Legislature(1999 - 2000)

01/11/2000 09:15 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                                                                                
GENERAL SUBJECT(S):                                                                                                             
Revenue Projections - Overview of oil revenue                                                                                   
And other revenue sources for FY'00 and FY'01                                                                                   
Commissioner Wilson Condon, Department of Revenue                                                                               
Larry Persily, Deputy Commissioner, Department of Revenue                                                                       
Chuck Logsdon, Chief Petroleum Economist, Department of Revenue                                                                 
                                                                                                                                
The following overview was taken in log note format.  Tapes and                                                                 
handouts will be on file with the Senate Finance Committee through the                                                          
21st Legislative Session, contact 465-4935.  After the 21st                                                                     
Legislative session they will be available through the Legislative                                                              
Library at 465-3808.                                                                                                            
                                                                                                                                
Time Meeting Convened:  Approximately 9:15 am                                                                                   
                                                                                                                                
Tape(s):  SFC-00 #1 Side A and Side B                                                                                           
                                                                                                                                
                                                                                                                                
PRESENT:                                                                                                                        
Senator Adams                                                                                                                   
Senator Parnell                                                                                                                 
Senator P. Kelly                                                                                                                
Senator Torgerson                                                                                                               
Senator Green                                                                                                                   
Senator Donley                                                                                                                  
Senator Phillips                                                                                                                
Senator Leman                                                                                                                   
                                                                                                                                
Senator Wilken                                                                                                                  
                                                                                                                                
                                                                                                                                
ALSO PRESENT:                                                                                                                   
SENATOR DRUE PEARCE                                                                                                             
SENATOR KIM ELTON                                                                                                               
REPRESENATIVE JERRY SANDERS                                                                                                     
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE                                                                              
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE                                                                       
CHUCK LOGSDON, CHIEF PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE                                                                 
                                                                                                                                
                                                                                                                                
LOG                                                                                                                             
SPEAKER                                                                                                                         
DISCUSSION                                                                                                                      
                                                                                                                                
                                                                                                                                
Tape SF00 - #1 Side A                                                                                                           
0                                                                                                                               
CO-CHAIR PARNELL                                                                                                                
Introduction (small tape delay)                                                                                                 
                                                                                                                                
                                                                                                                                
"What a difference a year makes."                                                                                               
An advisory vote was held Sept. 14, 1999,                                                                                       
asking voters if they wanted to use a                                                                                           
portion of permanent fund earnings to                                                                                           
finance government. "They sent a strong,                                                                                        
loud message that that's not going to                                                                                           
happen."                                                                                                                        
The Committee will be spending a lot of                                                                                         
time on the budget this session. The                                                                                            
governor has proposed an operating budget                                                                                       
that increases spending by approximately                                                                                        
$120 million over the current fiscal year                                                                                       
plus increases to labor contracts still in                                                                                      
negotiation. The total could be closer to a                                                                                     
$200 million increase. "To me that's cause                                                                                      
for concern."                                                                                                                   
From what I've been hearing "in the lunch                                                                                       
rooms and neighborhoods of Southcentral                                                                                         
Alaska," a huge budget increase has                                                                                             
generated more public cynicism and even                                                                                         
contempt as to whether or not the governor                                                                                      
and the legislature has gotten the message.                                                                                     
We're going to continue to work toward                                                                                          
reducing government spending and we are                                                                                         
going to do it in a way that focuses on                                                                                         
results for that spending.                                                                                                      
Our budget subcommittees are going to begin                                                                                     
this week on each agency budget.                                                                                                
In November I sent a memo to the budget                                                                                         
subcommittee chairs asking them to begin                                                                                        
working with the departments on writing                                                                                         
measures to allow us to determine whether                                                                                       
the agencies are accomplishing the missions                                                                                     
we are funding.                                                                                                                 
I anticipate a more aggressive schedule                                                                                         
this year establish missions and measures                                                                                       
so that we get to the budget numbers much                                                                                       
sooner.                                                                                                                         
Allocations for each agency will be                                                                                             
released sooner than last year. The offices                                                                                     
have had more time to work on missions and                                                                                      
measures during the interim.                                                                                                    
59                                                                                                                              
                                                                                                                                
Introduction of Senate Finance Committee                                                                                        
Secretary staff: Mindy Rowland, Senate                                                                                          
Finance Committee Secretary; Jamie Foley,                                                                                       
Asst. Senate Finance Committee Secretary;                                                                                       
Bree Simpson, Senate Finance Committee                                                                                          
Page.                                                                                                                           
68                                                                                                                              
                                                                                                                                
In every budget we deal with revenues and                                                                                       
spending. Today we'll begin with revenue.                                                                                       
77                                                                                                                              
SENATOR DONLEY                                                                                                                  
Last year we were presented with                                                                                                
approximately $100 million in new spending                                                                                      
by the governor and we tried to work toward                                                                                     
our target of a $40 million reduction to                                                                                        
help close the fiscal gap. We are in a                                                                                          
similar situation this year.                                                                                                    
While the House was successful at reducing                                                                                      
the governor's request, but only by                                                                                             
eliminating revenue sharing and municipal                                                                                       
assistance. The overall operating budget                                                                                        
for state agencies was actually increased.                                                                                      
That left the Senate Finance Committee in a                                                                                     
difficult situation trying to reduce the                                                                                        
operating budget. It is unwise to simply                                                                                        
eliminate municipal assistance since that                                                                                       
is a direct impact upon local property                                                                                          
taxes and small communities across the                                                                                          
state where this assistance may be their                                                                                        
only source of revenue.                                                                                                         
I was pleased with the budget the Senate                                                                                        
Finance Committee produced. It restored                                                                                         
some of the revenue sharing and municipal                                                                                       
assistance and still made reductions in                                                                                         
state spending consistent with the                                                                                              
Majority's five-year budget plan.                                                                                               
Unfortunately, after the Conference                                                                                             
Committee finished, the final version                                                                                           
didn't look like that.                                                                                                          
Co-Chair Torgerson and I had an                                                                                                 
understanding at the beginning of the                                                                                           
capital budget discussions last year that                                                                                       
Alaska Industrial Development and Export                                                                                        
Authority (AIDEA) monies would be counted                                                                                       
as general funds. However, in the budget                                                                                        
submitted from the House, the approximately                                                                                     
$19 million AIDEA funds were not treated as                                                                                     
general funds "which I don't think is true.                                                                                     
I don't think that's an honest way to                                                                                           
budget because that's real dollars that                                                                                         
could be used to reduce the fiscal gap."                                                                                        
The House then increased spending by $19                                                                                        
million, which created a bigger problem.                                                                                        
Therefore, I think we should reach an                                                                                           
agreement now with the other body as to                                                                                         
what funds will be treated as general funds                                                                                     
and which will not. The discrepancy last                                                                                        
year jeopardized our ability to continue                                                                                        
the five-year plan, meet out targets and be                                                                                     
successful in reducing overall state                                                                                            
spending, which is an important component                                                                                       
in closing the fiscal gap.                                                                                                      
We are again faced with another increase                                                                                        
from the executive branch at a time where                                                                                       
we need to be working toward reductions and                                                                                     
closing the fiscal gap.                                                                                                         
I'm hoping there will be a different sense                                                                                      
from the other body. Maybe we should reach                                                                                      
out to them early so they don't cut out                                                                                         
municipal assistance and increase the state                                                                                     
operating budget.                                                                                                               
140                                                                                                                             
SENATOR ADAMS                                                                                                                   
I don't think we should judge the requested                                                                                     
increase of $100 million until we have a                                                                                        
chance to look at it. We should look at the                                                                                     
budget program by program, item by item and                                                                                     
the affects on Alaskans.                                                                                                        
In looking at last year's budget, we see                                                                                        
that sometimes in making these drastic                                                                                          
cuts, lawsuits arise because programs such                                                                                      
as public safety and rural and urban                                                                                            
schools are not adequately funded. "We                                                                                          
should fund what is rightly so in the                                                                                           
constitution."                                                                                                                  
I realize we are faced with an approximate                                                                                      
$100 million deficit but we should look at                                                                                      
those programs and services that we need to                                                                                     
fund and that help jobs and families in the                                                                                     
State Of Alaska.                                                                                                                
In the past, instead of creating new jobs,                                                                                      
we have transferred jobs from Juneau and                                                                                        
rural Alaska into Anchorage. I think that                                                                                       
is wrong. If you want to cut, let's cut                                                                                         
those 1000 state jobs that have increased                                                                                       
in the last five years before reducing the                                                                                      
governor's proposed budget.                                                                                                     
170                                                                                                                             
SENATOR P. KELLY                                                                                                                
We are in the final year of the five-year                                                                                       
plan and I think we should carry out the                                                                                        
plan according to the rules laid out five                                                                                       
years ago. However, we should not include                                                                                       
the capital budget in the spending                                                                                              
reduction plan although we do need to be                                                                                        
disciplined in the capital budget.                                                                                              
The public wants us to cut government, not                                                                                      
cut growth in the state. There is a                                                                                             
difference between increasing bureaucracy                                                                                       
and addressing building needs.                                                                                                  
For the state to grow, we need to continue                                                                                      
to build roads and bridges, fix schools                                                                                         
etc.                                                                                                                            
If capital needs aren't met, we end up                                                                                          
doing bond debts later, which increases the                                                                                     
operating budget.                                                                                                               
I recommend that we look at the capital and                                                                                     
operating budgets separate.                                                                                                     
We spend almost the entire capital budget                                                                                       
matching federal funds. The state is                                                                                            
growing only as the federal government                                                                                          
wants rather than letting the state decide                                                                                      
how the state will grow.                                                                                                        
203                                                                                                                             
CO-CHAIR PARNELL                                                                                                                
Introduce Senator Drue Pearce, Senator Kim                                                                                      
Elton and Representative Jerry Sanders                                                                                          
220                                                                                                                             
CHUCK LOGSDON,                                                                                                                  
CHIEF PETROLEUM                                                                                                                 
ECONOMIST, DIVISION                                                                                                             
OF OIL AND GAS                                                                                                                  
AUDIT, DEPARTMENT                                                                                                               
OF REVENUE                                                                                                                      
Handout: Alaska State Revenue Outlook                                                                                           
Department of Revenue Presentation to                                                                                           
Senate Finance January 11, 2000                                                                                                 
                                                                                                                                
And                                                                                                                             
                                                                                                                                
Fall 1999 Revenue Sources Book, Alaska                                                                                          
Department of Revenue, Oil and Gas Audit                                                                                        
Division, December 8, 1999                                                                                                      
227                                                                                                                             
                                                                                                                                
Department of Revenue has restructured the                                                                                      
revenue sources book to try to refocus and                                                                                      
look at the total revenue picture.                                                                                              
234                                                                                                                             
                                                                                                                                
Handout: The Total Revenue Picture                                                                                              
                                                                                                                                
Our revenue picture has dramatically                                                                                            
changed with the reduction of oil                                                                                               
production on the North Slope. Other                                                                                            
sources of revenue have become more                                                                                             
important in the total revenue picture in                                                                                       
providing the money that the state has to                                                                                       
spend.                                                                                                                          
Investment revenues today is the largest                                                                                        
source on income followed by federal                                                                                            
revenue and then oil revenues.                                                                                                  
                                                                                                                                
Handout: The Total Revenue Picture FY99                                                                                         
(pie chart)                                                                                                                     
                                                                                                                                
The white-colored wedges are restricted                                                                                         
revenue (Investment Earnings Restricted,                                                                                        
41%, $2.267 billion; NoTUFF Restricted,                                                                                         
36%, $2.350 billion and Oil Restricted, 3%,                                                                                     
$0.208 billion.)                                                                                                                
The green-colored wedges are the                                                                                                
unrestricted revenue (Oil Unrestricted,                                                                                         
14%, $0.913 billion; NoTUFF Unrestricted,                                                                                       
5%, $0.332 billion and Investment Earnings                                                                                      
Unrestricted 1%, $0.047 billion.)                                                                                               
In typical presentations on the revenue                                                                                         
situation, the focus has been on the                                                                                            
unrestricted portions of the revenue                                                                                            
because that is what effectively represents                                                                                     
the "general purpose money" that is                                                                                             
available for appropriation.                                                                                                    
Note that the restricted revenue is                                                                                             
seventy-seven percent of the monies coming                                                                                      
in. Of that, the investment earnings is the                                                                                     
biggest chunk of restricted revenues. The                                                                                       
biggest portion of the restricted                                                                                               
investment earnings revenue is the                                                                                              
permanent fund.                                                                                                                 
252                                                                                                                             
                                                                                                                                
Handout: Total State Revenue, Actual FY1999                                                                                     
and Projected 2000-2001 (table)                                                                                                 
                                                                                                                                
We've broken the "unrestricted revenue"                                                                                         
amounts into "Oil Revenue", "Non-Oil                                                                                            
Revenue" and Investment Earnings". The                                                                                          
investment earnings in this case are those                                                                                      
that are earned on general fund balances                                                                                        
that the Department of Revenue manages.                                                                                         
We'll get a nice bump up because oil                                                                                            
revenues will be up from last year.                                                                                             
We're going to get a nice "bump up" on the                                                                                      
1999 general purpose revenues mostly                                                                                            
because oil revenues are going to be a lot                                                                                      
higher this year. So far in this fiscal                                                                                         
year, we've averaged almost $21 per barrel.                                                                                     
In FY99 oil prices averaged just over $12                                                                                       
per barrel.                                                                                                                     
262                                                                                                                             
                                                                                                                                
Note that year 2000 restricted money has a                                                                                      
big drop in investment earnings. This is                                                                                        
based on the permanent fund earnings and                                                                                        
there was a big drop in the investment                                                                                          
market in the third quarter of 1999. I                                                                                          
expect that the permanent fund will                                                                                             
probably revise those numbers upwards.                                                                                          
271                                                                                                                             
CO-CHAIR PARNELL                                                                                                                
Does the "Unrestricted: Non-Oil Revenue"                                                                                        
include corporation general income tax?                                                                                         
                                                                                                                                
MR. LOGSDON                                                                                                                     
Correct.                                                                                                                        
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
The projected corporation general income                                                                                        
tax shown on page 17 of the source book                                                                                         
predicts reduced revenue of about one                                                                                           
million dollars a year. Is that an economic                                                                                     
indicator that we should be concerned                                                                                           
about? Or is something else going on?                                                                                           
280                                                                                                                             
MR. LOGSDON                                                                                                                     
I can't give you an indication of whether                                                                                       
that's driven by economic activity.                                                                                             
                                                                                                                                
LARRY PERSILY,                                                                                                                  
DEPUTY                                                                                                                          
COMMISSIONER,                                                                                                                   
DEPARTMENT OF                                                                                                                   
REVENUE                                                                                                                         
                                                                                                                                
                                                                                                                                
Some is based on economic activity and also                                                                                     
the increased use of "S" corporations,                                                                                          
which do not pay corporate income tax in                                                                                        
Alaska.                                                                                                                         
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
I was concerned that was an indicator of a                                                                                      
declining economy.                                                                                                              
                                                                                                                                
MR. PERSILY                                                                                                                     
I believe it is more a matter of "S"                                                                                            
corporations rather than taxpaying "C"                                                                                          
corporations.                                                                                                                   
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
But aren't the largest taxpaying                                                                                                
corporations the larger corporations that                                                                                       
don't qualify for "S" status.                                                                                                   
                                                                                                                                
MR. PERSILY                                                                                                                     
They are and that is why there is just a                                                                                        
small decrease.                                                                                                                 
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
Thank you.                                                                                                                      
                                                                                                                                
MR. LOGSDON                                                                                                                     
The department is going to continue to                                                                                          
refine our forecast document and we have                                                                                        
been cooperating with the Division of                                                                                           
Legislative Finance and Office of                                                                                               
Management and Budget and the Division of                                                                                       
Finance to make our revenue estimates and                                                                                       
projections more understandable and                                                                                             
reconcilable. We have a number of agencies                                                                                      
that account for state revenues.                                                                                                
I won't address the permanent fund since                                                                                        
the corporation will be making a separate                                                                                       
presentation to the Committee. The Office                                                                                       
of Management and Budget can tell you about                                                                                     
the federal revenue situation.                                                                                                  
I'm going to therefore focus on oil                                                                                             
revenues, which continues to provide over                                                                                       
70 percent of our general-purpose spendable                                                                                     
money.                                                                                                                          
                                                                                                                                
Handout: Alaska Oil Prices                                                                                                      
                                                                                                                                
I guess the real question on everyone's                                                                                         
mind is how high will Alaska's oil prices                                                                                       
go and how long will they stay above $20                                                                                        
per barrel.                                                                                                                     
307                                                                                                                             
                                                                                                                                
In December 1999 the average was $24.63 per                                                                                     
barrel. That is about the highest monthly                                                                                       
average since the Persian Gulf War.                                                                                             
Oil prices are very healthy right now and                                                                                       
there are fundamental reasons for that,                                                                                         
mostly because OPEC dropped production and                                                                                      
Non-OPEC production has not increases. We                                                                                       
also have a healthy economy and it is                                                                                           
winter.                                                                                                                         
Watch OPEC because they are key. ANS has                                                                                        
averaged nearly $21 per barrel so far this                                                                                      
year.                                                                                                                           
                                                                                                                                
Handout: ANS Spot Price (West Coast                                                                                             
Delivery)                                                                                                                       
                                                                                                                                
If you look at the track record of oil                                                                                          
prices, you'll notice extreme volatility.                                                                                       
There are lots of peaks and valleys since                                                                                       
January 1986. In fact, we've just come out                                                                                      
of one of the deepest valleys since ANS                                                                                         
started production. Volatility is what oil                                                                                      
prices are all about.                                                                                                           
                                                                                                                                
Handout: ANS Spot Prices and 60-month                                                                                           
Moving Average (West Coast Delivery)                                                                                            
                                                                                                                                
If you look at the data in a different way,                                                                                     
you'll see there is a tendency for the                                                                                          
average to be relatively stable. The bold                                                                                       
line shown on the graph is a calculated 60-                                                                                     
month moving average of oil prices.                                                                                             
                                                                                                                                
Handout: ANS West Coast Price and Futures                                                                                       
Market for ANS                                                                                                                  
                                                                                                                                
These are futures market prices for early                                                                                       
October and early December. Whenever the                                                                                        
price of oil is below the long-run                                                                                              
relatively flat curve, the futures contract                                                                                     
for a delivery scheduled a few months into                                                                                      
the future will approach the long-run                                                                                           
average.                                                                                                                        
In the case of October 1999 futures, when                                                                                       
cash prices were below the long-term                                                                                            
averages, the futures contract prices go up                                                                                     
and begin to approach the long-term                                                                                             
average.                                                                                                                        
In the case of the December 1999 futures                                                                                        
curve, where prices are considerably above                                                                                      
the $17 per barrel number, oil could only                                                                                       
be sold for about $17 per barrel instead of                                                                                     
the current cash price.                                                                                                         
The point is that the futures market tends                                                                                      
to look at the world with a longer                                                                                              
perspective than the next month's estimated                                                                                     
price. The question is how fast the price                                                                                       
will approach the long-run average.                                                                                             
                                                                                                                                
Handout: Historical Futures Market Prices                                                                                       
for ANS                                                                                                                         
                                                                                                                                
This chart illustrates that the futures                                                                                         
market follows the same pattern for several                                                                                     
years. The belief of experts is that if oil                                                                                     
prices rise above $17 per barrel, the                                                                                           
prices will go down again at one point. The                                                                                     
only question is, when and how fast.                                                                                            
358                                                                                                                             
                                                                                                                                
Handout: Futures Based Market Prices for                                                                                        
ANS                                                                                                                             
                                                                                                                                
This illustrates the point that even when                                                                                       
oil prices in December 1999 were two                                                                                            
dollars per barrel above October 1999                                                                                           
prices; the futures market averages the                                                                                         
same long-range price of $17 per barrel.                                                                                        
                                                                                                                                
Handout: Cumulative Average ANS Oil Price,                                                                                      
Moving Average and Confidence Intervals                                                                                         
                                                                                                                                
This is the cumulative average of ANS oil                                                                                       
price that illustrates several different                                                                                        
perspectives. We have already looked at a                                                                                       
five-year average, and this chart compares                                                                                      
the findings to twelve, twenty-four,                                                                                            
thirty-six and forty-eight month averages.                                                                                      
                                                                                                                                
Handout: ANS Oil Prices - The Department of                                                                                     
Revenue Forecast (Long Term)                                                                                                    
                                                                                                                                
The department has begun to take a longer-                                                                                      
term viewpoint of five and ten years from                                                                                       
now.                                                                                                                            
Unless there is major structural change in                                                                                      
the world economy, oil prices should                                                                                            
average $17 to $18 per barrel.                                                                                                  
The fundamental reason for this is that                                                                                         
over time, market forces will continue to                                                                                       
provide production and consumption                                                                                              
incentives that tend to guide oil prices to                                                                                     
that average.                                                                                                                   
OPEC is currently pulling oil off the                                                                                           
market to encourage higher prices and as                                                                                        
prices rise, they will begin to put more                                                                                        
oil on the market. Non-OPEC producers will                                                                                      
explore and develop more oil to add to the                                                                                      
market.                                                                                                                         
Consumers react to higher oil prices as                                                                                         
well by reducing consumption.                                                                                                   
Higher fuel prices can be a drag on the                                                                                         
community. Higher oil prices mean higher                                                                                        
energy prices.                                                                                                                  
400                                                                                                                             
SENATOR P. KELLY                                                                                                                
When you refer to "long-term" do you mean                                                                                       
five years?                                                                                                                     
402                                                                                                                             
MR. LOGSDON                                                                                                                     
Yes. Although I've actually used ten years                                                                                      
to calculate some of the projections.                                                                                           
                                                                                                                                
SENATOR P. KELLY                                                                                                                
Last year the Committee heard information                                                                                       
saying that the market forces were                                                                                              
conspiring to keep prices down. This                                                                                            
handout states that market forces will                                                                                          
continue to provide production and                                                                                              
consumption incentives to bolster price                                                                                         
higher.                                                                                                                         
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
The earlier information was provided to us                                                                                      
by Cambridge Energy.                                                                                                            
                                                                                                                                
SENATOR P. KELLY                                                                                                                
That information seems opposite from what                                                                                       
you are saying today.                                                                                                           
412                                                                                                                             
MR. LOGSDON                                                                                                                     
The path to that average is not a smooth                                                                                        
one. Oil prices over one or two years can                                                                                       
be quite low or quite high, but over time,                                                                                      
the highs and lows tend to be offset and                                                                                        
prices move toward that average. Because of                                                                                     
the possibility of a major structural                                                                                           
change in the way the world economy                                                                                             
consumes energy, a twenty-year average is                                                                                       
not practical.                                                                                                                  
424                                                                                                                             
SENATOR P. KELLY                                                                                                                
Are you saying that your view and Cambridge                                                                                     
Energy's is the same.                                                                                                           
                                                                                                                                
MR. LOGSDON                                                                                                                     
I don't know Cambridge Energy's long-term                                                                                       
view.  I hope the large multi-national                                                                                          
corporations will be in "for the long haul"                                                                                     
and invest in projects that are economic                                                                                        
with oil prices of $17 to $18 per barrel.                                                                                       
430                                                                                                                             
SENATOR P. KELLY                                                                                                                
It seemed that the information given to us                                                                                      
last year reflected a long-term view.                                                                                           
However, the conclusion was different from                                                                                      
your long-term view in that they projected                                                                                      
lower prices.                                                                                                                   
434                                                                                                                             
CO-CHAIR TORGERSON                                                                                                              
Cambridge Energy said that the price would                                                                                      
go up to $20 per barrel and then drop back                                                                                      
down to $15 to $16 due to overproduction.                                                                                       
Do any other analysts agree with your                                                                                           
assessment of prices of $17 to $18?                                                                                             
439                                                                                                                             
MR. LOGSDON                                                                                                                     
In looking back at the futures market, our                                                                                      
view has been consistent with the market                                                                                        
view.                                                                                                                           
The $17 to $18 figure is based strictly on                                                                                      
a historical evaluation. However, short of                                                                                      
a major structural change, whether it be a                                                                                      
policy to address global warming through                                                                                        
major fuel taxes to encourage the use of                                                                                        
other fuels, the track record demonstrates                                                                                      
that if you hang in long enough view oil                                                                                        
prices will average $17 to $18. Doesn't                                                                                         
mean it won't be painful at certain points                                                                                      
because oil prices are volatile.                                                                                                
452                                                                                                                             
CO-CHAIR TORGERSON                                                                                                              
I hope you're right.                                                                                                            
Does the BP/Arco merger have any bearing on                                                                                     
your price structures?                                                                                                          
                                                                                                                                
MR. LOGSDON                                                                                                                     
We do not believe so.                                                                                                           
                                                                                                                                
CO-CHAIR TORGERSON                                                                                                              
The merger is not reflected in these                                                                                            
projections?                                                                                                                    
                                                                                                                                
MR. LOGSDON                                                                                                                     
Correct.                                                                                                                        
455                                                                                                                             
SENATOR LEMAN                                                                                                                   
It appears to be listed as nominal dollars,                                                                                     
is that true of your projection?                                                                                                
                                                                                                                                
MR. LOGSDON                                                                                                                     
Yes.                                                                                                                            
                                                                                                                                
SENATOR LEMAN                                                                                                                   
                                                                                                                                
458                                                                                                                             
MR. LOGSDON                                                                                                                     
Handout: ANS Destination Price, Actual vs.                                                                                      
Forecast                                                                                                                        
                                                                                                                                
This shows the actual prices and some of                                                                                        
our prior forecasts.                                                                                                            
In the past we had been guilty of                                                                                               
extrapolation in our projections that                                                                                           
prices would continue to rise dramatically.                                                                                     
This was based on the belief that because                                                                                       
there is a limited supply of oil, prices                                                                                        
would continue to go up.                                                                                                        
Our latest forecast shows our belief that                                                                                       
over the long term, oil prices will remain                                                                                      
relatively flat.                                                                                                                
468                                                                                                                             
                                                                                                                                
Handout: Alaskan Oil Production                                                                                                 
                                                                                                                                
ANS production in calendar year 1999                                                                                            
averaged 1.077 million barrels per day.                                                                                         
This is based on preliminary data from                                                                                          
Alyeska.                                                                                                                        
That is about 25 percent or .0358 million                                                                                       
barrels per day less than what was produced                                                                                     
five years ago.                                                                                                                 
We are currently projecting North Slope                                                                                         
projections for FY00 at 1.055 million                                                                                           
barrels per day. However, there have been a                                                                                     
few production disruptions and we don't yet                                                                                     
know the effect that will have on the total                                                                                     
production.                                                                                                                     
477                                                                                                                             
                                                                                                                                
Handout: FY 2000 ANS Production                                                                                                 
                                                                                                                                
Year to date we are averaging 1.03 million                                                                                      
barrels per day. We are behind our                                                                                              
projections.                                                                                                                    
There will be about three more months of                                                                                        
cold weather on the North Slope that                                                                                            
enhances the performance of the oil fields.                                                                                     
We want cold weather, but not too cold.                                                                                         
They don't send people out in 50 degrees                                                                                        
below zero chill factor for safety reasons.                                                                                     
486                                                                                                                             
                                                                                                                                
Handout: Alaskan Oil Production Forecast                                                                                        
                                                                                                                                
We are expecting Prudoe Bay, the "mother                                                                                        
lode," to decline over time by 30-40                                                                                            
thousand barrels per day. Other fields,                                                                                         
Kuparuk, Point McIntyre and Endicott, will                                                                                      
decline an average of 15-25 thousand                                                                                            
barrels per day. Fortunately new fields,                                                                                        
Alpine, Prudoe and Kuparuk Satellites and                                                                                       
North Star will offset the declines over                                                                                        
the next five years.                                                                                                            
We expect oil production to plateau at just                                                                                     
over one million barrels per day through                                                                                        
2006.                                                                                                                           
496                                                                                                                             
                                                                                                                                
What are the consequences of these oil                                                                                          
price and production estimates in terms of                                                                                      
revenue consequences?                                                                                                           
                                                                                                                                
Handout: State Of Alaska Historical Sources                                                                                     
of Revenue                                                                                                                      
                                                                                                                                
CBR fund revenues decline slightly over                                                                                         
time and reflects reduced spending.                                                                                             
We had high oil prices in 1997 and we                                                                                           
didn't have to take from the CBR.                                                                                               
The non-oil revenue component is relatively                                                                                     
stable.                                                                                                                         
                                                                                                                                
Handout: How Far Have We Come to Closing                                                                                        
the Fiscal Gap With Higher Oil Prices?                                                                                          
                                                                                                                                
In January of 1999, the Department of                                                                                           
Revenue predicted exhaustion of the CBR                                                                                         
fund in January 2003, now using the Office                                                                                      
of Management and Budget's budget plan we                                                                                       
see the CBR fund with a zero balance in                                                                                         
August 2003.                                                                                                                    
511                                                                                                                             
CO-CHAIR PARNELL                                                                                                                
So in that case there is not a big                                                                                              
difference in the long run?                                                                                                     
                                                                                                                                
MR. LOGSDON                                                                                                                     
Right, I've got some other scenarios to                                                                                         
show the effect.                                                                                                                
515                                                                                                                             
                                                                                                                                
Handout: State Of Alaska, Sources of                                                                                            
Revenue                                                                                                                         
                                                                                                                                
This illustrates the exhaustion of the CBR.                                                                                     
                                                                                                                                
Handout: Alaska State Revenue Outlook,                                                                                          
General Fund FY00                                                                                                               
                                                                                                                                
We updated this outlook using the January                                                                                       
curves for 2000 and 2001 and the futures                                                                                        
market price aiming at $21.78 per barrel                                                                                        
FY00 average and a projected North Slope                                                                                        
production volume of 1.058 barrels per day.                                                                                     
This gives us a projected oil revenue of                                                                                        
$1,502.8 million, projected other non-oil                                                                                       
revenue of $417.8 million, general fund                                                                                         
budget of $2,321.5 million and a projected                                                                                      
draw from the CBR fund of $400.9 million.                                                                                       
524                                                                                                                             
CO-CHAIR PARNELL                                                                                                                
Is this for the current fiscal year 2000?                                                                                       
                                                                                                                                
MR. LOGSDON                                                                                                                     
Correct.                                                                                                                        
                                                                                                                                
Handout: Alaska State Revenue Outlook,                                                                                          
General Fund FY01                                                                                                               
                                                                                                                                
This uses a projected ANS oil price of                                                                                          
$18.86 and a projected North Slope                                                                                              
production volume of 1.045 barrels per day.                                                                                     
The result is an oil revenue of $1,218.9                                                                                        
million, projected other non-oil revenue of                                                                                     
$386.7, a general fund budget of $2,419.4                                                                                       
and a projected draw for the CBR fund of                                                                                        
$813.3 million.                                                                                                                 
530                                                                                                                             
CO-CHAIR PARNELL                                                                                                                
Is the general fund budget amount the same                                                                                      
that is shown in the Governor's proposed                                                                                        
budget for FY01?                                                                                                                
                                                                                                                                
MR. LOGSDON                                                                                                                     
Yes.                                                                                                                            
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
Therefore the projected CBR draw is $813.3                                                                                      
million?                                                                                                                        
                                                                                                                                
MR. LOGSDON                                                                                                                     
Yes.                                                                                                                            
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
Is the Governor's budget based upon an oil                                                                                      
price of $18.86?                                                                                                                
                                                                                                                                
MR. LOGSDON                                                                                                                     
I don't know. I only have the spending                                                                                          
number.                                                                                                                         
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
Ask Mr. Persily.                                                                                                                
                                                                                                                                
MR. PERSILY                                                                                                                     
The general fund budget expenditure is from                                                                                     
the Office of Management and Budget.  The                                                                                       
projected oil revenue figure is not an                                                                                          
official number.                                                                                                                
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
Is that the same figure that was used for                                                                                       
the December 15 release of the budget?                                                                                          
                                                                                                                                
MR. LOGSDON                                                                                                                     
Yes.                                                                                                                            
If oil production or prices changed, the                                                                                        
projected CBR fund draw would change as                                                                                         
well.                                                                                                                           
                                                                                                                                
Handout: CBRF Depletion Matrix, $ per                                                                                           
Barrel                                                                                                                          
                                                                                                                                
This illustrates how long the CBR would                                                                                         
last under different spending and oil                                                                                           
revenue scenarios.                                                                                                              
                                                                                                                                
557                                                                                                                             
                                                                                                                                
Handout: Revenue Sensitivity to $1 per                                                                                          
Barrel Change in Oil Price FY 1988-2010                                                                                         
                                                                                                                                
This shows the spendable money for every                                                                                        
dollar in the oil prices. The amount has                                                                                        
steadily decreased since 1990 and expected                                                                                      
to continue through 2010.                                                                                                       
                                                                                                                                
                                                                                                                                
Handouts: Oil Revenue and the BP/ARCO                                                                                           
Merger - Production Tax                                                                                                         
                                                                                                                                
The tax base is the netback value of                                                                                            
production calculated as the destination                                                                                        
sales price less transportation to that                                                                                         
destination.                                                                                                                    
The destination value is defined as market                                                                                      
value and is currently set as ANS spot                                                                                          
price. We believe that oil prices will                                                                                          
continue to be determined in the world                                                                                          
market and that the merger will not affect                                                                                      
destination prices.                                                                                                             
                                                                                                                                
Handouts: Oil Revenue and the BP/ARCO                                                                                           
Merger - Production Tax                                                                                                         
                                                                                                                                
Because of there are some structural                                                                                            
changes in who owns refineries and tankers,                                                                                     
we will continue to closely monitor                                                                                             
contracts to ensure that spot prices is an                                                                                      
accurate measure of destination value.                                                                                          
It is unclear whether we will be able to                                                                                        
continue to rely on spot prices as a                                                                                            
dependable indicator.                                                                                                           
578                                                                                                                             
                                                                                                                                
Transportation costs are the basic                                                                                              
deduction from the destination value. Those                                                                                     
are specifically defined in regulations.                                                                                        
The allowable costs will be largely                                                                                             
determined by what assets are employed and                                                                                      
not who owns them.                                                                                                              
We are hopeful that the merger will lead to                                                                                     
cost savings and even reduce some of the                                                                                        
transportation costs. There is a strong                                                                                         
audit function.                                                                                                                 
                                                                                                                                
Handouts: Oil Revenue and the BP/ARCO                                                                                           
Merger - Royalties                                                                                                              
                                                                                                                                
Royalties are also based on the netback                                                                                         
production value established by contract                                                                                        
with the State Of Alaska.                                                                                                       
Contracts have been reactive and any final                                                                                      
agreement on transportation and or value                                                                                        
will be retroactive.                                                                                                            
588                                                                                                                             
                                                                                                                                
                                                                                                                                
SFC 00 #3 Side B   9:57 AM                                                                                                      
                                                                                                                                
                                                                                                                                
MR. LOGSDON                                                                                                                     
We believe we have sufficient protection.                                                                                       
The production divestiture and other                                                                                            
concessions by BP were designed to protect                                                                                      
the state's interest post manager. One of                                                                                       
the major things that could affect our                                                                                          
revenue over the long run is how much oil                                                                                       
gets produced. We would like to see a                                                                                           
healthy rate of investment in exploration                                                                                       
and development.                                                                                                                
582                                                                                                                             
                                                                                                                                
Handouts: Oil Revenue and the BP/ARCO                                                                                           
Merger - Property Tax                                                                                                           
                                                                                                                                
Property tax should be largely unaffected                                                                                       
by the merger since the production and                                                                                          
transportation facilities are commonly                                                                                          
owned and subject to appraisal methods                                                                                          
based either on regulated cash or                                                                                               
historical cost.                                                                                                                
If the merger results in higher levels of                                                                                       
investment the tax levels could increase.                                                                                       
                                                                                                                                
                                                                                                                                
Handouts: Oil Revenue and the BP/ARCO                                                                                           
Merger - Income Tax                                                                                                             
                                                                                                                                
It is virtually impossible to calculate the                                                                                     
effect of the merger on this tax type                                                                                           
because modified apportionment is based on                                                                                      
so many elements.                                                                                                               
                                                                                                                                
                                                                                                                                
Summarize, Department of Revenue does not                                                                                       
think the merger will have any short-term                                                                                       
negative effects on the state's revenue. We                                                                                     
will have to be diligent at watching                                                                                            
possible long-term effects.                                                                                                     
565                                                                                                                             
                                                                                                                                
Conclusion                                                                                                                      
564                                                                                                                             
MR. PERSILY                                                                                                                     
                                                                                                                                
565                                                                                                                             
CO-CHAIR TORGERSON                                                                                                              
Are the contracts reopened only for                                                                                             
negotiation of transportation costs? Who is                                                                                     
negotiating those contracts?                                                                                                    
                                                                                                                                
MR. LOGSDON                                                                                                                     
You would have to ask the Department of                                                                                         
Natural Resources. I think both destination                                                                                     
and transportation costs are being                                                                                              
discussed.                                                                                                                      
                                                                                                                                
CO-CHAIR TORGERSON                                                                                                              
Is that part of the charter agreement that                                                                                      
was signed by the Governor?                                                                                                     
                                                                                                                                
MR. LOGSDON                                                                                                                     
This actually goes back to original                                                                                             
agreements established in earlier                                                                                               
settlements. All of the agreements contain                                                                                      
clauses that allow renegotiations of the                                                                                        
terms.                                                                                                                          
                                                                                                                                
CO-CHAIR TORGERSON                                                                                                              
Do they require legislative approval?                                                                                           
                                                                                                                                
MR. LOGSDON                                                                                                                     
I do not know.                                                                                                                  
                                                                                                                                
CO-CHAIR TORGERSON                                                                                                              
What is the actual reduction of income tax?                                                                                     
                                                                                                                                
MR. LOGSDON                                                                                                                     
I don't know. We will get you that                                                                                              
information.                                                                                                                    
546                                                                                                                             
SENATOR ADAMS                                                                                                                   
What do you suggest the Committee watch for                                                                                     
in the March 2000 Petroleum Forecast? Do                                                                                        
you believe OPEC will continue to hold oil                                                                                      
production at the present level? Do you                                                                                         
believe that cold weather will continue and                                                                                     
allow for higher prices? Should we be                                                                                           
concerned that Iraq could flood the market                                                                                      
to help pay for its past wars? Or that                                                                                          
Russia will increase its oil development                                                                                        
with the change in government leadership?                                                                                       
What should we be watching for?                                                                                                 
537                                                                                                                             
MR. LOGSDON                                                                                                                     
Our source book identifies our prediction                                                                                       
that prices will go down for all those                                                                                          
reasons. OPEC will increase production and                                                                                      
agree to an increase in quotas at their                                                                                         
March meeting.                                                                                                                  
Iraq is currently producing all they are                                                                                        
allowed, three million barrels per day, but                                                                                     
has the potential to produce more. The                                                                                          
United Nations has extended Iraq's ability                                                                                      
to shift $5.2 billion worth of oil under                                                                                        
the current embargo and a new agreement is                                                                                      
being written that will reestablish a                                                                                           
monitoring and inspection committee. This                                                                                       
agreement will completely lift the cap on                                                                                       
the amount of oil Iraq can export and will                                                                                      
allow some of the earnings to go toward                                                                                         
purchase of oil production services and                                                                                         
equipment. Cambridge Energy is a good                                                                                           
source for more information on the                                                                                              
situation in Iraq.                                                                                                              
Because I cannot predict the weather, I                                                                                         
can't say if cold weather will be a factor                                                                                      
in keeping oil prices high.                                                                                                     
The Russian economy is improving partly                                                                                         
because of high oil prices. The key is                                                                                          
getting pipelines to access some of the                                                                                         
production and the US is involved in this                                                                                       
endeavor. There is a real potential for                                                                                         
additional production from Russia.                                                                                              
It is just these kinds of scenarios that                                                                                        
the futures market is already considering                                                                                       
and incorporating. This is one of the                                                                                           
reasons why oil prices are much lower in                                                                                        
the futures market than they are today.                                                                                         
510                                                                                                                             
SENATOR ADAMS                                                                                                                   
Do you provide the House and/or Senate                                                                                          
Finance Committee co-chairs weekly updates                                                                                      
on price changes or information that could                                                                                      
affect oil revenues?                                                                                                            
506                                                                                                                             
CO-CHAIR PARNELL                                                                                                                
We wish we were.                                                                                                                
                                                                                                                                
SENATOR ADAMS                                                                                                                   
We should request that every two weeks.                                                                                         
506                                                                                                                             
MR. LOGSDON                                                                                                                     
We update our web site daily with info on                                                                                       
production and oil prices.                                                                                                      
501                                                                                                                             
SENATOR WILKEN                                                                                                                  
I appreciate the information you provided                                                                                       
regarding the BP/ARCO merger and your                                                                                           
short-term expectations that the merger                                                                                         
won't affect state revenues. I would like                                                                                       
an analysis of BP's new exploration                                                                                             
budgets. While I am not privy to                                                                                                
confidential information, I understand the                                                                                      
exploration budget is only 50 percent of                                                                                        
the pre-merger amount. Have you looked at                                                                                       
that and assessed the long-term affect on                                                                                       
the state's revenue flow?                                                                                                       
                                                                                                                                
MR. LOGSDON                                                                                                                     
I have not but it is something we will be                                                                                       
looking at. We will hopefully have an                                                                                           
assessment in the Spring 2000 Forecast.                                                                                         
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
We learned last year about the tie between                                                                                      
energy prices and inflation. Please comment                                                                                     
on current inflationary pressures and how                                                                                       
they might have a bearing on the forecast.                                                                                      
487                                                                                                                             
MR. LOGSDON                                                                                                                     
Generally, even though oil prices have                                                                                          
gotten very high, the US economy has not                                                                                        
been significantly affected. I assume that                                                                                      
is because other prices, such as                                                                                                
agricultural products that may have offset                                                                                      
oil prices.                                                                                                                     
                                                                                                                                
CO-CHAIR PARNELL                                                                                                                
Conclusion of meeting.                                                                                                          
470                                                                                                                             
                                                                                                                                
Adjourn 10:10 AM                                                                                                                
                                                                                                                                
SENATE FINANCE COMMITTEE                                                                                                        
LOG NOTES                                                                                                                       
01/11/00                                                                                                                        
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