Legislature(2019 - 2020)ADAMS ROOM 519
04/16/2019 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Spring 2019 Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 25 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 16, 2019
1:30 p.m.
1:30:15 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:30 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Tammie Wilson, Co-Chair
Representative Jennifer Johnston, Vice-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Andy Josephson
Representative Gary Knopp
Representative Bart LeBon
Representative Kelly Merrick
Representative Colleen Sullivan-Leonard
Representative Cathy Tilton
MEMBERS ABSENT
None
ALSO PRESENT
Bruce Tangeman, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Ed King, Chief Economist,
Office of Management and Budget; Colleen Glover, Tax
Director, Department of Revenue.
PRESENT VIA TELECONFERENCE
None
SUMMARY
SB 25 EXTEND BOARD OF DENTAL EXAMINERS
SB 25 was SCHEDULED but not HEARD.
PRESENTATION: SPRING 2019 REVENUE FORECAST
Co-Chair Foster reviewed the meeting agenda.
Co-Chair Wilson relayed the agenda for the afternoon
meeting.
^PRESENTATION: SPRING 2019 REVENUE FORECAST
1:30:40 PM
BRUCE TANGEMAN, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation: "Spring 2019
Revenue Forecast Update." He wanted to have Dan Stickel and
Ed King to the table for back-up.
Commissioner Tangeman turned to slide 2: "Overview." The
presentation was an update to the fall forecast. The fall
forecast was more robust and took several months to put
together. He noted that the publication put out by the
Department of Revenue (DOR) each year [The Revenue Sources
Book] was a good resource for legislators to refer to. The
presentation would not be as substantial as the
department's fall forecast presentation. He would touch on
the revenue forecast and the changes to it. The
presentation would also cover the ANS oil price forecast,
the oil production forecast, the North Slope lease
expenditures forecast, and the oil credits forecast and tax
credit bonding update.
Commissioner Tangeman continued that in the fall forecast
for FY 19 the department was forecasting just under $68 per
barrel. In the spring forecast which was released on March
15, 2019, the department was estimating just under $69 per
barrel. As of the previous Friday, the actual year-to-date
price of oil was almost $70 per barrel - a month later the
price of oil was out-pacing the spring forecast by about $1
per barrel. In the current price range $1 equated to about
$70 million of the state's bottom line. He thought it
reflected an uptick in oil prices. Although the state was
not going to rely on oil prices to fix its financial woes,
it was positive to see the increase. He reported that the
average for the month of March was about $68 per barrel and
the average for April at the current mid-point of the month
was about $71.50 per barrel. The state was seeing some
healthier prices for oil as it closed out the fiscal year.
He hoped the price would stay at current levels.
Commissioner Tangeman indicated that on the production
side, the state was at about 100,000 barrels per day. The
fall forecast reflected 526 and the spring forecast was
511. The state was about 2.5 percent under pace compared to
the spring forecast.
Commissioner Tangeman advanced to slide 4 which compared
the Fall 2018 forecast to the Spring 2019 forecast. He
pointed to the unrestricted general fund (UGF) petroleum
revenue at the top without significant changes. The second
section showed the UGF non-petroleum revenue. The total UGF
revenue for FY 19 in the third section reflected a deficit
of $90 million. He reminded members that the price was
about $1 per barrel over the forecast which almost closed
the gap. The department was forecasting a $40 million
surplus for 2020. The last section at the bottom of the
slide was the Permanent Fund transfer that the department
pulled out of UGF to show as a separate line item. It had
not changed much from fall to spring.
Commissioner Tangeman would have Mr. Stickel walk the
committee through some of the details of the changes from
the previous slide.
1:35:12 PM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, explained that slide 5
walked through some of the key changes from the fall
forecast to the spring forecast for FY 19 and FY 20. He
conveyed that for FY 19 the department reduced the UGF
revenue forecast by $89 million. The main component of the
reduction was related to the oil and gas production tax.
Higher oil prices would have increased the forecast by $25
million but was more than offset by some impacts that moved
production tax in the other direction. He offered that the
state had lower than expected cash payments from refiled
tax returns related to some amended terra filings for the
Trans Alaskan pipeline. He referred to them as Federal
Energy Regulatory Commission (FERC) payments. The state had
unexpected refunds for the calendar year 2018 and some
other company-specific items. Altogether they reduced
production tax by about $105 million for a net impact of an
$80 million reduction. The state also had lower than
expected income tax payments in the last quarter of 2018
which reduced the state's non-petroleum corporate forecast
by $15 million. The state also had some miscellaneous
revenues that were reduced by $2 million and an increase to
the royalty forecast of $8 million based on the higher oil
price forecast. Adding up the 4 items he highlighted
equaled $89 million in reductions for FY 19.
Mr. Stickel suggested that looking at FY 20 the department
increased the forecast by $39 million. Production tax was
the largest piece increasing by $45 million. Royalties were
increased by $19 million. Both were offset by non-petroleum
corporate income tax and some other miscellaneous
non-petroleum revenues that pulled the revenue forecast in
the other direction to get to the net $39 million increase.
Representative Knopp asked for clarification about the
revenue flow and whether it was based on the fiscal year or
calendar year. Commissioner Tangeman clarified that the
forecast was on a fiscal year basis.
Vice-Chair Johnston noted that in Commissioner Tangeman's
opening remarks he mentioned $71.50 per barrel and the
ratio of $70 million for every $1 - which filled the
deficit gap of $89 million. She was looking at the previous
slide. She wondered if his statement held true looking at
the extra revenue from higher prices.
Commissioner Tangeman explained that the $71.50 per barrel
price was the average in April thus far. Year-to-date the
average was just about $70 per barrel. He furthered that
the current forecast being reviewed was based on a forecast
of $69 per barrel. The forecast was a month old and had
already increased by about $1. He suggested that if oil
prices stayed steady at $70 the state would realize about
$70 million more. The state was showing a deficit of about
$89 million. It would make up a big difference.
Representative Carpenter was looking at the UGF non-
petroleum revenue on slide 4, the projection was negative
numbers continuing out to FY 28. He thought it reflected a
continuation of a recession of some sort that was less than
economic growth in the non-petroleum economy. He asked if
he was accurate.
Mr. Stickel responded that the reduction in the non-
petroleum revenue forecast primarily had to do with an
expectation of lower mineral prices. The department had
reduced the non-petroleum corporate income tax forecast.
The primary weakness was in the mining sector. The state
had also reduced its forecast for mining license tax which
was the severance tax on the mining industry. He reiterated
that there was not a projection of lower activity in the
industry. It was simply lower profitability due to the
price forecast used. He would be turning the presentation
over to Mr. King to address the following few slides on the
oil price forecast.
1:40:47 PM
ED KING, CHIEF ECONOMIST, OFFICE OF MANAGEMENT AND BUDGET,
reviewed slide 7: "Price Forecast Summary." The slide
showed a time series of the price forecast for the
following 10 years starting in the current fiscal year and
moving out to FY 28. He highlighted that only the first two
years showed a change which reflected the fact that when
DOR was putting the spring forecast together there was a
recognition that current prices were exceeding the fall
forecast. The department used the actual futures market
price for the rest of FY 19 and a rounded number for FY 20.
He concurred with the commissioner that since the March
15th release of the spring forecast, prices had been
consistently higher. Oil prices were closing just under $72
per barrel at present. As the department moved forward and
prices continued to increase the FY 19 number increased. It
was difficult to tell whether the factors currently pushing
up prices would hold and encourage a change in the
following fiscal year or 10 years from now. It did not make
sense to change the longer-term forecasts.
Co-Chair Wilson asked how long the price increase had to
stay static before the forecast was adjusted again.
Commissioner Tangeman responded that the department only
put out the forecast twice per year, once in the fall and
again in the spring.
Co-Chair Wilson asked if it was normal to only do the
forecast for 2 years. Commissioner Tangeman replied that
the department made a change to FY 20 because the numbers
he was seeing in the range between $6 to $70 range were
very accurate. The department was using half a year of
actual oil prices. Dropping down to $64 did not seem
realistic which was why the department brought the amount
up to $66 and continued out with the previous fall
forecast. The department was not seeing anything to justify
making changes in years 3 through 10.
Representative LeBon returned to slide 4. He wondered if
the UGF non-petroleum revenue numbers included the
elimination of the petroleum property tax share.
Commissioner Tangeman responded in the negative. The
forecast did not take into account any legislation in play.
Vice-Chair Ortiz asked about the reasons for the bump in
the month.
Mr. King responded that what had been happening in the
previous 30 days had much to do with what was going on in
Venezuela. Venezuela was experiencing civil unrest, certain
sanctions were applied, and there were some power outages
that disrupted production of about 500,000 barrels per day.
Currently, there were also sanctions on Iranian production.
He reported that 6 countries had waivers. The waivers
expired in the following month and there was some
uncertainty about whether they would be extended. The
uncertainty was driving some of the risk of price as well.
Also, there was civil unrest in Libya threatening oil
production, although it had not caused any disruptions thus
far. The risk of disruption was driving the price up. The
same thing to a lesser extent was happening in Nigeria. He
continued that with Saudi Arabia and Russia both committing
to cut production to hold prices up in the $70 target
range, it had helped significantly with the price being
above the $60 to $65 range that the market would otherwise
support. The geopolitical factors and the intentional
supply cuts were pushing up on prices.
Mr. King noted some disruption in the mid-continent with
shale production. There were some problems with cargo
deliveries being rejected because the sulfur content was
too high. Also, some capital investors were having a
difficult time finding capital. However, now that the
prices had been up higher, he starting to see the rig count
increase. Presently, over the current week he had seen a
flat line. Over the previous 2 weeks he had seen a steady
increase in the price. It was starting to stabilize. As
soon as the uncertainties were resolved, he would expect
the prices to drop back down again. The department would
not want what was going on in the current environment to
influence the department's projections in the following
year or 10 years into the future.
1:46:39 PM
Representative Knopp asked if the department followed
things such as Rampco going public or the Chevron and
Anadarko merger. He wondered if fluctuations were included
in the department projections. Mr. King responded that he
monitored the news. However, the department did not have a
price model to inject changes into. They were factors he
was paying attention to and trying to understand. However,
in the long-term the department focused on supply and
demand. He noted that in the near-term price forecasting
the focus was more on geopolitics, mergers and
acquisitions, and access to capital. He paid attention to
certain things that were not actually modeled.
Vice-Chair Ortiz asked if Commissioner Tangeman would be
talking about the production forecast. Commissioner
Tangeman indicated they only touched on the issue on one
slide. It was mostly a Department of Natural Resources
(DNR) issue.
Vice-Chair Ortiz asked if global warming would interfere
with the production season and production. Mr. King
indicated that the legacy fields such as Prudhoe Bay and
Kuparuk did not use ice roads. The ice road season would
not impact their production as much as it would for
exploration activity. He continued that whenever there was
not a permanent road for moving out West or East, a short
ice road season would mean a shorter production window. In
other words, it would take longer to get facilities into
production which meant it would cost more. In terms of
production inside Prudhoe Bay, it was true that the
production facilities worked more efficiently when it was
colder. However, it did not necessarily mean there would be
a reduction in production. It meant that it would take more
effort to produce the same amount of oil.
Mr. King had already talked to all of the points on
slide 8.
1:50:23 PM
Mr. King moved to slide 9: "Potential Macroeconomic and
Global Drivers of Price Change." One of the large factors
that people were paying attention to was global demand and
the long-term projections of global demand. There were
concerns around global trade. He suggested there would be a
call for a change in demand forecast. It was currently
holding prices down slightly. If trade conversations
resolved, he would expect that prices would increase as the
demand forecast increased. There were also many
conversations going on about whether the current growth
pattern was sustainable globally and whether it would
flatten out or correct. If it did, he expected prices would
fall in line. China and other trade partners and what was
going on in the European Region were very important to the
future direction of prices.
Mr. King brought up that new fields were being discovered
everyday as exploration activities occurred. As new fields
came online it would increase supply and push down on
price. It was a matter of timing on the new resources as
far as what they would do to the price. Also, technology
was always changing. New technology that made production
more efficient and less costly would likely push down on
prices. The same was true with demand. If the need for
fuels was reduced, demand would be reduced, and prices
would likely fall. There were several things the department
was paying attention to in the long-term that suggested it
was unlikely the price would return to triple digits. He
also noted that the geopolitical factors were more
temporary in nature, and the world was seeing many of them
presently. When the issues were resolved he expected prices
to return to a fundamental level.
Mr. King turned to slide 10. He reported that the slide was
an illustration of the Energy Information Agency (EIA)
forecast relative to DOR's. The black dashed line in the
center represented DOR's forecast. He pointed out that they
were in inflation adjusted terms which was why they looked
much flatter than they would if the Revenue Sources Book
numbers were inserted on a plot. He highlighted that the
DOR forecast tracked fairly closely to the EIA's forecast.
He also pointed out the wide range around what the EIA
expected. All of the factors he talked about and mostly the
geopolitical factors could push up on prices very quickly.
as the market had to adjust there were situations where the
prices could correct very severely in the other direction.
There was a wide range of prices. He would not interpret
the chart as EIA suggested that prices would run up to $120
and grow from there. Rather, the chart was saying that
there would be volatility. The price would bounce around
within the range.
Co-Chair Wilson asked what EIA stood for.
Mr. King responded that it stood for the Energy Information
Agency. It was part of the administration of the federal
government that tracked energy.
Mr. King turned to the chart on slide 11: "Petroleum
Analyst Consensus Price Forecasts." It compared DOR's
revenue forecast to what other analysts were saying. He
pointed out that the department's forecast was more-or-less
in line with the midrange of forecasts of the other
analysists at investment firms. There was a similar range
of ideas in the near-term but not as wide of a range as
what the EIA's long-term forecast suggested. He reminded
members that prices were unpredictable. He could not
determine what the prices would be but could explain what
was going on and the range of possible outcomes the
legislature could plan around.
Co-Chair Wilson asked about the "Real Brent." She wondered
if it had to do with actual prices.
Mr. King responded that the term "real" for economists
meant adjusted for inflation.
Mr. King moved to slide 12: "Summary of Price Forecasts."
The slide reflected all of the forecasts lined up. He
pointed to the red line representing the New York Market
Exchange (NYMEX). He explained that NYMEX was what people
in the market were actually paying for the right for the
option to buy at a future price. The Department of
Revenue's forecast tracked the red line for 2 years into
the future using those numbers as the forecast. He
highlighted that the department's forecast was slightly
higher than NYMEX which was normal. He elaborated that when
commodity traders were purchasing options they were buying
in some risks and opportunity costs. The long-term future
prices were always lower with the NYMEX than analysists
expected. They were not necessarily predictive of what
future prices would be, rather, they were reflective of
what people were willing to pay for future delivery.
Co-Chair Wilson asked what NYMEX stood for.
Mr. King indicated that it stood for New York Market
Exchange.
1:56:22 PM
Vice-Chair Ortiz queried about long-term forecasting and
whether the department factored in the growth of
alternative energies and them having an impact on long-term
demand for oil.
Mr. King responded that in the past when the department had
its forecasting sessions many items were discussed. The
department brought in experts to talk about what future
demands might look like and how things were changing in the
market place. Participants took the information and made
judgements about how those factors would influence future
prices. The department also looked at the forecasts
generated by other entities. Several things were taken into
consideration.
Representative Josephson asked why the department compared
its price to Brent crude as opposed to West Texas
Intermediate (WTI) or something else. He wondered if had
something to do with the type of oil being produced.
Mr. King explained that it had to do with logistics
surrounding crude oil. He explained that when a producer
was putting oil onto a tanker and bringing it into a
refinery, it was going to a refinery in Anacortes or Los
Angeles. The proper way to value the crude was to look at
what was being paid for other crudes coming into the same
refineries. Brent crudes were coming in on ships that were
competing with or augmenting ANS crude in the refineries.
He continued that because there were no pipelines crossing
the Rocky Mountains none of the WTI crudes entered into
those refineries except occasionally by rail car. The two
markets were bifurcated. The pricing was the opportunity
cost of bringing a barrel of oil from Alaska.
Representative Josephson was surprised that the Brent oil
field area in the middle of the North Sea was much closer
to Northern Europe than the North Slope was to Long Beach
or Washington State.
Mr. King replied that there were dozens of marker crudes in
the world. However, the two largest marker crudes were
Brent and WTI. He furthered that when a contract was signed
for delivery, the contract might say Brent minus $1 or WTI
plus $2. The benchmark crudes were how they were pricing
delivery.
2:00:07 PM
Commissioner Tangeman continued to slide 14 - the one slide
in the presentation on the oil production forecast. He
indicated the Department of Natural Resources was
responsible for the forecast. Slide 14: "10-Year Production
Forecast: Changes since Fall 2018 Revenue Sources Book"
showed 2 years of actual productions and were above 500,000
barrels of oil per day. Production was fairly stable. The
orange line represented the fall forecast. The blue line
depicted the spring forecast. It accounted for the slight
dip he had mentioned earlier from 526,000 to 511,000 as the
department's forecast number for FY 19. The state was
mostly back on track for the out years for production
compared to the fall forecast. He highlighted that from
FY 17 to FY 28 the state was at about 500,000 barrels of
oil per day. He thought several years of flat forecasting
was positive. He would never bank on a stable revenue
stream for the State of Alaska because of the state's
dependency on oil production and price. However, having the
Earnings Reserve Account (ERA) draw was nice and stable
equal to about $3 billion in the following year increasing
to about $3.5 billion within 10 years. Price was also
fairly stable with the potential to increase slightly. He
did not think there were wide sidebars on the price, high
or low. The production forecast seemed stable as well. He
suggested that as far as stable revenues went, it was the
best picture the department had seen in a while.
Co-Chair Wilson commented that in order to remain flat new
oil would have to continue to flow into Alaska's pipes. She
did not think it was only about current production. It also
encompassed new projects as they came online.
Commissioner Tangeman agreed. He suggested there was a
significant year-over-year decrease of 6 to 8 percent. He
believed that when the state flattened out and there was a
couple of years of increases, it was attributed to the
legacy fields. Producers were investing more and getting
more for less. He noted the legacy fields were still
declining. However, new production was coming on to fill
the void. There might be a bump in upcoming years when the
new fields came online.
Commissioner Tangeman turned the presentation over to Mr.
Stickel to discuss the lease expenditure forecast.
2:03:24 PM
Mr. Stickel reviewed the chart on slide 16: "Lease
Expenditures Forecast: North Slope Capital Expenditures."
He explained that lease expenditures were important for 2
reasons. First, they were a part of the production tax
calculation. Monies that companies spent in their oil and
gas operations directly impacted the revenue forecast.
Second, they were an important indicator of investment and
future production. The slide showed the state's forecast
for North Slope capital spending in both the fall and
spring forecasts. The state had about $1.7 billion in North
Slope capital spending in FY 18 which was expected to
increase slightly in FY 19 and increase significantly in
FY 20 and FY 21 to over $3 billion per year. It represented
investment in new fields which was exactly what was needed
to bring the new oil into the pipe as Co-Chair Wilson had
suggested. The state was seeing major spending beginning in
FY 20 on fields like Moose's Tooth, Pikka, Willow, and
other new developments. The slight increase from fall to
spring had to do with some increased understanding of what
the cost of the new projects would be. There was some
uncertainty about what it would take to bring the new
production online based on conversations with the operators
and review of public information and information on tax
returns. The department increased the forecast slightly
from fall to spring.
Representative Josephson referred to the $3.1 billion to
$3.3 billion expenditure in FY 21. He wondered if the state
would pay $0.35 for every dollar spent in the form of
deducted taxes.
Mr. Stickel replied that the expenditures would be deducted
against the production tax to the extent that the company
was paying at the net tax rate. They would receive a 35
percent benefit. It was not always the case depending on
what company was making the expenditure. The net impact
would likely be less than a full 35 percent.
Representative Josephson asked, without the deduction, if
they would be paying a flat tax of 35 percent assuming net
rather than gross.
Mr. Stickel replied that the statutory net tax rate before
deductions and credits was 35 percent.
Co-Chair Wilson asked how much of an investment a company
would have to make before deductions could be applied
against the 35 percent tax.
2:06:44 PM
Commissioner Tangeman responded that he had heard it would
take an investment of about $5 billion to get an oil field
similar to Pikka or Willow to production. If the fields
were being developed by a company already producing, there
would be a different tax implication. For new investments,
the monies were being invested up front and would not
realize the true impact of the ax system until a field was
brought into production. There were many moving parts in
the tax structure that made it difficult to provide a
number based on a question in a setting like the current
hearing. The system was much more complicated.
Co-Chair Wilson wanted the public to understand that there
was a significant amount of risk that accompanied an
investment. A company had to go beyond production to the
point of making a profit before receiving a tax credit for
the 35 percent. She emphasized the risks companies were
taking by making investments. The tax structure had changed
such that the state no longer gave the tax credits it used
to provide for the initial $5 billion start-up costs.
Commissioner Tangeman agreed with Co-Chair Wilson. He added
that he was also seeing that the further away from Prudhoe
Bay and the trunk line, mostly to the West and the East, it
would get more and more expensive to explore and develop.
The fields such as Pikka, Willow, and the Greater Moose's
Tooth have confirmed the resource. However, the farther
away the location was, the more expensive it was to
develop.
Co-Chair Wilson asked if additional pipeline was a portion
of the investment made by new companies establishing new
fields.
Commissioner Tangeman responded that it was a huge portion
of investment. Not only did a company have to reach the
site for the development phase, but the product also had to
be brought back to the main facilities and trunk lines.
Representative Josephson asked if a producer like Conoco
Phillips could offset their costs to the East and in
Prudhoe Bay before a field in the West came into
production. In other words, because they had profits and
were in the black, they would be able to enjoy the
deductions in the Eastern fields immediately and in the
same year. He asked if he was correct.
Commissioner Tangeman replied, "Yes, that's correct. He had
already noted that it was very different for a company that
was already developing fields, earning a profit, and
reinvesting its profits to develop more oil further away
from the infrastructure. A new entrant would not have any
other production to offset the costs.
Co-Chair Wilson thought more investment was a good thing
for Alaska. Commissioner Tangeman responded in the
affirmative. He reiterated that it was getting more
expensive to develop further from the infrastructure.
Co-Chair Wilson thought everyone wanted to see monies
invested in Alaska rather than somewhere else.
2:10:51 PM
Mr. Stickel had a comment to add to the previous
discussion. The information presented on slide 16 and slide
17 represented allowable lease expenditures against the
production tax calculation. There were certain costs, some
of which were significant that were not included in the
numbers. For instance, lease acquisition costs and
financing charges were a major cost for a new company
coming in and doing business that were not represented in
the numbers.
Mr. Stickel continued to slide 17: "Lease Expenditures
Forecast: North Slope Operating Expenditures." The slide
looked at the state's forecast of operating expenditures on
the North Slope. In the fall and spring forecasts the
department was seeing fairly stable operating expenditures
of about $2.5 billion per year for the existing fields.
There was a slight increase at the FY 23 to FY 24
timeframe. It represented the additional cost of operations
for the new fields the state expected to come online.
Vice-Chair Ortiz returned to the issue of taxes. He asked
if the effective tax rate had been 8 percent rather than 11
percent. He wondered if there was a presentation that
provided the information.
Mr. Stickel responded that the department presented in the
other body some analysis that showed that for FY 20 the
estimated effective tax rate for North Slope oil was about
8 percent. It represented the department's revenue forecast
to the state divided by the production tax value in that
particular year.
Vice-Chair Ortiz asked about the fluctuation of the tax
rate per company.
Mr. Stickel suggested that the tax rate would fluctuate.
Some companies were small producers and were able to offset
most or all of their tax liabilities. Some would pay zero
and some might pay 8 percent. He clarified that 8 percent
was the North Slope average.
2:14:02 PM
Mr. Stickel scrolled to the chart on slide 18: "North Slope
Transportation Costs Forecast." The slide examined
transportation costs, the costs of getting oil from the
fields on the North slope to market. The Trans Alaska
pipeline tariff was the largest portion of the number.
There was also marine transportation costs and feeder
pipeline costs. He highlighted the drop from FY 18 to FY 19
from $9.5 per barrel to $8.40 per barrel in transportation
costs. The primary reason for the drop was because there
was an agreement on a new methodology for calculating the
Trans Alaska Pipeline tariff implemented in FY 19. The
transportation costs between the fall and spring forecasts
had not changed much.
Co-Chair Wilson asked where the tariff started for a
company with a smaller line going into the larger pipeline.
She wondered if the cost for the shorter line would be at
the company's expense.
Mr. Stickel responded that generally the cost for the
pipeline within the unit would be a gathering line and
would be deductible as a lease expenditure. The line
outside the unit and connecting into the rest of the
transportation line was called a feeder pipeline. The
feeder pipeline costs were going to be included in the
transportation cost number.
Co-Chair Wilson asked for further clarification about
transportation costs attached to oil. Mr. Stickel responded
that generally for new fields the transportation cost was
higher. Prudhoe Bay had no feeder pipeline costs. Oil was
placed directly into the Trans Alaska Pipeline. The further
away from Prudhoe Bay, the more significant the
transportation costs were to get it to the line.
Co-Chair Wilson asked if a company was required to share a
feeder line. Mr. Stickel replied that her question was
beyond his area of expertise. Commissioner Tangeman
suggested that the question should be directed to DNR.
Co-Chair Wilson was unsure whether there would be an
advantage and costs would go down. She was curious about
the potential for recouping costs. Commissioner Tangeman
assumed there were agreements put into place with DNR on
how feeder pipelines were handled. Co-Chair Wilson asked,
"Through the lease agreement, most likely?" Commissioner
Tangeman responded affirmatively.
Representative Josephson thought a unified tax system for
each tax payer meant that when a legacy field was largely
paid for and additional investments were made outside of
that field, they could apply their new investments against
the profits derived from the established and paid for
fields. He wondered if it was a consequence of having a
unified tax system.
Mr. Stickel suggested that to say a field was largely paid
for was a debatable point. It was true that a company had a
slope-wide production tax calculation for all of its oil
and gas investment on the North Slope. Each company's
specific production tax value would be based on the value
of all of their oil sold, the value of their capital
expenditures, and their operating expenditures pooled to
make the calculation.
Commissioner Tangeman indicated that the department's tax
director would comment on the last few slides.
2:18:52 PM
COLLEEN GLOVER, TAX DIRECTOR, DEPARTMENT OF REVENUE, began
her portion of the presentation with slide 20 which showed
the tax credits available for repurchase by the state. She
clarified that it was the forecasted payoff assuming the
state did not go forward with the bonding. The chart showed
that by FY 24 all of them would be paid off. She reported
that for FY 19 there had been about $100 million that was
paid off leaving a current balance of about $740 million.
There were no new oil and gas tax credits that were
available anymore. The program ended with the passage of
HB 111 [Legislation passed in 2017 - Short Title: Oil and
Gas Production Tax; Payments; Credits].
Co-Chair Wilson asked what the statutory payment amount was
for the current year. Commissioner Tangeman thought the
amount was $170 million for FY 20. Co-Chair Wilson asked if
it would be stretched out a little longer if the
legislature did not pay that amount. Commissioner Tangeman
responded in the affirmative.
Ms. Glover turned to slide 21 which provided the current
status of the tax credit bonding bill - HB 331 that passed
in the prior year. There was open litigation concerning the
bill and the department was on stand-by until the
litigation was resolved. The official spring forecast
assumed the bonding passed and all of the credits were paid
off in FY 21.
Commissioner Tangeman added that the plaintiff appealed the
case to the Supreme Court in the previous February. The
department was estimating another 12 months before the
issue was resolved. In the following year, he hoped to be
prepared to hit the market to sell the bonds soon after the
litigation was completed. The department was not selling
the bonds presently because of the risk of selling them
while a legal issue was in a dispute. It was prudent to
wait. He hoped there would be a positive resolution and the
state would be able to bond for the balance.
Co-Chair Foster asked if the commissioner had a sense about
how much of the $740 million was expected to fall under the
bonding. He wondered about the percentage. Commissioner
Tangeman answered that the state would bond for the entire
balance. If there was an appropriation made for the current
year, the department would bond for the balance.
2:21:58 PM
Co-Chair Foster commented that not all of the oil companies
would choose to participate. He wondered if the companies
had expressed enthusiasm about the bonding. He was hoping
for an approximate percentage. Commissioner Tangeman did
not know. The credits had been available for purchase on
the open market, but there was no interest thus far. The
department was proceeding on the assumption that the
remaining amount would be bonded.
Co-Chair Foster understood that the full amount would be
bonded and that not all oil companies would decide not to
participate. Instead of getting one lump sum they would get
payments over a series of years. His second question was
regarding the Supreme Court. It was his understanding that
there was some expectation that they might decide the case
by early October of the current year. He asked if that
information was accurate.
Commissioner Tangeman explained that DOR had asked for an
expedited ruling. He was uncertain if the court would
comply with the state's request. He was not optimistic, but
the department would be prepared. In response to the
representative's question, a company could choose either
path. He thought companies realized that if they wanted to
take the hair cut of close to 10 percent, it was their
choice - but they would be paid immediately under the
bonds. Alternatively, they could sit in the cue and wait
subject to appropriation.
Representative Josephson asked how much was appropriated in
the February 13, 2019 budget for the payment of the cash
bonds. Co-Chair Wilson interjected that the amount was $170
million in the governor's original budget paid out through
other funds. Commissioner Tangeman answered that the
statutory minimum was $170 million for FY 20 paid with
Alaska Industrial Development and Export Authority (AIDEA)
receipts.
Representative Josephson thought there had been an
additional amount. Commissioner Tangeman responded that
there was an addition of $84 million for FY 19 from AIDEA
receipts. The total was $254 million.
Co-Chair Wilson noted there was also an additional $27
million that was left in the operating budget for the first
payment in anticipation that the bonding would go forward.
Commissioner Tangeman responded, "On the debt service,
correct."
2:25:36 PM
Representative Josephson suggested that because the bond
package was not authorized or suspended pending litigation,
the administration believed that the legislature
underfunded in FY 19 in terms of the requirement noted in
the footnote on the slide. He suggested that the $84
million was a catch-up amount.
Commissioner Tangeman responded in the affirmative. He
elaborated that the previous administration and the
previous legislature appropriated $100 million as a
backstop because everyone assumed the bonding issue would
take affect the previous fall. Someone sued and currently
things were delayed. He agreed it was probably appropriate
for addressing the issue in the prior year. The amount of
$84 million was a recognition that only $100 million was
appropriated. He conveyed that $184 million would have been
the number. It was a catch-up amount as Representative
Josephson had suspected.
Co-Chair Wilson noted that there was $70 million currently
in the budget. She wondered how the money would be paid
out. Ms. Glover explained that the state was still working
against credits that were earned in FY 15 and applied for
in FY 16. The state had been paying off a percentage of the
remaining amount. The division was going back to FY 15
credits and taking the $70 million and allocated just as
the division did for the $100 million. Anyone that had
applied for tax credits more recently was in the cue for a
later date.
Co-Chair Wilson thought that the money would not be used
for someone willing to take the haircut. It had to do with
when the amount came in and when the projects were
certified in terms of the state owing money. Ms. Glover
responded that they were based on outstanding credits
earned in FY 15. Co-Chair Wilson wanted to make sure her
memory was correct.
Representative Josephson suspected that the bonding
agencies thought Alaska was off the rails. Commissioner
Tangeman thought Representative Josephson's reference was
an appropriate one. He reported that when the loans were
being made in 2013, 2014, and 2015 payments were going out
in whole year-after-year. At the time the state was in a
much different revenue situation. The lenders were under
the assumption that whole payments would continue to be
made. The amount was vetoed and reduced to the statutory
minimum, and lenders were trying to figure out what was
happening. He thought it was clearer what the situation was
at present. There had been a couple of years where only the
minimum was paid out and a bond proposal idea was caught up
in litigation. There was really nothing else to do. It was
a waiting game.
Representative LeBon thought the lenders were keeping a
close eye on the situation and waiting. Commissioner
Tangeman agreed.
Co-Chair Wilson commented that the negative consequences of
having the credits outstanding was that what could
potentially be occurring on the North Slope was not
happening because companies did not have access to funding.
She asked if she was accurate.
Commissioner Tangeman thought she was accurate. He believed
everyone was looking closely at how and where they would
invest their capital. Things that occurred in the prior
year most likely affected their decision-making going
forward.
Vice-Chair Johnston mentioned that third parties were
gravely affected from the state not honoring its
agreements, even though statute allowed the state to do
what it was doing. She thought it had a huge impact on
investment in Alaska.
2:30:55 PM
Representative Carpenter asked to return to macroeconomics
on slide 9. He asked what factors were being considered
when talking about the national economy. He wondered if the
national economy was staying stagnant. He thought there was
a deficit problem within the national government. As the
state grappled with the issue over the following 10 years,
he wondered how the solutions would impact prices of oil if
there was a decrease in federal spending over the long-
term. Commissioner Tangeman responded that he would have
Mr. King responded.
Mr. King relayed that the department did not have an
explicit model to use to turn knobs on the economy in order
to see how things flowed through it. The department had a
prototype of a model but had not gone live with it. The
reality was that all of the different factors created
uncertainty which, in turn, created volatility. The
volatility parameter was included in the department's model
to understand how far prices could move. The department did
not attempt to say that there would be a war that would
raise the price. The department might say at some point in
the future an event was likely to happen. The uncertainty
parameters drove the range of possible outcomes. He thought
that if deficit spending continued and resulted in a
reduction in travel for vacation and other things, it would
potentially drive the price down. All factors played into
what happened in Alaska mostly through oil prices.
Co-Chair Wilson indicated the committee would be recessing
the meeting until April 17, 2019 at 9:00 AM.
ADJOURNMENT
2:35:25 PM
The meeting was adjourned at 2:35 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Spring Forecast Slides.HFIN.pdf |
HFIN 4/16/2019 1:30:00 PM |
HFIN - DOR Spring Revenue Forecast |