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