Legislature(1995 - 1996)
01/20/1995 09:00 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
January 20, 1995
9:00 a.m.
TAPES
SFC-95, #1 Side 1 (000-end)
SCF-95, #1 Side 2 (end -560)
CALL TO ORDER
Senator Steve Frank, Co-chair, convened the meeting at
approximately 9:00 a.m.
PRESENT:
The following members
attended:
Co-Chair Frank
Senator Donley
Senator Phillips
Senator Rieger
Senator Zharoff
ALSO ATTENDING: Senator Torgerson, Senator Green, Co-chair
Halford arrived soon after the meeting began. Commissioner
Wil Condon, Dr. Charles Logsdon, Chief Petroleum Economist,
Department of Revenue, Annalee McConnell, Director, Office
of Management and Budget, Mike Greany, Director, Legislative
Finance Division; and aides to committee members and other
members of the legislature.
SUMMARY INFORMATION:
OVERALL FY-96 REVENUE FORECAST
Presentation was made by Dr. Charles Logsdon of the
Department of Revenue
CO-CHAIR FRANK invited Dr. Charles Logsdon, Chief Petroleum
Economist, Department of Revenue, to join the members at the
committee table and proceed with the Department
presentation.
DR. CHARLES LOGSDON gave a presentation on the state revenue
outlook with emphasis on FY-96. In reviewing the materials
provided, he drew attention to, The "Revenue Resources Book"
which contains a detailed presentation of all the state
general fund unrestricted revenues with emphasis on oil
(which represents 85% of the income into the treasury). The
FY-95 Petroleum Revenue Executive Update will be faxed
monthly to the committee members. This information gives a
summary of the current fiscal year with respect to revenue
and how we are tracking since we receive payments for the
royalties and severence taxes on a one month basis. On a
more general distribution, the chart shows oil revenues,
which is a summary of what has gone on during the last month
that impacts oil revenues.
Dr. Logsdon brought attention to The Executive Update which
explains how much has been collected along with expectations
to get through to the end of the year. It points out how
much the state would have if it liquidated its anticipated
production on the futures market. On that basis, for FY-95,
it is $1.91 billion which is below the current projection.
Applied to FY-96, with anticipated production and valued at
futures market, it is $1.88 billion. That compares to $1.94
billion base case.
Dr. Logsdon referenced a series of graphs. The first graph
entitled "GF Unrestricted Revenues" points out the FY-95
estimate for base case (which is the middle line) is $1.95
billion. That assumes an oil price of $16.39/bbl. This year
the average price has been $16.40/bbl. We are within a
penny on the price side which is good. We are under on the
production side. Looking beyond to FY-96, it shows $1.96
billion, which would assume an oil price of $16.72/bbl.
Characterizing the revenue curve, if we can assume oil
prices stay robust ($16/bbl and up range), we should be able
to bring in, at the top, $2 billion per year until year
2000.
Dr. Logsdon pointed out that the second graph entitled
"Alaska Oil Production Forecast" shows what is driving this
ultimate decline in revenue. There are three scenarios.
The oil production is modeled so that the higher the oil
price the more attractive investments are both in existing
fields and also in devloping existing fields, which are
currently not economic. West Sax provides the best example.
The slope of the curve and ultimate decline does not
indicate a dispute that is negative. There is a financial
technical question as to whether or not it will decrease at
a much greater rate (illustrated by the bottom curve), or a
lesser rate (the upper curve). We are conservative in our
estimates with respect to production fields that we know
have been discovered and which have been deliniated. We do
not carry much in the way of speculative oil that would be
discovered and produced within this time period.
Dr. Logsdon continued by discussing the oil market. Demand
side fundamentals are very strong. The oil economy is
starting into the second year of robust growth. As
economies grow so does oil consumption. Last year the world
burned an extra 1.1 billion bbl/day. The forecast is
another 1.1 billion bbl/day increase next year. On a
percentage basis that is a 1-1/2% growth rate. Mitigating
that information, however, is the fact that non-OPEC sources
picked up about 700,000 bbl/day in 1994. Some comes from the
North Sea and other sources, including robust supplies from
Russia. Russia managed to export 1.8 million bbl/day. OPEC
does not have much room to move oil prices up this next
year. If Iraq stays embargoed, it will increase the
likelihood that prices will remain firm and even drift
upward. That is our base case.
Dr. Logsdon directed the attention of the committee to the
map showing the placement of Chechnia with respect to the
Black Sea and Caspian Sea. The primary oil pipeline carries
525,000 bbl/day for export. This is a volatile region with
open conflict. So far this has not influenced oil markets
more than it has. This could be why oil markets have firmed
up during the last three weeks. In watching Russia, we keep
in mind it is the primary sponsor in the U.N. for lifting
the embargo on Iraq. If Iraq becomes a part of the world
community again, it could mean a major managment problem for
OPEC to keep from glutting the market. This is a major
downside risk. Our base case assumption is, this will not
happen, and Iraq will remain outside the market.
Dr. Logsdon went on to explain the next graph "FY-95 Weekly
Average ANS Production Crude, Condensate, NGL's". In FY-95,
the graph shows that we are 30,000 bbl/day below anticipated
production. There will be meetings with other resource
agencies within a couple of weeks revising these figures.
There was overoptimism regarding GHX2 and what it would do
for Prudoe Bay. We might be reducing our 1995 production
assumption down to account for that. On the price side, the
news is good. We are using $16.39 bbl/day. We are
averaging $16.40 bbl/day this year.
Dr. Logsdon pointed out that the graph entitled "West Texas
Intermediate and Alaska North Slope L-48 Spread". He
pointed out that the difference between the price of WTI and
ANS has shrunken in the last three years. In 1991 there was
a $3.50 difference. Now the difference is down to $1.75.
Good news. Dr. Logsdon finished with two last comments
regarding price: the first, FY-94 price was, in nominal and
real dollar terms, the lowest annual price since the
Iran/Iraq revolution. Secondly, the last graph (extracted
from "Oil and Gas Jounral", January 2, 1995) shows that 50%
of the price since world war II has been below $14.95 and
50% has been above, so that the median is $15. The average
is $18. Dr. Logsdon concluded by saying that the price of
oil is going to stay between $15-$18.
SENATOR RIEGER questioned the "Oil & Gas Journal" graph
showing 1993 wellhead prices, and asked how it compares to
market prices.
DR. LOGSDON responded that the price compares to the market
price in Texas.
SENATOR RIEGER asked for clarification regarding the $11
price shown on the map for 1994. DR. LOGSDON pointed out
that it was done in 1993 dollars. 1994 was a very bad year
for prices. Alaskan oil averaged $14.22 on a FY basis.
SENATOR RIEGER asked if there was an inflation assumption in
the long term price forecast and unrestricted revenues. DR.
LOGSDON responded affirmatively to the inflation assumption.
The figures indicate nominal dollars. "The Revenue Sources"
book lists the assumption on page 32. The inflation rate
for a base case is 4-1/2%.
SENATOR ZHAROFF asked what would happen to the price
prediction of $15-$18 if the oil export ban was lifted. DR.
LOGSDON indicated that it would help push us to the upper
range of that price. It is estimated that if the ban were
lifted today, we would get at least a fifty cent
increase/bbl in resource value.
Bringing us to the upper part of the $15-$18 range.
SENATOR HALFORD questioned how differential and
transportaion costs to the gulf coast effect the spot market
average. How does the model take out the fact that it costs
considerably more to get the oil to the gulf coast? DR.
LOGSDON responded that the price falls between the two. In
our model there is a marketing assumption. We begin by
calculating how much oil goes to the gulf coast and how much
goes to the west coast. Based on the transportation costs,
we net those back. A fifty cent differential is not enough
increase in the gulf to offset the higher transportation
costs to the gulf. Therefore, the net backprice of the gulf
is lower.
SENATOR HALFORD voiced his understanding that if the average
spotprice is $15.50, and the gulf coast and west coast
prices are fairly close together, the assumption is we are
getting a higher net than is actual, due to the
transportation differential. DR. LOGSDON responded by saying
that numbers given take into account that factor. The spot
averaging statement gives you a rough idea of what is going
on in the lower 48. In order to be more specific,
information regarding the volume weighted transportation
costs would have to be subtracted. Ultimately, the worth of
the product when it comes out of the ground is our primary
interest. That is the value for post severence tax and
royalty purposes.
SENATOR HALFORD asked if the affect is lower than the lower
of the two spot prices as long as west coast is lower than
gulf coast.
DR. LOGSDON suggested focusing on west coast prices. The
predominance of oil goes to that market. As demand for oil
on the west coast goes up and our crude production goes
down, there will be less need to ship to any other market
besides the west coast.
SENATOR HALFORD inquired concerning the net benefit to the
state in lifting the export ban if the west coast and gulf
coast prices have come together. DR. LOGSDON responded that
if the prices are at parody (west coast/ gulf coast) and we
lifted the export ban, we would still make $20 million per
year just in transportation costs. This price however is not
very stable. If oil is selling for more on the west coast
than it is on the gulf coast, it will tend to bring oil into
the west coast from other areas (esp. from Equador, Canada,
or Columbia). When it hits parody that means something is
occurring. Basically what is happening is that the ANS
surplus issue is probably going away. The sooner the ban is
lifted the sooner there is an opportunity to make money.
CO-CHAIR FRANK questioned what happens to the actual oil if
the export ban is lifted. Does it change the actual patterns
of flow of ANS? DR. LOGSDON responded that out of Valdez it
would be a new marketing dynamic. Dr. Logsdon's personal
opinion is that it would have effects on OPEC and how the
middle eastern countries want to jump into that market. The
middle eastern countries have not had to worry about Alaska
as a competitor in the far east markets.
SENATOR PHILLIPS observed that the lower 48 has had a warmer
winter this year and asked for observations relating to
effects of consumption relating to price. He also wanted
verification that this is the first time the U.S. is
importing more than 50% of our oil. DR. LOGSDON responded
that the warmer weather dominated the crude oil market in
December for ANS (and all U.S. crude oils). Prices were
fairly low. The graph on page 6 indicates prices dipped as
low as $15.50 in December, which was a direct function of
the warmer weather. Consumption was down 2% in December
from the year prior. That is short term. Over the long
term, consumption of oil in the U.S. was up 2% for the
entire year. Insofar as the 50% increase of oil importation,
that is a trend of an overall increase in consumption and
decrease in production in the U.S. This will have an effect
on energy policy as we go forward.
SENATOR PHILLIPS stressed the importance of the opening of
ANWR in terms of increased dependency on foreign oil.
SENATOR RIEGER questioned the long-term supply and demand of
oil. How many million/bbl from the North Sea could be
expected as a potential source for increased production?
DR. LOGSDON concluded that it was a question mark whether or
not they can continue to develop new fields at the rate that
they have been doing it.
SENATOR RIEGER questioned Russian production at
unsustainable rates that is causing field damage. DR.
LOGSDON concourred that that was occurring, illustrated by
the dramatic fall in production over the last eight or nine
years. However, new investments made over the last three or
four years have helped arrest that decline. The primary
problem now is not their ability to produce, but to move the
product to market. Existing pipelines are in bad shape.
SENATOR RIEGER asked how long it would be before the market
begins to run out of cheaply produced fuel and a secular
tightening of the world oil supply occurs. DR. LOGSDON
responded by saying that there is no consensus. There are
two points to be made. Firstly, within the next five years
scarcity of oil could occur and prices will esculate at a
real growth rate for a number of years. Then we would have
to go to OPEC for every barrel. Conversely, the other
possibility is that the price could stay flat in nominal
dollars for a long time. The main reason given for that is
we will be there asking OPEC for oil and they will realize
that they have to reinvest more than 10% of their income
back into exploring and developing their existing oil
fields. This is something that they have not had to do in
years. Dr. Logsdon speculated that somewhere inbetween is
where oil prices will average.
CO-CHAIR FRANK questioned the production figures for Iraq,
what their potential for export is, and what effect that is
going to have. DR. LOGSDON responded that Iraq is producing
at 700,000 bbl/day. It is felt that they are leaking another
100,000-200,000 bbl/day onto world markets. There is
speculation that Iran is laundering crude oil for Iraq. We
know they are trucking oil into Jordan. This is domestically
consumed oil. Before the war they were producing 300,000
bbl/day. There is speculation that they could ramp up well
over to a million to a million and a half very quickly.
Once you get that flow of oil going it doesn't take very
long to attract the investment to fix the problems to allow
them to produce that amount. It might only be a short term
problem, but certainly it would be a management problem for
the cartel.
CO-CHAIR FRANK inquired as to an OPEC quota. DR. LOGSDON
responded that the quota is 700,000 bbl/day. The quota has
been reduced since the war, although he indicated he would
have to double check on that statement.
CO-CHAIR FRANK asked if they are free to increase production
within the cartel? DR. LOGSDON responded that they do not
sign agreements. They are members of the cartel though they
do not agree with their quota.
CO-CHAIR FRANK asked if Dr. Logsdon had a matrix that would
show what the price would go down to if another two million
came onto the market? DR. LOGSDON responded that the short-
run elasticity is fairly small. It suggests that the price
would crater. You would go very rapidly down to $10/bbl.
Over the longer term (6 months), you would see forces come
into play that may tend to ameliorate that. Governments
produce over 50% of the oil in the world today. That means
there would be heavy politics to lift the embargo on Iraq.
CO-CHAIR FRANK reiterated that Russia is the prime sponsor,
yet you would think that they would be more concerned about
their domestic budget. DR. LOGSDON responded that for
economic reasons they would have an opportunity to do
business with Iraq. Oil is one of Russia's major sources of
hard currency.
CO-CHAIR FRANK asked about tariff changes and the effects on
Alaska's pipline. DR. LOGSDON responded that the tariff
filing this year is up to $3.71/bbl (up fifty cents from
last year). The primary reason behind that increase revolves
around the unanticipated additional expenses for electrical
and maintenance work. The pipeline has been running many
barrels of oil for 15 plus years, and it is in need of
maintenance. The tariff is designed to allow the pipeline to
recover. Because of the impact of the wellhead value, the
state is going to share roughly 25% of those costs as they
are passed on to the shipper and affect the value of the oil
at the point of production.
CO-CHAIR FRANK discussed the tariff case and the settlement
that it provided for a decline over time consistent with
production.
He said it appears we gave up something in the short run to
gain something in the long run. DR. LOGSDON responded that
it is a large investment. There is the initial outlay for
construction, and there are operating and maintenance costs
with any capital structure. Dr. Logsdon felt the shippers
are interested in having a line that has integrity and those
investments are necessary and are done in an efficient way.
CO-CHAIR FRANK asked for Dr. Logsdon's perception of Iraq
production. DR. LOGSDON responded that as long as Saddam
Hussein is in Bagdad and we are getting most of our oil from
the Saudis along with other historical interests in the
middle east, "I don't believe the U.S. will ever allow that
export ban to be lifted." The key variable is dependent on
the head of Iraq. At this time it is Saddam Hussein. Dr.
Logsdon said he does not believe the embargo will be lifted
as long as he is in Bagdad.
SENATOR ZHAROFF questioned the likelihood of the export ban
being lifted. DR. LOGSDON responded that there is a very
good chance the export ban could be lifted. However, this
is a matter of federal policy and there are many interest
groups who would be very much opposed to it. Their power
has been diminished considerably. Letters were sent from the
maritime unions to President Clinton supporting the lifting
of the ban, as long as Jones' Act tankers are used to export
the oil. If it is lifted, that will be the first condition.
The refiners on the west coast would be very much opposed to
this since their feed stock costs would go up. The
environmental community along with some of the midwestern
congressional delegation are also opposed to lifting the
ban.
End SFC-95, Side 1
Begin SFC-95, Side 2
ADJOURNMENT
The meeting was adjourned at approximately 9:50 a.m.
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