Legislature(2021 - 2022)ADAMS 519

01/19/2022 01:30 PM House FINANCE

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Audio Topic
01:32:21 PM Start
01:37:49 PM Presentation: Department of Natural Resources Production Forecast
02:44:45 PM Presentation: Fall 2021 Revenue Forecast
03:56:24 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentations: TELECONFERENCED
- Production Forecast by
Pascal Umekwe, Commercial Analyst, Department of
Natural Resources
- Fall 2021 Revenue Forecast by
Dan Stickel, Chief Economist, Department of
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 19, 2022                                                                                           
                         1:32 p.m.                                                                                              
1:32:21 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Foster  called the House Finance  Committee meeting                                                                    
to order at 1:32 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Kelly Merrick, Co-Chair                                                                                          
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Bryce Edgmon                                                                                                     
Representative DeLena Johnson                                                                                                   
Representative Andy Josephson                                                                                                   
Representative Bart LeBon                                                                                                       
Representative Sara Rasmussen (via teleconference)                                                                              
Representative Steve Thompson                                                                                                   
Representative Adam Wool                                                                                                        
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Maduabuchi Pascal Umekwe,  PhD, Commercial Analyst, Division                                                                    
of  Oil  and  Gas,  Department of  Natural  Resources;  John                                                                    
Crowther,   Deputy  Commissioner,   Department  of   Natural                                                                    
Resources; Dan  Stickel, Chief Economist,  Economic Research                                                                    
Group,  Tax Division,  Department of  Revenue; Senator  Bert                                                                    
Stedman; Senator  Click Bishop;  Senator Natasha  von Imhof;                                                                    
Senator Bill Wielechowski; Senator Donny Olson.                                                                                 
PRESENT VIA TELECONFERENCE                                                                                                    
Corri Feige, Commissioner,  Department of Natural Resources.                                                                    
Colleen  Glover,  Director,   Tax  Division,  Department  of                                                                    
PRESENTATION:  DEPARTMENT  OF NATURAL  RESOURCES  PRODUCTION                                                                    
PRESENTATION: FALL 2021 REVENUE FORECAST                                                                                        
Co-Chair  Foster   relayed  that  the  committee   would  be                                                                    
following  COVID-19   mitigation  policies  in   effect.  He                                                                    
reviewed the  meeting agenda.  He recognized  Senate Finance                                                                    
Committee members  including Co-Chair  Bert Stedman  and Co-                                                                    
Chair Click Bishop in the room.                                                                                                 
SENATOR  BERT  STEDMAN,  offed a  gift  of  appreciation  on                                                                    
behalf of the Senate Finance  Committee to the House Finance                                                                    
Committee for  all of  its hard work  over the  past several                                                                    
years. He held  up a symbolic check in the  amount of $4.943                                                                    
billion to the principal of  the Permanent Fund on behalf of                                                                    
future  generations of  all Alaskans.  He held  up a  second                                                                    
symbolic  check for  $4  billion dated  July  21, 2021,  for                                                                    
future generations  of all Alaskans.  He offered one  of the                                                                    
two checks for  the House Finance Committee  to display. The                                                                    
other  check  would  be  displayed  in  the  Senate  Finance                                                                    
Committee  room.   He  stated  the  committees   had  worked                                                                    
together  to save  approximately  10 percent  of the  entire                                                                    
Permanent Fund for future generations.  He stated that in 30                                                                    
to  40 years  the  $8.9  billion would  grow  to "stacks  of                                                                    
Co-Chair Foster asked for any comments from members.                                                                            
Representative LeBon  stated that  any bank would  honor the                                                                    
checks. He asked to accept the $4 billion check.                                                                                
Co-Chair Foster suggested accepting the $4.9 billion check.                                                                     
1:37:49 PM                                                                                                                    
Representative Edgmon  thanked the Senate  Finance Committee                                                                    
for its  growing commitment to  growing the  Permanent Fund.                                                                    
He  remarked  that  Alaska  was   the  only  state  with  an                                                                    
endowment. He lauded  the committee for holding  the line in                                                                    
terms of  growing the fund.  He appreciated the  gesture. He                                                                    
remarked there was lightheartedness  in the gesture, but the                                                                    
underlying message was serious.                                                                                                 
Co-Chair Merrick  thanked the  Senate Finance  Committee and                                                                    
appreciated working  collectively with the committee  in the                                                                    
past couple  of years. She  believed it was an  example that                                                                    
working collaboratively resulted in achieving great things.                                                                     
Co-Chair Foster stated he was up for taking either check.                                                                       
Representative  LeBon   concurred  with   Co-Chair  Foster's                                                                    
Representative Wool  thanked Senate  Finance for all  of its                                                                    
work. He asked for the larger check.                                                                                            
Co-Chair  Foster  requested  to  receive  the  $4.9  billion                                                                    
[symbolic] check.                                                                                                               
Co-Chair Stedman thanked the committee.                                                                                         
Co-Chair Foster thanked the Senate Finance Committee.                                                                           
^Presentation:  Department of  Natural Resources  Production                                                                  
1:40:05 PM                                                                                                                    
CORRI FEIGE,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES                                                                    
(via   teleconference),  echoed   thanks  to   both  finance                                                                    
committees  for their  commitment to  growing the  Permanent                                                                    
Fund  for future  generations of  Alaskans. She  believed it                                                                    
was  germane the  [symbolic] checks  were  presented on  the                                                                    
frontend  of the  2021 production  forecast  because of  the                                                                    
relationship   to  royalty   revenues   directed  into   the                                                                    
Permanent  Fund.   She  introduced  Department   of  Natural                                                                    
Resources (DNR)  staff. She provided opening  remarks with a                                                                    
prepared statement:                                                                                                             
     Looking  back, in  2021, the  oil sector  recovery from                                                                    
     the  chaos and  extreme price  and demand  fluctuations                                                                    
     that were so prevalent during  2020 and the peak of the                                                                    
     global pandemic, the  International Energy Agency notes                                                                    
     the  demand has  now  been ahead  of  supply since  the                                                                    
     third quarter of  2020 through the 4   quarter of 2021.                                                                    
     Year 2022 is  looking like we will see  higher and more                                                                    
     stable prices enduring.                                                                                                    
     Members  of  the  committee  will  probably  know  that                                                                    
     Alaska North Slope Crude closed  just above $89/ barrel                                                                    
     yesterday. 2022 will likely  see global rebalancing and                                                                    
     continued strong  prices, though  that can  change very                                                                    
     quickly   in   this   rather   uncertain   and   highly                                                                    
     politically  charged global  environment.  At the  most                                                                    
     recent meting  of the  OPEC Plus on  January 4,   those                                                                    
     member nations announced that  they planned to continue                                                                    
     to  their   restrained  monthly  increase   in  supply;                                                                    
     however,  some  analysts  worry  that  this  restrained                                                                    
     approach indicates  that the  idle capacity in  some of                                                                    
     these nations  is going  to be  difficult to  return to                                                                    
     production  and  it is  that  market  dynamic that  has                                                                    
     driven  prices higher  over the  last couple  of weeks.                                                                    
     Stronger and  more stable prices and  increasing demand                                                                    
     is good for Alaska's  industry. Though when the current                                                                    
     political  climate,  companies   across  the  petroleum                                                                    
     sector and  especially those operating in  Alaska, face                                                                    
     significant  headwinds,   there  is  pressure   on  all                                                                    
     companies  to exhibit  capital discipline  and increase                                                                    
     shareholder profits and returns  and that combined with                                                                    
     climate  activism  and  energy transition  dynamics  is                                                                    
     resulting    in   financial    barriers   and    slower                                                                    
     reinvestment in the sector.                                                                                                
     The times are uncertain.  Alaska's operators are taking                                                                    
     full  advantage   of  the  price  rise   and  near-term                                                                    
     stability  to  continue  to  capture  more  efficiency,                                                                    
     value,  and production  from the  existing assets,  and                                                                    
     that is  resulting in somewhat flattened  decline rates                                                                    
     across many of Alaska's major North Slope fields.                                                                          
1:44:20 PM                                                                                                                    
MADUABUCHI PASCAL UMEKWE,  PHD, COMMERCIAL ANALYST, DIVISION                                                                    
OF OIL AND GAS, DEPARTMENT  OF NATURAL RESOURCES, provided a                                                                    
PowerPoint   presentation  titled   "Fall  2021   Production                                                                    
Forecast," dated  January 19, 2022. He  addressed elaborated                                                                    
on comments made  by Commissioner Feige. He  remarked it had                                                                    
been  an  interesting 12  to  24  months with  [oil]  prices                                                                    
swinging  between below  zero and  the  current numbers.  He                                                                    
intended to  discuss the  production outlook  throughout the                                                                    
presentation. He  noted the work  had been  conducted within                                                                    
the  Division  of Oil  and  Gas  by  a team  of  geologists,                                                                    
engineers,  and commercial  analysts,  who  worked with  the                                                                    
assets  on a  daily basis.  The  forecast had  been done  in                                                                    
close collaboration  with the  Department of  Revenue (DOR).                                                                    
The  presentation  included  a  review of  FY  21,  the  DNR                                                                    
production forecasting approach, and  the fall 2021 forecast                                                                    
Mr. Umekwe advanced  to the outlook for FY  21 production on                                                                    
slide 4, which DNR had forecast  in fall 2020. He pointed to                                                                    
a black bar  reflecting actual production in a  bar chart on                                                                    
the lower right of the slide.  He noted the gray bars in the                                                                    
extremes  [to the  far  left  and far  right  of the  chart]                                                                    
represented the high and low  production ranges generated by                                                                    
DNR, while the  gray bar to the immediate left  of the black                                                                    
bar reflected  DNR's expected case.  The blue  bar reflected                                                                    
an aggregate  look at what  different operators  thought. He                                                                    
reported  that  the  actual  production  came  within  DNR's                                                                    
forecasted  range   and  was  about  5   percent  above  the                                                                    
department's expected case.                                                                                                     
Mr. Umekwe touched on factors  the department believed would                                                                    
shape  the landscape  for  existing  and upcoming  projects.                                                                    
Factors    included    energy    transition    and    strong                                                                    
environmental,  social, and  governance  issues that  impact                                                                    
the  way  companies looked  at  capital  in the  Arctic.  He                                                                    
referenced statements made  on the factors in  the media and                                                                    
from Wall Street. He remarked  that companies in Alaska were                                                                    
aware of energy transition and  were taking steps to address                                                                    
their strategy  and response. He  noted there  were multiple                                                                    
options available  to companies and each  company approached                                                                    
the transition in its own  way, picking options that matched                                                                    
their long-term strategy.                                                                                                       
Mr.  Umekwe stated  that COVID-19  had  really impacted  the                                                                    
numbers and  overall project climate.  He remarked  that the                                                                    
impacts  beginning  in  2020  continued  to  shape  the  way                                                                    
companies  interacted and  managed fields  and redevelopment                                                                    
1:48:46 PM                                                                                                                    
Mr. Umekwe moved to slide  5 and addressed "FY 2021 Summary:                                                                    
North Slope." He  considered what was expected  from oil and                                                                    
gas  fields  that  were past  the  point  where  significant                                                                    
development  was occurring.  He pointed  to a  chart on  the                                                                    
bottom right  showing production changes across  North Slope                                                                    
assets  and explained  that he  largely  expected assets  to                                                                    
show as red  because fields generally declined on  a year to                                                                    
year  basis.  He  added  that a  green  bar  indicated  that                                                                    
something  was happening  with the  assets.  He remarked  it                                                                    
took  a   lot  to  stabilize  decline   let  alone  increase                                                                    
production in a given asset.                                                                                                    
Mr. Umekwe  continued to address  slide 5. The  slide showed                                                                    
that North  Slope production from  FY 20 to FY  21 increased                                                                    
by  2  percent.  The  increase included  activities  in  the                                                                    
Greater  Prudhoe  Bay  Unit   (GPBU)  due  to  well/facility                                                                    
optimization  efforts.   He  noted  that  when   looking  at                                                                    
historical data,  it would be  necessary to go back  to 2005                                                                    
to  see facilities  being  run at  their  current level.  He                                                                    
noted  the  prior  operator  set   the  groundwork  for  the                                                                    
optimization  efforts and  the current  operator was  moving                                                                    
their own strategy of cost  reduction and looking across the                                                                    
fields  for  small  opportunities. Additionally,  the  Milne                                                                    
Point  Unit  (MPU)  had  seen   a  20  percent  increase  in                                                                    
production due  to consistent  drilling efforts.  He relayed                                                                    
ExxonMobil's efforts, which had  been taken over by Hilcorp,                                                                    
had resulted  in a  40 percent growth  in the  Point Thomson                                                                    
Unit (PTU) due to improved facility reliability.                                                                                
Mr. Umekwe discussed decreases in  production on slide 5. He                                                                    
reported  that ConocoPhillips  had  held  production at  the                                                                    
Kuparuk River Unit  (KRU) essentially flat at  FY 20 levels.                                                                    
He  noted there  was  a drop  of 300  barrels,  which was  a                                                                    
phenomenal feat. The Greater Mooses  Tooth Unit 1 (GMT1) had                                                                    
seen  a  50  percent   production  drop  due  to  persisting                                                                    
reservoir challenges. He  highlighted the presentation would                                                                    
show good news  for the asset resulting from  the next phase                                                                    
of  development: GMT2.  He highlighted  that the  absence of                                                                    
drilling at  Oooguruk since 2016  had led to  declines shown                                                                    
on the  slide. He stated  that overall,  it was good  to see                                                                    
the growth  in the amount that  was being seen on  the North                                                                    
Slope. The first effort was  to stabilize decline and add to                                                                    
1:52:47 PM                                                                                                                    
Co-Chair  Foster  noted  that Representative  Rasmussen  was                                                                    
Mr. Umekwe  moved to an FY  21 summary on Cook  Inlet basin.                                                                    
He  highlighted the  importance of  the basin  that produced                                                                    
much  supply for  in-state refineries  as  well as  yielding                                                                    
revenues  from royalty-in-kind  sales.  He  stated that  the                                                                    
basin  production  had decreased  by  22  percent or  ~3,000                                                                    
barrels of oil per day. Some  of the decreases for the basin                                                                    
included the  Redoubt Shoal and  McArthur River  fields that                                                                    
were taken  offline at  the height of  the pandemic  in June                                                                    
2020  as a  result  of the  pandemic-related  oil crash.  He                                                                    
noted the two fields had been brought back online.                                                                              
1:54:29 PM                                                                                                                    
Mr. Umekwe turned  to slide 7 and showed a  snapshot of some                                                                    
of  the North  Slope projects  that would  be impacting  the                                                                    
outlook over the next two  fiscal years. He listed the Fiord                                                                    
West Kuparuk,  CD5 2   expansion, and the  Narwhal projects.                                                                    
He stated  it was significant  activity in the asset  as the                                                                    
operator   continued  to   deepen  portfolio   projects.  He                                                                    
highlighted the first  oil had been produced  in the Narwhal                                                                    
unit in December 2021. The plan  was to drill about 12 wells                                                                    
going forward, which  would increase the amount of  oil to a                                                                    
peak of around 32,000 barrels of  oil per day. The first oil                                                                    
for the GMT2  project had been drilled in  November 2021. He                                                                    
detailed that the  wells had not all been  drilled but there                                                                    
was  consistent work  to  bring to  its  estimated level  of                                                                    
production of a peak of around 30,000 barrels per day.                                                                          
Mr. Umekwe  pointed out  that production  did not  reach its                                                                    
peak right from the beginning.  He discussed the Pikka field                                                                    
and noted  a merger between  Santos and Oil Search  had been                                                                    
completed  and  the  FID  [final  investment  decision]  was                                                                    
expected for  phase 1 of  the development. He noted  phase 1                                                                    
was  expected   to  result  in  ~80,000   barrels  per  day.                                                                    
Production  was anticipated  to increase  in 40,0000  barrel                                                                    
increments. He  highlighted the Willow  field and  noted the                                                                    
operator  was  working  on issues  highlighted  in  a  court                                                                    
decision.  The  project was  expected  to  reach the  second                                                                    
record of decision  by the end of 2022  with construction to                                                                    
follow in the beginning of 2023.                                                                                                
1:57:31 PM                                                                                                                    
Co-Chair Foster  noted that Vice-Chair Ortiz  had joined the                                                                    
Representative  Josephson asked  about the  Willow field  on                                                                    
the  list shown  on  slide  7. He  observed  that the  slide                                                                    
appeared  hopeful that  corrections could  be made,  and the                                                                    
project could  move forward.  He asked  for the  accuracy of                                                                    
his  statement.  He asked  if  the  department followed  the                                                                    
details of the litigation.                                                                                                      
Mr. Umekwe  answered that much  of the information  shown on                                                                    
the slide was the publicly available information.                                                                               
JOHN  CROWTHER, DEPUTY  COMMISSIONER, DEPARTMENT  OF NATURAL                                                                    
RESOURCES,  responded that  DNR  and the  Department of  Law                                                                    
(DOL) had been following the  litigation and remand from the                                                                    
court.  He detailed  that the  necessary record  of decision                                                                    
and approval  from the Bureau  of Land Management  (BLM) was                                                                    
back  with  BLM  at  present. He  elaborated  that  DNR  was                                                                    
participating   in  the   group  reviewing   the  identified                                                                    
deficiencies  and  corrections  and supporting  the  federal                                                                    
agency to try  to accelerate the review for  completion in a                                                                    
timely way. The schedule shared  with DNR would complete the                                                                    
review in  2022 and would  allow construction to  proceed in                                                                    
2023. He noted that  the timelines were always aspirational;                                                                    
however,  the Willow  timeline was  incredibly important  to                                                                    
the  state. He  explained  the department  was working  very                                                                    
hard  to  do  everything  possible to  support  the  federal                                                                    
review to keep it on schedule.                                                                                                  
Representative  Wool  asked  if  they  were  discussing  the                                                                    
Natural Petroleum Reserve-Alaska (NPRA)  fields that were in                                                                    
question. He  looked at the  estimate of 130,000  barrels of                                                                    
oil per  day. He asked  if the ultimate projection  from DNR                                                                    
would include the 130,000 barrels per day.                                                                                      
Mr.  Crowther answered  that  the Willow  field  was in  the                                                                    
federal  leases within  NPRA, while  the  Pikka project  was                                                                    
located on  state leases near  the boundary on  state lands.                                                                    
He verified  that the numbers in  the presentation reflected                                                                    
the volumes [projected on slide 7] in the outyears.                                                                             
2:00:11 PM                                                                                                                    
Representative Edgmon observed on slide  7 that the start of                                                                    
production in  phase 1  of the  Pikka project  was scheduled                                                                    
for 2025  and a  final investment  decision was  expected by                                                                    
2024/2025. He  asked if it was  consistent with expectations                                                                    
a year ago and factored  in the high profile dispute between                                                                    
Oil  Search  and  ConocoPhillips in  terms  of  construction                                                                    
easement permits.  He asked if the  impediment still existed                                                                    
and whether it had influenced the timeline for both phases.                                                                     
Mr. Crowther  replied it was  DNR's understanding  the Pikka                                                                    
project  was split  from a  single  phase with  a target  of                                                                    
120,000 barrels  into two phases  partially due  to COVID-19                                                                    
and a difficult  period of low oil prices  and tight market.                                                                    
The first  phase had a peak  of 80,000 barrels per  day that                                                                    
may receive  final investment decision in  2022. There would                                                                    
be  a  second  phase  with  a  subsequent  final  investment                                                                    
decision  in  the  2024  timeframe  that  would  take  total                                                                    
production to  the original target  of ~120,000  barrels per                                                                    
day. He  relayed that  DNR was very  aware of  the situation                                                                    
and was speaking with both  parties about how to resolve the                                                                    
issues  and enable  development to  proceed. He  deferred to                                                                    
Commissioner Feige for additional detail.                                                                                       
Commissioner Feige added that  the Kuparuk River Unit needed                                                                    
to  be   crossed  to  access   the  Pikka  field   and  both                                                                    
developments  were state  resources  under  state leases  on                                                                    
state lands. The  state was very engaged in  the process. It                                                                    
was the  state's desire  to see  the two  parties come  to a                                                                    
commercial agreement,  which would be the  fastest path. She                                                                    
elaborated it  had always  been the  path that  operators in                                                                    
Alaska and other  places had been able to  travel in sharing                                                                    
access  across  state  lands. She  relayed  that  the  Pikka                                                                    
development was the first time  on the North Slope where the                                                                    
operator  and the  owner  of  the field  was  not a  working                                                                    
interest owner in  one of the other fields  operating on the                                                                    
North  Slope. In  the past,  when third-party  operators had                                                                    
needed  access  to  facilities  or  needed  to  cross  other                                                                    
producing  fields,  the  parties   had  been  able  to  come                                                                    
together in  a commercial arrangement usually  because there                                                                    
was oil  processed through a  facility or there  was sharing                                                                    
of  some  other facility.  In  the  Pikka case,  Oil  Search                                                                    
needed  to construct  its own  seawater  treatment plant  to                                                                    
Oliktok Point, which was the  easement dispute referenced by                                                                    
Representative Edgmon.                                                                                                          
Commissioner  Feige  explained  the new  seawater  treatment                                                                    
plant  was  needed because  of  the  chemistry required  for                                                                    
water to optimize oil recovery  from Pikka. The chemistry of                                                                    
the  water coming  out of  the  existing seawater  treatment                                                                    
plant owned  by ConocoPhillips  was not the  exact chemistry                                                                    
needed;  therefore, Oil  Search opted  to construct  its own                                                                    
plant.   It   was   the  department's   understanding   that                                                                    
ConocoPhillips would  need to expand its  seawater treatment                                                                    
plant  at   Oliktok  Point  for  the   Willow  project.  She                                                                    
explained it was  not an area where the  two companies could                                                                    
share   a  commercial   arrangement.   The  department   was                                                                    
currently  working   with  both   parties  to   encourage  a                                                                    
commercial arrangement  for a  long-term road  use agreement                                                                    
because access  to the Pikka  field required the  Spine Road                                                                    
crossing the  Kuparuk River field.  The department  was very                                                                    
engaged and  was watching the  timelines closely  because it                                                                    
was in  the state's  interest for Pikka  to continue  on the                                                                    
stated timeline.                                                                                                                
2:05:22 PM                                                                                                                    
Representative  LeBon  thanked   the  commissioner  for  the                                                                    
summary. He asked if the  state had the authority to mandate                                                                    
a settlement if there was  not a settlement of the agreement                                                                    
between the two companies in a timely manner.                                                                                   
Commissioner Feige replied in  the affirmative. She informed                                                                    
the committee that  none of the access provisions  in any of                                                                    
the  leases or  unit  agreements were  exclusive. The  state                                                                    
believed it  had statutory provisions that  would enable the                                                                    
state to help the companies  come to an agreement. The state                                                                    
was hoping the  parties came to a  commercial arrangement on                                                                    
their own because it would be the shortest timeline.                                                                            
Mr. Umekwe moved on to discuss DNR's forecasting approach.                                                                      
2:07:13 PM                                                                                                                    
Mr. Umekwe turned to slide  9 and addressed the DNR forecast                                                                    
process including  projects and  pools within  the forecast.                                                                    
He  relayed that  the  forecasting  process typically  began                                                                    
with the public numbers published  by the Alaska Oil and Gas                                                                    
Conservation Commission (AOGCC). He  explained DNR looked at                                                                    
the pools online  at a given date. He detailed  that DNR did                                                                    
projections  for  pools  going  into  the  future  using  an                                                                    
industry norm. The department  collaborated closely with the                                                                    
DOR  to discuss  projects in  detail and  get its  questions                                                                    
answered.  He relayed  there were  about  20 projects  under                                                                    
development,  evaluation,  and/or   review  such  as  Pikka,                                                                    
Willow,  and others.  The department  reviewed the  projects                                                                    
and talked with explorers to  gain insight into any gaps the                                                                    
department may  have in its  understanding of  the projects.                                                                    
He explained  that future production  from the  projects was                                                                    
adjusted  and risked  for scope  of contribution,  chance of                                                                    
occurrence,  and start  date. He  elaborated that  typically                                                                    
the  expected  rate  was  either exceeded  or  not  met.  He                                                                    
pointed out  it was  difficult to have  a forecast  that was                                                                    
100  percent  accurate.  He  stated  that  the  department's                                                                    
approach was consistent over the years.                                                                                         
Mr. Umekwe  turned to slide  10 and addressed  categories of                                                                    
production: ongoing/current  vs future production.  He began                                                                    
with production from existing  fields including Prudhoe Bay,                                                                    
Kuparuk,   and  others.   The   department  considered   how                                                                    
facilities  were  managed,  how  base  production  had  been                                                                    
maintained  or  managed,  and  the  different  enhanced  oil                                                                    
recovery techniques  that had  been applied  to give  a good                                                                    
sense of  future production. The department  also considered                                                                    
future  production  including   projects  under  development                                                                    
(planned  to  occur  in  the next  fiscal  year)  and  under                                                                    
evaluation.  He stated  projects under  evaluation typically                                                                    
had  substantial  capital   requirements  and  commerciality                                                                    
2:10:54 PM                                                                                                                    
Mr.  Umekwe  advanced  to  slide   11  and  addressed  major                                                                    
projects considered  in the fall 2021  forecast. He provided                                                                    
generalized  characteristics. First,  the projects  included                                                                    
were  not online  as  of  the end  of  FY  21. The  projects                                                                    
required  significant   investment  to  get   started,  they                                                                    
involved known discoveries  with identifiable operators, and                                                                    
had higher  risk factors. He  pointed to  a map on  slide 11                                                                    
and highlighted  that yellow represented federal  land, pink                                                                    
reflected  Native land,  and blue  reflected state  land. He                                                                    
pointed  out   that  royalties  the  state   took  from  the                                                                    
different  slices of  land differed  greatly. He  elaborated                                                                    
that the  state received 100  percent of the  royalties from                                                                    
state land, while 50 percent  of the royalties from the NPRA                                                                    
area  went to  a  firm handling  the  mitigation effects  of                                                                    
development.  He relayed  that the  state received  about 27                                                                    
percent  of the  royalties generated  from projects  located                                                                    
about three  to six miles  from the northern portion  of the                                                                    
Mr. Umekwe  relayed that all  oil that went to  the pipeline                                                                    
helped the state  in some way. He elaborated  that it helped                                                                    
other  projects, reduced  tariffs, and  made other  projects                                                                    
more  economic.  He  reiterated that  the  slice  the  state                                                                    
received  from the  various locations  differed. He  relayed                                                                    
that chapter 6  of the Revenue Sources  Book addressed taxes                                                                    
and royalties for different segments of land.                                                                                   
2:13:09 PM                                                                                                                    
Representative Edgmon  asked about the optimism  level going                                                                    
forward. He referenced  the oil price projection  of $89 per                                                                    
barrel, which would  suggest the tide may  be turning toward                                                                    
more capital dollars being allocated  to the North Slope. He                                                                    
asked about  the outlook relative to  oil companies deciding                                                                    
to put money into development.                                                                                                  
Mr.  Crowther  answered  there were  competing  factors.  He                                                                    
discussed  that price  drove investment  in the  sector both                                                                    
nation  and  worldwide. He  remarked  that  Alaska had  been                                                                    
blessed  with some  new understanding  of  its geology  that                                                                    
made  the state  comparatively  more  attractive. There  was                                                                    
tremendous potential  in the eastern NPRA  and western state                                                                    
lands that had not existed  five years back. He believed the                                                                    
state had price  and geology on its side,  which were strong                                                                    
factors  supporting  investment  in Alaska.  He  highlighted                                                                    
that  there  were  sector-wide energy  transition  pressures                                                                    
that were making  competition for capital - even  in a high-                                                                    
price  environment  -  very  intense.  He  stated  that  the                                                                    
department  liked  to  be   optimistic,  but  the  situation                                                                    
tempered the  optimism. He shared that  the commissioner had                                                                    
been   traveling  to   tell  the   department's  story   and                                                                    
explaining why  even as the  sector-wide squeeze  was taking                                                                    
place, Alaska  was the place  to make low  carbon intensity,                                                                    
environmentally  friendly,  responsibly  developed  oil  and                                                                    
2:15:40 PM                                                                                                                    
Commissioner  Feige believed  it was  a time  of opportunity                                                                    
for  state  lands  on  the  North  Slope.  She  stated  that                                                                    
companies on  the NPRA  and other  federal lands  around the                                                                    
country  were facing  strong headwinds  toward  any kind  of                                                                    
lease  activity  and  development. She  elaborated  that  as                                                                    
there had been during the  Obama administration, there was a                                                                    
reinvigorated  interest in  state lands,  especially on  the                                                                    
North  Slope.  She  detailed  there  were  large  tracks  of                                                                    
exploration acreage that  had yet to be  explored and tested                                                                    
located east  of the haul  road that were a  continuation of                                                                    
the Nanushuk  or Brookian  play type, which  was one  of the                                                                    
hottest play types in the  world. She shared that department                                                                    
members would  attend the  upcoming American  Petroleum Expo                                                                    
to  present and  meet  with industry.  The department  heard                                                                    
repeatedly that the Brookian plan  or Nanushuk formation was                                                                    
shallow,  onshore, and  in  large  volumes. She  highlighted                                                                    
that  its  location  on state  lands  was  another  positive                                                                    
Commissioner Feige shared that  she and the DOR commissioner                                                                    
had been  meeting with capital providers  across the country                                                                    
(in  Houston  and  New  York)  and  were  highlighting  that                                                                    
Environment,  Society  and  Governance (ESG)  was  not  just                                                                    
something new to  Alaska. She continued that  ESG had become                                                                    
trendy in the  past year or so because of  the change in the                                                                    
federal administration. She highlighted  that the way Alaska                                                                    
leased  its   lands,  captured  revenues,  and   turned  the                                                                    
revenues around  into the Permanent  Fund, into  a dividend,                                                                    
and into taxes  that went directly to  local communities for                                                                    
schools, and  new hospitals  in Barrow,  fell under  the ESG                                                                    
box.  She stressed  that ESG  was not  a new  initiative for                                                                    
Alaska, "it was  in the DNA of how we  do our business here"                                                                    
and was  in Alaska's statutes and  constitution. She pointed                                                                    
out that  Alaska had  anti-wasting statutes  that prohibited                                                                    
the venting of natural  gas, something that separated Alaska                                                                    
from  places  like Texas  and  the  Permian Basin  or  North                                                                    
Dakota  and the  Bakken  where venting  of  natural gas  was                                                                    
Commissioner  Feige  believed  Alaska  was  positioned  very                                                                    
well.  Alaska  faced some  headwinds  in  ensuring it  could                                                                    
bring capital  to operators that were  working and investing                                                                    
in the  state. The state  was doing  its part to  ensure the                                                                    
capital  was   available.  While  at  the   same  time,  the                                                                    
companies were  working together  to reduce  their emissions                                                                    
at existing  operations. The  companies were  making certain                                                                    
they were doing  good well work and did not  have venting or                                                                    
"fugitive emissions."  She summarized  there was work  to do                                                                    
and  the path  was  not easy,  but she  believed  it was  an                                                                    
opportunity and there was reason to be optimistic.                                                                              
2:19:36 PM                                                                                                                    
Representative  Wool  referenced  testimony  that  the  high                                                                    
[oil]  price   regime  was   attractive  to   investors.  He                                                                    
highlighted that  when price went up,  producers (especially                                                                    
fracking, Permian Basin and other)  wanted to produce, which                                                                    
caused supply  to increase and  price to go down.  He stated                                                                    
it was  a self-regulating cycle.  He asked if the  cycle was                                                                    
expected. He  asked if there  was a price point  worked into                                                                    
projections  at which  there would  be less  development and                                                                    
production (if the price dropped below a certain number).                                                                       
Mr.  Umekwe  confirmed  that   price  regulated  supply.  He                                                                    
explained that production in the  U.S. followed high prices.                                                                    
Once  supply   increased,  prices  should  level   off.  The                                                                    
expectation was  for prices to  remain in the $70  range and                                                                    
higher in the  current year declining to the  high $60 range                                                                    
or so  in next year.  He emphasized that many  factors could                                                                    
change pricing. He referenced the  pandemic and noted it was                                                                    
not possible to  know what it would bring.  He addressed how                                                                    
sensitive projects were  to price. He looked  at projects on                                                                    
slide  11 and  explained  that companies  all had  breakeven                                                                    
prices needed to  make the projects happen.  He relayed that                                                                    
very low prices  would result in few  projects, whereas high                                                                    
prices  sustained significant  activity. He  added that  the                                                                    
detail was incorporated into DNR's modeling.                                                                                    
2:22:22 PM                                                                                                                    
Mr. Umekwe  turned to slide  13 and addressed the  Fall 2021                                                                    
North   Slope  annualized   forecast.  The   department  was                                                                    
forecasting production  to around  500,000 barrels  per day.                                                                    
Some of  the production would  come from Cook Inlet  and the                                                                    
majority would come  from the North Slope.  He reported that                                                                    
production was around  493,000 barrels per day in  FY 21 and                                                                    
492,000 barrels per day in  FY 22. The department aggregated                                                                    
numbers  provided  by  operators to  determine  whether  the                                                                    
department's   long-term  numbers   fell  within   the  same                                                                    
ballpark. He pointed  to a line graph on slide  13 and noted                                                                    
the  gray lines  reflected DNR's  projections (the  top line                                                                    
reflected the high  case, and the bottom  line reflected the                                                                    
low  case).  The  black   line  reflected  the  department's                                                                    
expected case,  and the blue  line reflected  the operators'                                                                    
long-term outlook.  The department did  not aim to  have the                                                                    
black and blue lines match up  because it would never be the                                                                    
case; however, the goal was  to ensure the lines fell within                                                                    
the  same  ballpark.  He  pointed  to  the  deviation  shown                                                                    
beginning  in  2029 going  forward  and  explained that  DNR                                                                    
included all  20 or so projects  shown on the map  [on slide                                                                    
11],  while  the  operators'  information  did  not  include                                                                    
projects  that   had  not  yet   been  brought   online.  He                                                                    
elaborated that  the blue line  excluded Pikka,  Willow, and                                                                    
other projects under development.                                                                                               
2:25:06 PM                                                                                                                    
Vice-Chair  Ortiz   asked  for   more  detail  on   how  the                                                                    
department  arrived  at  the  black  line  representing  the                                                                    
expected case.                                                                                                                  
Mr.  Umekwe replied  there was  uncertainty surrounding  how                                                                    
any  project   would  perform  for  multiple   reasons.  For                                                                    
example, an operator  may expect 130,000 barrels  of oil per                                                                    
day;  however,  when  the  project  actually  happened,  the                                                                    
number could be  higher or lower. He elaborated  the more an                                                                    
operator developed  a reservoir, the better  they understood                                                                    
it.  He  furthered  there  was  a  high  chance  the  actual                                                                    
production numbers  would not match initial  projections. He                                                                    
explained  that DNR  incorporated  that  possibility in  its                                                                    
numbers.  He elaborated  that for  each  given project,  the                                                                    
department  forecasted a  range  of rates  including a  mean                                                                    
case  and a  case where  everything an  operator anticipated                                                                    
came to fruition.                                                                                                               
Vice-Chair  Ortiz   looked  at  the  blue   line  reflecting                                                                    
operators' projections  on slide 13. He  understood the line                                                                    
did not  include some  of the projects  included in  the DNR                                                                    
projections.   He  asked   if   the   blue  line   reflected                                                                    
expectations that  the projects  would come to  fruition and                                                                    
become a  part of  production in  future years.  He observed                                                                    
there was  a significant  difference in the  line reflecting                                                                    
the    operators'   long-term    projections   versus    the                                                                    
department's high case scenario.                                                                                                
Mr.  Umekwe responded  that operators  provided numbers  for                                                                    
the projects with operational fields.  The operators did not                                                                    
include  production from  future fields  such as  Willow and                                                                    
Pikka in the  data used to generate the blue  line. Once the                                                                    
fields were added, the numbers would start to increase.                                                                         
Vice-Chair  Ortiz  thought  it  seemed  at  some  point  the                                                                    
operators would  include the fields in  their projections as                                                                    
part of the forecasting process.                                                                                                
2:28:33 PM                                                                                                                    
Representative  Wool   looked  at  the  DNR   expected  case                                                                    
reflected by  the black line  on slide  13. He asked  if the                                                                    
black  assumed  all 20  projects  mentioned  earlier by  the                                                                    
department would come online.                                                                                                   
Mr. Umekwe answered  that the black line  expected that some                                                                    
projects would  happen, and some  would not. The  black line                                                                    
averaged across the range of possibilities.                                                                                     
Representative  Wool asked  for  verification  that the  top                                                                    
line  showing over  1 million  barrels per  day assumed  the                                                                    
best case scenario.                                                                                                             
Mr.  Umekwe  confirmed  that  the  top  line  reflected  the                                                                    
department's  optimistic  case.  He  stated  the  department                                                                    
would provide  an updated chart  showing production  at just                                                                    
under 1  million barrels per  day around 2031. The  top line                                                                    
showed  a case  where many  of the  projects took  place and                                                                    
took place on time.                                                                                                             
Representative Wool surmised it was statistically unlikely.                                                                     
Mr. Umekwe  replied that  things would have  to line  up for                                                                    
the scenario to occur.                                                                                                          
Mr.  Umekwe  addressed  slide  14   showing  the  fall  2021                                                                    
statewide  oil production  forecast including  categories of                                                                    
production. He  directed attention to a  chart and explained                                                                    
that  some of  the  forecasted production  came from  assets                                                                    
that were  already producing (reflected  in blue).  The rust                                                                    
colored  portion of  the chart  reflected oil  expected from                                                                    
wells to be  drilled in FY 22. He noted  that the rust color                                                                    
had  been very  small  in the  last  forecast cycle  because                                                                    
projections had  been much different  at the time.  The gray                                                                    
portion of  the chart  reflected early stage  projects under                                                                    
evaluation and  development. He pointed  to the  outyears on                                                                    
the  chart and  noted an  increased contribution  from those                                                                    
projects. He  relayed the chart  was based on a  snapshot in                                                                    
time based on factors that  were subject to change including                                                                    
operators'  plans,   commercial  climate,  and   the  fiscal                                                                    
2:32:19 PM                                                                                                                    
Mr. Umekwe turned  to slide 15 and  addressed the production                                                                    
forecast summary. He relayed that  DNR's work generating the                                                                    
forecast  was  a  collaboration  with  DOR.  The  department                                                                    
worked  to use  the best  information to  generate the  most                                                                    
realistic outlook  for the state. He  highlighted that DNR's                                                                    
fall  2021   outlook  showed  production   of  approximately                                                                    
500,000  barrels  per  day  in FY  22.  Across  the  outlook                                                                    
period,  production was  projected to  exceed the  figure at                                                                    
times  and fall  below the  figure at  times. He  added that                                                                    
companies'  responses to  the pandemic,  including how  they                                                                    
managed fields and what they  deployed capital to, could add                                                                    
to  the  level of  uncertainty  in  the outlook  period.  He                                                                    
turned to the last slide  showing individuals who had worked                                                                    
on the presentation.                                                                                                            
Co-Chair   Foster    thanked   the   department    for   the                                                                    
2:34:03 PM                                                                                                                    
Co-Chair Foster introduced House Finance Committee staff.                                                                       
2:34:43 PM                                                                                                                    
AT EASE                                                                                                                         
2:44:33 PM                                                                                                                    
^Presentation: Fall 2021 Revenue Forecast                                                                                     
2:44:45 PM                                                                                                                    
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION, DEPARTMENT OF REVENUE,  drew members' attention to                                                                    
an email  notification sent from  the Department  of Revenue                                                                    
(DOR)   earlier  in   the  day.   He   explained  that   the                                                                    
department's Economic  Research Group did a  monthly revenue                                                                    
update for  the current  and next  fiscal year.  He detailed                                                                    
that  the information  was used  for  internal purposes.  He                                                                    
elaborated that if the outlook  for unrestricted revenue was                                                                    
more than a  10 percent deviation from  the official revenue                                                                    
forecast, the  department would begin  sending out  an email                                                                    
to all  interested parties.  As of earlier  in the  day, the                                                                    
updated futures  market outlook for  FY 22 suggested  an oil                                                                    
price of slightly over $80  per barrel compared to $75.72 in                                                                    
the  fall forecast.  Likewise, the  FY 23  outlook was  just                                                                    
over  $78 per  barrel versus  $71  per barrel  [in the  fall                                                                    
forecast].   The   difference   amounted  to   an   expected                                                                    
additional unrestricted  general fund (UGF) revenue  of $281                                                                    
million for FY 22 and an  additional $467 million for FY 23.                                                                    
He noted the rest of  the information reflected the official                                                                    
fall revenue forecast released in early December.                                                                               
Vice-Chair Ortiz asked if Mr.  Stickel had said $400 million                                                                    
for FY 23.                                                                                                                      
Mr. Stickel  clarified the updated  forecast was  about $467                                                                    
million above the fall forecast for FY 23.                                                                                      
2:48:15 PM                                                                                                                    
Mr. Stickel provided a  PowerPoint presentation titled "Fall                                                                    
2021 Forecast  Presentation House Finance  Committee," dated                                                                    
January 19, 2022 (copy on file).  He began on slide 2 of the                                                                    
presentation  and  addressed  the agenda.  The  presentation                                                                    
included forecast  background, economic indicators,  and key                                                                    
assumptions,  in  addition to  the  fall  2021 forecast  and                                                                    
petroleum forecast assumptions detail.                                                                                          
Representative Wool  referenced the revenue  information Mr.                                                                    
Stickel had  provided. He  asked for  the technical  term of                                                                    
the price and how frequently it would change.                                                                                   
Mr. Stickel  answered that the  forecast used for  cash flow                                                                    
analysis purposes was based on  the futures market for Brent                                                                    
Crude. He  explained that  Brent Crude  was trading  any day                                                                    
markets  were open.  The Economic  Research Group  looked at                                                                    
the prices  once a month to  prepare a cash flow  update for                                                                    
internal  purposes,  which  would   be  the  basis  for  the                                                                    
notifications the department would send out going forward.                                                                      
Representative  Wool  asked  if  it was  a  daily  price  or                                                                    
average over the month.                                                                                                         
Mr. Stickel  answered that the department  published a daily                                                                    
price, and the futures market prices were monthly.                                                                              
2:50:31 PM                                                                                                                    
Mr.  Stickel  turned  to slide  4  and  provided  background                                                                    
information  on the  fall revenue  forecast, which  had been                                                                    
published  in December  in the  annual Revenue  Sources Book                                                                    
(RSB).  He noted  the  publication  included information  on                                                                    
historical and  forecasted revenue.  He elaborated  that DOR                                                                    
gathered  data   from  the  tax  accounting   system,  state                                                                    
accounting  system, and  various  state  agencies to  report                                                                    
actual  revenue  for  the  most   recent  fiscal  year.  The                                                                    
department  maintained models  within the  Economic Research                                                                    
Group for all  of the major revenue sources  to generate its                                                                    
10-year revenue  forecast. The  RSB fulfilled  the statutory                                                                    
requirement  that the  governor provide  a revenue  forecast                                                                    
for  the  current  and  next  fiscal  year.  The  book  also                                                                    
provided the  revenue information  to fulfill  the statutory                                                                    
requirement for  a long-term fiscal  plan out of  the Office                                                                    
of Management  and Budget. The  revenue forecast  became the                                                                    
basis for  the governor's  official budget proposal  and was                                                                    
updated in a spring forecast  in March or April. In addition                                                                    
to the  basic data,  the report included  detailed narrative                                                                    
about  each  of the  state's  revenue  sources and  forecast                                                                    
variables.  He  relayed  that all  of  the  information  was                                                                    
located on the Tax Division's website.                                                                                          
2:51:51 PM                                                                                                                    
Mr.  Stickel  moved to  slide  5  and discussed  key  Alaska                                                                    
economic indicators reflecting data  as of January 12, 2022.                                                                    
He  reported that  state gross  domestic  product (GDP)  was                                                                    
down slightly  in the  third quarter;  there had  been small                                                                    
modest growth since late in  2020. He reported the state GDP                                                                    
was still down 6.3 percent  from the similar period in 2019.                                                                    
The  data indicated  the value  of the  economy was  holding                                                                    
steady, but it  was still not back  to pre-recession levels.                                                                    
He noted it would be  interesting to see what fourth quarter                                                                    
data  [to be  released in  March] looked  like with  holiday                                                                    
shopping and  higher oil prices.  He stated  that employment                                                                    
was  up by  7,200  jobs  compared to  one  year earlier  but                                                                    
remained down over 13,000 jobs  from the same month in 2019.                                                                    
Jobs  were up  by 26,000  from  the COVID-19  lows in  April                                                                    
2020,  but jobs  were still  down by  over 51,000  jobs from                                                                    
pre-pandemic highs in July 2019.  The biggest job losses had                                                                    
been  in transportation,  leisure and  hospitality, and  oil                                                                    
and gas.  The industries  had only  recovered about  half of                                                                    
the losses from the COVID recession.                                                                                            
Mr.  Stickel  continued  to  address   slide  5.  Wages  and                                                                    
salaries  had recovered  from pandemic  woes, which  DOR was                                                                    
attributing to  a combination of  a strong labor  market and                                                                    
some recovery in the  employment situation. Bankruptcies and                                                                    
foreclosures were still lower  than the pre-pandemic levels.                                                                    
He detailed  there had been  various government  and private                                                                    
industry policies  that had  helped people  avoid bankruptcy                                                                    
and stay in their homes, as  well as the strong labor market                                                                    
and   extensive  stimulus   programs.  Housing   starts  had                                                                    
increased  from  2020  and  would  end  around  pre-pandemic                                                                    
levels at the  end of 2021. As of the  first quarter of 2021                                                                    
(the most recent data  available), average delinquency rates                                                                    
were lower than the prior  year. He explained the low levels                                                                    
were  a  very good  sign.  He  elaborated that  between  the                                                                    
strong  labor market,  strong  housing  prices, and  lenders                                                                    
working with  borrowers, there had  not been a  major uptick                                                                    
in mortgage delinquencies with the recession.                                                                                   
2:55:25 PM                                                                                                                    
Representative  Edgmon remarked  that all  data reflected  a                                                                    
snapshot or  picture in time.  He observed that  the numbers                                                                    
would look  different were it  not for a  substantial influx                                                                    
in  federal spending.  He added  that the  state was  on the                                                                    
cusp  of  receiving  much  more  federal  funding  from  the                                                                    
federal  infrastructure bill.  He  remarked, "We  live in  a                                                                    
world  of  windows these  days  of  pre, current,  and  post                                                                    
pandemic."  He pointed  out that  the current  picture could                                                                    
look much different in the future.                                                                                              
Representative  Rasmussen noted  she  had seen  in the  news                                                                    
recently that  the Fed anticipated  several rate  hikes. She                                                                    
wondered if any analysis had been  done on how it may impact                                                                    
the economy in Alaska.                                                                                                          
Mr.  Stickel answered  that  he had  not  done any  specific                                                                    
analysis  on the  issue.  He pointed  out  that the  current                                                                    
level of  federal interest rates was  historically extremely                                                                    
low.  He  reasoned that  even  if  there were  several  rate                                                                    
increases  over  the course  of  the  year, rates  would  be                                                                    
moving towards more of a normalization.                                                                                         
2:57:25 PM                                                                                                                    
Representative Josephson referenced  Mr. Stickel's statement                                                                    
that jobs  were still down  by 51,000 in comparison  to pre-                                                                    
pandemic.  He remarked  that Alaska's  population had  grown                                                                    
somewhat.  He thought  some people  were moving  from a  two                                                                    
income to  one income household  or they were getting  by on                                                                    
savings or federal largesse or by some combination.                                                                             
Mr. Stickel speculated that all  of the components mentioned                                                                    
by  Representative  Josephson were  part  of  the story.  He                                                                    
deferred   to  the   Department  of   Labor  and   Workforce                                                                    
Development for details.                                                                                                        
Co-Chair  Foster  noted  that  Representative  Thompson  had                                                                    
joined   the   meeting  at   the   start   of  the   current                                                                    
2:58:27 PM                                                                                                                    
Mr. Stickel  moved to  slide 6  and discussed  fall forecast                                                                    
assumptions. He  noted that the forecast  had been finalized                                                                    
in late  November/early December  just after  the [COVID-19]                                                                    
omicron variant hit  the news. He pointed  out that COVID-19                                                                    
was still  a source  of uncertainty.  He explained  that the                                                                    
approach DOR  had taken with  the pandemic was to  develop a                                                                    
plausible  scenario to  forecast the  impacts. The  forecast                                                                    
assumed a 5.86 percent return  for the Permanent Fund for FY                                                                    
22  and a  6.2  percent return  for FY  23  and beyond.  The                                                                    
federal  revenue  forecast  had   incorporated  all  of  the                                                                    
stimulus  funding  as  of  the end  of  November.  The  fall                                                                    
forecast included  a preliminary estimate for  state revenue                                                                    
from  the federal  Infrastructure  Investment  and Jobs  Act                                                                    
(IIJA).  He  noted  the  spring  forecast  would  include  a                                                                    
refined estimate.                                                                                                               
Mr. Stickel  continued to address  slide 6. The  oil revenue                                                                    
forecast was based on a $71  per barrel oil price for FY 23.                                                                    
The department  followed the futures  market and  had prices                                                                    
at  $68 per  barrel  by  FY 31.  The  forecast assumed  that                                                                    
underlying economic activity had  largely returned to normal                                                                    
with  the exception  of tourism.  The  forecast assumed  1.5                                                                    
million cruise  ship passengers annually  with a  75 percent                                                                    
adjustment for the summer of FY 22 to reflect uncertainty.                                                                      
3:00:37 PM                                                                                                                    
Mr. Stickel advanced  to an illustration on  slide 7 showing                                                                    
relative contributions to total state  revenue for FY 21. He                                                                    
detailed that investment earnings,  federal revenue, and oil                                                                    
and  gas  were the  biggest  sources  of state  revenue.  He                                                                    
highlighted two  windfalls in FY 21  including the extremely                                                                    
high  returns on  investments (the  Permanent Fund  returned                                                                    
29.7  percent in  FY 21)  and  significant federal  revenues                                                                    
from stimulus packages. He noted  that other revenue sources                                                                    
shown on  the slide were  meaningful and contributed  to the                                                                    
economy  and  made  up  about 3.5  percent  of  total  state                                                                    
Co-Chair Merrick  asked what federal  revenue would be  on a                                                                    
normal year.                                                                                                                    
Mr. Stickel  answered that federal  revenue would  likely be                                                                    
similar  in terms  of magnitude.  He  noted that  investment                                                                    
earnings, federal revenue, and  petroleum were the top three                                                                    
[revenue contributors]. He relayed  that the information was                                                                    
available in the RSB.                                                                                                           
Co-Chair  Merrick   thought  the  stimulus   packages  would                                                                    
increase the share of revenue significantly.                                                                                    
Mr.  Stickel  responded  that   the  stimulus  packages  did                                                                    
significantly  increase federal  revenue; however,  in terms                                                                    
of the share of total  revenue, the federal share was likely                                                                    
in  line  with  historical  numbers when  factoring  in  the                                                                    
extremely large investment earnings.                                                                                            
Representative Wool  estimated the  total federal  money for                                                                    
the pandemic may  have totaled $5 billion to  $6 billion. He                                                                    
referenced the investment  earnings and asked if  it was the                                                                    
percent of  market value  (POMV) draw  that went  into state                                                                    
revenue  or the  total  revenue inclusive  of the  Permanent                                                                    
Fund's total earnings.                                                                                                          
3:03:37 PM                                                                                                                    
Mr. Stickel  answered that  total state  revenue on  slide 7                                                                    
included the  full return of  the Permanent Fund,  which was                                                                    
nearly  30  percent for  the  year.  The presentation  would                                                                    
address unrestricted  revenue later on, which  only included                                                                    
the POMV draw.                                                                                                                  
Mr. Stickel turned to slide  9 and discussed the total state                                                                    
revenue from all  sources for FY 21 and the  forecast for FY                                                                    
22 and FY  23. He highlighted that total  state revenue came                                                                    
from  four  broad   sources  including  investment  revenue,                                                                    
federal  receipts,  petroleum   revenue,  and  non-petroleum                                                                    
revenues. He  noted that revenues  were further  broken down                                                                    
into  four categories  of restriction  in  the forecast  and                                                                    
budget documents. He began with  UGF, revenues that could be                                                                    
appropriated for any purpose and  most commonly discussed in                                                                    
budget  discussions.  Designated  general funds  (DGF)  were                                                                    
technically   available    for   appropriation    but   were                                                                    
customarily  appropriated   for  a  specific   purpose.  For                                                                    
example, half  of the revenue  from the state's  alcohol tax                                                                    
was customarily  appropriated to the alcohol  and other drug                                                                    
abuse treatment and  prevention fund. The use  of the "other                                                                    
restricted revenues"  category was dedicated for  a specific                                                                    
use and  generally the use  of the funds was  restricted. He                                                                    
highlighted    examples    including   the    constitutional                                                                    
dedication  of royalty  revenue  to the  Permanent Fund  and                                                                    
school fund  or motor fuel tax  revenue that had to  be used                                                                    
for a specific purpose for aviation per federal law.                                                                            
Mr.  Stickel listed  federal revenue  as the  fourth funding                                                                    
category on  slide 9. He  relayed that federal  revenues had                                                                    
certain caveats around the way they  had to be used and were                                                                    
shown as  restricted revenue in  the DOR forecast.  He noted                                                                    
that  sometimes designated,  other, and  federal funds  were                                                                    
lumped  together  into  a   single  category  of  restricted                                                                    
revenue. In FY 21, total  state revenue from all sources was                                                                    
about $29.8  billion. The  department was  forecasting total                                                                    
revenue at $13.4 billion for FY  22 and $14.6 billion for FY                                                                    
23. The UGF  portion of the total was $4.8  billion in FY 21                                                                    
and forecasted to be $5.7 billion  in FY 22 and $5.9 billion                                                                    
in FY  23. He highlighted  two columns on the  right showing                                                                    
the percentage change  from FY 21 to  FY 23 and FY  22 to FY                                                                    
23 in the forecast.                                                                                                             
Representative Josephson looked at  FY 21 investment revenue                                                                    
of $16 billion [under  the other restricted revenue category                                                                    
on slide  9] and asked why  the number went to  $1.4 billion                                                                    
in FY 22.                                                                                                                       
Mr.  Stickel  replied  that  the   primary  reason  for  the                                                                    
difference was Permanent Fund earnings  above and beyond the                                                                    
POMV  draw. The  POMV  draw was  considered as  unrestricted                                                                    
general fund  revenue and any additional  earnings above the                                                                    
draw were  counted as restricted  revenue. He  explained the                                                                    
$16.2 billion  reflected the strong return  of the Permanent                                                                    
Fund above and beyond the POMV draw.                                                                                            
Representative   Josephson   surmised  the   $16.2   billion                                                                    
reflected  that  until  July  1, 2021,  the  corpus  of  the                                                                    
Permanent Fund  was generating more revenue  than ever seen.                                                                    
He  surmised DOR  was  expecting much  less  revenue in  the                                                                    
current   and  following   fiscal   year.   He  stated   his                                                                    
understanding that  DOR believed the stock  market could not                                                                    
sustain the growth seen in the last year.                                                                                       
3:08:58 PM                                                                                                                    
Mr.  Stickel answered  that the  Permanent  Fund return  was                                                                    
extremely high  at just shy of  31 percent in FY  21. Callan                                                                    
Associates,   the   state's   investment   consultant,   was                                                                    
projecting   more   modest   returns  going   forward.   The                                                                    
department was expecting  a 5.8 percent total  return on the                                                                    
Permanent Fund  in FY 22  and 6.2 percent annual  return for                                                                    
FY 23 and beyond.                                                                                                               
Representative Josephson stated  that in a way it  was not a                                                                    
surprise, but in another way,  it was an enormous statement.                                                                    
He observed it  was certainly the largest item  on the table                                                                    
in terms of the delta from year-to-year.                                                                                        
3:10:11 PM                                                                                                                    
Mr. Stickel turned  to slide 10 and  indicated the remainder                                                                    
of  the  presentation  would  focus  primarily  on  the  UGF                                                                    
revenue  forecast because  it had  the most  flexibility and                                                                    
discretion  in  the  budget process.  He  communicated  that                                                                    
investment  revenue   had  become  the  largest   source  of                                                                    
unrestricted  revenue  for the  state  by  far. The  primary                                                                    
component was the POMV transfer  from the Permanent Fund. He                                                                    
reported that  investment revenue had contributed  just over                                                                    
$3.1 billion in  FY 21 and was estimated  to contribute $3.1                                                                    
billion  in  FY  22  and  nearly  $3.4  billion  in  FY  23.                                                                    
Petroleum revenue generated about $1.2  billion in FY 21 and                                                                    
was estimated to  contribute $2.3 billion in FY  22 and $2.1                                                                    
billion  in FY  23. The  non-petroleum revenue  sources were                                                                    
estimated  to contribute  about $375  million in  FY 22  and                                                                    
about $476 million in FY 23.                                                                                                    
Representative Wool  asked why investment revenue  was going                                                                    
down in FY 22. He asked if  there was a negative year in the                                                                    
five-year averaging.                                                                                                            
Mr. Stickel replied that the  POMV transfer was based on the                                                                    
average  value of  the first  five  of the  last six  fiscal                                                                    
years.  Per  statute,  the  FY 21  transfer  had  been  5.25                                                                    
percent of  the five year  average and  5 percent for  FY 22                                                                    
going forward.  He turned to  slide 11 showing a  summary of                                                                    
key  changes to  the unrestricted  revenue forecast  between                                                                    
the spring FY  21 and fall FY 21  forecast. The department's                                                                    
oil price  forecast had  increased by  $14.72 per  barrel to                                                                    
$75.72 for  FY 22 and  by $9.00 per  barrel to $71.00  in FY                                                                    
23. The  increase was due  to some of the  stabilization and                                                                    
recovery  in the  oil markets  as the  economy continued  to                                                                    
recover from the COVID-19 recession.                                                                                            
Mr.  Stickel continued  to address  slide 11.  There was  no                                                                    
change  for the  FY  22 projection  for  the Permanent  Fund                                                                    
transfer. He explained it had  to do with the transfer being                                                                    
based on  the first  five of  the last  six years.  Based on                                                                    
strong  returns, the  Permanent Fund  transfer estimate  was                                                                    
increased  by  about  $154  million for  FY  23.  For  total                                                                    
unrestricted  revenue,  FY 21  came  in  about $120  million                                                                    
higher than  expected in the  spring forecast.  The forecast                                                                    
had  increased by  about $1  billion  for FY  22 versus  the                                                                    
spring  and by  slightly over  $800  million for  FY 23.  He                                                                    
noted  that  the figures  did  not  reflect new  information                                                                    
released by the department earlier in the day.                                                                                  
3:13:44 PM                                                                                                                    
Mr. Stickel  shared that  next set  of slides  would provide                                                                    
more  detail  on the  sources  of  unrestricted revenue.  He                                                                    
began with investments on slide  12. He highlighted that the                                                                    
Permanent Fund transfer was expected  to account for between                                                                    
half and two-thirds of UGF revenue  for each year in the 10-                                                                    
year  revenue forecast.  He  noted it  really  spoke to  the                                                                    
importance of the  Permanent Fund as an asset  for the state                                                                    
and a major  source of state revenue. The  transfer had been                                                                    
about $3.1 billion  in FY 21 and was  expected to contribute                                                                    
a similar amount  in FY 22 and about $3.4  billion in FY 23.                                                                    
There was also  a small amount of  other investment revenue,                                                                    
which  primarily represented  earnings on  cash balances  in                                                                    
the General Fund.                                                                                                               
Mr.  Stickel  advanced to  slide  13  showing the  estimated                                                                    
transfer from  the Permanent  Fund to  the General  Fund for                                                                    
the  next ten  years.  The forecast  estimated the  transfer                                                                    
would  increase to  $4.6 billion  by FY  31. He  highlighted                                                                    
that  the   forecast  was  based   on  a   long-term  return                                                                    
assumption of  6.2 percent and  a 5 percent of  market value                                                                    
transfer to  the General Fund  annually. He stated  that the                                                                    
Permanent Fund was a stable  and growing revenue source with                                                                    
much  of the  stability coming  from the  trailing five-year                                                                    
average used in the calculation  for transfer to the General                                                                    
Representative  Edgmon  referenced  Mr.  Stickel's  previous                                                                    
statement  that the  Permanent Fund  earnings could  account                                                                    
for one-half to two-thirds of UGF.  He asked if the range of                                                                    
one-half  to   two-thirds  was  primarily  related   to  the                                                                    
volatility of  oil revenue. He  remarked that  the Permanent                                                                    
Fund  was growing  over time,  but the  earnings would  come                                                                    
down from the 30 percent returns in the past year.                                                                              
Mr.   Stickel  responded   there   were  several   variables                                                                    
involved. First,  oil prices were expected  to moderate over                                                                    
the  coming   years.  Once  the  strong   returns  from  the                                                                    
Permanent Fund  were fully baked into  the revenue forecast,                                                                    
DOR  was  expecting the  transfer  amount  to increase.  The                                                                    
estimate of one-half  to two-thirds was intended  to give an                                                                    
order  of  magnitude to  illustrate  the  importance of  the                                                                    
Permanent Fund.                                                                                                                 
Representative Edgmon stated that  all things considered, as                                                                    
long as  the POMV  draw was adhered  to, the  Permanent Fund                                                                    
was  not really  the source  of the  one-half to  two-thirds                                                                    
fluctuations in other  sources of revenue. He  asked for the                                                                    
accuracy of his statement.                                                                                                      
Mr. Stickel answered it was  a combination of Permanent Fund                                                                    
and oil  revenue. For example, the  department was expecting                                                                    
unrestricted  petroleum revenue  of $2.3  billion in  FY 22,                                                                    
but  the amount  was expected  to drop  below $2  billion in                                                                    
future years,  while at  the same  time there  were expected                                                                    
increases  for  the  Permanent  Fund. He  stated  it  was  a                                                                    
combination  of the  two different  revenue sources.  All of                                                                    
the detail behind  the calculations was included  on page 11                                                                    
of the RSB and factored  in the 10-year revenue forecast for                                                                    
investment  revenue,  petroleum revenue,  and  non-petroleum                                                                    
3:18:38 PM                                                                                                                    
Representative  Edgmon  remarked that  he  had  been on  the                                                                    
committee  long  enough  to  remember  when  Permanent  Fund                                                                    
earnings were  nowhere near one-half to  two-thirds of total                                                                    
UGF. He observed that things  seemed to be changing quickly.                                                                    
He underlined the importance of  the revenue stream from the                                                                    
Permanent  Fund.  He  referenced   the  historic  nature  of                                                                    
revenue in  the state  and pointed  out that  Permanent Fund                                                                    
earnings were  fairly steady. He  stated the fund  should be                                                                    
something  the  state  could  count  on  in  perpetuity.  He                                                                    
considered that  oil had  been the  state's other  source of                                                                    
mostly permanent  revenue and noted  it was holding  its own                                                                    
but was nowhere near what it had been in the past.                                                                              
Representative Josephson was struck  by the anticipated $4.6                                                                    
billion  draw in  ten years.  He  commented it  was a  short                                                                    
period  of  time.  He  asked  if  it  meant  the  department                                                                    
believed the  total value of  the fund would be  $95 billion                                                                    
in 10 years.                                                                                                                    
Mr. Stickel  answered that he  did not have  the information                                                                    
on  hand,   but  the   number  provided   by  Representative                                                                    
Josephson  sounded  in  the  ballpark.  The  department  was                                                                    
forecasting the  value of the Permanent  Fund would continue                                                                    
to increase  given the expectation  of a 6.2  percent annual                                                                    
return and the  trailing 5 percent draw, in  addition to oil                                                                    
and gas and other mineral royalties.                                                                                            
3:20:49 PM                                                                                                                    
Mr.  Stickel turned  to  unrestricted  petroleum revenue  on                                                                    
slide  14.  He  relayed  there were  four  main  sources  of                                                                    
petroleum revenue  including property tax,  corporate income                                                                    
tax,  production tax,  and royalties.  He detailed  that the                                                                    
state levied a  property tax on all oil and  gas property in                                                                    
the state  as a  fairly stable  revenue source  generating a                                                                    
little  over $100  million  per year  in  state revenue.  He                                                                    
pointed  out the  number only  reflected the  state's share.                                                                    
There  was additional  revenue  exceeding  $400 million  per                                                                    
year in  property tax that went  to municipalities annually.                                                                    
The  state  levied  a corporate  income  tax  on  qualifying                                                                    
corporations doing business  in the state. He  noted the tax                                                                    
was on profits and because  the recession was very difficult                                                                    
on  the oil  and gas  industry, there  had been  net refunds                                                                    
paid out in FY 21. Based  on the improved environment in the                                                                    
petroleum  industry,  the  department was  forecasting  $145                                                                    
million of  corporate revenue in  FY 22 and $240  million in                                                                    
FY 23.                                                                                                                          
Mr. Stickel  highlighted there had  been a provision  of the                                                                    
federal  Coronavirus  Aid,  Relief,  and  Economic  Security                                                                    
(CARES)  Act that  allowed corporations  to  carry back  net                                                                    
operating  losses  for  tax  years  2018  through  2020  and                                                                    
corporations  could  receive  refunds for  certain  previous                                                                    
taxes paid. He explained  that Alaska's corporate income tax                                                                    
statute  adopted   the  federal   tax  code   by  reference;                                                                    
therefore,  the  net  operating   loss  provision  had  been                                                                    
automatically  adopted  into  Alaska's  tax.  The  estimated                                                                    
impact of the  carry back refunds was about  $2.4 million in                                                                    
FY 21 and just under $50 million in FY 22.                                                                                      
Representative Wool  stated that  the legislature  had heard                                                                    
about the  carry backward tax  the previous year and  it had                                                                    
never been  fixed. He asked  for verification  the situation                                                                    
meant the state had to  write a check for the aforementioned                                                                    
Mr. Stickel agreed. He confirmed  the provision had remained                                                                    
in  law   and  some   companies  were   requesting  refunds.                                                                    
Companies could  request a refund  check or could  apply the                                                                    
amount in  lieu of  additional tax  payments. The  state was                                                                    
starting to see the refund requests come to fruition.                                                                           
Representative Wool  asked for verification Mr.  Stickel had                                                                    
stated the amount was $50 million for FY 22.                                                                                    
Mr. Stickel answered that the  department was estimating the                                                                    
refund impact to be $2.4 million  in FY 21 and $49.6 million                                                                    
in  FY  22.  He  noted there  were  some  modest  offsetting                                                                    
positive impacts in future years.                                                                                               
3:24:20 PM                                                                                                                    
Mr. Stickel  continued with slide  14. He discussed  the oil                                                                    
and  gas  production  tax,  the  state's  severance  tax  on                                                                    
petroleum. For the  North Slope, the tax consisted  of a net                                                                    
profits  tax  with a  gross  minimum  tax floor.  Given  the                                                                    
current  oil price  regime,  the  forecast anticipated  most                                                                    
companies would  be paying above the  minimum tax throughout                                                                    
the forecast  time horizon. The production  tax was expected                                                                    
to bring  in just under $1  billion in FY 22  and about $740                                                                    
million  for FY  23. Royalties  were the  largest source  of                                                                    
unrestricted  petroleum revenue  and brought  in about  $729                                                                    
million in  FY 21  and were  expected to  bring in  about $1                                                                    
billion  in FY  22  and  FY 23.  He  noted  the royalty  was                                                                    
limited to  the state's  General Fund  share. The  table did                                                                    
not  reflect   additional  royalty  revenue  going   to  the                                                                    
Permanent Fund and school fund.                                                                                                 
Mr. Stickel advanced to slide  15 and discussed unrestricted                                                                    
non-petroleum  revenue  for FY  21  to  FY 23.  The  largest                                                                    
source of  non-petroleum revenue  was taxes. He  stated that                                                                    
typically,  corporate  income  tax   was  the  largest  non-                                                                    
petroleum tax  type. The  tax generated  a little  over $100                                                                    
million in FY 21. He  relayed that CARES Act related refunds                                                                    
and some of the economic difficulties impacted non-                                                                             
petroleum  tax  to  the  tune of  $6.7  million,  which  was                                                                    
included  in  the FY  21  number.  The department  estimated                                                                    
about  $76.7 million  in  FY  22. He  noted  the amount  was                                                                    
imbedded in the  $15 million [shown in the first  row of the                                                                    
FY 22 column on slide  15]. Other significant taxes included                                                                    
mining license tax, insurance  premium tax, fisheries taxes,                                                                    
and excise taxes. He pointed  to the "other" category at the                                                                    
bottom of the slide,  which included all other non-petroleum                                                                    
revenues such  as licenses;  permits; charges  for services;                                                                    
minerals, rents,  and royalties; and  miscellaneous revenues                                                                    
such as state corporation  transfers and dividends. In total                                                                    
the department was expecting  non-petroleum revenue of about                                                                    
$375 million for FY 22 and $476 million in FY 23.                                                                               
Representative   Josephson  asked   if   the  refined   fuel                                                                    
surcharge amount [on slide 15] involved the sweep.                                                                              
Mr.  Stickel   answered  that  beginning  with   the  FY  22                                                                    
forecast,  the  department  was  showing  the  refined  fuel                                                                    
surcharge as DGF.  He explained the change had  been made in                                                                    
consultation  with the  Legislative  Finance Division  (LFD)                                                                    
and the Office  of Management and Budget (OMB)  to match the                                                                    
way  the  information  was shown  in  budget  documents.  He                                                                    
clarified the  revenue source  itself did  not go  away. The                                                                    
department was merely switching the  way it was shown in the                                                                    
revenue forecast.                                                                                                               
Representative  Wool  asked  why  there  was  a  significant                                                                    
increase in mining tax.                                                                                                         
3:27:52 PM                                                                                                                    
Mr. Stickel answered  that the $9 million  in mining license                                                                    
tax in  FY 21 was an  aberration due to low  minerals prices                                                                    
and some difficulties with the  COVID recession had impacted                                                                    
the mining  industry, just like  many other  industries. The                                                                    
increase to  nearly $50  million in  FY 22 and  FY 23  was a                                                                    
recovery to historical average levels.                                                                                          
Representative   Josephson   noted  that   mining   produced                                                                    
fantastic  well-paying jobs  but brought  in little  for the                                                                    
state.  Compared to  oil and  gas, the  revenue was  low and                                                                    
unimpactful. He thought it was  important to think about the                                                                    
issue for the future.                                                                                                           
3:29:19 PM                                                                                                                    
Mr.  Stickel  turned  to slide  17  and  provided  petroleum                                                                    
detail  and changes  to the  long-term  price forecast.  The                                                                    
slide  showed the  fall 2021  oil forecast  for North  Slope                                                                    
crude in  comparison to the spring  forecast. The department                                                                    
had made a  change to the way it forecast  oil prices in the                                                                    
fall  forecast. Previously,  DOR had  looked at  the futures                                                                    
market for  two years  and applied an  inflation adjustment.                                                                    
The change  in the  fall forecast  used futures  market data                                                                    
for as many  years as were available. He  explained that the                                                                    
fall forecast  used futures market  data through FY  29. The                                                                    
change had been  made to provide a  more accurate projection                                                                    
of oil prices  and to allow policymakers to  focus on policy                                                                    
discussions instead  of whether the forecast  was correct or                                                                    
Mr. Stickel relayed that  the department's Economic Research                                                                    
Group  had prepared  an analysis  of  historical prices  and                                                                    
futures market projections and what  would have happened had                                                                    
the forecast  used additional years  of futures  markets. He                                                                    
explained  the analysis  made a  compelling case  that using                                                                    
more data from  the markets provided a  better forecast. The                                                                    
group   had   presented    the   findings   internally   and                                                                    
subsequently  to LFD  and OMB.  He shared  that all  parties                                                                    
agreed  the  change would  provide  a  more forthcoming  and                                                                    
accurate revenue  forecast. The  price forecast on  slide 17                                                                    
had been generated  on December 9 using  futures market data                                                                    
at  the time.  The  calculation  resulted in  an  FY 23  oil                                                                    
forecast of about  $71 per barrel, which was  $9 higher than                                                                    
the spring  forecast. The slide showed  moderate declines in                                                                    
price with prices stabilizing in the mid to upper $60s.                                                                         
3:31:46 PM                                                                                                                    
Representative  Rasmussen asked  if there  would be  time to                                                                    
ask  LFD Director  Alexei Painter  questions on  the updated                                                                    
Co-Chair Foster stated his understanding of the question.                                                                       
Representative  Rasmussen  relayed  she  was  interested  in                                                                    
hearing from  Mr. Painter  on the  updated forecast  and new                                                                    
modeling highlighted by Mr. Stickel.                                                                                            
Co-Chair Foster believed Mr. Painter  would be presenting to                                                                    
the committee  on Friday and  there would be  an opportunity                                                                    
to ask the questions then.                                                                                                      
Representative   Wool  looked   at  the   dotted  red   line                                                                    
reflecting the  spring forecast compared to  the dotted blue                                                                    
line reflecting the  fall forecast [on slide  17]. He stated                                                                    
his understanding  that both  lines included  futures market                                                                    
data  through FY  29. He  asked why  there was  a difference                                                                    
between the two forecasts.                                                                                                      
Mr. Stickel answered  that the futures market had  been in a                                                                    
state  of "backwardation"  for some  time.  He explained  it                                                                    
meant  the futures  market was  expecting  oil prices  would                                                                    
show modest declines  over the next several  years. When the                                                                    
department  prepared  the  spring   forecast,  it  used  the                                                                    
futures market to inform its  FY 22 forecast and had applied                                                                    
an  inflation adjustment  beyond  FY 22.  He elaborated  the                                                                    
department had  assumed there would  be modest  increases in                                                                    
price after  FY 22. Whereas  the fall forecast used  as many                                                                    
years as were  available in the futures market  for the fall                                                                    
forecast.  He  explained  that   DOR  had  incorporated  the                                                                    
backwardation in the market through FY 29.                                                                                      
Representative Wool stated  his understanding the department                                                                    
had changed its modeling  methodology between the spring and                                                                    
fall forecasts.                                                                                                                 
Mr. Stickel answered in the affirmative.                                                                                        
Representative   Wool  wondered   if   the  futures   market                                                                    
indicated the  locked price a  person could buy or  sell oil                                                                    
for out through FY 27 or FY 29.                                                                                                 
Mr. Stickel  agreed. He explained  it was the price  for oil                                                                    
in  the  future  if  someone  wanted to  trade  the  oil  at                                                                    
3:35:10 PM                                                                                                                    
Mr. Stickel turned to slide  18 showing how the department's                                                                    
petroleum   price  forecast   compared  to   other  forecast                                                                    
sources.  The   department's  forecast  compared   to  Brent                                                                    
forecasts from  the Energy  Information Agency  from current                                                                    
futures markets as of January  11, 2022, and from an average                                                                    
of analyst  forecasts. He explained the  department compared                                                                    
the  ANS  forecast  to  Brent because  Brent  was  a  global                                                                    
benchmark  crude,  which  competed with  ANS  and  typically                                                                    
priced  at   a  very  similar  level.   He  highlighted  the                                                                    
department's  forecast  was  in   the  range  of  the  other                                                                    
forecasts. He  remarked that oil  prices had  increased over                                                                    
the  last  several  weeks.   He  detailed  the  department's                                                                    
forecast was on  the lower side for the next  two years, but                                                                    
it moved  back in  the range of  other forecasts  after that                                                                    
time. He  added that  the difference in  the next  couple of                                                                    
years  had been  the justification  for starting  to provide                                                                    
monthly revenue updates.                                                                                                        
Mr.  Stickel  moved to  a  chart  on  slide 19  showing  how                                                                    
revenue for  FY 23 would  change with different  oil prices.                                                                    
He detailed that at the  forecasted price of $71 per barrel,                                                                    
the estimated  unrestricted revenue excluding  the Permanent                                                                    
Fund  transfer was  about $2.6  billion.  He explained  that                                                                    
each $1 increase above the  forecasted price would lead to a                                                                    
$60 million to $65 million change in the revenue forecast.                                                                      
Mr.  Stickel  provided  a  recap  of  information  presented                                                                    
earlier by  the Department  of Natural Resources  (DNR). The                                                                    
slide  showed the  10-year outlook  for oil  production from                                                                    
the North  Slope in addition to  the high and low  cases. In                                                                    
general,  there  was  stable   to  slightly  increasing  oil                                                                    
production  expected.  He   highlighted  that  the  official                                                                    
production forecast was  a reference case within  a range of                                                                    
potential outcomes  and production could be  higher or lower                                                                    
than forecasts shown.                                                                                                           
3:38:33 PM                                                                                                                    
Vice-Chair Ortiz asked  if slide 20 was an  exact replica of                                                                    
information  provided  earlier  by  DNR.  Alternatively,  he                                                                    
wondered  if  the  information was  adjusted  based  on  DOR                                                                    
Mr.  Stickel  answered   that  DOR  incorporated  additional                                                                    
months of  actual production into  the DNR  information. The                                                                    
DOR forecast incorporated actual  production through the end                                                                    
of November into the FY 22 number.                                                                                              
Mr.  Stickel  addressed  a  chart  on  slide  21  showing  a                                                                    
comparison  of the  fall production  forecast to  the spring                                                                    
production forecast.  Over the near-term, the  fall forecast                                                                    
increased  above  the  spring   forecast  primarily  due  to                                                                    
increased drilling and activity at  the major fields. In the                                                                    
long-term, there  had been some  reductions compared  to the                                                                    
spring  forecast  given  the  increased  uncertainty  around                                                                    
legal and Arctic financing issues.                                                                                              
Mr.  Stickel  discussed a  chart  on  slide 22  showing  the                                                                    
state's  allowable lease  expenditures on  the North  Slope,                                                                    
including how the  numbers had changed over  the past decade                                                                    
and the  10-year forecast.  He noted  the chart  factored in                                                                    
average  oil  and  gas employment  and  indicated  a  strong                                                                    
correlation  between company  spending  and employment.  The                                                                    
allowable   lease  expenditures   were   important  in   the                                                                    
production  tax  calculation  because they  were  deductible                                                                    
from the  net production  tax. Company  spending was  also a                                                                    
very important measure of current  and planned investment in                                                                    
Mr. Stickel explained that the  forecast on slide 22 related                                                                    
to a  question asked earlier by  Representative Edgmon about                                                                    
expectations for future spending. He  detailed that in FY 21                                                                    
the oil and  gas industry had been hit hard  by the COVID-19                                                                    
situation.  He  elaborated  that capital  expenditures  were                                                                    
about  $1.5 billion  and operating  expenditures were  about                                                                    
$2.4  billion,  which  reflected at  $2.7  billion  decrease                                                                    
year-over-year  in company  investment in  the North  Slope.                                                                    
The department  was forecasting a  rebound for FY 22  and FY                                                                    
23.  He expounded  that as  companies started  to invest  in                                                                    
major  new developments  like Pikka  and Willow  and resumed                                                                    
drilling  at  existing  fields, capital  expenditures  would                                                                    
increase  and stabilize  at  a little  over  $2 billion  per                                                                    
year.  On the  operating expenditure  side, it  was expected                                                                    
that  some of  the cuts  made over  the last  year would  be                                                                    
permanent  as   companies  adopted  cost   saving  measures.                                                                    
Additionally, there were small  increases in operating costs                                                                    
expected  in  several  years associated  with  bringing  new                                                                    
fields online.                                                                                                                  
3:42:00 PM                                                                                                                    
Representative  Josephson stated  that pursuant  to HB  111,                                                                    
non-producers   baring   wholly  allowable   expenses   were                                                                    
required to come into production  by a given number of years                                                                    
or they would  lose the opportunity to  deduct the expenses.                                                                    
He asked if his statement was correct.                                                                                          
Mr. Stickel answered that  companies currently in production                                                                    
were allowed to deduct  allowable lease expenditures against                                                                    
the value  of the oil  they sold when calculating  their net                                                                    
profits.  He  explained  that  a   company  was  in  a  loss                                                                    
situation   (whether  it   was  a   current  producer   with                                                                    
insufficient  revenue  or a  new  company  developing a  new                                                                    
field), any  of the  lease expenditures  not applied  in the                                                                    
production tax  calculation would  become a  carried forward                                                                    
lease  expenditure. There  was a  provision in  statute that                                                                    
the   carried  forward   expenditures  decreased   in  value                                                                    
beginning in the 8 or 11 year after they were earned.                                                                           
Representative Josephson  stated that  if a person  was just                                                                    
beginning a  new lease  hold and  exploration work  in 2022,                                                                    
they had to have confidence  they would begin to produce oil                                                                    
by 2029 or the deductions would  be lost over time. He asked                                                                    
if he was accurate.                                                                                                             
Mr.  Stickel confirmed  the  provisions  around the  carried                                                                    
forward  lease expenditures  would  be part  of a  company's                                                                    
investment decision making process.                                                                                             
3:44:19 PM                                                                                                                    
Mr.  Stickel  stated that  slide  23  showed a  history  and                                                                    
forecast of North Slope transportation  costs (also known as                                                                    
netback costs). He explained the  costs reduced the value of                                                                    
oil  for  tax  and royalty  purposes.  Transportation  costs                                                                    
included getting  oil to  market including  the Trans-Alaska                                                                    
Pipeline  System  (TAPS)  tariff, marine  costs,  and  other                                                                    
smaller items  such as  feeder pipeline  tariffs. In  FY 21,                                                                    
the  average transportation  cost  for North  Slope oil  was                                                                    
$9.19 barrel. The forecast was for  $9.70 in FY 22 and $9.09                                                                    
in FY 23. The department  was expecting transportation costs                                                                    
would remain just  under $10 per barrel  throughout the ten-                                                                    
year   forecast,   given   that    any   higher   costs   of                                                                    
transportation  were  generally  offset  by  increasing  oil                                                                    
production and throughput.                                                                                                      
Representative Wool asked  why the costs in FY 19  and FY 20                                                                    
were particularly low.                                                                                                          
Mr. Stickel  replied that the three  primary components were                                                                    
broken out. He  explained that in FY 19 and  FY 20 there had                                                                    
been some  changes to the  way the TAPS pipeline  tariff was                                                                    
calculated that  reduced tariffs.  He elaborated that  a new                                                                    
settlement methodology had  been incorporated. Additionally,                                                                    
fuel was a  major component in marine costs,  which had been                                                                    
impacted by lower oil prices.                                                                                                   
3:46:31 PM                                                                                                                    
Mr. Stickel  turned to  slide 24  and discussed  tax credits                                                                    
for  purchase. He  explained that  prior to  2016 there  had                                                                    
been  various tax  credits in  state statute  that could  be                                                                    
applied against  tax liability or  turned into a  tax credit                                                                    
certificate. He detailed that the  state could then purchase                                                                    
the  tax  credits  at  face   value.  Changes  made  by  the                                                                    
legislature in  2016 and 2017 implemented  sunset provisions                                                                    
for all  of the  tax credits; therefore,  there were  no new                                                                    
credits  being  earned. He  highlighted  there  was still  a                                                                    
large  outstanding balance  of the  tax credit  certificates                                                                    
for activity  performed prior  to the  sunsets. There  was a                                                                    
formula in  statute suggesting  an annual  appropriation for                                                                    
state purchase of the tax  credits. He explained the formula                                                                    
was based  on either 10  percent or 15 percent  of estimated                                                                    
production  tax levy  before subtracting  credits. Prior  to                                                                    
2016, the full amount of  eligible tax credits was purchased                                                                    
by  the state  annually. Beginning  in 2016,  less than  the                                                                    
full amount was purchased by the  state. In FY 20 and FY 21,                                                                    
no appropriation  was made, and a  $54 million appropriation                                                                    
was  made in  FY 22,  which  was still  below the  statutory                                                                    
Mr. Stickel stated that under  the fall revenue forecast the                                                                    
statutory  appropriation would  be $199  million for  FY 23.                                                                    
Slide  24 showed  an estimated  $587 million  in outstanding                                                                    
tax credits  available for state  purchase at the end  of FY                                                                    
22. He  explained that if  the legislature were to  make the                                                                    
statutory appropriation  per the  fall forecast,  the entire                                                                    
balance of the certificates would be retired by FY 26.                                                                          
Representative Josephson  asked if the FY  23 budget request                                                                    
was $199 million.                                                                                                               
Mr.  Stickel believed  Representative Josephson  was correct                                                                    
that $199 million was the statutory appropriation.                                                                              
Mr.  Stickel indicated  there was  one slide  remaining that                                                                    
the Tax Division director would review.                                                                                         
COLLEEN  GLOVER,  DIRECTOR,   TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE (via  teleconference), spoke to slide  26 related to                                                                    
an  oil and  gas production  tax audit  update. She  relayed                                                                    
that DOR was still working to  catch up and would like to be                                                                    
on a  three-year audit  cycle. She relayed  that all  of the                                                                    
division's  other tax  programs were  on a  three-year audit                                                                    
cycle in statute. She explained  that oil and gas production                                                                    
tax  was an  outlier and  there  was a  six-year statute  of                                                                    
limitations for the audits. In  the past, the department had                                                                    
been at the  late date of getting the  audits completed. She                                                                    
reiterated the division  was working to catch up  and get on                                                                    
a  three-year  cycle. She  reported  that  the progress  had                                                                    
slipped a bit  from the previous year, but  she believed the                                                                    
work  was   still  on  track.  She   relayed  departures  in                                                                    
personnel  had contributed  to the  delay. She  believed the                                                                    
division was in the same  situation as many employers across                                                                    
the nation and  it was struggling to  recruit new employees.                                                                    
She  noted that  the division's  teams were  small and  even                                                                    
several vacancies hindered its ability to get work done.                                                                        
3:50:56 PM                                                                                                                    
Ms. Glover  continued to speak  to slide 26.  She referenced                                                                    
how COVID had resulted in  the state embracing telework. She                                                                    
lauded the oil  and gas production audit team  for being the                                                                    
leading team on embracing  technology. She remarked that the                                                                    
team  had  used  little  paper prior  to  COVID;  therefore,                                                                    
teleworking  had  not hindered  the  ability  to get  audits                                                                    
done.  The  division  continued   to  try  to  leverage  its                                                                    
technology  and  used  [Microsoft] Teams  meetings  to  stay                                                                    
connected. She  noted that  audits were  done by  teams, not                                                                    
individual  people. The  division had  been working  to have                                                                    
consistency  in  its  audits. She  highlighted  improvements                                                                    
made by a risk-based approach.  She detailed that instead of                                                                    
doing  labor   intensive  audits   that  may   not  generate                                                                    
significant  findings, the  division looked  at past  audits                                                                    
and high risk  areas to perform targeted audits  in order to                                                                    
leverage  its  resources.  She   summarized  that  work  had                                                                    
slipped  by  one  or  two quarters,  but  she  believed  the                                                                    
division was on  track to be on the three-year  cycle by the                                                                    
time it completed its 2018 and 2019 audits in 2023.                                                                             
Representative  Josephson looked  at  the petroleum  revenue                                                                    
projection of $2.082 billion in FY  23 on slide 10. He asked                                                                    
if the  money was paid  from the producers  and uncontested.                                                                    
Alternatively, he asked if some  of the funding was possibly                                                                    
Ms.  Glover answered  that  the  unrestricted revenue  shown                                                                    
under   the  production   tax   revenue  reflected   monthly                                                                    
estimated payments.  She clarified the data  did not include                                                                    
any settlements or litigation amounts.                                                                                          
Representative Wool  asked if it  was fair to say  that many                                                                    
of the audits  would end up being settled for  less than the                                                                    
face value.                                                                                                                     
Ms.  Glover   replied  that  every  audit   and  result  was                                                                    
different. She  would not say audits  were typically settled                                                                    
or  negotiated   for  less.  There  were   audits  that  got                                                                    
litigated all  the way up to  the supreme court. Much  of it                                                                    
related  to  the  state's  confidence   in  its  ability  to                                                                    
litigate  and how  strong the  Department  of Law's  opinion                                                                    
3:55:26 PM                                                                                                                    
Co-Chair Merrick thought  a couple of tax  auditors had been                                                                    
added the  last year.  She asked  if it  was within  the DOR                                                                    
Ms.  Glover  answered  that the  two  corporate  income  tax                                                                    
auditor positions had  not been included in the  final FY 22                                                                    
Co-Chair  Merrick reviewed  the schedule  for the  following                                                                    
3:56:24 PM                                                                                                                    
The meeting was adjourned at 3:56 p.m.                                                                                          

Document Name Date/Time Subjects
HFIN Fall 2021 Revenue Forecast Presentation 2022.01.19.pdf HFIN 1/19/2022 1:30:00 PM
DNR Fall 2021 Production Forecast_House.pdf HFIN 1/19/2022 1:30:00 PM
DNR Production Forecast_HFIN_Replacement slide 011922.pdf HFIN 1/19/2022 1:30:00 PM