Legislature(2021 - 2022)DAVIS 106
03/17/2022 11:30 AM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Oil and Gas Update; Global Markets, Geopolitics, High Prices, and Other Influences on State Revenue and Production | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 17, 2022
11:37 a.m.
MEMBERS PRESENT
Representative Ivy Spohnholz, Chair
Representative Adam Wool, Vice Chair
Representative Andy Josephson
Representative Calvin Schrage
Representative Andi Story
Representative Mike Prax
MEMBERS ABSENT
Representative David Eastman
COMMITTEE CALENDAR
PRESENTATION(S): OIL AND GAS UPDATE; GLOBAL MARKETS~
GEOPOLITICS~ HIGH PRICES~ AND OTHER INFLUENCES ON STATE REVENUE
AND PRODUCTION
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAN STICKEL, Chief Economist
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint, titled "Spring 2022
Forecast and High Oil Prices Presentation."
CORRI FEIGE, Commissioner
Department of Natural Resources
Juneau, Alaska
POSITION STATEMENT: Provided introductory remarks during the
oil and gas update presentation.
JOHN CROWTHER, Deputy Commissioner
Department of Land and Natural Resources
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"Oil & Gas: Global Markets and Geopolitics and Their Influence
on State Production."
LARRY PERSILY, Oil and Gas Analyst
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"Hope of 'normal' oil and gas markets was premature - for
multiple reasons, and it's getting a lot more complicated."
ACTION NARRATIVE
11:37:06 AM
CHAIR IVY SPOHNHOLZ called the House Special Committee on Ways
and Means meeting to order at 11:37 a.m. Representatives
Schrage, Prax, and Spohnholz were present at the call to order.
Representatives Story, Josephson, and Wool arrived as the
meeting was in progress.
^PRESENTATION(S): Oil and Gas Update; Global Markets,
Geopolitics, High prices, and Other Influences on State Revenue
and Production
PRESENTATION(S): Oil and Gas Update; Global Markets,
Geopolitics, High prices, and Other Influences on State Revenue
and Production
11:38:52 AM
CHAIR SPOHNHOLZ announced that the only order of business would
be the Oil and Gas Update; Global Markets, Geopolitics, High
prices, and Other Influences on State Revenue and Production
presentation.
11:39:42 AM
DAN STICKEL, Chief Economist, Department of Revenue, provided a
PowerPoint presentation, titled "Spring 2022 Forecast and High
Oil Prices Presentation" [hard copy included in committee
packet]. He went through the agenda and moved on to slide 4 and
discussed the key changes between the Fall 2021 and the current
Spring 2022 forecasts. Oil prices increased by almost $16 per
barrel for fiscal year 2022 (FY 22) and $30 for FY 23. Those
reflect tightened supply and demand fundamentals in the market
and the impacts of the recent uncertainty concerning the Russian
invasion of Ukraine. The total unrestricted revenue forecast
increased by $1.2 billion for FY 22 and by $2.4 billion for FY
23, which was driven by the increased oil price outlook. Total
state revenue, slide 5, comes from four different sources,
including investments, federal receipts, petroleum, and other
non-petroleum revenues. Within those four categories there are
four levels of distinction as far as restrictions in the budget.
Unrestricted General Funds can be appropriated for any purpose.
Designated general funds (DGF) are technically available for
appropriation but are customarily appropriated for some specific
purposes. Other restricted revenues are revenues that are
specifically dedicated and cannot be appropriated in any way,
for example, the constitutionally dedicated portion of revenues
that goes towards the permanent fund dividend (PFD). All
federal revenues have provisions around how those must be used.
He said FY 21 holds the record for the largest total state
revenue in state history at $29.8 billion. It is forecasted
that FY 22 will have just under $16 billion and just over $16
billion for FY 23. A near 30 percent return on the permanent
fund recorded for FY 21, as well as one-time stimulus money from
the federal government, explains why FY 21 was substantially
higher than any other year.
11:49:24 AM
MR. STICKEL explained to Representative Prax that the designated
petroleum revenue represents primarily the transfer to the
permanent fund above and beyond the constitutionally mandated 25
percent. The other restricted revenue for petroleum revenue
reflects settlements to the constitutional budget reserve (CBR)
fund as well as the constitutional dedication of royalties for
the permanent fund and school fund. The final piece of
petroleum revenue under federal revenue represents shared
revenues from the federal government for bonuses, rents, and
royalties in the National Petroleum Reserve.
11:50:35 AM
MR. STICKEL mentioned that there are four ways the state gets
revenue from oil and gas: property tax, corporate income tax,
production tax, and royalties. The property tax is levied on
all oil and gas property produced in the state and tends to be a
stable revenue source generating a little over $100 million per
year to the state; over $400 million is generated by
municipalities from oil and gas property. The corporate income
tax is levied by the state on qualifying corporations doing
business in the state. This applies to C corporations and is a
tax on profits. The Oil and Gas Production Tax is expected to
be the largest source of Oil and Gas Revenue for the
Unrestricted General Fund. This is the state's severance tax on
oil and gas; it's a net-profits tax with a gross-minimum tax
floor and should exceed $2.5 billion of revenue in FY 23.
Royalties are expected to bring in $1.3 billion this fiscal year
and $1.4 billion next fiscal year.
11:53:14 AM
MR. STICKEL continued to address oil prices, through historical
graphs using nominal daily prices. Throughout the 1990s, the
price of oil was relatively low compared to more recent prices.
From 2004-2008 oil prices were increasing until collapsing
during the 2008 recession. The shale oil boom in 2014 resolved
supply and demand imbalances which led to an oversupplied market
and caused a decrease in prices. Prices increased from then
until the pandemic hit. In response to Representative Prax, he
mentioned that there is a higher long-term price. Volatility is
high and expected to increase but it is difficult to predict.
12:00:38 PM
CHAIR SPOHNHOLZ highlighted the present-day volatility in the
price of oil.
12:01:46 PM
MR. STICKEL showed slide 9, which shows a more recent graph with
oil prices from 2020 to present day. He highlighted the
infamous low price of negative $2.77 on April 20, 2020.
Following the price collapse, supply and demand responded to low
oil prices, the Organization of Petroleum Exporting Countries
(OPEC) agreed to production cuts. Demand rebounded where demand
outstripped supply which resulted in higher oil prices.
12:04:20 PM
MR. STICKEL moved to slide 10, which shows an even more recent
graph with oil prices from Feb 15, 2020, to March 14, 2022. The
Russian invasion of Ukraine has led to a lot of uncertainty in
the market and restrictions on Russian crude oil. Oil prices
peaked at $125.44 per barrel on March 8, 2022. Forecast
finalizations occurred shortly after the peak.
12:05:45 PM
MR. STICKEL showed through the U.S. Energy Information
Administration (EIA) Short-Term Energy Outlook from March 2022
that markets were in balance before the COVID-19 pandemic hit,
then demand plummeted. Supply was slower to respond to than
demand due to the pandemic shutdowns. Since the recession,
supply has been slower to respond to rising demand and there
have been several quarters where reserves were drawn. These
federal energy outlooks are generated monthly through EIA.
12:08:05 PM
MR. STICKEL moved to slide 12, which shows changes to the long-
term price forecast which expects $16 per barrel for FY 22 and
$30 per barrel for FY 23. These numbers are presented in the
context of high volatility.
12:10:09 PM
MR. STICKEL directed attention to slide 14 and explained the Oil
Volatility Index (OVIX), which uses a statistical formula that
uses futures market prices for oil and options market prices to
come up with a statistical measure for the range of future
prices for the next month, and the likelihood of various
pricing. Supply and geopolitical issues have been historical
drivers of volatility. The biggest spikes in volatility were at
the start of the COVID-19 pandemic and at each of the subsequent
COVID-19 variants. The bottom line is that there is a period of
heightened volatility around oil prices.
12:15:27 PM
MR. STICKEL discussed that slide 15 looks at volatility based on
options market expectations and gives the 10th, 25th, 75th, and
90th percentiles. For example, in FY 22, the 10th percentile of
prices would be about $81 per barrel and the 90th percentile
would be about $110 per barrel. For FY 23 the range would be
$63 dollars in the 10th percentile and $163 dollars in the 90th
percentile. There is a 20 percent chance that oil prices in FY
23 could average less than $63 or more than $163 dollars per
barrel; therefore, there is high volatility and uncertainty in
the market at present. In response to Representative Spohnholz,
he said the average price of oil would need to be about $114 to
reach the forecast for Spring 2022. There is a 50 percent
likelihood that the forecast would be reached, but it is
difficult to quantify. In response to Representative Prax, he
said the department has considered locking in a price through
the futures market; hedging would require a statutory change
through the legislature. Slide 16 shows that the official
forecast was $101 dollars per barrel, which results in just
under $5 billion in Unrestricted General Fund Revenue before the
Permanent Fund transfer. Any increase or decrease could result
in an $80-85 million change in the unrestricted revenue for FY
23.
12:24:03 PM
CORRI FEIGE, Commissioner, Department of Natural Resources,
provided introductory remarks and mentioned an energy conference
she attended in which there were discussions on recent
geopolitical influences on the volatility of the oil market.
She pointed to underinvestment of the oil and gas industry
globally as a cause of tight supply in the last 5-10 years.
12:27:00 PM
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), delivered a PowerPoint presentation, titled
"Oil & Gas: Global Markets and Geopolitics and Their Influence
on State Production" [hard copy included in committee packet].
Regional markets may not reflect the global market but can be
impacted by it. Slide 2 shows the 10 largest producers and
share of world oil production in 2020. Slide 3 shows the net
petroleum trade in the United States. As the U.S. has become a
crude oil producer, trade has decreased. Because of refining
capacity in the U.S., petroleum products have been increasingly
exported.
12:31:05 PM
MR. CROWTHER said that slide 4 shows pricing indexes and metrics
that are used for different crude oil qualities in the U.S.
Slide 5 shows U.S. domestic oil production, which had an
increase in production over the last 10 years. Slide 5 shows a
graph from the U.S. Energy Information Administration. In 2010,
there was a significant import of oil from Russia; this
dramatically dropped to an absolute low in 2014. There has been
an increase since then in Russian oil imports driven by various
factors. Even as there have been significant changes in oil
price, Russian imports have not been influenced by price.
12:36:18 PM
COMMISSIONER FEIGE offered clarification by noting that imports
from Russian crude required a blend stock due to the grade
needed for the refining process. When Texas refineries came
online, Russian crude was offset because shale oil tends to be
light, and the Russian crude imported at the time had the same
character.
12:37:14 PM
MR. CROWTHER resumed on slide 7 and defined spare capacity as
the ability to bring production up quickly and keep that
production level for a protracted period, usually 90 days.
Spare capacity takes time and money to build and maintain. It
takes spare capacity to ramp up production quickly. Companies
typically maintain little or no spare capacity. They work to
produce the most they can economically produce and, together
with state law and regulations, support the long-term health and
productivity of the reservoir in the process. Globally, most
spare capacity is maintained by nation states for strategic
reasons. Spare capacity is different from prospectivity.
Alaska continues to have significant potential and
prospectivity.
12:38:33 PM
MR. CROWTHER described on slide 8 that producers are generally
known to be producing all resources considered economic at an
optimal pace. Higher oil prices make marginally economic
barrels feasible to produce. Ramping up production may be
possible on different timelines with considerations like new
wells in existing fields, repairing broken wells, and processing
improvements to de-bottleneck facilities that enable production.
Permitting timelines impact project timelines. Medium to long-
term levers include permitting approval timelines, legislation
under debate, and funding. The commissioner has advocated for
financing projects in Alaska. Historically, projects have taken
from a few years to decades to come online after discovery,
depending on numerous factors such as commercial alignment,
market and economic conditions, funding, and permitting.
MR. CROWTHER, in response to Representative Spohnholz, referred
to the Willow and Pikka projects as two near-term large
projects. Both projects are at advanced stages and have unique
factors affecting their progress to full development. There is
an active miscellaneous land use permit application from Oil
Search Alaska Santos, the project developer for Pikka.
Transportation issues will be dealt with among Oil Search Alaska
and ConocoPhillips.
12:44:09 PM
LARRY PERSILY, Oil and Gas Analyst, provided a PowerPoint
presentation, titled "Hope of 'normal' oil and gas markets was
premature - for multiple reasons, -and it's getting a lot more
complicated" [hard copy included in committee packet]. Mr.
Persily summarized slide 2 and said that before Russia attacked
Ukraine, prices were increasing due to production quotas.
Russia's production capacity is short. In January, OPEC Plus
was falling short of its targets by 600,000 barrels a day, which
drove up prices before the war. It turns out that last year's
so-called "missing barrels" were consumed.
12:47:04 PM
MR. PERSILY, responding to Representative Spohnholz, said that
Canada can accelerate production faster than Alaska.
Geopolitics plays a factor in pricing and production. He
referenced a quote from Helima Croft, head of global commodity
strategy, who said, "The White House has embarked on the oil
equivalent of a scavenger hunt."
12:52:20 PM
MR. PERSILY said that Russia used to export about 40 percent of
their production. It is unclear what their exports will be now
that the war in Ukraine is underway. Exports to the U.S.
averaged 200,000 barrels a day last year.
12:53:21 PM
MR. PERSILY showed slide 12 which details geographic refinery
constraints such as a lack of pipeline capacity to move U.S.
crude oil to the West Coast, and limitations of shipping crude
from the Gulf Coast to the West Coast. Roughly half of the West
Coast refinery input comes from imports from Canada, Iraq, Saudi
Arabia, and Brazil. The U.S. Gulf Coast refinery capacity is
tuned for heavier crude rather than lighter U.S. shale crude,
which is often exported. Hawai'i gets its oil from Russia.
Self-imposed sanctions have been adopted by ship owners,
insurers, and refiners. Meanwhile, Russia is looking towards
China and India as the best options for buying cargo. For a
refinery to retool to process different types of oil would take
extra time and money.
12:56:11 PM
MR. PERSILY said that Russia previously supplied as much as 40
percent of Europe's natural gas. Coal is making a comeback in
Germany and China. Europe is more committed to solving climate
change than the United States, but there is still an imperative
for energy. Analysts call coal a "safety valve" to meet Europe
and Asia's power needs. Germany decided to build its first
liquified natural gas (LNG) terminal, which will be completed in
two years. Spain has spare capacity at its import terminals but
lacks pipeline capacity to move more gas to central Europe.
1:00:00 PM
MR. PERSILY said that in the United States, due to low oil
prices in the past, there have been more than 600 bankruptcies
totaling more than $321 billion in debt. The United States is
now the largest LNG exporter in the world and became thus in
just six years after constructing seven LNG ports by converting
unused import terminals into export terminals. In response to
Representative Spohnholz, he mentioned that high prices are
referred to as "demand destruction." For example, if gas is too
expensive, people may drive less. This accelerates the debate
between relying on Russia to increase supply versus swapping for
renewables. He mentioned that most analysts agree that oil
prices are likely to exist between $90-100 based on the current
situation.
1:02:20 PM
CHAIR SPOHNHOLZ further noted the volatility of oil prices and
provided closing remarks.
1:04:58 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
1:05 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DNR Presentation on Global Markets and State Production, 3.17.22.pdf |
HW&M 3/17/2022 11:30:00 AM |
|
| Larry Persily Presentation for W&M, 3.17.22.pdf |
HW&M 3/17/2022 11:30:00 AM |
|
| DOR Presentation on Spring Forecast and Oil Volatility 3.17.22.pdf |
HW&M 3/17/2022 11:30:00 AM |