Legislature(2017 - 2018)SENATE FINANCE 532
01/19/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| 2016 Fall Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 19, 2017
9:03 a.m.
9:03:34 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Natasha von Imhof
Senator Mike Dunleavy
Senator Peter Micciche
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue;
Senator David Wilson; Dan Stickel, Assistant Chief
Economist, Tax Division, Department of Revenue; Chantal
Walsh, Director, Division of Oil and Gas, Department of
Natural Resources.
SUMMARY
^2016 FALL REVENUE FORECAST
9:04:46 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself. He noted the first change, which was
the detail of production forecasting. He explained that the
most recent contract expired, so there was a choice to make
an independent forecast through the Department of Natural
Resources (DNR). He explained that Department of Revenue
(DOR) worked with DNR to create a methodology. He stated
that DNR had data, which a contractor did not have access.
He also noted that the contractor was from out of the
state, so the contractor did not have immediate access to
the field. He remarked that the FY 17 forecast was 490,000
barrels per day, and the current daily average was 550,000
barrels per day. He noted that the higher average was due
to the cold and highly producing winter months. He stressed
that production was higher than the forecast.
Commissioner Hoffbeck remarked that the daily price was
currently between $52 and $54 per barrel. He stated that
there would be a chart in the presentation that would
reflect the impact on the price of oil. He stated that one
dollar per barrel was worth approximately $30 million in
long-term revenue.
9:10:58 AM
Co-Chair MacKinnon noted that there were various testifiers
available for comments.
Senator Micciche remarked that there was an increase to an
average of 531,500 barrels per day, which was an increase
from the 519,200 per day in FY 15. The increase was the
first since 2002. He queried the reason for the increase in
the current challenging price environment. Commissioner
Hoffbeck replied that there were several factors that
contributed to the increase. He explained that there was a
statistically anomaly. He remarked that the years prior saw
a lengthy and robust turnaround in the fields, which
created some "de-bottlenecking" to allow for additional gas
and water handling. He added that there was also new oil
brought online.
Senator Micciche wondered whether the change in the tax
policy may have caused greater investment in the fields,
therefore increasing the number of barrels per day.
Commissioner Hoffbeck responded that tax policy made a
difference. He explained that some of the fields that came
online were "pre-tax policy" change, others came online due
to the investments made because of the tax policy.
Co-Chair MacKinnon queried the number related to "new oil."
Commissioner Hoffbeck agreed to provide that information.
Co-Chair MacKinnon remarked that there were recent
announcements by some companies asserting that they may put
100,000 barrels of new oil in the pipeline.
9:14:45 AM
Senator Dunleavy felt that worldwide exploration was down,
and felt that the decisions of Oil Producing and Exporting
Countries (OPEC) had an impact on the numbers. He asserted
that some felt that the price oil would rebound. He
wondered why the state forecast was counter than the
optimistic international forecasts. Commissioner Hoffbeck
replied that the forecast was made prior to Saudi Arabia
agreeing to the OPEC reduction in production. He stated
that the agreement had almost instantaneous seven to ten-
dollar bump in the price of oil. He stressed that there was
already a response to the oil patch in the lower 48,
because rigs were coming back online. He remarked that some
were looking at the $60 price point as a temporary ceiling,
and there may be another oversupply. He stated that the
forecast for the following years were $56 and $60. He
shared that the price forecast would be reexamined in the
spring, observing whether the OPEC deal would hold.
Vice-Chair Bishop appreciated the cautious approach to
forecasting. He felt that the approach helped the
legislature to keep the pressure on the budget,
notwithstanding the other departments to provide services
to the state.
9:17:50 AM
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE, discussed the PowerPoint, "Fall 2016
Revenue Forecast Presentation; Forecast Released December
15, 2016" (copy on file).
Mr. Stickel looked at slide 2, "Alaska Department of
Revenue":
The mission of the Department of Revenue is to
collect, distribute and invest funds for public
purposes
Major Programs
Tax Division
Enforces the tax laws of the state; forecasts,
collects and accounts for tax revenues
Treasury Division
Manages and invests state funds
Permanent Fund Dividend Division
Administers the PFD program and distributes the
annual dividend payment to eligible Alaskans
Child Support Services Division
Collects and distributes child support to
custodial parents
Mr. Stickel highlighted slide 3, "Forecasting Methods:
Trends for Forecast Period":
Oil Price is projected to increase 7 percent on
average over the forecast period (FY 2017-2026)
Oil Production is projected to decrease 4 percent on
average over the forecast period
Unrestricted General Fund Revenue is projected to
increase 5 percent on average over the forecast period
Investment Income is projected to increase 5 percent
on average over the forecast period
Total State Revenue is projected to increase 2 percent
on average over the forecast period
Mr. Stickel addressed slide 4, "Forecasting Methods:
Introduction":
All data is based on the DOR Fall 2016 Forecast.
This is a forecast. All figures and narratives in this
document that are not based on events that have
already occurred, constitute forecasts or "forward-
looking statements." These numbers are projections
based on assumptions regarding uncertain future events
and the responses to those events. Such figures are,
therefore, subject to uncertainties and actual results
will differ, potentially materially, from those
anticipated.
This forecast supersedes all prior estimates or
forecasts as the official forecast of the department.
Therefore, all prior forecasts should be used only for
comparison purposes.
9:19:42 AM
Senator Micciche reiterated his appreciation for the DOR
conservatism in the current forecasting. He stated that in
his first two years of the legislature, he observed a
"rosy" forecast of oil prices by DOR and DNR. He remarked
that the management must be based on a realistic case. He
felt that the celebration of the conservatism results at a
higher number at the end of the fiscal year. He felt that
the state could not count on an oil price above $60 in the
distant future.
Mr. Stickel highlighted slide 5, "Forecasting Methods: What
Do We Forecast at DOR?":
We directly forecast Petroleum Revenue
Accounted for 72 percent of state unrestricted
revenue in FY 2016
Projected to be 67-68 percent in FY 2017 and FY
2018
Includes severance taxes, royalties, corporate
income tax, and all other revenue from oil
companies
Mr. Stickel addressed slide 7, "Petroleum Revenue Forecast:
Factors":
Four Factors for Petroleum Revenue Forecast
1. Production
2. Price
3. Costs
Capital Expenditures
Operating Expenditures
Transportation Costs
4. Credits
Mr. Stickel addressed slide 9, "Fall 2016 Production
Forecast":
COMPONENT: Forecast Level
2011-2016: Well-by-Well Forecast
2016-Present: Pool Level Forecast
COMPONENT: Uncertainty Handling
2011-2016: Deterministic
2016-Present: Probabilistic
COMPONENT: Risking
2011-2016: Unrisked CP; First attempts in UD/UE
risking in 2013 Fall Forecast
2016-Present: Probabilistic technical and Non-
Technical risk
COMPONENT: Type Wells
2011-2016: Some type wells
2016-Present: Pool-by-Pool type wells
COMPONENT: Oil Price Dependency
2011-2016: None
2016-Present: Some dependence on price
COMPONENT: UD Production
2011-2016: 10-Year Outlook
2016-Present: 1-Year Outlook (1)
COMPONENT: UE Production
2011-2016: 10-Year Outlook
2016-Present: 5-Year Outlook (1)
9:24:24 AM
Senator Micciche remarked that the federal revenue in the
total state revenue for FY 16 was $2.5 billion, $3.5
billion in FY 17, and $3.1 billion in FY 18. He wondered
how one would account for a $600 million difference in the
forecast. Commissioner Hoffbeck replied that the authorized
amount was the amount the state could capture in federal
revenue. He remarked that most of the revenue was match-
associated revenue. He stressed that the state must do a
100 percent spend to qualify for the federal match dollars,
but typically the state did not meet all the qualifying
expenditures. Therefore, the state came up 20 to 30 percent
less than would could have been achieved.
Senator Micciche surmised that the prediction was the total
program dollars available if every match was achieved. He
assumed it was not a revenue number, and wondered if there
was a realistic reflection of the actual federal receipts.
Commissioner Hoffbeck replied that the annual percentage
could be adjusted downward in future forecasts.
Senator von Imhoff noted that the federal dollars could
decrease, because of the new presidential administration.
She expressed concern over the decrease in Medicaid
funding, and how that might affect the state's budget. She
remarked that there had been a recent expansion in health
care, and wondered how the decrease in federal funding
would affect the health care expansion. She queried the
modeling of potential outcomes. Commissioner Hoffbeck
replied that DOR had not modeled that unwinding, and
assumed that the Department of Health and Social Services
(DHSS) had modeled that unwinding of the Medicaid
expansion.
Mr. Stickel addressed slide 10, "Production Forecast: ANS
History and Forecast by Pool." He stated that the slide
showed a history of oil production on the North Slope since
the start of production, and a ten-ear forecast. He
remarked that in the late 1980s Alaska North Slope oil
production peaked at just over 2 million per day. He stated
that since the 1980s, with a few exceptions, production had
been declining. He announced that the state was currently
at slightly above 500,000 barrels per day, and was
projected to decline at 4 percent annually during the
forecast period.
Co-Chair MacKinnon noted some individuals who may be
available for questions.
9:29:30 AM
Mr. Stickel highlighted slide 11, "Production Forecast:
Currently Producing":
Volumes from Currently Producing (CP):
Oil from all currently producing pools and wells
Decline curve analysis forecast at pool level
inherently includes 'background' ongoing
development activity, facility maintenance,
turnaround events
Mr. Stickel addressed slide 12, "Production Forecast: Under
Development":
Volumes from Under Development (UD):
Ongoing development wells in existing, mature
fields above and beyond CP
New fields expected to produce within 1 year (by
6/30/2017)
Mr. Stickel looked at slide 13, "Production Forecast: Under
Evaluation":
Volumes from Projects Under Evaluation (UE):
New fields expected to produce within 2-5 years
(7/1/2017 to 6/30/2021)
UE 1: Facilities in place, significant sunk cost,
well locations finalized, drilling plans in place
Examples: Nuna, GMT1, Mustang, Moraine, 1H
NEWS, Nuiqsut expansion
UE 2: Facility-sharing agreements in place,
source of funding identified, EIS progress
Example: GMT2
Risk factors internalized in forecast based on
breakeven price
Mr. Stickel addressed slide 14, "Production Forecast:
Excluded from Forecast":
Characteristics:
Unknown first-oil date/estimated greater than 5
years
Discovery (contingent resource) or just prospects
(prospective resource)
Uncertain finances (e.g., sourcing for private
equity)
Facilities incomplete or nonexistent
Projects in Appraisal
Technological Uncertainty
Environmental/Permitting Uncertainty
Economic Uncertainty
Examples: Pikka, Ugnu, Placer, Tofkat, Pt Thomson (MGS
or full-cycling), Liberty, Fiord West, Smith Bay
Senator Micciche wondered whether there was work with DOR
with the accuracy probabilities. He felt that many
companies did not evaluate as accurately as others. Mr.
Stickel replied that evaluation involved a comparison to
the criteria for the under-evaluation category. He
referred to slide 13.
Co-Chair MacKinnon wondered if the characteristics were
different that forecasts from years past. Mr. Stickel
replied that there was a desire to develop a more robust
definition.
9:35:15 AM
Co-Chair MacKinnon appreciated the conservative approach to
accurately defining each category. She wondered whether the
Willow field was the recent ConocoPhillips announcement Mr.
Stickel replied in the affirmative.
Co-Chair MacKinnon wondered what was moved into the
"undefined" or current forecast versus "under development."
Mr. Stickel responded that he would provide a specific
list. He announced that no fields were moved out of the
forecast. He stressed that there was some moving between
"under development" and "under evaluation" given the new
time horizons.
Co-Chair MacKinnon wondered whether that was consistent
with general accounting practices, or if the projection was
a more conservative approach. Mr. Stickel replied that DNR
evaluated reserves. He stated that the categories set up by
DNR were not exactly mimicking accounting definitions of
"reserves."
Co-Chair Hoffman looked at the 100,000 barrels in the
Willow field, and wondered whether that was considered "new
oil." He asked how that field fell into the definition of
21. Mr. Stickel replied that field would most likely
qualify as "new oil" under the gross value reduction
provisions of the tax law.
Co-Chair Hoffman recalled that there was a declaration that
decline was at 4 percent. He queried the year envisioned
that the Willow field would be included in reversing the 4
percent decline. Mr. Stickel replied that he had not
studied the development in detail. He remarked that the
announcement was recent, and fell outside of the time
horizon for the forecast. He stated that the field would be
examined for the next forecast.
Senator Olson queried the timing of the opening of the 10-
02 lands and the opening of the Alaska National Wildlife
Refuge (ANWR). He asked what the numbers would like that
with the anticipation with that opening. Commissioner
Hoffbeck replied that there must be federal legislation
that allowed for the opening. He remarked that there was
only one current well, so there was work needed to
delineate the field. He speculated that with the approval
of drilling of ANWR in the current year, there would be 10
years until oil reached the pipeline from an ANWR
development.
Senator Olson queried the general oil production
anticipation of the opening of the lands. Commissioner
Hoffbeck replied that he did not know enough to make that
determination.
Senator Olson wondered whether production would be doubled.
Mr. Stickel responded that there was a hypothetical
analysis that was presented in a previous session to the
House Resources Committee. He stated that, based on myriad
assumptions, ANWR could potentially add 500,000 barrels per
day.
Senator Olson stressed that he was referencing only the !0-
02 lands. Mr. Stickel agreed to provide further
information.
Co-Chair MacKinnon announced that the Senate Resource
Committee would do a "deeper dive" into the production
forecast.
9:41:46 AM
Mr. Stickel looked at slide 15, "Production Forecast":
Official Forecast=
Currently Producing + Under Development + Under
Evaluation
Mr. Stickel highlighted slide 16, "Production Forecast:
ANS." He stated that most of the oil in the forecast
continued to come from the currently producing fields such
as Kuparuk, Prudhoe Bay, Colville River, and some of the
smaller current developments. He remarked that there was a
small amount of underdevelopment oil that qualified in the
one-year time horizon in 2018; and a modest amount of
undervaluation from the new fields at a peak of 31,000
barrels per day in 2022.
Mr. Stickel looked at slide 17, "Production Forecast: DOR
Cases":
High Case (P10):
Based on DNR modeling, oil production would have
a 10 percent probability of exceeding this level
Official Forecast (P50):
Based on DNR modeling, oil production would have
an equal probability of coming in above or below
this level
Low Case (P90):
Based on DNR modeling, oil production would have
a 90 percent probability of exceeding this level.
Note: None of the cases include any of the
"Excluded from forecast window" fields
With these fields, production could exceed the
high case
Mr. Stickel discussed slide 18, "Production Forecast: ANS
by Case." The slide showed the official forecast and the
high case and low case from DNR. He stated that the
official forecast declined at 4 percent annually reaching
331,000 per day of ANS production by 2026. The high and the
low case represented plus or minus approximately 40,000
barrels per day on that level. He stressed that the
calculation was before any potential new developments that
were excluded from the current forecast.
Mr. Stickel looked at slide 19, "Production Forecast: ANS
Details." He stated that the table was from page 37 of the
Revenue Sources Book, and presented the information from
the previous graph in table form. He stated that the slide
also showed the level of production estimated from the
fields that qualified as new oil for the gross value
reduction, which was a provision of the tax code. He noted
that the gross value reduction eligible production by 2026
reduced to zero. That reduction was due to some of the
reforms made to the tax system in the previous legislative
session that set new time limits for how long a field can
qualify for the new oil provision.
Mr. Stickel highlighted slide 20, "Production Forecast: ANS
Comparison to Prior Forecast." The slide was a comparison
of the fall forecast to the spring forecast. He noted that
the forecast was reduced from the previous forecast for the
next few years. He noted that beyond 2023 showed a slight
increase to the overall production forecast.
9:44:51 AM
AT EASE
9:45:11 AM
RECONVENED
9:45:16 AM
Co-Chair MacKinnon looked at slide 19.
Senator Micciche looked at slide 10, and noted the decline
rate from 1989 to 1999. He noted the flattening out from
1999 to 2004. He wondered whether there was a consideration
of those time periods, or whether there was an adjustment
for the changes in production. He felt that there was a
default to 4 percent to 6 percent. He wondered how many
years of relatively flat production or increased production
before the decline rate assumptions would flatten. Mr.
Stickel replied that DOR was looking at the range of
potential developments and the level of drilling by the
operators. He remarked that a significant uptick in
drilling activity and significant new finds in production
would cause the production forecast to have a lower decline
rate or flatten.
Senator Micciche queried the point at which actual
production entered that equation. Mr. Stickel replied that
the DNR modeling showed that actual production used to
derive the currently producing forecast. He noted that
there was an examination of the production trends for each
of the oil pools and the level of drilling and investment
in those pools as compared to the projections going forward
and development.
Senator Micciche wondered whether there was a segment in
forecasting that realized certain findings that may not be
pursued, should the price remain still. He asked if there
was a probability at certain dollar points. Mr. Stickel
replied in the affirmative, and explained that price was a
risk factor in the DNR model.
Mr. Stickel displayed slide 21, "Fall 2016 Price Forecast."
He stated that the slide compared the Fall and Spring
Production Forecasts.
9:49:48 AM
Mr. Stickel looked at slide 22, "Price Forecast: Historical
ANS West Coast, West Texas Intermediate and Brent Crude
Prices 2009+." He stated that the chart showed a history
over the most recent seven years of ANS oil prices, he US
benchmark (West Texas Intermediate), and international
benchmark (Brent Crude Prices). He stated that the Brent
Crude Price had traded closer to ANS crude than the US
benchmark in recent years. He noted that from 2011 to 2013,
there was relative stability in oil prices at between $100
to $120. That stability made the oil price forecasting
easier. He noted that prices began declining in 2014, and
continued to decline through 2015. He stated that in 2016
the prices bottomed very early in the year at $26 per
barrel, and the prices have increased throughout most of
2016.
Senator von Imhoff remarked the gap in 2012, and wondered
which price would be used in the forecast. Mr. Stickel
replied that there was an issue related to West Texas
Intermediate (WTI) crude. The crude storage was land-
locked, and with the rise in shale production there was too
much crude to move out. He stated that, relative to
worldwide prices, WTI was depressed for several years. He
felt that the Brent Crude was more appropriate to compare
with ANS, because it was not landlocked like WTI.
Vice-Chair Bishop remarked that there was a completion of
the second leg of the Keystone Pipeline, which got ANS oil
waterborne. He remarked that there were recent events which
allowed WTI to trade par with Brent Crude.
Senator Dunleavy wondered how much the state relied on the
international projection methodologies, versus the state's
own methodology. Mr. Stickel replied that there would be
slides in the presentation that would outline the price
forecasting process.
9:53:26 AM
Mr. Stickel highlighted slide 23, "Price Forecast: Key
Drivers":
Supply, Demand and Spare Capacity in CY 2017
percent
Current Events
decreased
accepts lower prices - OPEC recently agreed to
cut supply
been defined and developed (i.e. Shale oil)
Mr. Stickel looked at slide 24, "Price Forecast: Historical
ANS West Coast Price 2015+." He noted that the low of
$26.23 per barrel was reached in early 2016, which was just
before the Iran nuclear sanctions were lifted. He remarked
that there was some concern that Iranian oil would flood
the market. He stated that, since that low point, demand
had performed slightly better. He noted that there were
"moves" by Oil Producing and Exporting Countries (OPEC) to
restrain supply. He remarked that since the low point in
2016, prices had doubled. The closing price of ANS crude
two days before the meeting was $54.83 per barrel.
Mr. Stickel addressed slide 25, " Price Forecast: Impact of
Spare Compacity." He stated that the slide provided some
context for some of the previous statements. He remarked
that the slide was from the U.S. Energy Information Agency
that looked at the relationship between oil production and
oil consumption. He remarked that, for the most recent 2.5
years production had significantly outpaced oil
consumption. He remarked that, globally, the state was
putting oil into inventories at record levels. The
projections of the Energy Information Agency and several
experts were that production and consumption would start to
come into a balance, which would support price stability.
Mr. Stickel highlighted slide 26, " Price Forecast: Base
Price Method":
Price forecast is based on fall 2016 forecasting
session held on October 4
Participants gave 10th, 50th, and 90th percentile
paths
Average of these paths used to derive PERT
distribution
Base case is the median of the distribution
Co-Chair MacKinnon queried the definition of PERT. Mr.
Stickel replied that PERT was a statistical term. [PERT
stands for "Program Evaluation Review Technique.]
Senator Dunleavy wondered why the state came up with its
own prices. Mr. Stickel replied that the price forecast had
been historically produced in this manner. He shared that
DOR examined the comments from experts, and evaluated
whether those comments were reasonable. He remarked that
some analysts might differ in their projections. He stated
that there was value in evaluating what the analysts were
saying, and come to a consensus forecast.
9:58:43 AM
Co-Chair Hoffman noted that the governor had spoken about
the demand for gas and the proposed gas line in the state.
He wondered why there was not a focus of "cleaner" energy
options. Mr. Stickel replied that DOR evaluated different
projections for oil demand, and consumption growth over
time. He agreed that consumption growth was expected to
grow at a lower rate than in the past, which combined with
potential new supplies may set a ceiling on oil price
potential.
Co-Chair Hoffman wondered whether the new supplies for gas
or oil had an impact on the oil price. Mr. Stickel replied
that the impact was from new supplies for oil. He explained
that there were many shale finds, unconventional oils, and
fields that might provide new supply.
Senator Dunleavy wondered if past practices influenced the
forecast outline. Mr. Stickel replied in the affirmative.
He explained that there was not a strong reason to change
the practice of determining the forecast.
Senator Dunleavy asked how closely those projections
mirrored the actual price outcomes. Mr. Stickel responded
that the success in projecting oil prices was like the
success of other organizations. He remarked that a major
run up or crash in price was missed in the projections, but
other experts also missed those shifts in price.
Senator Dunleavy surmised that the results were similar.
Mr. Stickel agreed.
Senator Dunleavy wondered why the state would create its
own projection. Commissioner Hoffbeck replied that each
forecast had its own bias. He remarked that Goldman Sachs
usually had the lowest forecast, and other organizations
had higher forecasts. He stressed that someone needed to
analyze those different forecasts and compile them into an
estimate of the oil price. He stressed that picking one
forecast would apply someone else's bias. He felt that many
people hearing the same information would result in a less
biased determination. He remarked that it was not
necessary, but it was a process that had historically
worked and was a relatively inexpensive way to forecast the
price.
10:03:25 AM
Senator Dunleavy he felt that the internet was available
for easy forecast, and felt that maybe the forecasting
methodology was "an Alaska thing."
Co-Chair MacKinnon stressed that the state was in difficult
financial times, so she wondered if there was another way
to determine a forecast without expending the resources at
a state level.
Senator Dunleavy furthered that as the state was beginning
to enact potential revenue measures, there would be more
scrutiny as to how the figures were determined that the
state needed more revenue. He felt that the decades-old
processes would be questioned, and evaluated whether
politics may have impacted the forecast. Commissioner
Hoffbeck agreed to take those points under consideration.
Mr. Stickel defined PERT, "Program Evaluation Review
Technique."
Co-Chair MacKinnon discouraged the use of acronyms.
10:06:31 AM
Vice-Chair Bishop appreciated the discussion on price. He
felt that without production and throughput the price
conversation was a moot point.
Senator Micciche explained the history of PERT.
Mr. Stickel looked at slide 27, "Price Forecast: Nominal
ANS Price Distribution." He remarked that there was a high-
case and a low-case price path, the median 50 percent case,
and some other cases within that range. The forecast was
the 50 percent median most likely case that came out of the
price session, which showed prices increasing slowly from
current levels reaching slightly over $91 in FY 27. He
stated that backing out inflation showed prices settling in
the $70 to $75 range in real terms.
Co-Chair MacKinnon noted that there was an equal
distribution on the present-day scenario over the future at
different percentages. She wondered if there was volatility
in the forecast with the overlay of the national
organizations.
Mr. Stickel looked at slide 29, "Price Forecast: Consensus
View of Wide Distribution." The slide showed the price
forecast assumption from the Energy Information Agency and
the futures curve. He noted that through the end of FY 17,
the most likely case suggested prices in the $50 to $55
range. That range was similar to the DOR forecast. He noted
that there was a high and low case, which showed potential
volatility and uncertainty.
10:10:03 AM
Senator Micciche wondered whether there was a global
average cost of supply, where Alaska was placed out of the
market. He asked whether there was a local cost, that might
revise the future value of Alaska away from that global
cost of supply. Mr. Stickel replied that Alaska would
compete on a global level in the oil investment and new
finds.
Co-Chair MacKinnon noted that the comments were referencing
slide 29.
Mr. Stickel addressed slide 28, "Price Forecast: Historical
ANS West Coast Price FY Oil Price Bands (Annual Average and
Fall 2016 Forecast)." He noted that the history of 2010
through 2016 the average price was shown for those fiscal
years; and the range of prices within the fiscal years. He
noted that in 2013 and 2014 the volatility of price within
the fiscal year was low, which was unusual by historical
standards. He noted that the average price in 2015 was
slightly over $70 per barrel, but within the year the price
started over $100 per barrel and ended around $50 per
barrel. He noted that the bars for the 2017 through 2026
forecast represented the official forecast, high case
forecast, and low case forecast.
Mr. Stickel discussed slide 30, Price Forecast: Impact of
other prices in FY 2017." He stated that the slide allowed
the user to answer the question of the ending price of FY
17 should the price remain at a certain level. He stated
that the forecast for FY 17 prices was $46.81 per barrel,
based on five months of actual and seven months of
forecast. He stated that there was an anticipation of $45
and $50 for the remainder of FY 17. He stated that the
current day's price was closer to $55 per barrel. He stated
that the final FY 17 price would be close to $51, should
the price remain at the $55 level.
Co-Chair MacKinnon wondered whether the production figures
were given to the state monthly. Mr. Stickel replied that
the state received daily production figures, and those were
"trued up" to monthly production figures. He furthered that
the state received production taxes monthly.
Co-Chair MacKinnon noted that the production could vary,
based on the month. Mr. Stickel wondered whether her
summation was relative to the forecast.
Co-Chair MacKinnon replied in the negative. She wondered
whether the production was the same in January as it was in
July. Mr. Stickel replied that the numbers were
historically different between those months. He remarked
that maintenance activity and turnaround was normally
conducted in the summer.
Co-Chair MacKinnon felt that there was a solid base to
project forward based on other years' activity. Mr. Stickel
agreed.
10:15:01 AM
Mr. Stickel highlighted 31, "Price Forecast: ANS Comparison
to Prior Forecast." He noted that there was an increased
price forecast for the duration of the forecast period. He
noted that the forecast did not go up to the $100 per
barrel range.
Co-Chair Hoffman queried the additional revenue with the
revised forecast. He wondered whether the revenue was $100
million per year. Mr. Stickel replied that it depended on
the year.
Co-Chair Hoffman specifically queried the revenue for the
next year. Mr. Stickel replied that a one dollar increase
in oil price was a $30 million revenue increase. He shared
that there was a set of slides that would address that
question.
Mr. Stickel looked at slide 33, "Cost Forecast: North Slope
Capital Lease Expenditures." He remarked that company lease
expenditures were deductible from Alaska's production tax,
because it was a net-based tax. Lease expenditures were
also a factor in determining the value of many of the
credits, and provided a barometer of industry activity in
Alaska.
Mr. Stickel highlighted slide 33, "Cost Forecast: North
Slope Operating Lease Expenditures." He remarked that there
was a significant reduction to expected capital
expenditures in FY 17 and FY 18. He stated that the
companies would reduce costs in response to the low oil
prices wherever and whenever possible. He stated that there
were less operational rigs in the major fields, and certain
projects were canceled or delayed. He remarked that FY 17
and FY 18 were down, and then stable capital expenditures
expected after those years.
Mr. Stickel discussed slide 36, "Credits Forecast: Compared
with Production Tax." He noted that Alaska had numerous tax
credits in the tax code. Those credits could be taken
against a tax liability, should a company have sufficient
revenue to generate a tax liability to the state. He stated
that certain credits, such as the net operating loss credit
could be repurchased by the state in cash. The first chart
showed the relationship between the 2016 actual; and the
forecast for 2017 and 2018. The slide showed the
relationship between production tax revenue before any tax
credits, shown in the blue line. He noted that, in 2018,
the state estimated approximately $500 million in
production tax liability before credits. He remarked that
the following line showed production tax revenue after
application of credits against liability. There was a
forecast of $100 million of production tax, that would be
paid into the state as production tax revenue. He stated
that subtracting against that resulted in an expectation
for state repurchase of state tax credits took the revenue
to just above zero. He stated that there was an assumption
for FY 18, which showed the amount of tax credit
repurchases was as proposed in the governor's budget. That
forecast was based on a statutory appropriation in AS
43.55.028, which allowed for either 10 or 15 percent of the
production tax revenue to be deposited into the oil and gas
tax credit fund. He stated that, under that assumption, the
end of FY 18 showed approximately $887 million of tax
credits left in the books available for repurchase.
10:20:14 AM
Mr. Stickel looked at slide 37, "Credits Forecast: Compared
with Unrestricted Petroleum Revenue." He stated that in FY
18, after application of credits, there was an anticipation
of net unrestricted revenue to the state of over $1 billion
from the oil industry. He explained that including other
revenue would bring the number to a higher amount.
Mr. Stickel highlighted slide 38, "Credits Forecast:
Outstanding Tax Credit Obligations." The slide showed the
relationship between total credits repurchased by the state
for the companies that did not have enough tax liability to
offset all the credits.
Co-Chair MacKinnon wondered whether the administration had
a goal to change behavior by only paying out the statutory
minimum. Commissioner Hoffbeck replied that there was not a
goal to change behavior, but the administration recognized
that only paying the minimum could change behavior. He
stressed that some companies were relying on the cash
repurchase of the credits, and therefore would then not be
able to make those investments. He stressed that only
paying the minimum would likely change behavior. He
remarked that Alaska Oil and Gas Association (AOGA) would
adapt, but could not adapt to previous actions.
Co-Chair MacKinnon queried the variables in adaption. She
felt that there would be less production. She remarked that
it was not a goal, but rather a possible outcome from only
paying the minimum. Commissioner Hoffbeck replied that his
comments reflected AOGA's concerns. He announced that oil
companies had said that the use of credits to leverage
capital would not occur. He stated that the companies would
adapt to a payoff schedule.
10:30:13 AM
Commissioner Hoffbeck remarked that there was a series of
bills introduced by the governor in the previous session
which intended to pay off all the existing credits. He
stated that the fiscal measures did not pass, and the
governor felt that it was not prudent to pay off the
credits in the current financial situation. Therefore, the
minimum statutory amount, with the knowledge that it would
have a dramatic impact on some of the companies. He
stressed that the revenue stream must be available to pay
off the credits. He stated that the motor fuel tax and the
permanent fund protection act would still leave a $700
million gap to fill.
Co-Chair Hoffman felt that the gap would be closer to $1
billion. He stressed that the proposals did not provide the
necessary funds to pay off all the credits. Commissioner
Hoffbeck answered in the affirmative. He stated that a
long-term stable financial structure and the cash flow was
sufficient to meet the needs, there could be an examination
of using CBR funds to pay off the credit. He stressed that
the CBR was currently used as a backstop for budgetary
shortfalls, so the decision was directed at where the money
would be spent.
Co-Chair Hoffman wondered if the administration planned on
coming forward with structural changes to address the
problem. Commissioner Hoffbeck relayed that the
administration had a bill to deal with tax credit issues
that was fair and balanced. He stated that the bill was not
filed, but the administration was looking at all
suggestions. He stressed that the bill would be introduced
if necessary.
Vice-Chair Bishop did not want the stakeholders to forget
about the struggling tertiary and secondary employers and
employees who were waiting for a paycheck. Commissioner
Hoffbeck recognized those entities, and stressed that there
needed to be a stable and predictable plan to help everyone
move forward.
Senator Micciche felt that the legislature may have
complicated the growing debt with the $70 million limit per
company. He wondered whether the max payout complicated the
total payout of those credits. Commissioner Hoffbeck
replied that there was a backlog of nearly $700 million of
credits prior to the bill passing that needed to first be
paid off. He felt that the companies would also adapt. He
stressed that the companies depended on certainty, so they
can expect the state's participation.
10:36:03 AM
Mr. Stickel addressed slide 40, "Forecast Change:
Production Tax Revenue Highlights."
Oil price forecasts increased slightly from spring
forecast
settle around $70- 75 real
Change to oil production forecast methods
DNR
| Document Name | Date/Time | Subjects |
|---|---|---|
| 011917 DOR Fall 2016 Revenue Forecast Presentation - Senate Finance 1-19-17.pdf |
SFIN 1/19/2017 9:00:00 AM |
Operating Budget FY18 |