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Spring forecast shows only short-term relief Higher oil prices add just 10 months to end of state’s budget reserve fund; $416 million settlement with BP included in budget reserve Kristen Nelson PNA News Editor
Higher oil prices of the past several months and the forecast of above-normal prices for the next year will reduce the short-term draw on the state’s budget reserve fund, Revenue Commissioner Wilson Condon said April 12 in releasing the Department of Revenue’s spring forecast.
“Long term, however, the picture remains the same,” he said. “The Constitutional Budget Reserve Fund will run out of money. It is inevitable.”
The department forecasts Alaska North Slope oil will average $23.28 a barrel for the fiscal year ending June 30. That’s almost double the $12.70 average price for FY 1999. “OPEC’s production cutback made a dramatic difference in world oil prices this past fall and winter,” Condon said. Alaska North Slope crude hit a 10-year high when it topped out March 7 at $32.30 a barrel before starting its slide back down.
According to the department’s Spring 2000 Revenue Sources Book, the gradual slide will continue. The department forecasts Alaska North Slope crude will average $22.76 in FY 2001, then drop to $19.42 in FY 2002 before moving closer to historical averages in Fiscal 2003-2005 at $18.53 a barrel.
“No matter what people may see in the news or feel at the gas pump, we know that Alaska oil prices have averaged a little more than $17 a barrel in the past 15 years, and we see no indication that future long-term averages will be much different,” Condon said.
Constitutional Budget Reserve to run out in 2004 If the state budget were to remain at the FY 2000 level, the Department of Revenue forecast shows the state will need to draw $413 million from the Constitutional Budget Reserve Fund in FY 2001, with a $736 million draw in FY 2002. An additional $300 million draw is needed at the start of each fiscal year for cash-flow purposes, and then is repaid at the end of the year.
Based on oil price, investment earnings and a level state budget, the Budget Reserve Fund will run out of money in November 2004. The fund’s current market value is almost $2.6 billion.
“Despite the very high oil prices of the past year, all we gained was 10 months in the life of the budget reserve,” Condon said. “This makes it very clear that higher prices will not solve the problem, only a long-term fiscal plan will work.”
The spring revenue forecast includes the April 10 $416 million tax settlement paid to the state by BP Exploration (Alaska). The entire payment was deposited into the budget reserve, as required by state law.
“The other item of interest in the revenue forecast is the fact that unrestricted oil revenue next year will be in third place among the state’s revenue sources,” Condon said. Alaska’s total investment income – from the Permanent Fund, budget reserve and other sources – will be the No. 1 revenue source for FY 2001. Federal aid will be in the No. 2 spot, followed by unrestricted oil revenue from taxes and royalties. It’s the third year in a row that oil has placed third.
New oil will be one-quarter of production by FY 2005 The Department noted that new oil, fields already discovered and scheduled to come on-line, will account for one-quarter of Alaska’s production by fiscal year 2005. This new oil is taxed at a lower severance rate than the older, larger fields at Prudhoe Bay and Kuparuk because of the economic limit factor, or ELF, which reduces the nominal tax rate on a producing reservoir based on the average rate of production from the reservoir and the average productivity of the wells producing that reservoir, so that the severance rate falls over time as production from a field falls. The ELF also reduces the tax rate on smaller oil fields — most fields producing less than 20,000 barrels per day will pay little or no severance tax.
Revenue predicts that the average severance tax rate for North Slope fields will continue to fall as production comes from old oil fields and small new fields. The average oil production tax rate for North Slope production in FY 1994 was 13.5; the department projects that the average for FY 2001 will be 9.5 percent.
Revenue also noted that oil production for fiscal year 2000 has been a bit lower than forecast in the fall. The department said it assumes that a plateau rate of just over 1 million barrels per day for the next five years — on average about 6,000 barrels a day lower than the fall forecast.
Actual fiscal year production for 1999 averaged 1.164 million barrels a year. The estimate for fiscal year 2000 is an average of 1.032 million barrels a year; for FY 2001, 1.030 million barrels a day; for FY 2002, 1.002 million barrels a day; for FY 2003, 1.013 million barrels a day; for FY 2004, 1.019 million barrels a day million barrels a day and for FY 2005, 1.034 million barrels a day.
The increased production estimated for FY 2003 - FY 2005 is based on new developments at Alpine in FY 2001, Northstar in FY 2003 and Liberty and Colville River satellites in FY 2005.
Alaska North Slope production peaked at 2.005 million barrels a day in FY 1988 and production has dropped by 25 percent since FY 1997.
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