Depletion of Non-Renewable Resources Report on London Group outcomes UNCEEA meeting, New York, July 2007 Peter Comisari Gemma Van Halderen Australian Bureau of Statistics

London Group, depletion and the updated SEEA London Group has commenced work on the recommended treatment of depletion of non- renewable natural resources within an updated SEEA Key fundamental decisions on two aspects of depletion taken at the March 2007 London Group meeting in Johannesburg This session reports on the Johannesburg outcomes

SEEA-2003 Characterised by multiple treatment options for some issues If SEEA is to become an international statistical standard, these ‘options’ must be reconstituted as clear accounting recommendations

SEEA 2003 Chapter 10: sections Depletion Defensive expenditure Degradation

SEEA 2003 Depletion Depletion: Five sets of options Two sets of options targeted for resolution at March 2007 London Group meeting

Two issues for resolution  How best to view resource rent associated with the extraction of natural resources?  How best to view the discovery of mineral and energy resources ie subsoil assets? i.e. what is the relationship between mineral exploration and new discoveries of mineral and energy resources (subsoil assets)?

Issue 1 How best to view resource rent associated with the extraction of natural resources?

How to define the income element of resource rent? SEEA 2003 presented three options A1. Entire resource rent = income A2. No resource rent = income A3. Resource rent = part income and part depletion

London Group Recommendation: A3 resource rent = part income, part depletion Option A1 implies that natural resources are infinitely abundant – evidently not true for many resources. Option A2 ignores often substantial income earned by these industries – base for tax revenue etc. Option A2 provides no indication of why owners invest in extractive industries i.e. where is the economic return to the owners?

A3 resource rent = part income, part depletion, continued Option A3 has resource rent split into: income and depletion components Recognizes that natural resources have greater economic value when extracted – this additional value is reflected as income associated with the extraction process

A3 resource rent = part income, part depletion, continued SEEA is an integrated environmental and economic accounting system Extractive industries will not exist without an economic return to the owners As natural resource becomes scarcer, income share of resource rent falls and depletion share increases -- an appropriate message to policymakers

How to define the income element of resource rent? London group unanimously recommended A1. Entire resource rent = income A2. No resource rent = income A3. Resource rent = part income and part depletion

Second issues for resolution How best to view the discovery of mineral and energy resources ie subsoil assets? i.e. what is the relationship between mineral exploration and new discoveries of mineral and energy resources (subsoil assets)?

How best to view discovery of mineral energy resources? B1. Use independent sources, neither based on resource rent of the deposit, to separately value mineral exploration and mineral resources B2. Valuation of mineral deposit according to NPV of resource rent, calculated to exclude value of mineral exploration B3. Same values as option B2, but combine mineral exploration and mineral resource and attribute to a ‘developed natural asset’

Option B1: use independent sources, not linked to resource rent of the deposit generally: SNA requires market prices mineral resources rarely sold on market, especially in countries where they are owned by the government and market values for mineral resources tend to reflect combined value of mineral resources and associated mineral exploration i.e. risk of double counting

Option B2: valuation of mineral exploration according to NPV of resource rent SNA93 Rev.1 generally recommends market values but suggests use of NPV where returns are spread over lengthy periods (e.g. for mineral resources) NPV systematically links resource rent with values of mineral resources and mineral exploration -- value of mineral exploration excluded from resource rent used to value the mineral resource

Option B3: mineral exploration ‘producing’ new discoveries of mineral resources? Implies mineral exploration somehow transform inputs in order to ‘produce’ new discoveries? not valid -- can mineral resources be thought of as ‘produced’, in any sense?

Option B3: mineral exploration ‘producing’ new discoveries of mineral resources? continued… Output of mineral exploration = knowledge asset (information about the mineral resource) Value of this output is the price paid to the exploration company -- mineral exploration (knowledge) asset is used in the subsequent extraction process

London Group rejected option B3: instead, combined elements of options B1 and B2… Record the value of mineral exploration based on either market prices or costs depending on whether it is carried out by a contractor or on own account. The value of the mineral deposit ie the subsoil asset should be based on observed market value or, where this is unavailable, on NPV of the resource rent. In either case, the value of the mineral deposit should be calculated to exclude the value of mineral exploration.

In summary, London Group decisions and UNCEEA… London Group cognisant of UNCEEA’s objectives, i.e.: –‘mainstreaming’ SEEA –elevating SEEA to international statistical standard –advancing SEEA’s global implementation

London Group decisions and UNCEEA, continued… Decisions on depletion are: –consistent with 1993 SNA and draft SNA93Rev.1 –consistent with long-term thinking within London Group –implementable within statistical agencies, including developing countries…

London Group decisions and UNCEEA, continued… London Group decisions on depletion were unanimous

London Group decisions and UNCEEA Recommend UNCEEA endorse the outcomes achieved by London Group

SEEA 2003 Revision Process Issue 13 Recording of non renewable natural resources IssueLondon GroupUNCEEA 13.1 Identifying income element of resource rent Unanimous agreement on treatment Endorsement sought July Mineral exploration and mineral deposits Unanimous agreement on treatment Endorsement sought July Additions to and subtractions from stock of environmental assets For discussion next London Group meeting Seek endorsement July Ownership of mineral-related assets For discussion next London Group meeting Seek endorsement July Recording DepletionFor discussion next London Group meeting Seek endorsement July 2008