Legislature(2017 - 2018)HOUSE FINANCE 519
01/18/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Fall 2016 Revenue Forecast Presentation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 18, 2017
1:35 p.m.
1:35:00 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Representative Paul Seaton, Co-Chair
Representative Neal Foster, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue; Dan
Stickel, Assistant Chief Economist, Tax Division,
Department of Revenue; Paul Decker, Division of Oil and
Gas, Department of Natural Resources; David Teal, Director,
Legislative Finance Division(LFD); Rob Carpenter, Analyst,
Legislative Finance Division; Kelly Cunningham, Analyst,
Legislative Finance Division; Lacey Sanders, Analyst,
Legislative Finance Division; Amanda Ryder, Analyst,
Legislative Finance Division; Alexie Painter, Analyst,
Legislative Finance Division; Danith Watts, Analyst,
Legislative Finance Division; Helen Phillips, Finance
Committee Assistant, Legislative Finance Division;
Representative Delena Johnson; Representative Dan Saddler;
Representative Collen Sullivan-Leonard; Representative Lora
Reinbold;
PRESENT VIA TELECONFERENCE
SUMMARY
Fall 2016 Revenue Forecast Presentation
Co-Chair Seaton introduced the committee members and
indicated the committee would be doing a significant amount
of work in the session. He was hoping the committee would
concentrate on responsible budget reductions and developing
a sustainable fiscal plan. He introduced his staff, Joan
Brown and Arnold Liebelt, who would be working on the
operating budget. Taneeka Hansen would be helping with a
sustainable fiscal plan and other legislation. Jenny Martin
was his office manager and the contact for reserving the
House Finance room. Tom Spitzfaden was a University of
Alaska intern who would be doing a little bit of
everything.
Co-Chair Foster introduced his staff. Paul Labolle was his
Chief of Staff and aide for the capital budget. Jane
Pierson was his finance committee aide handling
legislation. Brodie Anderson was his aide for the finance
subcommittees for the Department of Transportation and
Public Facilities (DOT) and the Department of Labor and
Workforce Development (DOL). Graham Judson was his aide to
the finance subcommittee for the Department of
Environmental Conservation (DEC).
Co-Chair Seaton acknowledged Representative Kawasaki at the
table.
Representative Ortiz introduced his staff, Mary Hakala, who
was his finance subcommittee aide for the Department of
Education and Early Development (DEED).
Representative Pruitt introduced Dirk Craft, his finance
aide.
Representative Kawasaki introduced his staff. He was proud
to have an intern, William Jodwalis, in his office who
would be following the finance subcommittee for the
Department of Military and Veterans Affairs (DMVA). Ashley
Strauch would be working on the finance subcommittee budget
for the Department of Public Safety (DPS). Olivia Garrett
would be working on the finance subcommittee budget for the
Department of Corrections(DOC). Mercedes Colbert was his
Chief of Staff and would be monitoring the activities of
the committee.
1:39:04 PM
Representative Wilson introduced Remond Henderson who would
be her aide for the House Finance Committee.
Vice-Chair Gara was happy to be working with the members of
the committee. He encouraged anyone listening with ideas
for the budget to contact him, as he was happy to hear from
them. Molly Carver and Laura Cartier were his committee
aides. He clarified the correct pronunciation of
Representative Guttenberg's name.
Representative Tilton reported that Heath Hilyard would be
her finance aide.
Representative Grenn introduced his staff, Brook Ivy and
Joseph Cassie.
Representative Guttenberg introduced his staff, Tom
Atkinson and Seth Whitten. He also indicated having an
intern, Alliana Salanguit, who was currently in Norway
working on Artic Policy issues.
Representative Thompson introduced his aide, Brandon
Brefcznski. He looked forward to working with everyone. He
encouraged the chair to introduce the finance room staff.
He
Co-Chair Seaton asked David Teal to introduce his staff.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION(LFD),
invited his staff to introduce themselves.
ROB CARPENTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
worked on the capital budget, the supplemental budget, and
the budgets for the Department of Transportation and Public
Facilities (DOT) and the Department of Revenue (DOR).
KELLY CUNNINGHAM, ANALYST, LEGISLATIVE FINANCE DIVISION,
was the fiscal notes coordinator and was involved in the
budgets for the Department of Public Safety (DPS), the
Department of Corrections (DOC), and Judiciary (JUD).
LACEY SANDERS, ANALYST, LEGISLATIVE FINANCE DIVISION,
coordinated the operating budget and helped with the
budgets for the Department of Military and Veterans Affairs
(DMVA) and the Department of Commerce, Community and
Economic Development.
AMANDA RYDER, ANALYST, LEGISLATIVE FINANCE DIVISION, helped
with the budgets for the Department of Health and Social
Services (DHSS) and the Department of Fish and Game (DFG).
ALEXIE PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION, was
the analyst for the budgets for the Department of Education
and Early Development (DEED), the Department of
Environmental Conservation (DEC), and the Department of
Natural Resources (DNR).
DANITH WATTS, ANALYST, LEGISLATIVE FINANCE DIVISION,
assisted with the budgets for the Department of
Administration (DOA), the Department of Labor and Workforce
Development (DOL), the Department of Law (LAW), and the
University of Alaska (UA).
Co-Chair Seaton asked Helen Phillips to introduce her
staff.
HELEN PHILLIPS, FINANCE COMMITTEE ASSISTANT, LEGISLATIVE
FINANCE DIVISION, introduced herself; Bree Wylie and Jodie
McDonnell, committee secretaries; and Donna Page, the page.
Co-Chair Seaton asked if Ms. Phillips wanted to provide any
information to members.
Ms. Phillips indicated that she and her staff were non-
partisan support staff for the finance committee employed
within the Legislative Finance Division. She and her staff
worked at the direction of the co-chairs of House Finance
and provided operational, clerical, and secretarial
support. They assisted with logistical issues including
hearing preparation, bill files, minutes, and supplies. All
policies went through the co-chairs' office. She reviewed
the room protocol. She advised that no one, including
staff, was allowed to approach the table during the
meetings. The page was available to pass notes for
legislators.
Ms. Phillips mentioned a few items regarding recording. She
reminded members that the little red light meant that the
meeting was being recorded. In using the mics, it was best
to speak directly into them about 6 inches away. She
advised that to have a private conversation, members needed
to push the button and hold it down to avoid being
recorded. She provided information about the resources
available to committee members. There were three sets of
statutes located around the room [she pointed to the
various locations]. She also highlighted that there was a
set of detail budget books in the room, and in each
member's drawer an LFD overview and a copy of the Revenue
Sources Book could be found. There was also a set of the
administrative codes in the room. For new members, she
reported that each member had a filing cabinet which was
behind where they were seated. The cabinets were labeled
with member names. Bills in committee were in the top
drawer and bills reported out of committee were in the
bottom drawer. Bill files were placed in the top drawer
once they were scheduled. Overview documents went in the
bottom once they were heard. Prior to the meeting schedule,
members could find bills for the following week in the
front of their top drawer, scheduled by day. The weekly
schedule was delivered via email to everyone's office as
soon as it was published.
1:46:55 PM
Representative Ortiz asked if the finance committee staff
would be available for the subcommittee meetings.
Ms. Phillips responded her staff's duties were typically
related to the House Finance Committee room. However, a
member's staff would be informed about the ways in which
her staff provided support.
Co-Chair Seaton pointed out that members had a document
titled, "House Committee Rules." Co-Chair Foster would
review the rules with members.
Co-Chair Foster read from a prepared statement on the House
Finance Committee Rules:
Time:
House Finance meets in Room 519 at 1:30 p.m. to 3:30
p.m. (longer meetings and additional meeting times
will be scheduled when necessary). All committee
members shall be on time to committee. Please notify
the appropriate Co-Chair if you must be absent from or
leave during a meeting:
Representative Seaton, Operating and Supplemental
Budgets
Representative Foster, Legislation and Capital Budget
If not able to be in attendance, let the Chairs'
offices know where you can be reached in case you are
needed for a vote or to establish a quorum. Members
must be present to vote on passage of a bill from
committee and to sign committee reports.
If you are requesting an excused absence from the Call
of the House, both House Finance Co-Chairs must sign
the form and approve the absence from committee.
Committee Quorum and Voting Rules:
A quorum of the majority of the committee membership
(six members) is necessary to vote or take any
committee action.
If fewer than eleven members are present, motions to
amend may be adopted by a majority of those present or
attending telephonically.
Members participating via teleconference may be
considered for the purposes of establishing quorum and
for passage of amendments. Attached is a memo from
Legal Services regarding committee quorum.
Conflicts of Interest / Abstention from Voting:
It is not required to request to abstain from voting
to report a bill from committee due to conflict of
interest. However, if members would like to declare a
conflict of interest and request to abstain from
voting, they may.
Amendments:
Amendments should be drafted by Legislative Legal
Services to ensure conformity and legality. This will
facilitate the transmittal of amended legislation.
All amendments to legislation must be turned into the
appropriate Co-Chair's office at least 24 hours prior
to an amendment hearing in House Finance. This will be
strictly enforced. We will hold bills over if
amendments need to be done but are not submitted 24
hours ahead.
Committee Reports:
Members must be present to sign the committee report.
Please do not leave the room before signing (see
attached legal memo).
Draft House Finance Committee Substitutes:
Only the Co-Chairs and their staff may request draft
House Finance Committee Substitutes.
Participation:
All committee members are requested to be on time.
When necessary, and with notice to the Co-Chairs,
members may participate via teleconference. They may
vote on amendments and participate in committee
debate. However, members may not vote to move a bill
from committee. A member must be physically present to
vote on the passage of a bill from committee (see
attached legal memo).
Notice Requirements:
Written notice of the time, place, and subject matter
of all House Finance Committee meetings shall be given
in accordance with Rule 23 of the Uniform Rules.
Electronic Devices:
Members may not use electronic devices at the
committee table during official committee business. If
a person's cell phone goes off in committee they will
be required to bring a healthy snack to the next
meeting, no doughnuts or cookies. Additionally,
electronics will not be allowed to be used by the
audience in the front row during committee business.
Other:
Committee alternates will be called to serve on the
Finance Committee at the discretion of the Co-Chairs.
Co-Chair Foster asked if members had any questions.
1:51:33 PM
Representative Pruitt asked if it was acceptable to wear
"Make America Great Again" hats. It was not addressed in
the rules.
Co-Chair Seaton indicated that advertising was not
generally permitted. Hats without advertising were allowed.
Representative Wilson asked about bill substitutions. She
asked if committee members would be given materials 24
hours to review prior to voting on a bill. She wanted to
establish a 24-hour period for members to review a bill,
especially ones with substantial changes.
Co-Chair Seaton indicated the co-chairs had not had a
chance to discuss the issue. Their intention was that
everyone would have all the materials in plenty of time to
review them. However, the chairs would have to talk about
it. If the committee adopted amendments and rolled them
into a committee substitute, the whole committee would have
heard and seen all the provisions, therefore, a 24-hour
provision might not be necessary. The intention was for all
members to have adequate time to review anything that
passes from the committee.
Co-Chair Seaton reviewed the agenda for the meeting.
^Fall 2016 Revenue Forecast Presentation
1:54:16 PM
Co-Chair Seaton asked Commissioner Hoffbeck if he preferred
questions be held until the end.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself and indicated he preferred questions at
the end due to the number of slides in the presentation.
Co-Chair Seaton encouraged members to note the pages they
had questions about. He mentioned that he wanted page
numbers on all the slides in presentations. It was much
easier to reference a slide number when asking questions.
He reiterated that questions would be held until the end of
the presentation.
1:56:16 PM
Commissioner Hoffbeck was going to make a couple of brief
statements and then turn the presentation over to Mr.
Stickel. He informed the committee that in Revenue Sources
Book there was a major change in methodology in how DOR
forecasted production. In the past, DOR had used outside
contractors to do the production forecasting. The
Department of Revenue saw an opportunity in the current
year, because of the need to reduce spending wherever
possible and the fact that the current contract had
expired, to work with the Department of Natural Resources
(DNR) who did forecasting. The Department of Natural
Resources' numbers were used for the official forecast for
DOR. The change saved the state about $100,000. He wanted
to put the forecast into perspective: for FY 17 the
production forecast was 490,300 barrels per day. Currently
the production average for the year was about 510,000
barrels per day - about 4 percent more than the forecast.
He reported that production was currently running about
550,000 per day. In March, April, May, and June he saw
declines in production with warming on the North Slope.
Although production was currently robust, the average would
not be determined until the end of the year. He noted that
it was currently running higher than forecasted.
Co-Chair Seaton relayed that Representative Johnson and
Representative Saddler were in the audience.
Commissioner Hoffbeck continued that the price forecast for
FY 17 was $46.81. The price year-to-date was $46.92, very
close to the forecast. The price of oil was bouncing
between $52 and $54. The forecast was done prior to the Oil
Producing and Exporting Countries (OPEC) agreement to
reduce production. He thought prices would average higher
than forecasted by the end of the year, which would result
in more revenue to the state.
Co-Chair Seaton relayed that Representative Sullivan-
Leonard had joined the meeting.
Commissioner Hoffbeck furthered that there were two
additions to the Revenue Sources Book. First, there was a
new chapter, Chapter 1, which specifically dealt with
dedicated fund revenue available for appropriation. The
book generally dealt with unrestricted general fund
revenue. However, clarity and documentation were needed for
meetings with investors and rating agencies. The discussion
pointing to funds available for appropriation included
unrestricted general funds (UGF), realized earnings of the
Alaska Permanent Fund (PF), earnings of the Constitutional
Budget Reserve (CBR), and earnings from other funds that
were statutorily or customarily restricted rather than
constitutionally restricted. He added that Chapter 3
focused on income tax and sales tax. It included a ground
work discussion for a broad-based tax.
2:00:46 PM
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE, introduced the PowerPoint
Presentation: "Fall 2016 Revenue Forecast". He noted that
the department came up with a robust deck of slides, some
of which he would be glossing over. He was happy to revisit
any of them later.
Co-Chair Seaton acknowledged Representative Lora Reinbold
in the audience.
Mr. Stickel began with slide 3: "FORECASTING METHODS:
Trends for Forecast Period":
Oil Price is projected to increase 7 percent on average
over the forecast period (FY 2017-2026)
· Oil Production is projected to decrease 4 percent on
average over the forecast period
· Unrestricted General Fund Revenue is projected to
increase 5 percent on average over the forecast
period
· Investment Income is projected to increase 5 percent
on average over the forecast period
· Total State Revenue is projected to increase 2
percent on average over the forecast period
Mr. Stickel advised that the slide showed a list of high-
level trends. The average oil price in FY 16 was $43 per
barrel. The fall forecast anticipated an increase of about
7 percent annually over the following decade. In FY 16,
North Slope oil production averaged 515,000 barrels per day
and the department was forecasting, on average, a 4 percent
annual decline over the following decade. He continued that
UGF revenue in FY 16 was about $1.5 billion. The department
anticipated increases of about 5 percent annually over the
following decade. He indicated that investment income was
growing at about 5 percent annually. The largest piece was
the Permanent Fund. He noted that any of the investment
numbers were before any potential changes that were being
discussed in the current session. The total state revenue
was projected to increase by about 2 percent annually over
the following decade, which was a little bit less than the
unrestricted revenue amount. The department had a flat
forecast for federal revenue.
Mr. Stickel turned to slide 4: "FORECASTING METHODS:
Introduction":
All data is based on the DOR Fall 2016 Forecast.
· This is a forecast. All figures and narratives in
this document that are not based on events that have
already occurred, constitute forecasts or "forward-
looking statements." These numbers are projections
based on assumptions regarding uncertain future
events and the responses to those events. Such
figures are, therefore, subject to uncertainties and
actual results will differ, potentially materially,
from those anticipated.
· This forecast supersedes all prior estimates or
forecasts as the official forecast of the
department. Therefore, all prior forecasts should be
used only for comparison purposes.
Mr. Stickel elaborated that the slide was the department's
standard disclaimer. The large point was that there was
uncertainty around the forecast and all the numbers
presented by the department represented one possible
scenario within a range of scenarios. The department had
already talked about how prices and production were doing a
little better for the current fiscal year than anticipated
at the time the forecast was put together. He asked
committee members to keep that in mind in going through the
forecast numbers.
Mr. Stickel continued to slide 5: "FORECASTING METHODS:
What Do We Forecast at DOR":
We directly forecast Petroleum Revenue Accounted for
72% of state unrestricted revenue in FY 2016
Projected to be 67 percent to 68 percent in FY 2017
and FY 2018 Includes severance taxes, royalties,
corporate income tax, and all other revenue from oil
companies
· We directly forecast Non-Petroleum Revenue
· We use investment advisor forecasts for
Investment Revenue
· We use the Federal Revenue authorized for
spending as the forecast It is typically 20
percent to 30 percent more than actually gets
spent
· Compile all of these into Revenue Sources Book
Mr. Stickel reported that the economic research group
within the Tax Division at DOR maintained models for the
various petroleum taxes and other petroleum revenue sources
as well as non-petroleum revenue sources. They are
forecasted within DOR. The division worked with the Alaska
Permanent Fund Corporation (APFC) and the Treasury Division
to determine the investment revenues for the forecast. They
utilized projections from Callan Associates, the investment
consultant to both organizations. He indicated that when
looking at the federal revenue forecast the division used
the total authorized federal spending in the budget. It did
not attempt to estimate what the federal government was
going to provide to the state in the future. Typically,
actual receipts were a little less than the total federal
authorization. Historically, it had been about 20-30
percent less.
Mr. Stickel moved to slide 7: "PETROLEUM REVENUE FORECAST:
Factors":
Four Factors for Petroleum Revenue Forecast
1. Production
2. Price
3. Costs
· Capital Expenditures
· Operating Expenditures
· Transportation Costs
4. Credits
Mr. Stickel explained that, for many years, the petroleum
revenue provided 80-90 percent of the state's general fund
(GF) revenue. Looking out over the time horizon of the
forecast, the number was expected to be closer to 70
percent. It was still the largest contributor to
unrestricted revenue by far. There were four primary
factors the department considered when looking at the
petroleum revenue forecast. Oil production and price were
very important. Given the net value-based production tax
the state had, the lease expenditures were deductible. The
department looked at capital costs and operating costs
which were also important for tax credits. He added that
the credits themselves were deductible against the
production tax and some might be repurchased by the state.
He would walk through each of the four components in more
detail in the following set of slides.
2:05:15 PM
Mr. Stickel spoke to slide 9: "PRODUCTION FORECAST: Methods
Used." He explained that the slide looked at several
different components of the production forecast. It showed
DNR's new approach to the forecast versus the method of the
previous engineering consultant. One of the most
significant changes was moving from a well-by-well forecast
to a pool level forecast by DNR. Another significant change
was that the previous forecast had a 10-year time horizon.
Any project expected to come on line in the following ten
years would be evaluated for the forecast. The new method
had a 5-year time horizon. Therefore, the forecast was only
looking at current oil production and fields expected to
come on line in the following 5 years. He thought it was a
salient point. However, with implementing this method for
the fall forecast, the department did not drop anything out
of the forecast.
Mr. Stickel advanced to slide 10: "PRODUCTION FORECAST: ANS
History and Forecast by Pool." He drew attention to the
familiar mountain chart which showed North Slope production
by the major fields since the start of production on the
slope. Production peaked at 2 million barrels per day in
the late 1980s and, with a few exceptions (last year being
one of them and the start of the Alpine field being
another), production had generally been in decline since
the peak. The state was now looking at 500,000 barrels per
day of production. Recently, it had been slightly higher.
He added that the forecast over the following decade
anticipated an average of a 4 percent annual decline. Most
of the production in the forecast was still coming from
major fields of Prudhoe, Kuparuk, and the Colville River
Unit.
Mr. Stickel explained that in putting the forecast together
the department looked at production and potential
production in 4 different categories which he would review.
The categories included: currently producing, under-
development, under evaluation, and fields not included in
the current forecast.
Mr. Stickel scrolled to slide 11: "Production Forecast:
Currently Producing":
Volumes from Currently Producing (CP):
· Oil from all currently producing pools and wells
· Decline curve analysis forecast at pool level
inherently includes 'background' ongoing
development activity, facility maintenance, turn-
around events
Mr. Stickel reported that currently producing volumes
included all oil from currently producing pools and wells.
The Department of Natural Resources used a decline curve
analysis on the pool level to estimate production on the
currently producing fields. It also assumed a certain
amount of background development. For example, for a field
like Prudhoe Bay there was a certain amount of drilling
that would occur of which the department extrapolated an
estimate forward based on historical activity.
Mr. Stickel turned to the next category on slide 12:
"Production Forecast: Under Development":
Volumes from Under Development (UD):
· Ongoing development wells in existing, mature
fields above and beyond CP
· New fields expected to produce within 1 year (by
6/30/2017)
Mr. Stickel explained that with the new methodology it
represented oil volumes expected to come on within the
following year - new fields expected to come on by the end
of FY 17 as well as any development wells above the
background level of drilling in the existing fields. He
cited the example of an under-development project, the
continued build out of the CD5 in the Colville River Unit.
Mr. Stickel continued to slide 13: "Production Forecast:
Under Evaluation":
Volumes from Projects Under Evaluation (UE):
· New fields expected to produce within 2-5 years
(7/1/2017 to 6/30/2021)
· UE 1: Facilities in place, significant sunk cost,
well locations finalized, drilling plans in place
· Examples: Nuna, GMT1, Mustang, Moraine, 1H
NEWS, Nuiqsut expansion
· UE 2: Facility-sharing agreements in place,
source of funding identified, EIS progress
· Example: GMT2
· Risk factors internalized in forecast based on
breakeven price
Mr. Stickel relayed that the projects under evaluation in
the fall forecast were anything expected to come on line in
the following 2-5 years, through the end of FY 21. He noted
the Oooguruk Unit, the Kuparuk Unit, the Mustang Unit, the
Greater Moose's Tooth Unit, and the National Petroleum
Reserve Alaska (NPRA). The Greater Moose's Tooth Unit would
be the first major development on federal land in NPRA.
Mr. Stickel advanced to slide 14: "Production Forecast:
Excluded from Forecast":
Characteristics:
· Unknown first-oil date/estimated greater than 5
years
· Discovery (contingent resource) or just prospects
(prospective resource)
· Uncertain finances (e.g., sourcing for private
equity)
· Facilities incomplete or nonexistent
· Projects in Appraisal
· Technological Uncertainty
· Environmental/Permitting Uncertainty
· Economic Uncertainty
Examples: Pikka, Ugnu, Placer, Tofkat, Pt Thomson (MGS
or full-cycling), Liberty, Fiord West, Smith Bay
Mr. Stickel specified that the fourth category was those
things excluded from the forecast. There had been many
recent announcements that were very exciting, and the
department was monitoring them with the hopes of them
coming on line. However, they were projects that did not
have enough of a level of certainty to be included in the
forecast yet. The department had a list of some of the
various types of uncertainty around those projects.
Typically, they would be projects that would start oil
production 5 years or more into the future. Examples of
projects not included in the forecast were Pikka, Ugnu,
Smith Bay, and Willow.
2:10:15 PM
Mr. Stickel reviewed slide 15: "Production Forecast:
Official Forecast." He conveyed that the official
production forecast consisted of currently producing, under
development, and under evaluation categories.
Mr. Stickel scrolled to slide 16: "Production Forecast:
ANS." He relayed that the slide showed that most of the oil
in the forecast was from the currently producing fields
(Prudhoe, Kuparuk, Colville River, and some of the smaller
fields). Alaska had a small amount of oil that qualified
for the under development category of projects coming on
line in the following year and a modest amount of under
evaluation oil peaking at about 30,000 barrels per day.
Mr. Stickel explained slide 17: "Production Forecast: DOR
Cases":
High Case (P10):
· Based on DNR modeling, oil production would have a
10 percent probability of exceeding this level
Official Forecast (P50):
· Based on DNR modeling, oil production would have an
equal probability of coming in above or below this
level
Low Case (P90):
· Based on DNR modeling, oil production would have a
90% probability of exceeding this level.
Note: None of the cases include any of the "Excluded from
forecast window" fields
· With these fields, production could exceed the high
case
Mr. Stickel relayed that in addition to the baseline
forecast, the DNR modeling allowed for a range of possible
values for the production forecast. The Department of
Natural Resources provided a P50, which was the base case.
The department also provided a high case production
forecast [P10], which (based on the activity set in the
forecast) had a 10 percent probability of production being
base case level or higher. The department also provided a
low case (P90) where there was a 90 percent chance that oil
production would be at least the base case value. He
reiterated that the modeling only encompassed those fields
included in the production forecast. It did not comprise
any of the excluded fields.
Mr. Stickel continued to slide 18: "Production Forecast:
ANS by Case." He noted that in the official forecast oil
production would decline to about 331,000 barrels per day
by 2026. In looking at the high and the low case, based on
the DNR modeling, it was a plus or minus of 40,000 barrels
per day.
Mr. Stickel spoke to slide 19: "Production Forecast: ANS
Details." He conveyed that the chart provided the same
information supplied in the previous slide but in a table
form. The slide came from page 37 of the Revenue Sources
Book. He added that it showed the amount eligible for the
gross value reduction (GVR), an element of the production
tax that allowed for an additional benefit for certain
qualifying new production. He highlighted that the amount
of GVR went to zero in 2026 due to some changes that were
made in the 2016 legislative session establishing a limit
on the amount of time fields could qualify for the GVR.
Mr. Stickel turned to slide 20: "Production Forecast: ANS
Comparison to Prior Forecast." He relayed that the slide
was a comparison of the official forecast from the fall
forecast to the spring forecast for the North Slope
production over the near and midterm. The production
forecast had been decreased from the previous forecast
because there had been a reduction in planned drilling in
some of the plans of development from the operators in
response to low oil prices. He noted some projects being
pushed out and some rigs being taken down in response to
low prices. Over the long term there was a slight increase
over the previous forecast partially due to some projects
being pushed out later and remnants of the methodology
change.
Mr. Stickel introduced slide 22: "Price Forecast:
Historical ANS West Coast, West Texas Intermediate and
Brent Crude Prices 2009+." The chart showed the previous 8
years of Alaska North Slope (ANS) prices. It also showed
the West Texas Intermediate, which was the US crude bench
mark, and Brent, an international waterborne crude
benchmark. He highlighted that from 2011 to 2013 toil
prices were fairly stable, making forecasting prices easy.
However, prices started to decline in mid-2014 and
throughout 2015. Since then, 2016 had seen a modest
recovery. Prices had doubled from their lows reached in the
beginning of 2016.
Mr. Stickel reviewed some of the key drivers when
evaluating ANS prices in slide 23: "Price Forecast: Key
Drivers":
Supply, Demand and Spare Capacity in CY 2017
· Supply - 97.4 mb/d
· Demand - 96.9 mb/d
· Global Spare Capacity - 1.17 mb/d or 1.2%
Current Events
· Weak global demand growth
· Cost of supplying the marginal barrel has decreased
· OPEC (Saudi Arabia) maintains market share and
accepts lower prices OPEC recently agreed to cut
supply
· Cost of supply has fallen as new sources have been
defined and developed (i.e. Shale oil)
Mr. Stickel indicated that the drivers included the
fundamentals of supply and demand as well as spare capacity
- the amount of slack in the market to pick-up a potential
increase in demand or a potential shock to supply. He
elaborated that spare capacity was fairly low by historical
standards, but at the same time demand growth had been weak
globally. Some of the major producers had aimed to secure
market share. At the same time the costs of new supply
dropped. In the shale patch, in particular, there had been
some amazing changes in technology and approaches that were
allowing some of the developments to come on line at much
lower prices than previously.
2:15:31 PM
Mr. Stickel moved to slide 24: "Price Forecast: Historical
ANS West Coast Price 2015+." He reported that the slide
showed key events over the previous 2 years. He reported
that the prior day's closing ANS price was $54.83 per
barrel and the low in early 2016 reached $26.23 per barrel.
Prices had more than doubled from the low. The low was
reached at the same time sanctions were lifted against Iran
and there was significant concern that Iranian oil could
flood the market. Since then, demand had come back
slightly, although not to the extent projected.
Mr. Stickel reviewed slide 25: "Price Forecast: Impact of
Spare Capacity." He reported that the slide, provided by
Energy Information Agency (EIA), was used for comparison
purposes. It was an example of the slides the department
looked at when coming up with a price forecast. He
highlighted the blue line (representing world oil
production) being ahead of the green line (representing
world oil consumption). Globally, the world had been
placing oil into inventory for the previous couple of
years. He explained when there was too much supply and not
enough demand, prices adjusted accordingly. Looking at
their analysis of the market fundamentals, the EIA and
several other experts were looking for supply and demand to
come into balance over the following year, which would
support price stability.
Mr. Stickel discussed slide 26: "Price Forecast: Base Price
Method":
· Price forecast is based on fall 2016 forecasting
session held on October 4
· Participants gave 10th, 50th, and 90th percentile
paths
· Average of these paths used to derive PERT
distribution
· Base case is the median of the distribution
Mr. Stickel detailed what the department did to generate
its forecast. About 30 experts from around the state got
together for the day. People from DOR, DNR, DOL, and the
University of Alaska discussed oil prices, what was going
on with supply and demand, and what other forecasters and
analysts were saying. At the end of the day each
participant was asked for a price path forecast. Everyone
provided their most likely P50 case, a high case, and a low
case. The cases were used to construct a distribution of
potential oil price paths shown on the following slide.
Mr. Stickel advanced to slide 27: "Price Forecast: Nominal
ANS Price Distribution." He indicated the forecasts were in
nominal terms. He pointed out that in the low case of 10
percent, oil prices ended at about $50 in FY 27. In the
high case, oil prices were up over $140. The official
forecast was the middle most likely median case within the
range of possible oil prices. Prices slowly climbed to
reach a little over $90 in nominal terms by the end of the
forecast period. In real terms, without inflation, the
price amounted to about $70 to $75.
Mr. Stickel drew attention to the bar chart on slide 28:
"Price Forecast: Historical ANS West Coast Price FY Oil
Price Bands (Annual Average and Fall 2016 Forecast)." He
reported that the chart spoke to some of the incredible
stability in oil prices Alaska had until the recent price
collapse. The historical bars on the chart through FY 16
showed the average price for the fiscal year as well as the
range in prices. For example, in 2015 the average price was
a little more than $70 per barrel. It ranged from about $50
and $110 in the year. He continued that for the forecast
for 2017 and beyond the bars represented the state's
official forecast within the range of the high and low case
forecast for each year.
Mr. Stickel moved to slide 29: "PRICE FORECAST: Consensus
View of Wide Distribution." He noted that the slide came
from EIA. The Department of Revenue was forecasting ANS
prices at $47 per barrel for FY 17 and $54 per barrel for
FY 18. He included the slide to show that EIA and the New
York Mercantile Exchange (NYMEX) futures curve both had
similar prices for the following year and a half in the
range of between $50 to $55 per barrel were in a similar
price range. He spoke to uncertainty on the chart that
reflected a price range of between $30 to $100 per barrel.
The department was doing its best.
2:20:45 PM
Mr. Stickel advanced to slide 30: "Price Forecast: Impact
of other prices in FY 2017: ANS Price Sensitivity." The
table was prepared in the prior month and included actual
prices for the first 5 months of the year through November.
It allowed the user to determine the final price for FY 17
if a given price was in place for the remainder of the
year. The forecast price was $46.81 which anticipated a
price of between $45-$50 for the remainder of FY 17 to
arrive at the price. Currently, prices were closer to about
$55 per barrel. In looking at the chart, if prices were $55
per barrel for the remainder of FY 17, then the final FY 17
price of about $51 per barrel would be about $4 to $5 above
the official forecast.
Mr. Stickel explained the chart on slide 31: "Price
Forecast: ANS Comparison to Prior Forecast." The chart
compared the official price forecast for the fall to the
previous spring forecast. He noted that with the recovery
and some of the market fundamentals, there was an increase
in the forecast for all of the years within the time
horizon. However, prices were not expected to reach the
$100 per barrel level any time soon.
Mr. Stickel moved to costs on slide 33: "Cost Forecast:
North Slope Capital Lease Expenditures." He iterated that
company lease expenditures were deductible in the
production tax calculation. The expenditures also factored
into several of the tax credits. Costs were also
interesting as a barometer of oil industry activity. He
highlighted that for 2017 and 2018 there was a significant
reduction to capital costs on the North Slope. He informed
the committee that when the department talked with the
companies, they indicated that it was their response to
lower oil prices. They had taken rigs off the slope,
shelved some projects, and pushed some things off where
possible. However, there were several projects going
forward. He mentioned some of the announcements of
companies taking activity down to save some capital which
could be seen reflected in the production forecast through
reduced drilling.
Mr. Stickel continued to slide 34: "Cost Forecast: North
Slope Operating Lease Expenditures." He reported that the
operating costs had also come down for 2017 and 2018.
Projections for operating costs were down due to cost
containment measures that the companies were pursuing.
There had been some layoffs and similar actions. He noted a
little bit of an increase starting in 2019, which was
largely a function of inflation. In real terms, he expected
operating costs to be fairly flat. He noted that on both of
the cost slides he pointed out it did not include any of
the potential development costs should a Smith Bay, Pikka,
or Willow Unit come on line. Those costs would be above and
beyond what was shown on the slides.
2:24:08 PM
Mr. Stickel detailed slide 36: "Credits Forecast: Compared
with Production Tax." He reported that tax credits were the
fourth and final piece of the petroleum revenue puzzle. He
indicated that in the production tax code there were
numerous tax credits, which he was not planning to discuss
in detail. He was happy to speak to the committee on the
subject at a different time. In general, there were tax
credits that could be used against a tax liability. A
company that paid tax and had enough activity in the state
to generate a tax liability could use the credits to reduce
what they paid to the state. Some of the credits could also
be repurchased by the state in cash. For instance, the
state could repurchase tax credits from a company that did
not have a tax liability or one that did not have enough to
use all of their tax credits. If a company drilled a well
and earned a loss credit on it, they could apply to the
state to have that credit purchased in cash. The slide
showed both types of credits. He pointed out that the blue
lines for 2016, 2017, and 2018 showed the total estimated
production tax to the state before any credits. The orange
bar showed the production tax net of only those tax credits
against liability. In other words, it was how much cash
payments came into the state as revenue. The third bar
depicted in grey netted the credits that were repurchased
by the state in cash. They came out on the appropriations
side.
Mr. Stickel explained that the credits program was
offsetting the production tax revenue. He highlighted that
for FY 17 and FY 18 the department only assumed that the
statutory appropriation for credits was made. He would
discuss the issue in the following slide in more detail.
Under the oil and gas tax credit fund statute there was
statutory language that the legislature would appropriate
either 10 percent or 15 percent of the production tax
revenue to the oil and gas tax credit fund for purposes of
purchasing those tax credits. In that case, at the end of
FY 18 the state would have about $887 million of tax
credits available for repurchase.
Mr. Stickel advanced to slide 37: "Credits Forecast:
Compared with Unrestricted Petroleum Revenue." He explained
that the slide addressed the same chart as the previous
chart but looked at total unrestricted petroleum revenue,
which included the production tax, the unrestricted
royalty, the corporate income tax, and the property tax. He
highlighted that even after all of the credits were
claimed, the industry would still be providing over $1
billion in unrestricted revenue to the state in FY 18. If
the department were to provide a third chart that included
restricted revenue (the portion of the royalty that went to
the permanent fund, the settlements to the CBR, and other
accounts), the number would be higher.
Mr. Stickel moved on to slide 38: "Credits Forecast:
Outstanding Tax Credit Obligations." He offered that the
department set up the oil and gas tax credit fund to
repurchase tax credits from those companies that did not
have enough of a tax liability to offset them.
Historically, through FY 16, the legislature provided
enough funding and the governor authorized enough funding
to repurchase those credits in full. In FY 16 the
appropriation was $500 million, which turned out to be just
enough to pay what came in for requests. However, in FY 17
after a veto, only $30 million was appropriated. There was
$646 million in credits available for repurchase and
requested for FY 17 that was not able to be paid out of the
appropriation.
Mr. Stickel indicated that for FY 18, assuming the
statutory appropriation would be made (15 percent of
production tax revenue) there would be about $885 million
in outstanding tax credits available for repurchase at the
end of FY 18. He furthered that in carrying it out through
the end of the forecast period, if only the statutory
appropriation was made for each year, the liability would
continue to grow to about $1.6 billion by the end of FY 26.
2:29:03 PM
Mr. Stickel advanced to slide 40: "Forecast Change:
Production Tax Revenue Highlights":
Oil price forecasts increased slightly from spring
forecast
· Long-term prices (FY2025+) now expected to settle
around $70- 75 real
Change to oil production forecast methods
· Forecast now produced by technical experts at DNR
· FY 2017-18 forecasts decreased, long-term forecast
increased slightly
Unrestricted revenue forecast increased somewhat due to
higher oil price forecast
Capital expenditures stabilize at lower level than last
few years
Companies cited oil prices and uncertainty regarding the
state budget and fiscal system, as factors impacting
decision-making
Mr. Stickel conveyed that the following set of slides
offered some comparisons to the previous Spring 2016
forecast in terms of the petroleum revenue forecast. Oil
prices were increased slightly over the spring forecast.
The production forecast for 2017 and 2018 was decreased
slightly while the long-term production forecast increased.
He continued that the unrestricted revenue forecast
increased slightly due to the higher oil price. The
department expected that capital expenditures would fall in
2017 and 2018 and stabilize thereafter.
Mr. Stickel continued to slide 41: "Forecast Change:
Comparison from Spring 2016 Forecast for FY 2017." He
reported that there were a couple of tables that looked at
some of the detailed data for FY 17 and FY 18. The
department increased the oil price forecast by 20 percent
in FY 17 and decreased its production forecast by 3
percent. He noted that the deductible lease expenditure
deserved some explanation. There were two ways the
department presented lease expenditures in the Revenue
Sources Book. The first way was looking at total lease
expenditures including operating and capital expenditures
in the oil patch. The second way the department presented
lease expenditures was to look at deductible lease
expenditures; how much of the total expenditures could be
used by a company to offset a positive revenue. He
concluded that even though the department's forecast of
total expenditures decreased for FY 17, with the increase
in gross value and oil price, the amount of lease
expenditures deductible against the tax increased by 9
percent. The state's transportation costs forecast
decreased slightly. In total, the forecast for the wellhead
value of crude oil on the North Slope increased by 34
percent and the unrestricted petroleum revenue forecast
increased by 37 percent or $262 million. The department was
currently forecasting just shy of $1 billion for FY 17 in
unrestricted petroleum revenue.
Mr. Stickel turned to slide 42: "Forecast Change:
Comparison from Spring 2016 Forecast for FY 2018." He
reported that the estimated wellhead for North Slope crude
oil increased 36 percent. The department was forecasting
unrestricted petroleum revenue for FY 18 at about $1.1
billion, a 40 percent increase over the previous forecast.
Mr. Stickel scrolled to slide 44: "Revenue Forecast: 2016
to 2018 Totals." He explained that throughout the Revenue
Sources Book, with the exception of Chapter 1, the
department followed the budget conventions in consultation
with LFD and the Office of Management and Budget (OMB).
There were 4 categories of revenue included. He elaborated
that UGF revenue was revenue available for appropriation
for any purpose and was typically discussed the most. He
reported that unrestricted revenue was about $1.5 billion
in FY 16 and the department was forecasting about $1.4 in
FY 17 and $1.6 in FY 18. The next category of revenue was
designate general funds (DGF). There was not a
constitutional prohibition against it, but DGF was
customarily more statutorily used for a specific purpose.
He cited the alcohol tax as an example. He relayed that
half of the alcohol tax revenue was UGF and half was
customarily appropriated to the alcohol and other drug
abuse treatment and prevention fund. Even though the money
was customarily sent to that fund, the legislature
technically had the discretion to spend it on whatever it
wanted. the federal government dictated how federal
revenue, the third category, could be spent. The final
category was other restricted revenue, which was revenue
throughout the budget process viewed as "hands-off"
funding. It was revenue that had a constitutional or debt
covenant prohibition against the use of it for other
purposes. He provided some examples: oil revenue to the
Permanent Fund, settlements to the CBR fund, and other non-
oil examples. Non-oil examples included revenue that went
to the Alaska Fish and Game fund, different program
receipts, and investment revenue (earnings on the PF and
the CBR). The department historically and in budget
documents considered those items to be other restricted
revenue.
2:34:08 PM
Mr. Stickel pointed to slide 45: "Revenue Forecast: By
Spending Category." He explained that the slide showed a
10-year history and forecast of the same total revenue
picture the committee had just looked at. The total revenue
was expected to grow over the time horizon of the forecast
and was largely driven by expected growth in investment
revenue from the investment portfolio. He noted that the
investment portfolio had been the most volatile source of
revenue for the prior 10 years.
Mr. Stickel explained slide 46: "Revenue Forecast: 2016 to
2018 General Fund Unrestricted Revenue (GFUR)." He
mentioned having talked a lot about petroleum revenue. The
state also had non-petroleum revenues including non-
petroleum corporate income taxes, mining license taxes, and
marijuana taxes. The Marijuana tax was new and had
generated some interest. The state had received its first
set of collections in Marijuana taxes, half of which were
considered unrestricted revenue and half were considered
designated restricted revenue. He continued that there were
several other taxes the department administered as well as
the other non-tax revenue such as fines and forfeitures,
Non-petroleum rents and royalties, charges for services,
and miscellaneous revenues. He noted a small amount of
investment revenues that were considered to be
unrestricted. An example was earnings on the general fund.
The table was a summary of Chapter 5. Chapter 5 was
specific to non-petroleum taxes and other non-petroleum
revenue sources.
Mr. Stickel turned to slide 47: "Revenue Forecast: Revenue
Available for Appropriation." The department had a new
Chapter 1 in the current Revenue Sources Book, which
focused on revenue available for appropriation. It was a
process with which the department started with a table and
a couple of paragraphs in the previous year which was
expanded to be a full chapter. The goal was to provide a
better view of the state's ability to meet its obligations
for outside analysts or organizations that were not
familiar with Alaska's various budget conventions.
Mr. Stickel advanced to slide 48: "Revenue Forecast: 2016
to 2018 Totals to Appropriate." He reported that revenue
available for appropriation started with general fund
unrestricted revenue and added in designated general fund
revenue (revenue restricted by custom or statute),
royalties beyond 25 percent to the Permanent Fund (25
percent of all mineral royalties were guaranteed to the
Permanent Fund by constitution - an additional 25 percent
for certain leases went to the Permanent Fund by statute),
settlements and earnings on the Constitution Budget Reserve
Fund, and realized earnings of the Permanent Fund.
Mr. Stickel moved quickly to slide 49: "Wrap-Up: Big
Picture Takeaways for Forecast Period":
Oil Prices up by 7% and GFUR up by 5%
· Current prices trending higher than forecasted price
for FY 2017
Oil Production down by 4% but potential for upside
· Forecast doesn't include recent announcements new
finds (i.e. Smith Bay, Nanushuk, Pikka)
· Current production trending higher than forecasted
volume for FY 2017
Petroleum Revenue represents ~70% of our GFUR revenues
The GFUR trend over forecast period:
· Increase of 12% in FY 2018 or $177M
· Increase of 15% in FY 2019, or $249M
· Increases taper off in FY 2020 to average of 3% per
year until FY 2026
· Still low compared to past decade but no longer
decreasing as had since FY 2015
Mr. Stickel concluded by mentioning some high-level trends
he had discussed. Oil prices were expected to grow by about
7 percent annually. General fund unrestricted revenue was
expected to grow by about 5 percent annually even as oil
production under the forecast declined by about 4 percent
per year. There was a significant potential for an upside
with the exciting new developments if they preceded. Oil
revenue would represent about 70 Percent of the state's
unrestricted revenue under the forecast. Also, the state
appeared to have turned the tide in terms of the message
that had to be delivered to the legislature. The current
forecast had a modest increase in the revenue forecast,
which was nice, instead of the continued reductions the
state had experienced in the previous several forecasts as
prices were falling.
Mr. Stickel turned to slide 50: "Wrap-Up: Big Picture
Takeaways for Forecast Period (cont.)":
Investment Income is projected to increase 5% on average
over the forecast period
· Still have ~$53B in the Permanent Fund Account
Other Positive Revenue Trends:
· Mining Taxes to recover from low of $11M in FY 2016
to $36M average over the forecast period
· NPR-A Revenue is projected to increase 40% on
average over the forecast period (from $4M in FY2017
to a high of $45M in FY2024)
Mr. Stickel relayed that the slide mentioned investment
income was projected to increase by about 5 percent per
year before any potential changes. There were a couple of
other positive trends worth mentioning. Mining taxes were
expected to recover. It was a relatively small revenue
source for the state but definitely important to the over
all economy. Mineral prices for the minerals that were
mined in Alaska had recovered along with oil prices which
the department saw as a positive sign. Another item was
that in the Revenue Sources Book the NPRA revenues were
expected to increase up to $45 million per year. He
elaborated that the federal government received all of the
royalties for federal land in the NPRA and shared 50
percent of the revenue with the state to be used for
certain purposes. Historically, the revenue stream had been
a share of lease bonuses, and rents. Currently, with the
development of Moose's Tooth, which would be the first
development in the NPRA on federal land, the state would
start to receive a shared revenue from the royalties.
2:39:29 PM
Representative Pruitt wanted to address 2 specific areas.
First, he wanted to address the forecast for throughput. He
had concerns about what was being forecasted for throughput
because it was dramatically different from the current
average for the fiscal year to-date. He suggested the
average for the previous 6 months was 507,000 and a couple
of days prior it was 542,000 for the month. He expected
that in April and May there might be a dip in throughput as
the summer months approached. There was about a 3 percent
difference from what the state currently averaged and from
the department's forecast from last spring and in the most
recent Fall Revenue Sources Book. He wondered about the
large disparities.
Mr. Stickel would defer the technical questions to DNR. He
explained that when DOR looked at the forecast, it had some
of the same questions. The department wondered how the
state was producing 550,000 per day currently and
forecasting 490,000 for the year. He mentioned that
seasonality was a factor. Production seemed to be
significantly higher in the winter and lower in the summer.
The department's understanding was that there were some
turnarounds that could have been done the previous fall but
were potentially being pushed to later in the spring or the
following summer. Another factor was the change in the
methodology. He explained that what DNR had done in
producing the forecast was to look at what the actual oil
production was through the end of FY 16. The Department of
Natural Resources used that information as well as
information about the wells being drilled (the plans of
development) to generate the projection for FY 17 and FY
18. The good news was that production appeared to be coming
in stronger than the experts projected. He thought it was a
good thing.
Representative Pruitt understood the seasonality. Back in
July the throughput was 459,000, much lower than what the
department had forecasted. He noted the number in November
being 549,000 and December at 556,000. He thought Mr.
Stickel was suggesting he direct his question to DNR. He
had a glaring concern. He noted that in the Revenue Sources
Book the North Slope was separated from Cook Inlet. Yet he
was uncertain they were separated in the slides of the
presentation.
Mr. Stickel responded in the negative. The slides reflected
total statewide credits against total statewide revenue.
2:43:43 PM
Representative Pruitt disagreed with how the department
presented the information. He argued that the two could not
be put together [the North Slope and Cook Inlet] because
they were different tax regimes. He thought it provided a
false sense of what the state was dealing with. He
suggested that everyone understood that there was a drag
with Cook Inlet. He continued that there would be a net
output based on the current regime. However, he thought
grouping the North Slope with Cook Inlet was not a true
picture. He asked why the two regimes were put together. He
thought they should be separated. He wanted to have an
appropriate discussion about the two separate regimes. He
thought the information was clouded.
Commissioner Hoffbeck responded that expediency was a
factor. Otherwise, the department could have included 100
slides in the presentation. He was more than happy to
present the information separately and offered that there
was never any intention to obscure the information. Also,
the Cook Inlet credit regime would be gone in 2 years. He
referred to slide 38 noting that the forecast went out to
2026. Following 2019 the numbers reflected only the North
Slope credits.
Representative Pruitt understood the reason why the growth
slowed down substantially. Otherwise, there would be a much
steeper increase if the state was only paying a minimum
amount. He thought it was appropriate going forward that
the two regimes were separated out to avoid confusion.
Co-Chair Seaton appreciate Representative Pruitt's input.
He thought there would be another slide included. However,
the committee wanted to see the overall budget and the
overall impact on the state's budget.
Commissioner Hoffbeck had a comment on the reduced
production forecast. He reported that the department ran
some sensitivity numbers because substantially more oil was
being produced than the forecast. The increase was
approximately 50,000 barrels on average which amounted to
about $100 million in additional revenue.
2:47:03 PM
Representative Guttenberg asked the commissioner about
testing the in-house forecasts to previous forecasts to see
how accurate the department would have been had it been
doing the forecasting earlier.
Commissioner Hoffbeck recognized that the contractors
tended to over-forecast in the short-term. The new method
was similar to the method used prior to the most recent
contractor. He elaborated that when D. A. Platt and
Associates had the contract previous to 2011, he did pool-
by-pool forecasting. The method was similar, but the
probabilistic modeling was added along with other things
that were more sophisticated. The department was surprised
how much it dropped.
Mr. Stickel commented that in developing the new
methodology, DNR did a robust analysis of the previous
forecasts and back-tested the new methodology. The testing
helped show that the new methodology was reasonable and
provided a good forecast for the state. Although certain
slides were not included in the current presentation, he
was happy to do another presentation in the future.
Representative Guttenberg noted the commissioner mentioning
the change from the well-by-well methodology to the pool
level forecast. He wondered about any other changes the
commissioner observed with the change in methodology. He
wondered if he had seen changes in production or in
revenue. He asked if anything else significantly changed
that took him by surprise.
Commissioner Hoffbeck deferred to Mr. Stickel.
Co-Chair Seaton relayed that DNR was available on the
phone.
Representative Guttenberg was saving some of his questions
for DNR.
Mr. Stickel referred to slide 9, which showed some of the
significant changes on the methodology. He highlighted that
the state went to a probabilistic production forecast. He
explained that rather than having a single point estimate
of production, the department looked at a range of possible
outcomes for each pool. By doing so, additional information
was gleaned regarding the high side and low side.
Mr. Stickel highlighted that some meaningful changes were
made to the way risking was incorporated into the forecast.
In the previous methodology, the state received a forecast
for each field from the engineer of which the department
applied a uniform risk factor to the under development and
under evaluation categories. He continued that for under
evaluation, in particular, it ended up risking away the
vast majority of the expected production once reaching 10
years out. The Department of Natural Resources had changed
that methodology to more thoroughly look at risks and
economic parameters of each individual development. By
doing so, he thought it provided for a more robust risking
methodology and a higher forecast at the end of a decade
than in the previous forecast. He spoke to another change
which was the change to the cut-off window. It did not
affect the current forecast because everything the state
had coming online was within a 5-year window to start.
However, going forward, as the department evaluated
potential new developments it could result in a significant
change.
2:52:04 PM
Representative Guttenberg referred to slide 26 [slide 27]
and Mr. Stickel's reference to rounding down. He wondered
if an analysis with actuals had been done. He asked if
anything had changed considerably. He mentioned the
footmark at the bottom of the slide.
Commissioner Hoffbeck replied that it would not have made
any significant change. The department truncated the cents
off of the actual forecast.
Representative Guttenberg referred to slide 41. In
reference to transportation costs decreasing, he wondered
about resulting increased revenues.
Mr. Stickel would provide the information later.
Vice-Chair Gara asked if he was accurate that for every
additional dollar in oil price, the state gained about $30
million in production tax revenue.
Mr. Stickel replied that it depended on what year was being
examined as well as the starting price. He provided an
example. For instance, for FY 18 on page 101 of the Revenue
Sources Book there were sensitivity matrices with revenue
at different oil prices. At $50 per barrel the state would
expect $1.52 billion. At $60 billion per barrel the state
would expect $1.79 billion. It was a difference of $270
million for a $10 change, which would be $27 million per
dollar change - close to the $30 Vice-Chair Gara suggested.
Vice-Chair Gara referred to slide 38. He asked if the blue
bars represented the credits the state purchased. He wanted
to make sure they did not reflect the credits companies
were able to deduct off their production taxes. He asked if
he was accurate.
Mr. Stickel responded, "Correct."
Vice-Chair Gara referred to FY 18 on slide 36. He wondered
about the amount the state would have left after allowing
deductions and payments of credits. In FY 18, companies
that had profits would deduct about $400 million in
credits. He asked Mr. Stickel to comment about the idea of
the state, in FY 18, paying only the credits accrued in FY
18. Under the department's model the state would only be
paying the statutory minimum.
Mr. Stickel had the section highlighted on page 78 of the
Revenue Sources Book. He reported that approximately $646
million of the $961 million in total credits available for
repurchase in FY 18 were carry-forwards of excess for FY 16
and FY 17. The remainder was a little over $300 million of
new credits that would be earned and available for
repurchase in FY 18.
Vice-Chair Gara supposed that under the current system, if
the state allowed the current law's deductions of credits
from production taxes and paid what was generated for
credits for activity in FY 18, the state would have a
balance of -$200 million to -$250 million. In other words,
the state would pay about $250 million more that the state
received in production taxes. He asked if he was accurate.
Mr. Stickel responded that he was correct. He furthered
that if the legislature was to appropriate to repurchase
all of the credits that became available for appropriation
in FY 18, the state would have a net negative for the total
production tax. He added that there would also be a
positive in terms of total oil revenue.
Vice-Chair Gara asked if it was because of royalties.
[Mr. Stickel nodded affirmatively].
Vice-Chair Gara referred to Representative Pruitt's
question about just looking at the North Slope generated
credits, which the state really did not change in the
previous year. In FY 18 there would be $500 million in
production taxes, companies would deduct $400 million, and
$100 million would be left. He asked how munch was
projected in FY 18 as payable North Slope credits.
Mr. Stickel reported that of the total credits available
for purchase in FY 18 of $961 million, $537 million was
North Slope and $420 million was non-North Slope. He
indicated the numbers could be found on page 80 of the
Revenue Sources Book.
2:58:18 PM
Vice-Chair Gara asked for the amount for North Slope
credits that accrued for activity in FY 18. He wonted to
know what the payable amount would be.
Mr. Stickel could provide the information later.
Representative Thompson was concerned with the state's
number being over conservative. He was in the legislature
when the state over estimated every year. In a couple of
instances, the state over estimated by 20 percent which
promted the legislature to direct the department to use
more conservative numbers. The state went from a 5 percent
or 6 percent decline in production per year to an increase
in the previous year. The state projected $38 per barrel
and the price was up closer to $50 per barrel. He was
concerned that the numbers were too conservative showing a
larger deficit. He would be watching closely.
Representative Wilson asked if the state was doing anything
regarding royalty contracts. She wondered if the state was
selling to any in-state producers.
Mr. Stickel responded that there was royalty oil being sold
to in-state refineries.
Representative Wilson had questions about the information
on slide 19. She suggested that as of January 12, 2017 the
state had 557,000 barrels per day. On the slide it showed
490,289 barrels per day. She referred to the fall forecast
and wondered what months it included.
Mr. Stickel replied that for the particular production
forecast she was referring to, DNR incorporated actual
information through June 2016 to derive the base cast
forecast and information from the plans of development in
the department's discussions with the operators. The state
added the actual information it had at the time including
the first 3 to 4 months in FY 17. At the time that the
department produced the forecast the remaining 9 months,
October-December 2016 and January-June 2017 actuals were
incorporated into the forecast.
Representative Wilson suggested that the reason they were
seeing a large difference could be because DNR was using
2016 production numbers versus 557,000 barrels per day. She
asked if actual numbers would be reflected in the spring
forecast.
Mr. Stickel responded that the spring forecast would
incorporate some additional actual information into re-
running the forecast model. He indicated that to the extent
the actual information showed an over-performance, an
increase would likely appear in the spring forecast.
Co-Chair Seaton relayed that DNR was online. He preferred
that rather than DOR explaining DNR's forecast model for
production, members should hold parts of their question for
DNR.
3:02:52 PM
Representative Wilson asked about the $100 million figure
per additional 50,000 barrels per day.
Mr. Stickel had done some analysis anticipating such a
question. He elaborated that the number the commissioner
cited for FY 18, holding all else equal, with an additional
50,000 barrels of production the state would receive about
$100,000 million in additional unrestricted revenue
(consisting of primarily production tax royalty). In terms
of total revenue, the amount would be closer to $135
million which would include the restricted royalty
component to the Permanent Fund.
Representative Grenn referred to slide 26. He noted that
there was a bullet that indicated participants provided
their percentile path. He asked about the 30 experts that
met in the fall. He wondered if there were any non-State of
Alaska participants. He asked of the list of participants
was available to the public.
Mr. Stickel responded in the positive. Some private
economic consultants participated. He thought the
department could provide the list.
Representative Grenn referred to slide 38 where it showed
the bar of tax credits in the following 10 years. He
pointed to where it read, "…assuming statutory minimum
appropriations for FY 2018+." He asked about the work
assumption and whether it was used for ease of creating the
slide or whether it was a working strategy to be used long-
term.
Mr. Stickel indicated that the intent was to set the stage
of the state's potential liability. There was statutory
language concerning a minimal appropriation which was the
amount proposed by the administration for FY 18. The actual
appropriation amount in any of the years was still up for
debate and up to the legislature.
Representative Thompson referred to page 46 where it showed
investment revenues of $18.6 million. He asked if the state
was looking at changing the state's investment of its
wealth in order to get higher investment returns for non-
Permanent Fund assets. He thought the state was not making
much profit from a significant amount of investment money
like it should.
Commissioner Hoffbeck responded in the affirmative. He
relayed that the amount was primarily being driven by the
returns on the CBR. Until the state had a fiscal plan that
used other forms of revenue besides the CBR, the state
could not invest in anything long-term due to the prudent
investor rule. As soon as a fiscal plan was in place, DOR
would have a better idea of what the long-term use of the
CBR would be and would reinvest it in a much more
aggressive fashion.
Representative Thompson was interested in the returns for
many pots of money besides the CBR and the ERA. He would
like more information about the different funds.
Mr. Stickel replied that he could provide information about
how the various funds were invested.
3:07:49 PM
Representative Ortiz referred to slide 38. He assumed that
the blue line represented increasing liability to the state
due to "unpaid credit." He asked if he was correct.
Mr. Stickel responded affirmatively.
Representative Ortiz asked Mr. Stickel to define the word
liability, without considering possible changes in current
tax credit law. He wondered if the state was actually
liable for the amount of money listed on the slide.
Commissioner Hoffbeck relayed that there was no obligation
on the part of the state to pay the credits in cash. The
credits had been earned and the entities had certificates.
They had the option of holding the certificates and using
them against future tax liabilities, or they could sell
them to someone that had current taxes that could be
written off. The third option was for the state to purchase
the credits back. However, there was no requirement for the
state to purchase them back. Ultimately, at some point the
credits would hit the books as a purchase or as a credit
taken against tax liability.
Co-Chair Seaton indicated that in statute the state was
liable to place funds into an account but did not obligate
the state to pay money out of the fund. He asked if he was
correct.
Commissioner Hoffbeck responded affirmatively.
Co-Chair Seaton clarified that slide 38 was based on the
legislature appropriating what was deposited into the fund
every year and represented the growth of liability.
Commissioner Hoffbeck answered, "That is correct."
Co-Chair Seaton asked if the slide included any of the
other projects such as Pikka, Smith Bay, or other projects
with potential huge liabilities under the current regime.
Commissioner Hoffbeck responded in the negative.
3:11:06 PM
Representative Pruitt mentioned the federal revenue
portion. He noted an increase to the state of about $1
billion. He referred to the federal revenue section in
Chapter 6 [Revenue Sources Book]. He highlighted an
increase which would cost the state about $15 million,
which he thought was a good investment. He also mentioned
an increase of more than $100 million in FY 18. He asked
about the changes and the additional monies the state would
receive in terms of the additional $1 billion initially in
FY 17. He also quarried about the additional cost to the
state of $100 million in matching funds.
Co-Chair Seaton asked if Representative Pruitt was looking
at the Revenue Sources Book or one of the slides.
Representative Pruitt was looking at the Revenue Sources
Book. However, he noted that one of the slides was
highlighted because it was part of the state's revenues.
Co-Chair Seaton wanted to pull up the slide.
Commissioner Hoffbeck pointed to slide 44.
Mr. Stickel referred to page 62 of the Revenue Sources
Book. He responded that the department would investigate
the reason for the $100 million increase in matching funds
from FY 17 to FY 18. The numbers were provided by OMB. He
addressed the question about the increase in the forecast
for federal receipts between FY 16 and FY 17 of about $1
billion. He reported that the FY 16 represented the state's
estimated federal receipts for the fiscal year. He pointed
to footnote 3 on slide 44 noting that the forecasted
federal revenue was based on the total authorization for
federal receipts. Typically, the authorization was given
for the maximum amount of federal receipts the state could
possibly receive. Traditionally, the actual revenue came in
below that amount. He thought $3.5 billion would likely be
on the high side.
Commissioner Hoffbeck reported that for Pikka and some
other fields there was an increment of credits for what DOR
projected for spending for things such as environmental
studies and some work in defining a reservoir. However, it
did not include the large dollars associated with
developing a field.
Co-Chair Seaton clarified that $600 million to $800 million
per year in some years was not a big dollar spend.
Commissioner Hoffbeck responded that it was not.
3:15:12 PM
Vice-Chair Gara referred to slide 38 and noted that the
department listed the credits the state had to pay to
companies that did not have a profit. He referred to slide
36 which he thought had a great disparity from year-to-year
on the credits that the state essentially paid to the large
companies that had a profit - the credits they were able to
deduct from their production taxes. He wondered about the
amount the profitable companies were able to deduct - so
different in FY 16, FY 17, and FY 18. It looked like the
companies only deducted about $100 million in FY 16 and
$500 million in FY 18.
Mr. Stickel explained that the blue line, the production
tax before any credits, showed an anticipation of a higher
production tax liability for the major producers largely
due to an increase in prices. As far as the credits taken
against liability, one piece was the taxable per barrel
credits. Currently, companies had liabilities to apply the
credits against. Also, there were some exploration credits
incorporated that might be worth mentioning. Some of the
explorers had transferred credits to the major producers in
the amount of about $20 million in FY 17. The department
was estimating $100 million in FY 18. He noted page 80 of
the Revenue Sources Book.
Representative Guttenberg commented that the department had
included potential new fields and opportunities and noted
the issue of heavy oil. He spoke of technological
breakthroughs that would allow the production of heavy oil
to increase. He asked if the department consider the things
he mentioned in its forecasting.
Mr. Stickel responded that it came up when the department
met with the major oil companies during the process of
producing the forecast. The department asked them about
their different opportunities and developments. There were
no significant heavy oil plans that anyone was reviewing at
the current price level. He suggested that as the
department proceeded through future forecasts it would
continue to monitor the issue.
Representative Guttenberg wondered if the department had
information regarding the amount the major producers were
spending on heavy oil research.
Mr. Stickel did not think the number was at the
department's fingertips but he would look into it.
Co-Chair Seaton queried that if the producers had expenses
on the North Slope associated with a find or development,
their expenses would be available for tax credits at the
rate of 35 percent of their expenditures.
Mr. Stickel responded that as long as a prospect was on the
lease, it would be deductible. For instance, if a company
drilled an exploration well into a heavy oil prospect, it
would be treated the same way as an exploration well into a
light oil prospect.
Co-Chair Seaton thanked the presenters from DOR for their
presentation.
3:19:43 PM
Co-Chair Seaton asked Mr. Decker to explain the revised
methodology.
PAUL DECKER, DIVISION OF OIL AND GAS, DEPARTMENT OF
NATURAL RESOURCES, reported that the restriction of
projects with expected start-up dates within a 5-year
window made a dramatic difference in the forecast relative
to former forecasts. He continued that the former forecasts
that incorporated much longer lead projects and speculative
projects tended to over predict especially in the outyears
of the forecast. Some of the work the division did showed
that the error in previous forecasts increased with each
year forward the forecast was looking. He thought forecasts
might be good in the near years. However, by including the
more speculative projects, they tended to over forecast
further out into the future. The division had concluded it
was the fundamental challenge that needed to be addressed.
Some of the changes adopted included incorporating
probabilistic statistics - understanding that there was a
P50, P10, P90 range of certainty associated with many
aspects of the forecast. The division tried its best to
define distributions and to quantify uncertainties. He
asked if there were specific questions about the forecast.
Representative Pruitt commented that the department had
been accurate in the forecasting in the spring in terms of
the average. He understood the discussion about the future.
However, he wondered how the state could have confidence in
the future, because there was an estimate of 3 percent less
than what the state saw for the average for the first 6
months. He could see how there would be a dip in the warmer
weather month. However, he did not see the state dropping
down to as low as DNR forecasted, which was done recently
in the previous December. He wondered how the forecast
shifted so drastically from the spring forecast.
Mr. Decker replied that the previous forecast had been
crafted by DOR and its consultant. The Department of
Natural Resources did not consider the previous spring's
forecast in the process of preparing the department's
forecast. There had been a methodology change between the
two forecasts. One of the large changes had been changes in
behavior of the operators. They had amended their plans,
laid down rigs, and deferred drilling in entire units that
formerly were expected to be developing throughout the
upcoming year. He agreed that seasonality played a big part
in the forecast for the fall. He relayed that the
department's methodology tended to produce a straight line
through the year of relatively uniform decline throughout
the months of any given year. He noted that the department
was looking at the chance to reconcile monthly production
as the state was climbing out of low production in the
summer into peak production in the cold months. The
forecast was more of a baseline decline through the year.
The department thought its prediction would average out
because in the summer there was less efficient compression
for injection purposes, and turnaround events and field
maintenance occurred. He noted that the deferral of
development drilling activity in several fields was also a
contributing factor to the department's prediction leveling
out by the end of the fiscal year. He reported that
turnarounds done in previous years were major maintenance
events and that the state was reaping the benefits of some
of those efficiencies and improvements. He thought the
state was still seeing an increase in production from the
former turnarounds. He reported there was a lag in the
effect of industry operations or the lack of operations or
the deferral of things. He thought the state would see a
further slow-down throughout the rest of the year.
3:27:13 PM
Representative Ortiz asked about the net effect of going
from a well-to-well forecast to a pool forecast. He asked
Mr. Decker to define "pool." He wondered if the net impact
was causing a general decrease in production.
Mr. Decker explained that pool was an individual
accumulation of oil or gas. He elaborated that a field
might contain multiple pools. An example would be the
Prudhoe Bay Unit. A unit or a field was a collection of
multiple individual reservoirs. At Prudhoe Bay there were
more than a dozen pools in the field. He furthered that
pool-by-pool meant the production data reported by the
operators to the Alaska Oil and Gas Conservation
Commission. The department took the data, grouped it by a
geological reservoir in any given field, and applied its
decline curve analysis to look at the rate of decline.
Mr., Decker continued that the department also developed a
method to understand the possible high-end projection and
low-end projection of decline rather than a single decline
percentage estimate. He emphasized that the major
difference between what DNR did and what previous entities
had done in terms of forecasting had to do with what was
viewed as appropriate to be in the forecast. The Department
of Natural Resources was careful not to count certain
activity twice. Mr. Stickel had mentioned in his testimony
that the decline curve analysis incorporated a certain
element of background development activity inherent in
running an oil field. The department wanted to be sure that
if a company indicated it would drill 7 wells in a field, a
look back at the previous 3 years of development activity
had to be completed. The look-back would show how many
wells would they have been drilling on an average year
because that number was already included in the decline
curve projection. The under development category of the
forecast was small because there were not many new wells in
existing fields coming on in the forecast period.
Co-Chair Seaton thanked the testifier. He reviewed the
agenda for the following meeting.
ADJOURNMENT
3:30:57 PM
The meeting was adjourned at 3:31 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Fall 2016 Revenue Forecast Presentation - House Finance 1.18.17.pdf |
HFIN 1/18/2017 1:30:00 PM |
DOR Fall 2016 Forecast |
| DOR Response Letter to House Finance Committee - 2.7.17.pdf |
HFIN 1/18/2017 1:30:00 PM |
DOR Response Fall Revenue Forecast HFIN |