Legislature(1995 - 1996)
01/10/1996 09:00 AM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
January 10, 1996
9:00 a.m.
TAPES
SFC-96, #1, Side 1 (000-575)
SFC-96, #1, Side 2 (575-509)
CALL TO ORDER
Senator Steve Frank, Co-chairman, convened the meeting at
approximately 9:00 a.m.
PRESENT
In addition to Co-chairman Frank, Senators Donley, Phillips,
Rieger, Sharp, and Zharoff were present. Co-chairman
Halford arrived soon after the meeting began.
ALSO ATTENDING: Senator Lyda Green; Wil Condon,
Commissioner, Dept. of Revenue; Dr. Charles Logsdon, Chief
Petroleum Economist, Division of Oil and Gas Audit, Dept. of
Revenue; Mike Greany, Director, Legislative Finance
Division; and aides to committee members and other members
of the legislature.
SUMMARY INFORMATION
Oil and Gas Revenue Update
by the
Department of Revenue
Upon convening the meeting, Co-chairman Frank invited
representatives of the Department of Revenue to join members
at the committee table and commence presentation of updated
oil and gas revenue projections. WIL CONDON, Commissioner,
Department of Revenue, and DR. CHARLES LOGSDON, Chief
Petroleum Economist, Oil and Gas Audit Division, Department
of Revenue, came before committee.
[A complete transcript of the presentation was prepared and
is available by contacting the Legislative Finance Division,
P. O. Box 113200, Juneau, Alaska 99811-3200, (Phone: (907)
465-3795) or the office of the Senate Finance Committee
secretary (Phone: (907) 465-2618). The following minutes
reflect a brief abstract from the transcript.]
Commissioner Condon advised that the department had been
asked to respond to five items:
1. Why the department underforecast FY 95 revenues by
approximately $200 million.
2. Where FY 96 revenues are with respect to the
forecast.
3. What is projected for FY 97.
4. How lifting of the export ban will fit into
revenue forecasts.
5. Changes in the long-range forecast between the
spring and fall forecast this year.
As an additional item, the Commissioner told members he also
wished to discuss improvements in department forecasting.
Speaking to the first item, Commissioner Condon referenced
the FY 95 spring forecast of $1,885.0 in unrestricted
general funds and actual receipt of $2,079.7. The $200
million underforecast consists of:
1. Corporate taxes. The $140 million in additional
revenues reflects substantially larger payments made
by "a few of our very large tax payers during
. . . the last six months of FY 95."
2. Miscellaneous Taxes. Sixteen of the $19 million
results from underprojection of the fish tax.
3. Resource Sales. The department forecast $4.5
million and
received $20.2 million as a result of land sales
by the Dept. of Natural Resources.
4. Investment Earnings. Investments did better than
anticipated.
5. Miscellaneous Revenues. The difference results
from settlement of litigation (SBS and Executive
Life) the department could not have known was
going to settle.
Dr. Logsdon pointed to the "Revenue Source Book" and noted
that the department's base case forecasts $1,881.3 in
unrestricted general funds for FY 96. That assumes North
Slope production of 1.49 million barrels a day and an
average price of $16.36 per barrel. In the first six months
of FY 96, North Slope production has been slightly below the
base at 1.48 million barrels. However, the price has
averaged $16.61 (25 cents above the base).
In response to a question from Senator Sharp asking if the
administration intends to nominate oil for export should the
export ban be lifted, Dr. Logsdon advised of discussions
within the Dept. of Natural Resources. He noted the six-
month delay between nomination and the actual taking of more
in-kind barrels.
Referencing FY 97 projections, Dr. Logsdon pointed to
$1,840.0 in unrestricted general funds based on a price of
$16.40 and production of 1.41 million barrels a day. The
forecast assumes that prices will be lower in FY 97 and
production will continue to fall. It also assumes
continuation of the embargo on oil from Iraq. Non-OPEC
production is projected to grow rapidly in both 1996 and
1997 to accommodate the incremental increase in demand next
year. Analysts involved in oil consumption projections
predict that increasing demand, which has been averaging 2
percent or better for the past two years, will continue.
Greater production from the North Sea will put a squeeze on
OPEC and exert downward pressure on price. It is thus
expected to come down from where it is today to the
projected base case for FY 97.
In response to a question from Co-chairman Frank regarding a
slowing of the projected 5% decline in production, Dr.
Logsdon explained that decline will be somewhat mitigated by
production from Milne Point. While longer-term decline from
Prudhoe Bay is projected at 10 percent, other projects will
hold the rate to 5 or 6 percent through the end of the
century.
Responding to a question from Senator Zharoff, Dr. Logsdon
advised that the forecast does not include revenues from a
major gas sale since the window for development and start up
would be "somewhere between 2005 and 2010 . . . ."
Commissioner Condon noted that it would be surprising if
future taxes and royalties from gas would exceed "a couple
of hundred million dollars a year . . . ."
Dr. Logsdon voiced his belief that export of Alaskan oil
could commence by the start of FY 97 should the export ban
be lifted by Congress. Figured at 35 cents a barrel, export
would result in additional revenues of approximately $40
million.
Speaking to differences between the spring and fall
forecast, Dr. Logsdon noted that, over the longer term, the
department believes that non-oil and gas revenue will be
"significantly higher . . . than we forecast last spring."
Offsets will occur, however, in oil and gas revenues. While
the department price forecast has not changed from last
spring, the volume forecast has. Changes result from
"mistaken use of a computer forecasting model . . . ." The
department double counted the effect of future investments
in the field and used those volumes for the spring forecast.
That accounts for the difference between spring and fall
volume numbers.
Discussion followed among members and Dr. Logsdon and
Commissioner Condon regarding the importance of and need for
long-term forecasting. Dr. Logsdon suggested that, in the
future, the department should provide a long-range forecast
in the fall and a short-term update in the spring.
Co-chairman Halford inquired concerning the source of funds
used in review of department forecasting methodology and the
status of the contract for review. Commissioner Condon
explained that he asked the Department of Law for help when
he determined there was need to initiate review. He
thereafter "made use of their generous offer to get the
review done." He advised that he did not "look at the
contract or the contractual arrangements." Co-chairman
Halford expressed concern that the source of funds was an
appropriation for oil and gas litigation. The Commissioner
stressed that work done by the Division of Oil and Gas Audit
is related to dispute resolution. The forecast is "just one
aspect of the use of the analytical models . . . ." Co-
chairman Halford advised that the question would also be
asked of the Dept. of Law.
ADJOURNMENT
The meeting was adjourned at approximately 9:55 a.m.
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