Resource Extraction, Wealth and Discovery Alan Gelb, Kai Kaiser, Lorena Vinuela Center for Global Development and World Bank Presentation to Tunis Workshop November 4 2011 ResWPDiscovery A 102111
Main Points• Sub-soil assets are being discovered in Quantity• Exploration is only part-responsible but critical• Discovery boosts nations’ wealth above a normal return to exploration investment• Countries should encourage exploration while taxing extraction efficiently• Providing Geo-Science information seems to be an efficient way to encourage exploration – But the evidence needs to be strengthened
Sub-Soil Assets are Being Discovered Imputed Discovery = Extraction +Net Reserve Change Oil production in SSA has risen to 7 billion bbl, but imputed discovery has averaged 18 bbl since mid 1990sGlobally, rent value of oil discovered in 2000-2008 = $38 trillion (current prices)
Reserves are Growing for Most Minerals Copper Proven Reserves Million tons 600 400 • Copper reserves have grown since the 200 1930s, even as output is continuing to 0 increase. 1930 1935 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 • Imputed discovery for copper over 2000 - Australia Indonesia Canada Mexico Chile Papua New Guinea China Peru Cyprus Philippines 2008 was 70% of reserves in 2000 Poland South Africa Turkey United States Russia Kazakstan Zaire/Congo Zambia Other• For most minerals, imputed Copper Cumulative Production 600,000 discovery over 2000-2008 Thousand tons averages 40% of 2000 reserves 500,000• Oil 40%; Cobalt 17%, 400,000 Phosphate 67%, Iron 23% 300,000• Some reserves have declined 200,000 but this can be due to political 100,000 decisions to declassify reserves (coal) rather than exhaustion 0 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Discovery: Extensive and Intensive• Extensive – new finds. Intensive: improvements in existing operations (better recovery rates, knowledge, technology)• Without some prior extensive discovery intensive discovery cannot take place (you have to play to win)• Technology is opening options and driving down costs even as depletion of easy deposits raises costs. It is not clear how this will play out in future• There is still a lot to discover. Known reserves per sq.km. in low- income countries are only about a quarter of those in rich countries• For some countries, resource discoveries in one year can exceed GDP (Venezuela).• Many countries have reserves larger than are now proven. Their resource industries are far more sustainable than they seem – Example: oil and gas in the Americas
Discovery is Valuable• Hard minerals: value of imputed discovery (at current rents) about 17 times exploration costs• Hydrocarbons: no comparable data but partial information suggests a similar ratio – Other valuation methods will reduce ratio but still high• Why is exploration not pushed to the point where marginal cost = marginal benefit? – Earnings are in the future; private sector discounts risk heavily relative to social discount rate – Rent taxation reduces upside gains especially at cycle peaks – Option value of waiting for technology to lower costs• Argument for favorable treatment of discovery, especially if have efficient minerals rent tax system
Many Countries Do Encourage Exploration• Canada: METR exploration/development - 31% Less negative than for normal R&D -51%• Australia: high carry-forward rates, etc• Geo-Scientific data has the longest lead-time to production – especially disadvantaged• Also disadvantaged if force concessions to turn over to induce competition for discovery – Competition may also be the only way to reveal resource value for taxation• Options: tax breaks + extended non-competitive concessions (patents) or public data + competition
Is Providing Geo-Scientific Information a Good Investment?• Not enough is known but some interesting fragments reported:• Australia: $1 data spending => $ 5 - 15 private investment• Canada: $1 data spending =+ $5 private investment and $125 reserves• Developing countries (Reedman): cases show high investment response.• More rigorous data is needed, including from World Bank projects ($130 million over last decade)
Conclusion• Mining is not just about exhausting reserves. Discovery has been very important.• Discovery has positive wealth effect over and above normal exploration returns• Countries should aim for favorable incentives for competitive exploration plus efficient rent taxation• Public provision of Geo-Scientific data is one way to reconcile incentives and competition.
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