GENERAL SUBJECT(S): WORLD OIL PRESENTATION The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 21st Legislative Session, contact 465-2156. After the 21st Legislative Session they will be available through the Legislative Library at 465- 3808. Time Meeting Convened: 8:33 a.m. Tape HFC 99-50, Sides 1 & 2 Tape HFC 99-51, Side 1 PRESENT: House Finance Committee: Senate Finance Committee: X Co-Chair Therriault X Co-Chair Parnell X Co-Chair Mulder X Co-Chair Torgerson X Vice-Chair Bunde X Vice-Chair Donley X Representative Austerman Absent Senator Adams X Representative J. Davies X Senator Green X Representative G. Davis X Senator Kelly Absent Representative Foster X Senator Leman Absent Representative Grussendorf X Senator Phillips Absent Representative Kohring X Senator Wilken Absent Representative Moses X Representative Williams ALSO PRESENT: REPRESENTATIVE GAIL PHILLIPS; REPRESENTATIVE JOE GREEN; DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE; PETER BOGIN, CAMBRIDGE ENERGY RESEARCH ASSOCIATES; DOUGLAS MACINTYRE, US ENERGY INFORMATION ADMINISTRATION, US DEPARTMENT OF ENERGY. LOG SPEAKER DISCUSSION 000 Co-Chair Parnell Convened the Joint HFC & SFC meeting at 8:33 a.m. He introduced Mr. Bogin and Mr. MacIntyre and reviewed their biographies (copies on file). 056 PETER BOGIN, CAMBRIDGE ENERGY RESEARCH ASSOCIATES Provided members with a handout for the House and Senate Finance Committees from the Cambridge Energy Research Associates (Attachment 1, copy on file). He noted that the price forecast is on the upswing. He felt that oil prices reached bottom in 1988. 102 Mr. Bogin Discussed the page 2 of Attachment 1, The Oil Price and Production Cycle. As investment rises production rises. Technology is reducing the cost of production. Production reaches a price peak and declines. The cycle has been reduced because the price does not have to be as high to bring money into the industry. Oil at $12 dollar a barrel is profitable. 150 Mr. Bogin Reviewed page 2, Tomorrow's World. He noted that the implementation of new technology has shifted the market. There are signs of growth and recovery in Asia. The world economy is growing. Emphasized the impact of environmental concerns on economic growth. The desire for clean air and water will not end. Energy providers must do business without spoiling the environment. Providers must decide if they should produce more now, due to a concern that the future for oil will decline. 207 Mr. Bogin Observed that all oil companies must be part of a local community. Stakeholders and shareholders want corporations to be responsible. 241 Mr. Bogin Discussed role of company versus role of governments. The role between company and government is becoming blended. 251 Mr. Bogin Discussed page 3, The Blurring of Boundaries. He noted that new political alliances are being developed. There is an exchange across borders. He discussed new political alliances. 267 Mr. Bogin Observed that technology is being blurred. There is inter-fuel and gas to liquid competition. Observed that there is new information technology. Oil and gas companies are expanding to become energy companies. 302 Mr. Bogin Noted that they are concerned with long term supply energy and demand. See a triangle of difference forces that impact energy demand. Reviewed page 4. Technology sets baseline of how energy supply and demand will be affected. Noted that cars use less oil today due to fuel efficiency standards. Political decisions shift how oil is consumed. Economics affect the short-term of oil demand. 354 Mr. Bogin Skipped ahead to discussed page 9, Science and Technology Putting the Brakes on Hydrocarbon-based fuel Demand. 379 Mr. Bogin Reviewed page 6, The falling of BTU Barrier. Observed that technology has lowered the cost of all fuels, not just oil. 382 Mr. Bogin Discussed page 7, Choices for Oil Demand. Noted that oil is not used as a power generation fuel. The use of oil for space heating is being closed by natural gas. Petrochemicals are in competition with natural gas. Oil is still king in transportation. Noted that the price of oil for transportation in Europe is much higher. The cost of gas in France is $4 dollars a gallon. Noted France earns as much from taxation as from production. Questioned how long oil will rule transportation. Noted research on fuel cells to power cars. 456 Mr. Bogin Discussed page 8, Ground Zero: The Challenges to Oil at $0 dollars a barrel. Noted that there are lots of countries that have gas to sell. There are pressures to show that oil is environmental friendly. 469 Mr. Bogin Summarized that the demand for oil will not stay the same. Observed that the computer age is in its infancy. New technologies are being developed. The end of the cold world has unleashed brainpower on energy issues. 494 Mr. Bogin Reviewed page 12, Changes in Oil Demand by Region. Forecasting growth of one million barrels a day. Could be as low as 700 to 800 thousand barrels a day. Asia is recovering. Demand will grow three times as quick as the previous year. Demand needs to be higher to stay up with production growth. Doesn't expect a repeat of 1988. 515 Mr. Bogin Discussed page 11, Demand Side Risks in 1999. He observed that Brazil would be the key. Japan is a key trade partner. Japan is still in an economic morass. China is economically healthy. 539 Mr. Bogin Summarized that demand is better than 1998 but not great. 545 Mr. Bogin Discussed page 14, Supply. Noted that production costs are below $10 dollars a barrel. Some areas are below $5 dollars a barrel. Sixteen dollars a barrel generates activity. 557 Mr. Bogin Reviewed page 15, Estimated Operating Costs Around the World. Noted that Canada and Venezuela have the biggest supply of oil. Canadian oil sands have huge supplies that would be profitable at $20 dollars a barrel. Reserves put a cap of how high oil prices can rise in the future. 575 Mr. Bogin Discussed page 16, World Liquid Productive Capacity Outlooks. Will be 7 million barrels a day lower in the year 2005. Economics was lowering how much can be introduced. OPEC members did not wait for economics to work. Oil production capacity will keep up with demand. Demand is dependent on oil price. (TAPE CHANGE, HFC 99 - 50, SIDE 2) 002 Mr. Bogin Discussed page 17, Supply Side Risks in 1999. Iraq is on an upside curve. Nigeria has risk of civil strife. North Sea production was disappointing. The greatest risk is that the OPEC agreements won't stand. 011 Mr. Bogin Discussed page 19, Oil Market Regulation: The Playing Field. 028 Mr. Bogin Stated that gas will go up a few cents a gallon. 036 Mr. Bogin Reviewed page 20, The Regulators Hold Back - For How Long? Asia's crisis is weakening demand and creating a pool of oil that wants to come onto the market. Risk is that the success of the agreement can be the start of its own demise. 062 Mr. Bogin Discussed page 23, Total US Crude Stocks. Stock growth impact will hit in second and third quarter and lead to higher prices. 089 Mr. Bogin Summarized that oil will be in the $12 dollar range. Prices are forced down by supply if they get too high for the market. Prices in the $16 to $20 dollar range leads to market adjustments. Co-Chair Parnell Questioned time frame. 108 Mr. Bogin Prices coming down because the price of production is falling. Technology accounts for increased production in the same field and allows oil to be found in new locations. Politics are allowing the search for oil in new places. Prices will continue to fall. Over 5 to 10 period the cost will move down by approximately $2 dollars. 150 Representative Green Questioned if there is the same price situation in mature fields. 158 Mr. Bogin If price is high enough technology will help to get more oil out of mature fields. 188 Mr. Bogin Discussed page 26, The 1996-2000 Oil Price Environment. Noted stability and felt that the lowest curve would not occur. Estimated that OPEC agreements will be maintained and will lead to an average of $13 dollars. Estimated $11.25 in the first quarter. Estimated a $14.20 dollar a barrel average next year. Possibly up to $15 dollars a barrel on upside. Stressed that oil prices estimates are dependent on OPEC agreements and actions. 220 Mr. Bogin Reviewed page 27, Y2K. The oil industry is spending billions of dollars to fix the problem. Nothing is expected on the supply side until January 2000. Demand could increase in the middle of 1999 as people start to stockpile. This could affect prices. There could be an upward swing around the second half of the third quarter. If nothing happens after January prices will fall. If there are production problems prices could remain higher longer. Noted Alaska oil companies are on top of the problem, but companies in third world countries may not be as well prepared. 276 DOUGLAS MACINTYRE, US ENERGY INFORMATION ADMINISTRATION, US DEPARTMENT OF ENERGY. Provided members with a handout "World Oil Price Outlook" (Attachment 2, copy on file). Observed that data collection of the US Energy Information Administration is independent. 319 Mr. MacIntyre Discussed page 1 of Attachment 2, Outlook for Alaskan Oil Revenues. Concluded that Alaskan oil revenues will remain low, but may increase in the year 2000. Observed that Alaskan oil production is declining. World oil prices are expected to increase from historically low levels. 340 Speaker Phillips Noted that one of Alaska's major producers has been advocating "no decline after '99." She asked if the opening NPRA and ANWR was taken into account. 350 Mr. MacIntyre Stated that only current policies and production were included. 362 Mr. MacIntyre Discussed page 2, Oil Prices and Alaskan Oil Production. Alaska crude oil production will be close to 1 million barrels a day by the year 2000. 369 Mr. MacIntyre Reviewed page 3, Outlook for Alaskan Oil Revenues. Pointed out that their estimates do not account for inflation. 373 Mr. MacIntyre Discussed page 4, Why Are World Oil Prices so Low? Prices are low due to increases in oil production in Iraq, less demand of Asian countries, warmer than normal winters in the last 2 to 3 winters, and increases in oil supply. In 1997 there was a lot of supply growth. Sustained high prices lead to greater investment and increased supply. 398 Mr. MacIntyre Discussed page 5, Factors Influencing World Oil Market, Part 1 - Iraq. Noted that because of the oil for food agreement that Iraq has increased production to 2 million barrels a day. Most of the growth that can occur in Iraq has occurred. 411 Mr. MacIntyre Discussed page 6, Factors Influencing World Oil Market, Part I - Iraq continued. There has been a lot change in Iraq production. The current production program goes through May. Future increases will be smaller. 433 Mr. MacIntyre Reviewed page 7, Factors Influencing World Oil Market, Part 2 - Asia. They are projecting 1.5 million barrels a day production for Asia. This is 2 million less then what was projected. 454 Mr. MacIntyre Discussed page 8, Factors Influencing World Oil Market, Part 2 continued. Growth in Japan has declined. Other Asia producers have slowed growth. Less impact in China. 462 Mr. MacIntyre Discussed page 9, Factors Influencing world Oil Market Part 3, Warm Weather. There has been warmer than normal weather in the Northeast US and Western Europe over the past 2 - 3 years. These are regions where heating oil is still being used for space heating. 480 Mr. MacIntyre Discussed page 10, Factors Influencing World Oil Market, Part 3 continued. 1992 and 1993 were warmer than normal. Cyclical patterns where demand peaks in last two quarters. Last two winters were even warmer than 1992 - 1993. 494 Mr. MacIntyre Discussed page 11, Factors Influencing World Oil Market Part 4 - Other Supply Increases in 1997. Iraq is still the major OPEC producer. OPEC growth overall in 1997 was 546,000 barrels a day. Overall production increased by 2 million barrels a day. 513 Mr. MacIntyre Reviewed page 12, Recent Energy Information Administration (EIA) World Oil Price Forecasts. EIA did not forecast fall of price. Forecasts price around $11 dollars a barrel. The forecast was set before the OPEC announcement of March 23, 1999 to cut more production. (TAPE CHANGE, HFC 99 - 51, SIDE 1) 001 Mr. MacIntyre Expects prices to rise. Noted a balanced 1999 market. Demand and supply should be equal. If OPEC cuts only half of their projected amount there would be a draw on oil stocks that have been built up. 035 Mr. MacIntyre Discussed page 13, Long Term Outlook: No Improvement. Less than 1% annual increase in world oil price. 051 Co-Chair Torgerson What number is being used for inflation? 058 Mr. MacIntyre Observed that between 1997 and 2020 there would be less then a 1- percent increase. Noted that increase would be less then inflation. Observed that when oil prices flatten out is unknown. 081 Mr. MacIntyre Summarized that long term analysis is for a steady decline through the year 2020. The year 2000 should be slightly better than 1999. 112 Mr. MacIntyre Reviewed page 14 and 15, Energy Information - A Click Away. Noted that there is a lot of information on their website. 145 Co-Chair Parnell Observed that the meeting was intended to enable the committees to make better decisions. He asked for impressions on how the information impacts long term fiscal planning. 159 Co-Chair Therriault Without a dramatic change in production, prices are not going to be the state's salvation. He stressed that an upward swing will not make the difference without a major find. It will be tough to keep up with the decline in production from Prudhoe Bay. 179 Senator Phillips Stressed that the state needs to prepare for the worst and hope for the best. 184 Speaker Phillips Stressed that it would be wise to look at the range of a two-dollar decrease. Shouldn't look higher than $14 dollars. 199 Senator Wilken Emphasized that the good news is that it is not going to get much worse, but noted that it is not going to get much better. Committed to the creation of a 10-year financial plan. Slight price increase does not lessen the responsibility for a good course. 206 Representative Green Observed that Alaskan producers assured the state that they would spend as much on the last years of their fields as they did in the beginning. He suggested that this would be curtailed due to the low price of oil. This will lessen supply. The rate of decline will be greater. The outlook could be as bad or worse. Cannot anticipate a higher rate. Need to bite the bullet. 238 Co-Chair Torgerson Observed that the financial projections from the Department of Revenue show prices of $17 - 27 dollars a barrel. Doesn't expect the price to be as good. 249 Vice-Chair Bunde The ride is over. Might not be worse in the near time, but the pipeline will need to be dismantled at some point. Focus will shift to gas and allow opportunities 264 Representative G. Davis Any plan should have an upside and a downside to allow flexibility. 273 Senator Leman Stated that the information is not new. Observed that the information is consistent. The challenge is to address a methodology to respond to unexpected draws. 294 Co-Chair Parnell ADJOURNMENT The meeting adjourned at 10:37 a.m. JOINT HOUSE AND SENATE FINANCE COMMITTEES LOG NOTES March 23, 1999 Joint HFC & SFC 1 3/23/99