Legislature(2017 - 2018)Anch LIO
10/30/2017 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| 2017 Fall Production Forecast Presentation: Department of Natural Resources | |
| 2017 Fall Revenue Forecast Presentation: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
October 30, 2017
1:31 p.m.
[Note: The meeting was held in Anchorage, Alaska at the
Anchorage Legislative Information Office.]
1:31:25 PM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 1:31 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Gary Stevens
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
Senator Peter Micciche
ALSO PRESENT
Paul Decker, Acting Director, Division of Oil and Gas,
Department of Natural Resources; Ed King, Special Project
Assistant, Commissioner's Office, Department of Natural
Resources; Sheldon Fisher, Commissioner, Department of
Revenue; Dan Stickel, Chief Economist, Economic Research
Group, Tax Division, Department of Revenue; Senator Cathy
Giessel.
SUMMARY
2017 FALL Production Forecast Presentation: Department of
Natural Resources
2017 FALL Revenue Forecast Presentation: Department of
Revenue
Co-Chair MacKinnon discussed the agenda for the day.
^2017 FALL PRODUCTION FORECAST PRESENTATION: DEPARTMENT OF
NATURAL RESOURCES
1:32:25 PM
Co-Chair MacKinnon stated that the purpose of the
presentation was to understand the fiscal gap from the
administration's perspective, and to understand the revenue
forecast from Department of Natural Resources (DNR).
1:34:12 PM
AT EASE
1:34:41 PM
RECONVENED
ED KING, SPECIAL PROJECT ASSISTANT, COMMISSIONER'S OFFICE,
DEPARTMENT OF NATURAL RESOURCES, discussed the
presentation, "Preliminary 2017 Fall Production Forecast"
(copy on file). He stated that now the department had the
official numbers from 2017, it was possible to say that
there had been two years of consecutive production
increases.
Mr. King turned to slide 2, "2 Years of Production
Increases," which showed a bar graph. He qualified that the
FY 17 production number was still preliminary and could
change in the time before the Revenue Sources Book was
published. He pointed out that FY 17 showed an increase of
9,000 barrels per day (bpd) production increase over FY 16;
which amounted to roughly 3 million additional barrels of
oil over the previous year.
1:36:06 PM
Mr. King showed slide 3, "SHORT-TERM FORECAST," which
showed a line graph. Using the four months of preliminary
data for the current fiscal year, it was indicated that
production was on pace to beat the previous year's
production numbers. He indicated that the dashed line on
the graph represented DNR's twelve-month forecast, while
the red dots represented preliminary numbers for production
that had already occurred in the current fiscal year. He
noted that the actual production numbers were tracking the
forecast relatively well; indicating that the department
was looking at about 533,000 bpd for FY 18, which was a
9,000 bpd increase over the previous year.
Mr. King explained that for the four months of preliminary
data, the department expected about 4,000 bpd of increased
production over the previous fiscal year. Producers were
expected to continue to beat the previous year's production
for most of the winter months.
Mr. King displayed slide 4, "Where the Increases Came
From," which showed two bar graphs entitled 'FY17 change
over FY16,' and 'FY16 change over FY15.' He explained that
the slide showed the increases from the previous two fiscal
years, broken out by where the additional volumes of oil
came from. He noted that from FY 15 to FY 16, the Colville
River unit and the Prudhoe Bay unit each contributed
approximately half of the increase in production. The rest
of the units had been relatively flat, with only a slight
increase in production from the Nikaitchuq unit. He
specified that the majority of the increase in the Colville
River unit could be attributed to the CD5 development,
which was started in 2015 and continued to drill. The other
half of the production increase (in Prudhoe Bay) was
attributed to improved operator efficiency.
Mr. King continued to discuss slide 4, noting that there
had also been increases from FY 16 to FY 17 throughout many
of the fields; including Prudhoe Bay and Oooguruk. The
increases at Oooguruk had been in part due to fracture
stimulation success.
Mr. King spoke to slide 5, "Impressive Industry
Performance," which showed two bar graphs entitled 'FY17
Actual Versus Trend' and 'FY 16 Actual Versus Trend.' He
thought that it was impressive that the increases were over
and above the downward trend that history had indicated.
The slide compared the actual production numbers against
what production would have been if the anticipated five
percent decline would have continued. He pointed out that
the production across the entire North Slope was
impressive, and that the producers had beat the long-term
trend of production by a large margin. He thought it was
especially true of the Colville River and Prudhoe Bay;
which had almost 28,000 bpd of additional production, and
was the equivalent of bringing a new field online.
1:39:44 PM
PAUL DECKER, ACTING DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, reviewed slide 6, "10-YEAR
FORECAST." He noted that the slide was a representation of
what the forecast looked like, and the department would
have the actual numbers to provide when the Revenue Sources
Book was printed in December. He indicated that the solid
line with dots on the far left represented the actual
production numbers, and it was possible to see the increase
year over year. On the right of the slide, the dashed line
showed the mean case forecast, and the dotted lines above
and below showed the range of potential outcomes that were
considered feasible. He indicated that he had included the
fall forecast from the previous year (shown in small blue
triangles) as a frame of reference for the graph. He
explained how the forecast was incorporated into the
forecast that was currently being considered.
1:41:51 PM
Senator Stevens asked about the fall 2016 forecast as shown
on the graph and asked if there had been a mistake or
miscalculation.
Mr. King explained that there had been a change in the
forecast that was largely a product of the change in
information that the department had versus what it had a
year previously. He noted that the following slide would
address the issue of why the forecast changed.
He showed slide 7, "Lessons Learned":
• We assumed reduced capital expenditures and rig
laydowns would result in accelerated decline
• The operators outperformed expectations, doing more
with less
Mr. King continued to address Senator Stevens' question,
noting that when the department was putting together the
forecast 12 months previously, oil prices had just fallen
by about 50 percent. The prevalent news at the time was
highlighting rigs being laid down and global contraction of
the oil industry. At the time he had seen that companies in
Alaska were pulling back on capital. Given the information
that was available at the time, there had not been much
optimism about the ability for the producers to increase
production, and the forecast had reflected the sentiment.
With new information available, the forecast had been
adjusted accordingly.
1:43:44 PM
Mr. King discussed slide 8, "Lessons Learned," which showed
a bar graph which depicted the state forecast, the
aggregated operator forecast, and the actual production
numbers. He noted that the actual production beat not only
the state forecast, but also the operator forecast. He
thought the graph showed how impressive the operators had
been working at a time when the forecast was pessimistic.
He pointed out that the FY 18 state forecast was slightly
higher than the operator forecast. He relayed that the
state was optimistic that the producers would be able to
continue to operate well and continue to find efficiencies.
1:46:42 PM
AT EASE
1:47:08 PM
RECONVENED
Mr. Decker addressed slide 10, "CHANGES - FALL 2016 TO FALL
2017":
Fall 2016
• 5 yr future projects outlook
- Beyond 5 yrs was treated as "Pot of Gold"
(outside official forecast, excluded from Revenue
Sources Book)
• Annualized rates without seasonal fluctuations shown
• Emphasized improving long term predictions
• Under Evaluation projects were not risked for chance
of occurrence
Fall 2017
• 10 yr future projects outlook
- Beyond 5 yrs considered (part of official
forecast, included in Revenue Sources Book)
• Monthly rates with seasonal fluctuations shown
• Near term emphasis w/ attention to realistic long-
range outlook
• Under Evaluation projects risked for chance of
occurrence within ten year forecast window, first oil
start date, and probabilistic range in production
profiles
Mr. Decker noted that the department had made an important
change in 2017 - to include all projects that might make it
into the forecast on a risk-weighted basis. He noted that
some of the results of the change would be reflected in
future slides.
1:49:36 PM
Vice-Chair Bishop asked about the matrix for 'Under
Evaluation' project evaluation and wondered if it was
public information that could be shared with the committee.
Mr. Decker agreed to provide the information to the
committee.
Co-Chair MacKinnon asked if the near-term and long-term
production forecast model was consistent with that of other
regions similar to the state. She thought the slide took a
different look at production. She thought there had changes
to improve consistency and a better understanding of the
short-term forecast.
Mr. Decker stated that the department had tried to develop
its process internally without any particular canned
solutions; he did not know how other jurisdictions
accomplished the task. He felt the department's approach
was fundamentally sound; DNR had tried to incorporate risk
and uncertainties and develop everything in a probabilistic
manner. He thought the division's approach to risk and
uncertainty was an industry standard.
1:52:03 PM
Mr. Decker displayed slide 11, "TECHNICAL PROCESS CHANGES":
• Increase understanding of tools and technique
- Closer collaboration with software developer
- Hindcasting exercise/sensitivities to test
applicable Decline Curve Analysis regression periods
- Steps to improve near-term accuracy
• Improve process efficiency:
- Improved collaboration
- Regular consultation with Department of Revenue
• Improve communication with clients and stakeholders
Mr. Decker noted that it was only the second time the
Division of Oil and Gas had been through the process; prior
to which the production forecast had been generated by a
consultant hired by the Department of Revenue (DOR). He
felt that the division had made significant improvements to
the current forecast by implementing some small changes.
Mr. Decker continued to discuss slide 11, and relayed that
the department had done a look-back at some previous
forecasts and questioned how the selection of the historic
decline period had impacted the decline projections. The
division had made some minor adjustments that helped
emphasize the near-term history as the best predictor of
the near-term future. He hoped that communication with the
legislature would be smoother in the current year.
Co-Chair MacKinnon considered that when the division had
looked at previous forecasts it tried to apply the new
formula to test different results.
Mr. Decker affirmed that the division had engaged in
hindcasting, which was a way of testing the sensitivity of
the model to get the best prediction of future production.
1:54:31 PM
Senator von Imhof recalled a slide that referenced operator
forecasts and thought it was interesting that there were
three forecasts (the department's, the operators', and the
actual). She had heard it had been difficult in the past
for the department to obtain comprehensive and accurate
information from the operators. She discussed proprietary
information from producers and wondered if Mr. Decker felt
the department was getting sufficient information. She
asked why the department didn't just use the operator
forecast.
Mr. Decker felt that the department was receiving the
information it had requested and was happy with the results
of the information sharing. He felt that without
incorporating certainty and developing its own methodology,
the department would not have a sufficient estimate. He
thought was important for the department to include its own
understanding of the range of uncertainty in projects. He
qualified that some information provided by certain
operators was very precise, and other operators might have
a less accurate take on future performance. He thought it
was a good idea to maintain an independent forecast.
1:56:25 PM
Mr. King commented that the operators provided estimates
and had much more information about the reservoirs than the
department. He furthered that the operators also had
software, techniques and expertise to do estimates very
well. He relayed that DNR had been challenged with
aggregating all the different operator's information from
across the North Slope to provide the legislature with a
revenue estimate. He pointed out that the operators may not
have consistent methods that were applied to the fields. He
thought there was also a case that there were projects
under development, to which operators would apply different
risking methodologies and employ different assumptions for
when production would come online.
Mr. King continued. He informed that the department had its
own team that used production data from the Alaska Oil and
Gas Conservation Commission (AOGCC) applied in a consistent
method across the entire North Slope. He thought it gave
credibility to the numbers if the department's estimate
report was somewhat consistent to that offered by
producers. If there was big disparity, there would need to
be additional communication.
1:58:29 PM
Co-Chair MacKinnon reminded that the committee was having
background hearings on production and revenue forecasts
because in the past oil production revenue dramatically
impacted conversations pertaining to the state's fiscal
situation. She stated that the subject of how oil
production could factor into the state's economic recovery
had been the topic of multiple bills the committee had
considered.
Co-Chair MacKinnon informed that Senator Olson had joined
the meeting. She explained that Senator Micciche was not
present due to illness.
Mr. Decker reasoned that the department liked to do its own
forecast because it used public data as opposed to taxpayer
confidential information provided by operators (which the
department may or may not be able to share).
2:00:57 PM
Mr. Decker spoke to slide 12, "NEAR-TERM UNCERTAINTY":
• Decline Curve Analysis weighted toward recent
production history (2 to 5 yrs)
• Probabilistic range beginning from first date of
forecast (previously probabilistic curves were pinned
to last month of historical production)
• Full credit to planned UD production (previously we
discounted nearly all UD as "within background")
- Makes for more accurate near term production
- Makes up for rate increases from non-drilling rate
additions
Mr. Decker discussed the new practice of giving full credit
to "under development" (UD) production (wells expected to
yield production within the first year of forecast). He
considered it to be a significant change. Previously the
department had discounted most of the UD production as
within the background that showed up in the decline curve
analysis projections. For the short-term prediction, he
thought it was important to consider the activity that was
happening in the fields in the first year or two of the
forecast.
2:02:37 PM
Mr. Decker reviewed slide 13, "Methodology":
• Currently producing:
-Small uncertainty range due to established
behavior of production pools
-Quantitative probabilistic range of outcomes for
CP pools
• Projects Under Development:
-Applied quantitative probabilistic ranges using
type wells
-Some financial risk: Addressed using estimated
project breakeven price and Department of Revenue
oil price forecast
-Projects detailed in plans of development or in
confidential meetings with DOR
• Projects under Evaluation
-Projects that have been announced, but are
premature for sanctioning
-Applied quantitative probabilistic ranges using
type wells
-Financial risk using project breakeven price and
Department of Revenue oil price forecast
-Other uncertainties included
• Project chance of occurrence
• Project timing risk
Mr. Decker clarified that 'currently producing' fields
signified all the production coming from the currently
producing fields and were analyzed alone to develop one
category of the forecast. He explained that UD projects
were expected to yield production within the first twelve
months of the forecast, and DOR considered the operator's
plan of development. He continued that 'under evaluation
(UE) projects were expected to yield production from 2 to
10 years of the forecast.
2:04:56 PM
Mr. Decker read slide 14, "PRELIMINARY 2017 FORECAST."
Mr. Decker turned to slide 15, "FALL 2017 FORECAST
RESULTS," which showed a graph entitled 'Production
Forecast Range (All Alaska).' The slide showed the entire
10-year official forecast. He noted that the department had
added the dark line to the left to illustrate 3.5 years of
recent history. The dark blue line to the right was the
mean forecast. He pointed out whiskers on the graph that
showed the high and low ranges. He qualified that 80
percent of the time, the forecast was expected to be within
the limit of error between the whiskers. He pointed out
that the error range increased in the outlying years, as
there was greater uncertainty with future projects.
Mr. Decker explained that the graph showed a much more
believable and intuitive product than the department had
been able to show the previous year, in part because of the
seasonal adjustment that had been applied. He noted that
the "saw-tooth" pattern of the line on the graph reflected
wintertime efficiencies, as well as summertime downtime. He
considered the junction of the line between historical data
and forecast data and thought one might view the forecast
as seamless and believable. He observed that the forecast
increased in the following year, and then held relatively
steady. He thought the forecast was positive for Trans-
Alaska Pipeline System (TAPS) longevity.
2:07:07 PM
Mr. Decker showed slide 16, "ANS Forecast by Category,"
which showed a graph entitled 'Total North Slope Oil
Production (including NGLs).' The graph showed the forecast
without seasonal adjustments and showed single point
estimates over time. He explained that the dark blue
portion represented existing pools. The orange band
represented UD activity. The light tan at the top
represented UE projects.
Vice-Chair Bishop asked for clarification on the graph on
slide 16.
Mr. Decker edified that the light tan category on the graph
represented projects under evaluation. He thought the slide
was important as it showed that the bulk of the current
forecast came from the currently producing fields.
2:08:54 PM
Mr. Decker displayed slide 17, "Currently Producing
Forecast," which showed individual field's contribution to
the currently producing forecast. He explained that the
dark blue layer at the bottom represented the Prudhoe Bay
unit, the orange layer represented the Kuparuk River field,
and the tan layer of the graph represented the Colville
River unit. He explained that the three portions
constituted the workhorses in the currently producing
fields. He stated that if the state were to stop investing
(maintaining and replacing existing wells), the pools would
continue declining. He thought it was good that the decline
in the currently producing forecast was largely being
mitigated in the long term and the near term by the UD and
UE categories.
2:10:02 PM
Co-Chair Hoffman had heard of high expectations for the
Point Thomson project, and thought the graph showed a
steady line for its production forecast.
Mr. Decker discussed the Point Thomson project, which was a
three-well gas cycling project. He recalled the expectation
that it would come online at approximately 10,000 barrels
of condensate per day. He knew there had been operational
problems with getting production online, and it was his
understanding that in the previous few months or weeks the
project had come on at a fairly high and relatively steady
rate. He did not believe it had reached the mark of 10,000
bpd. He qualified that the project was very different than
the Point Thomson Expansion project, that would yield far
more condensate in addition to gas.
Co-Chair Hoffman asked if improvements in technology could
be anticipated in heavy oil.
Mr. Decker stated that in the long-term forecast in the UE
sector, there was one category for heavy oil development,
but it was not likely that technology would be applied to a
large-scale project unless there was a significant price
change.
2:12:07 PM
Mr. Decker spoke to slide 18, "WHERE WILL THE NEW OIL COME
FROM?" The slide showed a graph of a ten-year forecast
period entitled, 'All UE Projects-Risked for occurrence,
timing and scale.' He explained that the slide showed a
diagram of what the UE projects looked like under the ten-
year forecast. He qualified that the projects had been
risked for the chance of even occurring within a ten-year
window; and were also risked for the uncertainty of what
year oil production would start, and the level of
performance. He suggested that viewers conceive of the
graph as a best estimate of how the entire new oil
portfolio would perform over time. He cautioned against
looking at individual projects' magnitude in isolation as
discreet scenarios.
2:13:41 PM
Mr. King discussed slide 19, "HOW SHOULD WE INTERPRET THIS
FORECAST?":
• There's a lot to be excited about
- but there is still a lot of uncertainty in future
projects
• The forecast is a probability weighted average of
many possible outcomes
- It is not a prediction of exactly which scenario
will come to be
• Each year in the forecast is it's own best estimate
- The year to year changes are not actually
predictions of decline rates
Mr. King thought the slide spoke for itself.
Co-Chair MacKinnon stated that the committee had been
presented with a great deal of seismic data the previous
year. She wondered if the state was working its way through
the data to understand if there was anything of value.
Mr. Decker stated that the tax credit seismic data program
was one that his section in the Division of Oil and Gas
Resource Evaluation had a lot of responsibility for. The
first tax credits had been implemented in 2003. The
previous 5 to 7 years, the division had been busy working
on ensuring that the incoming data met expectations. The
department had released some data the previous year and had
recently received regulatory go-ahead to distribute more
data (with the caveat that some administrative costs could
be recouped). The department would be releasing more data
in the following months and expected that operators would
be very interested in updating information and using it to
develop exploration prospects.
2:15:58 PM
Co-Chair MacKinnon asked if the state had paid for the tax
credits associated with the data that was going to be
released.
Mr. Decker stated that the question would be best addressed
to the Department of Revenue.
Senator Stevens asked about Mr. Decker's reference to no
longer using consultants. He wondered how many people were
required to do the work, and if he was satisfied with the
number of employees tasked with the work in the division.
Mr. Decker answered in the affirmative. He stated that
there was a small group of individuals that spent a lot of
time on the forecast. He listed the following positions: a
commercial analyst, two reservoir engineers, and two
geologists (including himself). Others from the Division of
Oil and Gas, especially from the commercial section, would
weigh in on the forecast and provide important information.
He thought that the forecast product was considerably
better than what was provided the previous year and thought
the group had been naïve about how the product would be
used and scrutinized. He felt like there had been
significant improvements in the current year and hoped the
rest of the forecast team felt the same way.
Senator Stevens wondered if a consultant could do a better
job than the division.
Mr. Decker thought that consultants could potentially do a
better job, but qualified that he had not seen previous
projects conducted by the consultants with the sort of
probabilistic handling of uncertainty used by the division.
He considered the practice to be an industry standard
technique. He thought it was important to have quantitative
sideboards on any estimate as important as the forecast.
2:18:43 PM
Co-Chair MacKinnon thanked the testifiers. She commented on
the importance of the information presented. She warned
that the numbers presented were subject to change as the
department refined the forecast. She remarked on the
compressed time frame in which the numbers were requested
and delivered and advised the data would be refined over
time.
2:20:18 PM
AT EASE
2:26:18 PM
RECONVENED
^2017 FALL REVENUE FORECAST PRESENTATION: DEPARTMENT OF
REVENUE
2:26:43 PM
Co-Chair MacKinnon commented that the purpose of the
forthcoming presentation from the Department of Revenue
(DOR) was to further understand the revenue that was coming
into the state. She reiterated that current information on
oil and gas revenue was important to understand when
considering proposed taxes. The Senate was trying to
understand the gap in potential revenue coming into the
state. She reminded that oil and gas revenue constituted a
huge portion of the state's revenue. She mentioned oil and
gas tax legislation discussed by the Senate over the
previous four years. The Senate requested the commissioner
of DOR to provide price and production numbers prior to
introducing the budget. She reiterated that the numbers
were subject to change.
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
appreciated the opportunity to present to the committee. He
discussed the presentation, "Preliminary Fall 2017 Revenue
Forecast Presentation," (copy on file).
Commissioner Fisher turned to slide 2, "FORECASTING
METHODS: Timeline":
· December 2016: Fall 2016 forecast and Revenue
Sources Book
· Early April 2017: Spring 2017 forecast
· Late April 2017: Spring 2017 Alternative Scenario
o 4% Production Decline Scenario, Letter to Co-
Chairs
o Used in modeling by Department of Revenue,
Office of Management and Budget, and
Legislative Finance
· October 2017: Preliminary Fall 2017 forecast
o non-standard, provided to assist special
session
· December 2017: Final Fall 2017 forecast and Revenue
Sources Book
· March or April 2018: Spring 2018 forecast
Commissioner Fisher explained that historically DOR had
issued a forecast in the fall (generally in December), and
then updated the forecast in the spring. In the current
year there had been a couple of changes to the forecast.
The department and the legislature had realized that the
spring forecast (issued in April) was too pessimistic, as
it had predicted that oil would decline too rapidly. In
late April, the department had revised the forecast upward,
and reduced the rate at which the oil was predicted to
decline. The alternative scenario was offered for
consideration and had become the foundation for most
discussions for the previous six months. He stated that he
would discuss how the alternative scenario varied from the
official forecast.
Commissioner Fisher continued that the fall forecast being
presented was another deviation from the norm and was
available because of the nature of the special session. He
affirmed that the department would be issuing a regular
fall forecast and Revenue Sources Book in December, as well
as a revised forecast in the spring.
2:30:54 PM
Commissioner Fisher showed slide 3, "FORECASTING METHODS:
Introduction":
· All data is based on the DOR Fall 2017 Preliminary
Forecast.
· This is a preliminary forecast and some numbers will
change before the final submittal in December.
· Changes to unrestricted revenue between the
preliminary and final forecast are expected to be
less than $100 million in any given year.
Note: 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 subject to uncertainties and actual
results will differ, potentially materially, from
those anticipated.
Commissioner Fisher commented that the department had about
three days between the time it received the production
forecast from DNR and when it finished its work on the
forecast. He had demanded an accelerated timeframe. He
expected there to be revisions. He did not expect to see
revenue change in the forecast by more than $100 million in
any given year.
2:31:46 PM
Commissioner Fisher displayed slide 4, "FORECASTING
METHODS: What Do We Forecast at DOR?":
· We directly forecast Petroleum Revenue
o Accounted for 65% of state unrestricted revenue
in FY 2017
o Projected to be 70-72% in FY 2018 and FY 2019
o Includes severance taxes, royalties, corporate
income tax, and all other revenue from oil
companies
· We directly forecast Non-Petroleum Revenue
· We use Alaska Permanent Fund Corporation and
Treasury Division forecasts for Investment Revenue
· We use the Federal Revenue authorized for spending
as the forecast
o It is typically 20%-30% more than actually gets
spent
· Compile all of these into Revenue Sources Book once
the forecasts are finalized.
Commissioner Fisher stated that typically the department
used the total authorized federal revenue in the forecast
for consistency purposes, although it was typically not all
spent.
2:32:46 PM
Commissioner Fisher read slide 5, "Fall 2017 Preliminary
Petroleum Revenue Forecast."
Commissioner Fisher spoke to slide 6, "PETROLEUM REVENUE
FORECAST: Factors":
Four Factors for Petroleum Revenue Forecast
1. Production
2. Price
3. Costs
4. Credits
Commissioner Fisher stated that the department had
moderated its future oil price expectations compared to the
prior forecast.
2:33:37 PM
Commissioner Fisher read slide 7, "Fall 2017 Preliminary
Production Forecast."
Commissioner Fisher turned to slide 8, "PRODUCTION
FORECAST: ANS History and Forecast by Pool," which showed a
pictorial graph representation of oil production. He
pointed out that the dotted line denoted the present time.
He pointed out that the existing fields continued to
decline, although at a slower rate than predicted in the
past. The sliver of pink to the right of the dotted line
represented new fields that would come on line, that while
moderate would provide an uplift to the decline and help
stabilize revenues.
2:34:31 PM
Commissioner Fisher showed slide 9, "PRODUCTION FORECAST:
ANS by Case." He explained that there was a range of
possibilities shown on the slide. The high case (P10) was
intended to represent the 10 percent likelihood that oil
production of would be that level or higher. The 90 percent
case (P90) represented that there was a 90 percent
likelihood that production would be that level or higher.
The official forecast (at P50) represented a 50 percent
likelihood.
Commissioner Fisher displayed slide 10, "PRODUCTION
FORECAST: ANS Details," which showed a table entitled,
'Preliminary Fall 2017 ANS Oil Production Forecast.' He
thought the numbers on the table were consistent and
underlie the charts that the committee saw on the DNR
presentation earlier in the meeting. He qualified that the
numbers were from North Slope production only, and did not
include numbers from Cook Inlet, which were a smaller
percentage with less change from the prior forecast. For
20118 there was a forecast of a little over 530,000/bbl. He
pointed out that there was a modest decline, until 2024
when there was an increase or flat trend. He reiterated
that there was a leveling off of production compared to the
forecast a year previously.
2:36:17 PM
Commissioner Fisher reviewed slide 11, "PRODUCTION
FORECAST: ANS Comparison to Prior Forecast," which showed a
graph. He explained that the orange line represented the
official spring forecast that came out in early April 2017.
The graph showed a fairly steep decline in the first year
of about 12 percent, and then a levelling off. The grey
line represented the alternative scenario that was
described earlier, which had a 4 percent decline rather
than the steep 12 percent decline. The heavy blue line
presented the forecast as presented by DNR earlier in the
day. He thought it was worth noting that in the out years
the impact of the new forecast was greater.
2:37:38 PM
Commissioner Fisher spoke to slide 12, "PRODUCTION
FORECAST: NPR-A Update":
· Alaska's share of revenues fund the Alaska Impact
Grant Program
· Forecasted volumes from Moose's Tooth (GMT1 & GMT2)
and Willow
Source: Department of Revenue and Department of
Natural Resources; NPR-A = National Petroleum Reserve
- Alaska; GMT = Greater Moose's Tooth
Royalty Revenue and Volumes from NPRA
Commissioner Fisher explained that the state received a
share of the federal royalty from the National Petroleum
Reserve - Alaska (NPR-A), as well as some production tax,
corporate income tax, and property tax; but did not get a
state royalty.
2:38:14 PM
Commissioner Fisher turned to slide 14, "PRICE FORECAST:
Historical ANS West Coast, West Texas Intermediate (WTI)
and Brent Crude Prices 2009+," which showed a line graph.
He informed that the department had gone through its fall
pricing exercise. He reiterated that the department had
done some moderating of expectations during the out years.
The graph showed other benchmarks that were used elsewhere
in the world: West Texas Intermediate (WTI), which
referenced the price of oil in the Texan Basin; and the
Brent (worldwide pricing).
Commissioner Fisher continued discussing slide 14, noting
the wide range of numbers. He stated that there was a
number of factors that drove the figures, and although
there were differences, the figures generally moved
together.
2:39:42 PM
Commissioner Fisher showed slide 15, "PRICE FORECAST:
Historical ANS West Coast Price 2016+," which showed a line
graph over a narrower period of time from June, 2016 to
October, 2017. He pointed out a lesser degree of
variability in the price than the previous slide. He
expected there would be an interesting question pertaining
to the current price of oil, which was meaningfully higher
than what the DOR forecast had predicted. He explained that
the department started its day with consideration of the
futures forecast, and then later in the day considered the
prior day closing analysis.
Commissioner Fisher continued discussing slide 15, stating
that even though pricing in the current market was above
$60/bbl, the futures market was closer to the $54/bbl
range, which was what the department had predicted for the
coming year. He thought the forecast was very consistent
with other pricing forecasts in the immediate few years. He
added that if there was a dramatic movement in the world
markets, the department may choose to revisit the forecast.
He felt comfortable with the current forecast.
2:41:46 PM
Commissioner Fisher displayed slide 16, "PRICE FORECAST:
Key Drivers":
· Supply, Demand and Spare Capacity in FY 2018
- 99.08 million barrels per day
- 99.05 million barrels per day
· Current Events
OPEC and Russia are maintaining decreased
production until at least March 2018
- Compliance with this cut has been relatively high
Kurdish independence vote may disrupt supply
Commissioner Fisher shared that there was an expectation
that there would continue to be discipline in terms of
production from Russia and Saudi Arabia.
2:42:57 PM
Commissioner Fisher reviewed slide 17, "PRICE FORECAST:
Impact of Spare Capacity," which showed a graph entitled
'World Liquid Fuels Production and Consumption Balance.'
The orange line represented demand, and the blue line
represented production. He informed that when the green
bars fell below the mid-point, it indicated demand was
greater than supply and there was upward pressure on price.
When the green bars were above the line, it was a period in
which the supply was greater than demand and there was
downward price pressure. He pointed out a balance between
the two price drivers looking forward to 2018.
2:43:49 PM
Commissioner Fisher spoke to slide 18, "PRICE FORECAST:
Base Price Method":
· Price forecast is based on Fall 2017 forecasting
session held on October 9th
· Participants gave 10th, 50th, and 90th percentile
paths
· Average of these paths used to derive distribution
of possible prices
· Base case is the median of the distribution
Commissioner Fisher detailed that the participants
assembled for the forecast included economists from the
Institute of Social and Economic Research (ISER),
individuals from the Legislative Finance Division, staff
from DOR, and a number of people from the community.
Experts presented information about the direction of the
market, and how they predicted drivers that underlie
potential oil price for the future. Different percentile
pathways were considered (P10/P50/P90) and provided to the
forecast team.
2:44:45 PM
Commissioner Fisher discussed slide 19, "PRICE FORECAST:
Nominal ANS Price Distribution," which was a graph
reflecting the analysis from the department to predict a
set of alternatives with predictive expectations. The
numbers were reflected in nominal dollars. The graph showed
that oil price was forecast as largely unchanged for FY 18,
was approximately $56/bbl in FY 19, and grew close to
$80/bbl in FY 28. He thought it was worth noting that in
real dollar terms, the predictive forecast would show oil
price rising to about $60/bbl.
Co-Chair MacKinnon asked why the forecast did not use
industry price averages that were already compiled
elsewhere.
Commissioner Fisher informed that there was no single
industry average, but rather a variety of benchmarks to
choose from. He thought it was apparent that the DOR
forecast was closely in line with the industry price
averages. He stated that each source had different
characteristics that made it valuable and influential.
2:46:53 PM
Commissioner Fisher addressed slide 20, "PRICE FORECAST:
Historical ANS West Coast Price FY Oil Price Bands (Annual
Average and Fall 2017 Forecast)." He noted that the solid
black lines on the left-hand side showed the range of
pricing during the time period indicated. The grey bar that
intersected the bars represented the average price. The
right-hand side of the graph which showed the forecast
represented the P90 and P10 values, with the grey lines
predicting the average price predicted (as well as the
price reflected in DOR's model).
2:47:44 PM
Commissioner Fisher showed slide 21, "PRICE FORECAST:
Consensus View of Wide Distribution," which showed a graph
produced by the Energy Information Agency (EIA). The slide
was produced by the Energy Information Agency (EIC) and
showed its prediction in red. The green represented the New
York Mercantile Exchange (NYMEX), which was in essence the
futures market. He explained that EIA considered futures
market pricing and showed 95 percent confidence intervals
as shown by the dotted lines on the graph.
2:48:56 PM
Commissioner Fisher reviewed slide 22, "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast." The dotted
black line represented DOR's forecast price. The blue line
represented the analysts. The green line represented the
EIA price forecast. He noted that the jump that was
observable in January 2019 was somewhat reflective of a
stale price. He detailed that EIA had not updated the graph
since January 2017, while the lower portion of the green
line had been updated continuously.
Commissioner Fisher continued discussing slide 22. He
commented that experts had considered the NYMEX pricing to
be a strong predictor in the near term, but the further out
it went the less accurate it became. There was not a very
strong correlation between the future pricing and what had
happened historically. Alternatively, the blue line
represented what the analysts predicted; which also had
varied from what the futures had predicted. He thought that
the department was in a tight range with other predictive
models and had been relatively well served by its process
of forecasting pricing.
2:51:04 PM
Co-Chair MacKinnon asked if EIA was a federal agency.
Commissioner Fisher answered in the affirmative.
Commissioner Fisher displayed slide 23, "PRICE FORECAST:
ANS Comparison to Prior Forecast." The slide showed a
comparison; with the orange line representing the pricing
present in the spring 2017 forecast. He reiterated that
there was a spring forecast and additionally an alternative
scenario, and the pricing had not changed between the two.
The blue line showed how pricing had been revised in the
most current exercise.
2:52:24 PM
AT EASE
2:52:41 PM
RECONVENED
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, informed that he would
discuss the remaining two major factors of the petroleum
revenue forecast: company costs, and tax credits. He would
also address slides that summarized the revenue forecast
and make some comparisons to the previous forecast.
Mr. Stickel spoke to slide 25," COST FORECAST: North Slope
Capital Lease Expenditures," which showed the cost forecast
for North Slope capital expenditures compared to the
previous forecast. He conveyed that the department received
cost forecasts with a five-year time horizon, submitted by
the operators of the units twice per year; which were a
primary source of the department's cost forecast
information. Additionally, DOR looked at planned
development and various public information. There had been
a change in the cost forecast, and there were two
components. For the legacy fields and existing production,
operators had largely reduced expenditures across the
board.
Mr. Stickel continued discussing slide 25, observing that
the portion of the graph in which the blue line (fall 2017
forecast) rose above the orange line (spring 2017 forecast)
represented the addition of capital expenditures for new
fields that were coming online.
2:54:32 PM
Co-Chair MacKinnon referred to oil and gas tax credits, and
asked how the department considered investment, tax
credits, and the different scenario for production. She
thought there was a new dynamic happening and wondered how
payment of tax credits was affecting investment.
Mr. Stickel stated that the department was working closely
with DNR throughout the production forecast process. When
DOR incorporated new fields into the cost forecast, it
looked at the chance of occurrence that DNR assigned to the
fields. He gave an example in which DOR valued a new
project at $1 billion to bring online and DNR assigned a 20
percent probability for the project; DOR would include $200
million of the development cost into the forecast. He
addressed tax credits and noted that there had been a drop
in spending. There was approximately $4 billion in capital
expenditures on the North Slope in FY 15. The department
had met with companies and tried to glean what was driving
the change in behavior. The department had heard
consistently that state policy as well as oil price had
influenced negative cost pressure.
2:56:53 PM
Co-Chair MacKinnon referenced the governor's vetoes of a
Senate proposal to pay more tax credits, as well as the
decline in capital lease expenditures as shown on slide 25.
She asked about tax credits owed by the state.
Commissioner Fisher stated that a future slide would
address the matter and would reflect that credits would be
payed off more quickly and at higher levels than prior
forecasts had shown. He pointed out that the governor's
budget proposal, despite the vetoes, had included paying
off credits in a faster manner than the statutory minimum.
He thought that the department understood that there was a
need to pay off the credits, and looked forward to working
with the legislature to find a way to do so quickly as well
as provide the capital that producers needed to develop and
grow.
Co-Chair MacKinnon referred to companies that had gone
bankrupt, and other companies that had contacted
legislators regarding finances. She wanted a definitive
answer as to whether the state owed the credits, and
whether it would pay the credits. She understood that there
was not an established timeline.
Commissioner Fisher stated that the administration
acknowledged that the state owed the credits, and it was
more a question of the rate at which the credits would be
paid. He thought if it was possible to complete the special
session and deal with some of the bigger blocks associated
with funding state government, there would be an
opportunity to deal with other issues such as tax credits.
Co-Chair MacKinnon stated that the Senate had proposed
paying a third of owed tax credits the previous year, but
was not able to get the other body in agreement. She
thought perhaps the legislature would reach accord the
following year. She was encouraged to hear that there might
be a way to provide more certainty to the oil and gas
industry.
3:00:09 PM
Mr. Stickel informed that there would be additional slides
that would address the tax credit issue. He discussed slide
26, "COST FORECAST: North Slope Operating Lease
Expenditures." He stated that the slide reflected the
ongoing cost to maintain the fields on the North Slope. He
discussed continued pressure on bringing down operating
expenditures. He asserted that companies were doing
everything possible to make the current oil price level
work on the North Slope. He pointed out a 5 percent to 10
percent reduction in expected operating costs for legacy
fields. In the time frame from 2022 through 2023, there was
a bump up in expected operating expenditures. He reiterated
that the department had incorporated the cost of operating
some of the new fields that were added to the forecast.
3:01:22 PM
Mr. Stickel showed slide 28, "Statutory Credit
Appropriation: Methodology":
· DOR calculates statutory credit appropriation based
on production tax levied under AS 43.55.011, before
subtracting any credits against liability.
AS 43.55.028.
(b) The oil and gas tax credit fund consists of
(1) money appropriated to the fund, including any
appropriation of the percentage provided under (c) of
this section of all revenue from taxes levied by AS
43.55.011 that is not required to be deposited in the
constitutional budget reserve fund established in art.
IX, sec. 17(a), Constitution of the State of Alaska;
and
(2) earnings on the fund.
(c) The applicable percentage for a fiscal year under
(b)(1) of this section is determined with reference to
the average price or value forecast by the department
for Alaska North Slope oil sold or otherwise disposed
of on the United States West Coast during the fiscal
year for which the appropriation of revenue from taxes
levied by AS 43.55.011 is made. If that forecast is
(1) $60 a barrel or higher, the applicable percentage
is 10 percent;
(2) less than $60 a barrel, the applicable percentage
is 15 percent.
Mr. Stickel discussed the methodology of how DOR came up
with the statutory credit appropriation. He noted that the
legislature had phased out a lot of the tax credits that
were eligible for state purchase. There was still an
outstanding balance for the credits that were accrued, and
there were still some credits coming in the current year
and the following year. He explained that there was
statutory language that provided some guidance as to how to
appropriate money to pay off the balance.
Mr. Stickel continued discussing slide 28, and referenced
AS 43.58, which pertained to the oil and gas tax credit
fund. He thought the most important aspect of the topic was
the interpretation that the department had been using to
calculate the statutory appropriation. He clarified that
there was a 35 percent net tax before any taxable per-
barrel credits.
3:03:16 PM
Mr. Stickel reviewed slide 29, "Illustration of Tax and
Credit Calculations," which showed an example of how
production tax was calculated, and how the statutory
appropriation was estimated. The example came from the
spring 2017 official forecast. He observed that there had
been an estimated market price of $60/bbl, about 140
million taxable barrels, and $5.6 billion in costs; which
gave an estimated production tax value of $1.4 billion.
When the 35 percent net tax rate was applied, the tax
(before applying any credits) was estimated at $490
million. The statutory multiplier was 10 percent, and the
estimated statutory appropriation for FY 19 was
approximately $49 million at the time of the spring
forecast.
3:04:15 PM
Co-Chair MacKinnon pondered that if calculations were based
on predictions, the administration was in control of the
amount.
Mr. Stickel stated that Co-Chair MacKinnon was correct in
that the statute referenced the forecast price by DOR. He
continued that the provision of the appropriation to the
tax credit fund did not factor into the price forecast.
Commissioner Fisher stated that there had been no
discussion about the value of credits and what was paid and
unpaid as the department considered pricing in the
exercise. He thought that lowering the price forecast had
the counter-intuitive result of increasing the amount of
credit that would be paid.
3:05:49 PM
Mr. Stickel displayed slide 30, "Illustration of Tax and
Credit Calculations." He explained that the slide showed
the same calculation of FY 19 production tax and estimated
statutory appropriation as the previous slide, but using
the preliminary fall forecast rather than the official
spring forecast. He noted that the illustration decreased
the price from $60/bbl to $56/bbl and had increased the
number of barrels (due to the higher production forecast).
Estimated company spending had come down quite a bit. The
net result of the differences was an estimated production
tax value of $3.3 billion for FY 19. When the statutory 35
percent tax rate was applied, there was a production tax
value (before credits) of $1.15 billion. Since the forecast
market price was below $60/bbl, the multiplier for
determining the statutory appropriation was 15 percent, and
there was an estimated appropriation of $172.5 million (for
North Slope), which combined with Cook Inlet totaled $175
million.
3:07:16 PM
Mr. Stickel reviewed slide 31, "FY 2019 Statutory Credit
Appropriation":
Key Changes Spring to Preliminary Fall:
· Production forecast increased
o 29 million more taxable barrels
o $800 million more gross value
· Cost forecast decreased
o $1.1 billion less deductible costs
· Tax before credits increased
o $1.9 billion more profit x 35% = $660 million
· Different Statutory Appropriation Multiplier
o Appropriation is 15% of tax before credits when
price forecast <$60, 10% when price forecast is
$60+
Mr. Stickel specified that under the current preliminary
fall forecast, there was an estimated greater than $100
million under the statutory appropriation calculation for
all years of the forecast.
3:08:41 PM
Mr. Stickel spoke to slide 32, "CREDITS FORECAST: Compared
with Production Tax," which displayed a chart showing
production tax before and after credits against tax
liability. The grey bars showed net fiscal impact of
repurchased credits by the state. He pointed out that for
FY 19, if one just examined the net rate before applying
credits against liability, there was about $1.2 billion in
tax before credits. With the taxable per-barrel credits the
amount was closer to $300 million, and about $175 million
estimated for the statutory appropriation, leaving a net of
about $125 million for FY 19.
Co-Chair MacKinnon asked if it was fair to say that the 35
percent tax rate, in combination with the tax credits per
barrel, was a mechanism to create slight progressivity in
the overall model.
Mr. Stickel stated that adding a slightly progressive
element was part of the justification for going to the per
taxable barrel credit. He stated that another justification
was to directly incentivize production, as opposed to the
previous system which directly incentivized spending.
3:10:41 PM
Mr. Stickel discussed slide 33, "CREDITS FORECAST: Compared
with Unrestricted Petroleum Revenue," which looked at all
unrestricted petroleum revenue, and included the
unrestricted portion of royalty as well as corporate income
tax and property tax. He pointed out that even after
accounting for all the tax credits paid through
appropriation, the state still got well over $1 billion in
unrestricted revenue net from the industry. If you counted
the restricted revenue that flowed to the Permanent Fund
and the Public School Trust Fund, there was about $1.7
billion in FY 19; after which the amount increased.
3:11:22 PM
Mr. Stickel turned to slide 34, "CREDITS FORECAST:
Outstanding Tax Credit Obligations," which showed a bar
graph. The blue bars showed the outstanding balance of tax
credit obligations; and the grey bars showed the estimated
statutory appropriation for FY 19 and beyond, as well as
the actual appropriation that was made by the legislature
for FY 17 and FY 18. The chart showed how the estimated
balance of tax credits would change over time under the
forecast if the full statutory appropriation was made each
year.
Mr. Stickel continued discussing slide 34, noting that
legislative action in 2016 and 2017 with HB 247 and HB 111
phased out the earning of new credits over time. He stated
that there was an estimated $118 million in new credits
that would come on to the books in FY 19. Although the
credits had been phased out, if there was a delay in
companies submitting returns there would be a delay in
review and approval of credits by the department. There was
an estimated $175 million to be paid, which would leave a
balance of $679 million at the end of FY 19.
Vice-Chair Bishop asked about credits under review and
assumed that DOR as well as DNR had to review the credits.
Mr. Stickel affirmed that it was necessary to have both
departments review for certain exploration credits.
Co-Chair MacKinnon asked if the state had paid off the
credits for entities that had provided seismic data that
would be released.
Mr. Stickel stated that the appropriation for repurchase of
tax credits was sufficient to cover all outstanding tax
credits through FY 16 and stated that the answer to her
question was "most likely."
Mr. Stickel continued to discuss slide 34 and stated that
the slide showed that assuming the state made the statutory
appropriation as calculated, the scenario would potentially
pay off the entire balance of outstanding tax credits by FY
25. He thought the appropriation in the final year would be
in the $90 million range.
3:14:31 PM
Co-Chair Hoffman asked if Mr. Stickel was testifying that
it was the intent of the administration to fund the
statutory amount.
Commissioner Fisher answered in the negative. He thought
the administration was trying to articulate what the
statutory minimum was. He stated that he was trying not to
make policy decisions as to what the governor may or may
not choose to do and how he may or may not construct his
budget. He furthered that he was trying to articulate what
a steady state budget would be. In the past, the state had
paid the statutory minimum, and that was what was reflected
in the forecast.
Mr. Stickel showed slide 36, "FORECAST CHANGE: FY 2017
Forecast vs Actuals":
· About $125 million of "miss" due to transfers to the
CBRF from General Fund - prior-year adjustments
o Mineral revenue as a result of termination
(settlement, etc.) of administrative proceeding
or litigation is deposited to CBRF per Alaska
Constitution article IX, §17
· Remaining $170 million of "miss" due to Corporate
Income Tax forecast - primarily oil & gas
Mr. Stickel acknowledged that the department had missed the
forecast for FY 17 by about $300 million. He discussed two
major issues listed on the slide. He detailed that the
Legislative Audit Division had identified numerous
transactions of revenue received in previous fiscal years
and accounted for as general fund revenue, but should have
got to the Constitutional Budget Reserve (CBR). An
accounting an approximate $125 million adjustment for the
revenues was made in FY 17. He informed that additional
slides would address corporate income tax specifically.
3:17:17 PM
Mr. Stickel looked at slide 37, "FORECAST CHANGE:
Production Tax Revenue Highlights":
· Oil price forecasts decreased slightly from spring
forecast
o Long-term prices (FY2022+) now expected to settle
around $60 real
· Oil production forecast methods
o Forecast process by technical experts at DNR
improved from last year.
o Long term forecasts have stabilized.
· Unrestricted revenue forecast increased somewhat
mostly due to higher oil production forecast
· Lease expenditures expected to fluctuate over the
forecast period due to forecasted new production:
Companies have cut costs for existing fields but new
fields will add costs
· Companies cited Alaska investment instability and
uncertainty regarding the state fiscal system, as
factors impacting decision making
Mr. Stickel detailed that the forecast saw oil production
as more stable, which was a change from a consistent
decrease in previous forecasts. He highlighted the fact
that there was still uncertainty surrounding the revenue
forecasts.
3:19:24 PM
Vice-Chair Bishop commented on slide 37. He emphasized the
last bullet of the slide as the most important part of the
presentation. He thought the administration and the
legislature needed to send the correct signals to
companies.
Co-Chair MacKinnon referenced bills that took away cashable
credits and other credits.
3:20:19 PM
Mr. Stickel reviewed slide 38, "FORECAST CHANGE: Comparison
from Spring 2017 Forecasts for FY 20," which showed a
comparison showing the revised fall forecast for FY 18 in
two ways. The slide compared the forecast with the 4
percent decline scenario, as well as with the official
spring 2017 forecast. He pointed out that the price was
unchanged for FY 18, and production was up from both
previous forecasts. Costs were down from both previous
forecasts, and the result was a slight increase in the
forecast. He continued that the official spring forecast
had a $70 million decrease in the FY 18 forecast versus the
4 percent decline scenario. He stated that the reason for
the decrease had entirely to do with the reduced forecast
for corporate income tax.
3:21:23 PM
Mr. Stickel showed slide 39, "FORECAST CHANGE: Comparison
from Spring 2017 Forecasts for FY 2019." The slide was a
similar comparison to the previous slide, but looking at
the forecast for FY 19, which was the budget year that
would be before the legislature the following session.
Compared to the previous forecast's production,
expectations had been increased. Expectations for oil price
and company spending had been decreased. The revenue
forecast was a little higher than the previous official
forecast, and a little lower than the 4 percent decline
scenario. He cited that corporate income tax was a factor
of the reduction.
Mr. Stickel turned to slide 41, "REVENUE FORECAST: 2017 to
2019 Totals," which showed a table that showed all revenues
to the state for FY 17 and forecast for FY 18 and FY 19.
The table included Unrestricted General Fund (UGF) revenue
forecast, which was typically the subject of most of the
budget discussions. The table also showed designated funds
in three different categories used in the budget process.
Mr. Stickel continued to discuss slide 41. He observed that
unrestricted revenue was expected to rebound from the FY 17
levels, which had to do with FY 17 being a low-revenue
year. He qualified that FY 17 marked the lowest
unrestricted revenue the state had since 1999. He pointed
out a decrease in total revenue from FY 17, from a little
over $12 billion to approximately $10.6 billion. The reason
for the decrease in total revenue had to do with expected
moderation of investment returns. He mentioned over 12
percent Permanent Fund return in FY 17, and the expectation
for the return to go back to more historically normal 6 to
7 percent annual return in the future.
3:23:32 PM
Mr. Stickel spoke to slide 42, "REVENUE FORECAST: By
Spending Category;" which looked at total revenue with a
ten-year history, a ten-year forecast, and consideration
all state revenue sources. The slide showed that
historically oil revenue was the largest source of revenue
in the state, but going forward the largest source would be
investment revenue. Investment revenue would be followed by
federal funds, petroleum revenue, and non-petroleum
revenues in order of amount.
Mr. Stickel looked at slide 43, "REVENUE FORECAST: 2017 to
2019 Petroleum Unrestricted Revenue," which showed data
table. He commented that royalty was the biggest share of
unrestricted petroleum revenues and was expected to
continue to provide over half of the petroleum unrestricted
revenues going forward. He expected modest increases in
production tax, as price and production were both
increasing. He also expected a bounce-back to a corporate
income tax that had a positive UGF revenue impact to the
state.
3:24:52 PM
Mr. Stickel discussed slide 44, "REVENUE FORECAST: 2017 to
2019 Non-Petroleum Unrestricted Revenue," which showed a
table and considered the non-petroleum side of UGF
revenues. He expected that the non-petroleum revenues would
account for a quarter to one-third of unrestricted revenues
going forward; which became a more significant share than
in the higher oil price environment of the past. He
highlighted that FY 17 was a lower than expected year on
the non-petroleum corporate income tax. He expected the
amount to bounce back in FY 18 or FY 19.
Co-Chair MacKinnon asked about the governor's proposed
budget from the previous year. She mentioned the motor
fuels tax and thought the administration had spent the
funds before there was policy in place. She wondered if the
legislature would see the same occurrence in the following
year's proposed budget, or if the policy discussion would
lead the conversation.
Commissioner Fisher did not have a response. He understood
the concern expressed by Co-Chair MacKinnon and avowed to
communicate the information. He stated that there were
current policy discussions that would ultimately reflect in
the budget.
Co-Chair MacKinnon stated that in previous years the Senate
had faced policy decisions being included in the budget and
then not implemented by the legislature, resulting in a
revenue shortfall or additional spending. She thought it
was helpful for the budget to reflect actual revenues
rather than policy incorporated with revenues.
3:27:44 PM
Senator von Imhof referred to investment revenue, which had
not always been included with other revenue in past
budgets. She asked for a comment on using investment
earnings.
Commissioner Fisher thought that the governor had been
fairly transparent for some time that the administration
believed it could not solve the state's fiscal challenge
without using Permanent Fund investment income. He referred
to a chart from the presentation that showed that
investment income had become the largest single source of
revenue for the state. He thought the two bills that
included a Percent of Market Value (POMV) payout had
relatively modest differences. He viewed that investment
income would need to be part of the ultimate fiscal
solution for the state.
3:30:05 PM
Mr. Stickel looked at slide 41, which broke out revenues
into four broad categories. The investment revenue that was
shown under the UGF revenue category was a small amount and
represented earnings on the available balance of the GF and
was truly unrestricted revenue. He stated that the majority
of the investment revenue was shown as "Other Restricted
Revenue," which was consistent with past practice and
assumed no POMV plan. He stated that the matter had been
discussed and the department determined it would not show
the funds as unrestricted revenue in the Revenue Sources
Book until the legislature had passed a plan to start using
the revenue.
Co-Chair MacKinnon stated that the courts had interpreted
that the funds were unrestricted revenue, which was
somewhat in conflict with how the administration was
operating. She explained that there was a lawsuit.
Mr. Stickel explained that there were various ways in which
things were shown in the budget process, and DOR did its
best to have the Revenue Sources Book and the way it
presented the revenue forecast be consistent with the
conventions used in the budget process by the Office of
Management and Budget (OMB) and the Legislative Finance
Division (LFD). He furthered that the department had an
alternative way of looking at the revenue forecast, called
"Revenue Subject to Current Year Appropriation," and a
subsequent slide would address the concept. The slide would
look at all revenue that was technically available for
appropriation by the legislature.
Co-Chair MacKinnon referred to hundreds of millions of
dollars in tax credits outside the oil and gas industry
that had not been touched; and wondered if the
administration would be advancing any policy discussions or
legislation that would change the tax credits. She
explained that in order to obtain additional investment or
additional job opportunity the state had offered tax
credits for different industries in order to reinvest the
funds back into the industries. She gave mining and fishing
as industry examples of foregone revenue in the form of tax
credits.
Commissioner Fisher had not looked at doing so but was
happy to work with legislators on this issue.
3:33:49 PM
Co-Chair MacKinnon thought it was a difficult discussion.
She stated that there had been books issued on the subject.
She thought the fishing industry was a beneficiary of tax
credits. She thought it was hard to make money fishing when
most licenses were held by out-of-state owners. She thought
a huge benefit of tax credits was going to out-of-state
owners and wondered when the topic would be addressed. She
referenced elimination of oil and gas cash credits and
other credits. She thought the matter deserved scrutiny.
She mentioned free hunting and fishing licenses for
resident seniors. She stated there was a report on indirect
tax expenditures online with LFD.
Co-Chair Hoffman thought it was interesting to observe that
investment revenue was the state's largest revenue source.
He knew Vice-Chair Bishop had stated many times that the
CBR had dwindled. He asked about the current balance of the
Earnings Reserve Account (ERA).
Commissioner Fisher thought the CBR was approximately $2.2
billion and estimated that the ERA was approximately $13
billion.
3:37:00 PM
Co-Chair Hoffman outlined a concern that the Permanent Fund
itself was healthy. He thought the thought it might be
difficult given the magnitude of the deficit the state was
facing.
Commissioner Fisher echoed the comments of Co-Chair Hoffman
and thought one of the most important decisions the
administration and legislature had to make was to develop a
long-term sustainable draw from the ERA that was consistent
with the way the fund had been treat historically so it
would be available for future generations. He thought it
would be a challenge given the fiscal gap.
Co-Chair MacKinnon corrected her earlier statement
regarding the age for free hunting and fishing licenses.
The qualifying age was 60 rather than 65.
3:38:24 PM
Mr. Stickel returned to slide 44 and looked at non-
petroleum unrestricted revenue for FY 17, FY 18, and FY 19.
He stated that beginning in FY 18, the motor fuel tax was
moved from UGF to DGF. Following policy discussions in the
previous session, LFD had looked at existing statute and
made a determination that DOR had been incorrectly
classifying the motor fuel revenues as UGF. Subsequently
LFD had proposed moving the motor fuel tax revenues to
designated restricted funds. He continued that OMB had been
in agreement with the change, and the department had
followed the change in the presentation for consistency
purposes. He expressed a willingness to show the revenue
differently if desired. He noted that the detailed tables
in the revenue forecast would show the funds broken out
separately as DGF revenue.
Co-Chair MacKinnon referred to consistency and thought that
what he described was inconsistent from the previous year,
and also represented a reduction in UGF spend that could be
misinterpreted.
Mr. Stickel acknowledged that there would be a reduction
shown in UGF between FY 17 and FY 18, and stated that the
department would include footnotes and narrative explaining
the change in the revenue forecast document. He stated that
the department had aimed to be consistent with the
documents that would be put forward in the budget process.
Co-Chair MacKinnon asked Mr. Stickel to provide an example,
and an explanation about the reason for the change.
Mr. Stickel understood that there had been a
reinterpretation of existing statute. He stated that LFD
had provided a document that explained the justification
for the change. He was happy to provide the document for
the committee's consideration.
Co-Chair MacKinnon expressed the desire to see the
explanatory document and referenced her past discontent
with a previous reinterpretation of payment of tax credits.
3:41:47 PM
Mr. Stickel continued to discuss slide 44 and mentioned the
mining license tax. He continued that FY 17 was a
relatively strong year, and there was a nice jump in mining
license tax revenue into the $40 million range as there had
been more profitability in the mining sector. He discussed
investment revenue (unrestricted investment revenue on the
GF and other non-segregated balances) and noted that the
treasury division was expecting that over time the interest
rates would normalize and go back to a more historical
level of returns as opposed to the very low rates of return
the state had seen on safe investments over the past couple
of years.
Co-Chair MacKinnon asked the commissioner to convey to OMB
Director Pat Pitney (who would be presenting to the
committee later in the week) that it would be helpful to
know what the funds from the motor fuel tax
reinterpretation was designated for and how it would be
accounted for. She asked if there was a policy decision
that needed clarification. She thought the funds should be
used for the federal matching funds, so the state could
leverage the tax funds at a 10 to 1 ratio to ensure state
infrastructure was being kept at the highest and best use
possible. She considered whether it was necessary to follow
up with a private meeting in order to more fully understand
the administration's direction on the matter.
Commissioner Fisher stated that he would make sure that the
administration was prepared to discuss the matter the
following day when Director Pitney was in committee.
3:43:58 PM
Mr. Stickel looked at slide 45, "REVENUE FORECAST:
Petroleum Corporate Income Tax":
· Challenging to forecast in changing price
environment
o Based on U.S. or worldwide profitability,
apportioned to Alaska.
· Estimated payments lower than expected (FY17 ~ $95
million)
o Expecting a rebound as companies return to
profitability
· Refunds higher than expected (FY17 ~$93 million)
o Partially due to Net Operating Loss carry-backs
(FY17 ~$51 million)
o Expecting smaller impact going forward (if
price remains stable)
· CBRF movement of funds in FY 2017 (FY17 ~$62
million)
o In consultation with Legislative Audit
o Did not impact cash received but did impact
general fund / CBRF split
Mr. Stickel stated that the department had missed on the
forecast for FY 17. He stated that forecasting corporate
income tax had been a challenge with the changing price
environment as oil prices had gone from over $100/bbl down
to the $30/bbl level before slowly increasing over the
previous two years. The slide identified three reasons for
the department's inaccuracy with regard to the forecast of
petroleum corporate income tax. He informed that there was
a similar effect (to a lesser extent) for the non-petroleum
corporate income tax.
3:46:42 PM
Mr. Stickel reviewed slide 46, "REVENUE FORECAST: Corporate
Income Tax," which showed an illustration of petroleum and
general corporate income tax revenues. He pointed out that
that for petroleum corporate income tax revenues the state
received negative net revenues in FY 16 and FY 17; which he
considered an offset to extra revenue the state received in
some of the previous years. He expected corporate income
tax revenue would balance out at the $150 to $200 million
per year range for the next two years. The general
corporate income tax was forecast to increase to
approximately $150 million in FY 18. The state had received
over $40 million in estimated vernal corporate income tax
payments in the first quarter of the year.
3:47:46 PM
Mr. Stickel showed slide 47, "REVENUE FORECAST: Revenue
Available for Appropriation":
· Useful for outside analysts not familiar with
Alaska's budget conventions
· Better reflects ability of state to meet its
obligations
o Alaska has a budget framework that restricts
certain revenue based on constitution, statute,
of customary practice
o The ability of the state to meet its
obligations is not fully reflected by the
General Fund Unrestricted Revenue category
· All revenues subject to appropriation for any
purpose can be used by the legislature to fund
government services or obligations, including:
o Constitutional Budget Reserve Fund
o Earnings Reserve of the Permanent Fund
Mr. Stickel informed that slide 47 and slide 48 would focus
on revenue available for current-year appropriation. The
slides would show revenue without the customary
restrictions and budgetary conventions used in the rest of
the Revenue Sources Book, while looking at how much was
technically available for the legislature to appropriate
for any purpose. He informed that the department had
started the format a couple of years previously, largely in
response to entities outside Alaska (i.e. federal entities,
private entities, or rating agencies) that were considering
the state's budget documents and trying to make sense of
the its ability to meet obligations.
Mr. Stickel showed slide 48, "REVENUE FORECAST: 2017 to
2019 Available for Appropriation," which showed revenue
available for current year appropriation for FY 17, as well
as the forecast for FY 18 and FY 19. The slide considered
all unrestricted revenues and added the portion of
royalties beyond the 25 percent constitutional minimum that
went to the Permanent Fund. He noted that some leases had a
50 percent share, and some leases had a 25 percent share;
while the average going to the Permanent Fund was about 31
percent of royalties. The additional 6 percent was
considered available for appropriation. He thought it
should be noted that the realized earnings of the Permanent
Fund were a little higher than what would be available in a
sustainable draw scenario. All told, the state had a little
over $6 billion per year that was technically available for
appropriation by the legislature.
3:48:45 PM
Co-Chair MacKinnon asked if the total was outside of the
federal appropriation.
Mr. Stickel answered in the affirmative and stated that DOR
considered that federal appropriations typically had
specific uses and therefore were not considered available
for any purpose.
Co-Chair MacKinnon thought sometimes Alaskans were
receiving a distorted message about growth in government.
She referenced leveraging federal dollars in the form of
healthcare aid and federal highway projects; which might
give the perception of a growing budget. She used the
example of spending Department of Fish and Game, which
leveraged Pittman-Robertson funds. She thought it was
important to understand that the legislature had tried to
leverage as much funding as possible to fill the holes in
past budgets.
3:50:23 PM
AT EASE
3:50:54 PM
RECONVENED
Commissioner Fisher spoke to slide 49, "WRAP-UP: Changes to
10-Year Unrestricted Revenue Outlook," which would provide
a view of how the revenue forecast compared to prior years.
He thought there had been confusion about the official
spring forecast and the 4 percent decline. He drew
attention to the top box on the slide, which indicated that
the official spring forecast had a 12 percent decline in FY
18. It was possible to observe the decline diminish over
time as shown on the slide. He noted that the spring
forecast "alternative scenario" declined 4 percent, then
stayed at 4 percent throughout the time period on the
slide. The result was that the alternative scenario offered
more revenue to the state than the official forecast. He
informed that the 4 percent decline scenario had been used
by OMB and LFD for most of the modelling done in the past 6
to 9 months.
Commissioner Fisher continued to discuss slide 49 and
compared the department's current forecast against the
official forecast; where it was possible to see the current
forecast showed growth in every period. He noted that the
alternative scenario showed a modest decline in revenue was
predicted for FY 18 and FY 19, compared to what was
predicted previously. Moving out to years FY 25, FY 26, and
FY 27 it was possible to see meaningful additional revenue.
Commissioner Fisher turned to slide 50, "WRAP-UP: Big
Picture Takeaways for Forecast Period":
· Oil Prices for FY19+ decreased for the forecast
period
o Current prices trending slightly higher than
forecasted price for FY 2018
· Oil Production is forecasted to be steady
o Includes some new fields on a risked basis.
o Current production on track with forecast so
far for FY 2018
· Petroleum Revenue represents 65 - 74% of our
unrestricted revenues over the forecast period
· Unrestricted revenue changes (vs Spring 2017, 4%
decline scenario)
o FY 2018-2019 forecasts decreased
o FY 2020-2024 forecasts increased by <$100
million per year
· Structural budget deficit remains
Commissioner Fisher considered that the structural deficit
would continue until late in the ten-year period that was
being discussed.
3:53:58 PM
Co-Chair MacKinnon thanked the testifiers for their
comments.
Senator Olson referenced slide 42 and pondered the
increased investment income. He assumed the increase was
partly because of stock market growth. He thought there
would be a correction in the market in the next few years,
and he wondered if the department had a plan. He referenced
a loss of state funds in the past due the lack of ability
to transfer funds at the appropriate time.
Commissioner Fisher thought many people agreed with Senator
Olson's assessment that there was likely to be a market
correction. He thought the presentation on the following
day by OMB Director Pitney would include information on
historical market variability and the impact on investment
revenues to the state, particularly on the POMV model that
had been discussed. He expected that Permanent Fund
Director Angela Rodell (scheduled to present to the
committee later in the week) could elucidate the matter
further as well.
Commissioner Fisher continued to address the question
regarding whether the state should de-risk its portfolio to
anticipate the market correction. He thought most market
experts would say that trying to time the market was
counterproductive, and the ability to forecast a market
correction was exceedingly difficult. He thought history
would show that those funds that maintained steady asset
allocation through a market correction performed better
than those that attempted to time the market with
withdrawals and deposits.
3:57:16 PM
Senator Olson asked if there was a plan in place to deal
with the eventuality of a market correction and even lower
investment revenues.
Commissioner Fisher emphasized that the administration
believed additional revenue was important, and that the
state needed to diversify its revenue sources. He commented
that Alaska had dramatically more volatility in its state
revenue than any other state because it relied on sources
of revenue that had a fair amount of instability. He
thought having the tax revenue as a source of additional
revenue was an important component. He stated that the
proposal the governor had put forward for additional taxes
did not complete fill the fiscal gap. He asserted that many
had expressed a desire to see additional budget cuts, and
he thought the administration recognized there was still
work to be done in that regard. He furthered that the
administration looked forward to engagement on a variety of
topics, including healthcare.
3:59:15 PM
Senator Stevens wanted a better understanding of the CBR.
He referenced past large withdrawals and wondered if the
funds were owed back to the fund and needed to be returned.
Co-Chair MacKinnon stated that the withdrawn funds were
owed back to the CBR, and over the course of 2007 until
2012 (during high oil prices) the chair of the Senate
Finance Committee had returned the funds to the fund. There
was no provision in state statute as to when the funds
needed to be paid. There was an obligation to each
legislative body to return the money back to the CBR, which
had a higher threshold for access.
Senator Stevens thought the debt to the CBR was an
obligation not unlike the oil tax credits, which had a
schedule and were a debt.
Commissioner Fisher agreed.
Co-Chair MacKinnon thanked the administration. She
appreciated the advanced push that yielded a preliminary
revenue forecast. She commented on the length of the
presentation. She considered that the commissioner had made
a concerted effort to talk with the committee and follow up
with questions.
Co-Chair MacKinnon discussed the schedule for the week.
ADJOURNMENT
4:02:36 PM
The meeting was adjourned at 4:03 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 103017 DNR Production Forecast SFC.pdf |
SFIN 10/30/2017 1:30:00 PM |
Revenue Forecast |
| SFIN Fall 2017 Preliminary Revenue Forecast Presentation_ds_20171027.pdf |
SFIN 10/30/2017 1:30:00 PM |
Revenue Forecast |