplies
are not sufficient, it keeps cash prices
high. Once the inventory numbers come up
that is a clue to start selling, which is
what OPEC fears.
2448 Mr. Logsdon Referenced the chart that shows "other
revenues" for the FY04/FY05 era with a
relatively constant non-oil component
around $300 million dollars per year.
Mr. Logsdon concluded his briefing on the
oil prices.
2536 TOM BOUTIN, DEPUTY Understood that the Committee wanted
COMMISSIONER, information on the background of the
DEPARTMENT OF Investment Loss Trust Fund, the
REVENUE supplemental benefits system guaranteed
investment contract in the amount of
about $132 million dollars taken over by
the State of California regulators in
1991. AS 37.14.300 established the
investment loss trust fund by borrowing
$138 million dollars. The State has now
received from payments back, $137 million
dollars from the investment settlements
plus a third party out of court.
Additionally, $36 million dollars. The
investment loss trust fund has a cash
balance of about $6.45 million dollars
current balance some of which has been
appropriated. Some of the money has been
invested in a short-term pool - treasury
bill.
2657 Mr. Boutin Continued indicating the money
investments. The index is a 90-day T-
bill. He inquired if more specifics were
needed.
2741 Co-Chair Harris Asked if there was about $1 million
dollars left in that fund that has not
been earmarked. Mr. Boutin responded
that was correct and of the $6 million
dollars, $4.739 million has been
appropriated but not spent. $1.606 is a
reserve that is required. Department of
Administration provides the liability
side of the balance sheet and that
Department is responsible for looking
after that.
2838 Representative Fate Noted that the report has indicated that
OPEC is in a quandary to get the price
back to the $20 parameter. He questioned
if that was possible and what would be
the prognosis for the LNG in the next
five years & the price of oil.
2942 Mr. Logsdon Responded that LNG, the issue revolved
around supplying the North American
market as the price of gas is higher than
the rest of the world. With the use of
natural gas as the most efficient way to
generate electricity and the demand for
electricity tends to soar, the utility
market will absorb much of the LNG. To
date, there has not been a breakthrough
of the use of oil. He admitted that
there is potential for competition.
3115 Mr. Logsdon OPEC has cut into the projection. Saudi
Arabia has decided to accept lower market
share for prices. It is as low as it has
been since 1986. There is a major
difference now. Then the Saudis had
fallen to less than 300 million barrels a
day; today they are producing well over 8
million barrels a day. The market is
moving forward at a rigorous pace. He
spoke to the dollar inflation.
3246 Mr. Logsdon He claimed that they would keep
production about where it is. Whether or
not there will need to be a correction
made for the short-term oil production is
a wait and see what happens. That will
happen in March & April.
3332 Representative Fate Referenced NPRA as a source of revenue
and impact in the future. He asked if
consideration had been made to the
percentage that the State will receive
given the impact litigation settlements.
3353 Mr. Logsdon Stated that they have not done that. The
State is assuming that under the current
negotiations, 50% of any given royalties
will come to the State and the production
will be subject to the severance tax.
3449 Vice Chair Meyer Commented on the lunch with the Alaska
Oil and Gas Association. The theme was
that in order to increase oil production
and investing in the State of Alaska,
there would need to be a stable tax rate.
Additionally, recommended not "messing"
with the ELF formula. He thought ELF was
successful. He asked as more production
comes from the smaller fields, has that
been factored into the revenue forecast.
3556 Mr. Logsdon Responded that the forecast before the
Committee does make a projection of what
the ELF will be for each field going into
the future. Because much of the expected
production will be from fields with older
ELFS, it has been factored at a
percentage of severance tax into the
future.
3650 Representative Commented on the short-term price
Hawker prospects. He asked about the longer-
term profile of $22 dollar per barrel.
He noted that historically, the industry
has predicted more conservative numbers
than the State for the revenue forecast.
3760 Mr. Logsdon Advised that at present time there is a
process in place to look at the long-term
number once a year in the fall. Mr.
Logsdon was comfortable with $22 dollar
per barrel for this year and that high
prices often result in a correction.
There are opportunities and commitments
made to start spending if it is projected
too high and then there is a correction,
many problems result. There can be
"robust" oil prices for a while. At this
time, there is no decision to change the
projected "$22" dollars per barrel price.
4025 Vice Chair Meyer Followed up on the comments made by
Representative Hawker. He asked how
Alaska's price compared to other
countries prices for capital dollars.
4056 Mr. Logsdon For developments on shore, our cost
structures are fairly competitive. One
of the big concerns is that Alaska is
viewed as a "mature" oil province. The
price is probably smaller for a given
dollar outlay in Alaska. The opportunity
for the big "bonanza" could be more
exciting in other places.
4359 Co-Chair Harris Commented that other countries have a
reserve tax. He noted that Alaska does
not have that. Co-Chair Harris asked
what other countries do in that respect.
4450 Mr. Logsdon Did not know about those agreements. He
thought that only Texas had that at the
local level. He did not think it was
common. He offered to look into that and
provide that information.
4550 Co-Chair Harris Suggested that if other countries are
doing that and we are not, it could be
better for our economy.
4618 Representative Commented on the short and long term
Hawker prices. He referenced Page 44 from the
2003 Revenue Source Book.
TAPE HFC 04 - 13, Side B
4653 Representative Asked about the variable the number
Hawker provided by Department of Revenue. He
emphasized the "sensitivity" of that
number. He stressed that these are "real
money" numbers. A small change in the
price of oil can have a significant
effect on the numbers of the budget
situation. He reiterated how estimates
affect the legislative budget process.
4419 Representative Questioned if the State was being too
Hawker conservation with the numbers being used.
4353 Mr. Logsdon Explained that the forecast is a group
process and attempts to arrive at a
consensus. He asked that Commissioner
Corbus answer the question as there is a
policy consideration.
4301 Commissioner Corbus Noted that there is a group of 15 people
that participate in these negotiations.
They attempt to make the best judgment
and conclusion toward a more conservative
side.
4200 Representative Commented on the group meetings at
Hawker predictable intervals. He asked if they
should be considering the input variable
in the budgeting process before the next
meeting or should the variable be used
that was provided from the fall meeting.
4107 Commissioner Corbus Recommended taking the variable provided
in the fall forecast and operate from it.
4045 Representative Stated that he was not comfortable
Hawker accepting that as fixed point of
reference.
4004 Co-Chair Harris ADJOURNMENT:
The meeting was adjourned at 3:47 P.M.
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