Legislature(1995 - 1996)

01/10/1996 09:00 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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                             MINUTES                                           
                    SENATE FINANCE COMMITTEE                                   
                        January 10, 1996                                       
                            9:00 a.m.                                          
                                                                               
  TAPES                                                                        
                                                                               
  SFC-96, #1, Side 1 (000-575)                                                 
  SFC-96, #1, Side 2 (575-509)                                                 
                                                                               
  CALL TO ORDER                                                                
                                                                               
  Senator  Steve Frank,  Co-chairman, convened the  meeting at                 
  approximately 9:00 a.m.                                                      
                                                                               
  PRESENT                                                                      
                                                                               
  In addition to Co-chairman Frank, Senators Donley, Phillips,                 
  Rieger,  Sharp,  and  Zharoff  were  present.    Co-chairman                 
  Halford arrived soon after the meeting began.                                
                                                                               
  ALSO   ATTENDING:      Senator  Lyda   Green;   Wil  Condon,                 
  Commissioner,  Dept. of Revenue;  Dr. Charles Logsdon, Chief                 
  Petroleum Economist, Division of Oil and Gas Audit, Dept. of                 
  Revenue;   Mike   Greany,   Director,  Legislative   Finance                 
  Division; and aides  to committee members and  other members                 
  of the legislature.                                                          
                                                                               
  SUMMARY INFORMATION                                                          
                                                                               
                   Oil and Gas Revenue Update                                  
                             by the                                            
                      Department of Revenue                                    
                                                                               
  Upon  convening  the  meeting,  Co-chairman  Frank   invited                 
  representatives of the Department of Revenue to join members                 
  at the committee table and  commence presentation of updated                 
  oil and gas revenue projections.   WIL CONDON, Commissioner,                 
  Department  of  Revenue,  and  DR.  CHARLES  LOGSDON,  Chief                 
  Petroleum Economist, Oil and  Gas Audit Division, Department                 
  of Revenue, came before committee.                                           
                                                                               
  [A complete transcript of the  presentation was prepared and                 
  is available by contacting the Legislative Finance Division,                 
  P.  O. Box 113200, Juneau, Alaska 99811-3200, (Phone:  (907)                 
  465-3795)  or  the office  of  the Senate  Finance Committee                 
  secretary (Phone:   (907) 465-2618).  The  following minutes                 
  reflect a brief abstract from the transcript.]                               
                                                                               
  Commissioner  Condon advised  that the  department  had been                 
  asked to respond to five items:                                              
                                                                               
       1.   Why the department underforecast FY 95 revenues by                 
            approximately $200 million.                                        
                                                                               
                                                                               
       2.   Where  FY  96  revenues are  with  respect  to the                 
  forecast.                                                                    
                                                                               
       3.   What is projected for FY 97.                                       
                                                                               
       4.   How  lifting  of  the  export  ban will  fit  into                 
  revenue        forecasts.                                                    
                                                                               
       5.   Changes  in  the long-range  forecast  between the                 
  spring and          fall forecast this year.                                 
                                                                               
  As an additional item, the Commissioner told members he also                 
  wished to discuss improvements in department forecasting.                    
                                                                               
  Speaking  to the first  item, Commissioner Condon referenced                 
  the  FY  95  spring  forecast  of $1,885.0  in  unrestricted                 
  general  funds and  actual receipt  of  $2,079.7.   The $200                 
  million underforecast consists of:                                           
                                                                               
       1.   Corporate taxes.   The $140 million in  additional                 
  revenues       reflects substantially  larger payments  made                 
                 by "a few of our very large tax payers during                 
                 . . . the last six months of FY 95."                          
                                                                               
       2.   Miscellaneous Taxes.   Sixteen of the  $19 million                 
  results        from underprojection of the fish tax.                         
                                                                               
       3.   Resource Sales.    The  department  forecast  $4.5                 
  million and                                                                  
            received $20.2 million  as a result of  land sales                 
            by the Dept. of Natural Resources.                                 
                                                                               
       4.   Investment Earnings.  Investments  did better than                 
            anticipated.                                                       
                                                                               
       5.   Miscellaneous  Revenues.   The  difference results                 
  from           settlement of litigation  (SBS and  Executive                 
                 Life) the department could not have known was                 
                 going to settle.                                              
                                                                               
  Dr. Logsdon pointed  to the "Revenue Source  Book" and noted                 
  that  the  department's  base  case  forecasts  $1,881.3  in                 
  unrestricted general  funds for FY  96.  That  assumes North                 
  Slope  production  of 1.49  million  barrels  a  day and  an                 
  average price of $16.36 per barrel.  In the first six months                 
  of FY 96, North Slope production has been slightly below the                 
  base  at  1.48  million  barrels.   However,  the  price has                 
  averaged $16.61 (25 cents above the base).                                   
                                                                               
  In response to a  question from Senator Sharp asking  if the                 
  administration intends to nominate oil for export should the                 
  export ban  be lifted,  Dr. Logsdon  advised of  discussions                 
  within the Dept.  of Natural Resources.   He noted the  six-                 
                                                                               
                                                                               
  month delay between nomination and the actual taking of more                 
  in-kind barrels.                                                             
                                                                               
  Referencing  FY  97  projections,  Dr.  Logsdon  pointed  to                 
  $1,840.0 in unrestricted general  funds based on a price  of                 
  $16.40 and production  of 1.41 million  barrels a day.   The                 
  forecast assumes  that prices  will be  lower in  FY 97  and                 
  production  will  continue   to  fall.    It   also  assumes                 
  continuation  of the  embargo on  oil  from Iraq.   Non-OPEC                 
  production is  projected to  grow rapidly  in both 1996  and                 
  1997 to accommodate the incremental  increase in demand next                 
  year.   Analysts  involved  in  oil consumption  projections                 
  predict that increasing  demand, which has been  averaging 2                 
  percent  or better  for the  past two years,  will continue.                 
  Greater production from the North Sea  will put a squeeze on                 
  OPEC  and  exert downward  pressure on  price.   It  is thus                 
  expected  to  come  down  from  where  it is  today  to  the                 
  projected base case for FY 97.                                               
                                                                               
  In response to a question from Co-chairman Frank regarding a                 
  slowing  of  the  projected 5%  decline  in  production, Dr.                 
  Logsdon explained that decline will be somewhat mitigated by                 
  production from Milne Point.  While longer-term decline from                 
  Prudhoe Bay is projected at  10 percent, other projects will                 
  hold the  rate to  5 or  6 percent  through the  end of  the                 
  century.                                                                     
                                                                               
  Responding to a  question from Senator Zharoff,  Dr. Logsdon                 
  advised that the  forecast does not include  revenues from a                 
  major gas sale since the window for development and start up                 
  would  be  "somewhere  between 2005  and  2010  .  . .  ."                   
  Commissioner Condon  noted that  it would  be surprising  if                 
  future taxes and  royalties from gas would  exceed "a couple                 
  of hundred million dollars a year . . . ."                                   
                                                                               
  Dr. Logsdon  voiced his  belief that export  of Alaskan  oil                 
  could commence by the start  of FY 97 should the  export ban                 
  be lifted by Congress.  Figured at 35 cents a barrel, export                 
  would  result in  additional  revenues of  approximately $40                 
  million.                                                                     
                                                                               
  Speaking  to  differences   between  the  spring  and   fall                 
  forecast, Dr. Logsdon noted that, over  the longer term, the                 
  department believes  that non-oil  and gas  revenue will  be                 
  "significantly higher .  . . than we forecast  last spring."                 
  Offsets will occur, however, in oil and gas revenues.  While                 
  the  department  price forecast  has  not changed  from last                 
  spring,  the  volume  forecast  has.   Changes  result  from                 
  "mistaken use of a computer forecasting model  . . . ."  The                 
  department double counted the  effect of future  investments                 
  in the field and used those volumes for the spring forecast.                 
  That accounts  for the  difference between  spring and  fall                 
  volume numbers.                                                              
  Discussion  followed  among  members  and  Dr.  Logsdon  and                 
                                                                               
                                                                               
  Commissioner Condon regarding the importance of and need for                 
  long-term forecasting.   Dr. Logsdon suggested that,  in the                 
  future, the department should  provide a long-range forecast                 
  in the fall and a short-term update in the spring.                           
                                                                               
  Co-chairman  Halford inquired concerning the source of funds                 
  used in review of department forecasting methodology and the                 
  status  of  the contract  for  review.   Commissioner Condon                 
  explained that he asked the Department  of Law for help when                 
  he  determined  there was  need  to  initiate  review.    He                 
  thereafter  "made use  of their  generous offer  to get  the                 
  review  done."   He  advised that  he did  not "look  at the                 
  contract  or  the  contractual  arrangements."   Co-chairman                 
  Halford expressed  concern that the  source of funds  was an                 
  appropriation for oil and gas  litigation.  The Commissioner                 
  stressed that work done by the Division of Oil and Gas Audit                 
  is related to dispute resolution.  The forecast is "just one                 
  aspect  of the use  of the analytical  models . . .  ."  Co-                 
  chairman Halford  advised that  the question  would also  be                 
  asked of the Dept. of Law.                                                   
                                                                               
  ADJOURNMENT                                                                  
                                                                               
  The meeting was adjourned at approximately 9:55 a.m.                         
                                                                               

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