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TOWARDS COMPLETE 
BALANCE SHEETS IN THE 
NATIONAL ACCOUNTS – 
THE CASE OF SUBSOIL 
ASSETS 
Paul Schreyer, OECD 
Carl Obst, University of Melbourne 
Rome, September 2014
Outline 
• Background 
• Valuing stocks and their depletion 
• A volume index of subsoil assets for 
Australia plus some thoughts on 
sustainability 
• Conclusions
Background
4 
• Traditionally, much more effort to measure 
flows, in particular GDP, than to measure 
stocks 
• Flows are important but paint only part of 
the health card of an economy
Recent developments 
5 
• Stiglitz Sen Fitoussi (2009) Commission makes 
a plea for more systematic measurement of 
wealth 
• The 2008 SNA foresees full balance sheets, 
including R&D assets 
• The System of Environmental-Economic 
Accounting 2012 Central Framework (SEEA) 
extends SNA asset base to broader set of 
environmental assets (e.g., international fish stocks)
Data situation 
6 
• All OECD countries produce measures of produced 
assets (though not always comparable) 
• Only a minority of countries features complete SNA 
balance sheets (among them: Australia, France, 
Korea, Netherlands) 
• Single biggest gap: non-produced non-financial 
assets: methodological and data issues 
– Land (OECD/Eurostat Taskforce; Diewert and Shimizu) 
– Subsoil assets: this paper
Valuing subsoil assets and their depletion
• Consistent with valuation of produced assets: 
market prices 
• Possible when there are representative, 
observable transactions (e.g. land - 
sometimes) 
• Produced assets: observable transactions in 
new assets (investment) and estimates of 
retirement and depreciation are combined to 
yield current stock value at market prices 
• Subsoil assets: few if any transactions in 
assets in the ground, only sales of extracted 
resources 
8 
Valuation of subsoil assets
∞ 푝푆푡 
푝푡푋푡 = 휏=0 
+휏푆푡+휏 /(1 + 푟푡)휏 
ptXt: price and quantity of asset in the 
ground 
푝푆푡 
+휏푆푡+휏 resource rent = income: 
price and quantity of asset 
extracted 
9 
Common approach: asset market 
equilibrium
Shifting by one period to obtain user cost or 
resource rent equation: 
푝푆푡 
푆푡 = 푝푡−1푋푡−1푟푡 − 푝푡푋푡 − 푝푡−1푋푡−1 
10 
Common approach: asset market 
equilibrium (2) 
Return to capital Value of opening 
minus closing 
stock= 
additions - 
depletion + 
revaluation
Typically: 
• For produced assets, pt can be observed 
and pt needs to be estimated 
s 
• For non-produced assets, ps 
t can be 
observed and pt needs to be estimated, 
unless Hotelling is called in. 
11 
Common approach: asset market 
equilibrium (3)
푆Harold Hotelling (1931): 
푆푡 
푡 
rt = pt/pt-1-1 and St = -ΔXt (no additions) 
푝푆푡=-ptΔXt  푝=pt : price of asset in 
the ground = unit resource rent 
• Widely used but restrictive (one asset, no 
discoveries, constant marginal costs…) 
• Not supported empirically 
• Potentially misleading results when 
valuing depletion 
12 
Common approach: asset market 
equilibrium (4)
• Thus, to value stocks and depletion, the 
price of the asset in the ground must be 
estimated 
• NPV always requires some form of 
projection of extraction quantities and 
price develoments 
• ‘Impossibility theorem’ of valuing stocks 
just based on observable transactions? 
• Efforts should go into improving NPV 
estimates  OECD has started work 
13
Further decomposition of change in balance 
sheet values in user cost expression: 
푝푡푋푡 − 푝푡−1푋푡−1 = 푝 
푡 
Δ푋푡 + 푋 
푡 
Δ푝푡 
14 
Measuring depletion, additions 
and revaluation 
Volume 
change in 
asset 
Revaluation
Volume index of subsoil assets
• Several subsoil assets i=1,2,… 
• Volume of subsoil assets is non-decreasing 
if: 
푖 
푡 Δ푋푖 
푝푖 
푡 ≥ 0 
Note: 
• Valuation with average period prices is NA-compatible 
and significant for result 
• Statement about weak sustainability 
16 
Volume index of subsoil assets
17 
Subsoil assets covered by the ABS 
Asset category (SEEA 
definition) 
Asset type in ABS balance sheets 
Oil resources Crude oil 
Natural gas resources Natural gas 
Condensate 
Coal and peat resources Black coal 
Brown coal 
Non-metallic mineral 
resources (excluding coal and 
peat) 
Diamonds 
Ilmentite 
Magnesite 
Rare Earth Elements (REE) 
Rutile 
Zircon 
Metallic mineral resources Antimony 
Bauxite 
Cadmium 
Copper 
Cobalt 
Gold 
Iron ore 
Lead 
Lithium 
Platinum Group Metals (PGM) 
Nickel 
Silver 
Tin 
Uranium 
Zinc 
Source: SEEA 2012 and Australian Bureau of Statistics (2012).
18 
Volume index of mineral and 
energy resources, Australia 
80,0 
100,0 
120,0 
140,0 
160,0 
180,0 
200,0 
220,0 
240,0 
260,0 
1989 
1990 
1991 
1992 
1993 
1994 
1995 
1996 
1997 
1998 
1999 
2000 
2001 
2002 
2003 
2004 
2005 
2006 
2007 
2008 
2009 
2010 
2011
19 
Contribution of different mineral and energy 
resources to volume index 
Percentage points of average annual growth, 1989-2011, 
Australia 
-0,5% 
0,0% 
0,5% 
1,0% 
1,5% 
2,0% 
Natural gas 
Copper 
Iron ore 
Nickel 
Magnesite 
Condensate 
Zinc 
Gold 
Cobalt 
Uranium 
Lead 
Silver 
Zircon 
Rutile 
Ilmentite 
Black coal 
REE 
Cadmium 
Antimony 
Lithium 
PGM 
Brown coal 
Tin 
LPG 
Diamonds 
Bauxite 
Crude oil
• Upward trend 
• Not a price effect as revaluations are 
excluded 
• Only price effect in the sense that: 
– Rising prices may have triggered discoveries, i.e. 
recognition of resources as being economically 
demonstrated (i.e. classified as proven plus 
probable resources) 
– Relative prices may have changed, giving more or 
less weight to index components 
• Classic properties of any volume index 
20 
Volume index of mineral and 
energy resources, Australia
• Does an upward trending index for exhaustible 
resources make sense? 
• Driven by new discoveries and ‘economic appearance’ 
• Option: include all known deposits (currently only 
commerically exploitable deposits)? 
– New discoveries of same asset or new asset may still 
happen ((sand oil, shale gas) 
– Relative prices and weights may shift 
– Market valuation of economically non-viable sources is not 
convincing 
• Meaningful: separate index of depletion and addition 
• Depletion-adjusted income 
21 
Sustainability
22 
The importance of index number formulae 
290.0 
270.0 
250.0 
230.0 
210.0 
190.0 
170.0 
150.0 
130.0 
110.0 
90.0 
1989 
1991 
1993 
1995 
1997 
1999 
2001 
2003 
2005 
2007 
2009 
2011 
Laspeyres volume 
index 
Paasche volume index 
Törnqvist volume 
index 
Fisher volume index* 
Marshall-Edgeworth 
index*
Conclusions
• Importance of stocks not matched by data 
availability although some work is under way 
• Natural resource stocks should be valued 
symmetrically to produced assets with the price of 
the asset in the ground, not the unit resource rent 
• Resource rents are the correct measure for income 
and the price of capital services from natural 
resources 
• Valuation of stocks, even near-market, nearly 
always implies imputations and forward-looking 
estimates 
• Need to invest in the quality of these estimates 
24
• Physical monitoring of quantities asset-by-asset 
is impractical 
• Upward trending measure of the stock of 
exhaustible resource is economically 
meaningful 
• But not a sufficient measure of sustainability 
• Needs complementing with information on 
other stocks to capture externalities from the 
use of subsoil assets 
25
Thank you! 
26

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HLEG thematic workshop on "Intra-generational and Inter-generational Sustainability", Paul Schreyer

  • 1. TOWARDS COMPLETE BALANCE SHEETS IN THE NATIONAL ACCOUNTS – THE CASE OF SUBSOIL ASSETS Paul Schreyer, OECD Carl Obst, University of Melbourne Rome, September 2014
  • 2. Outline • Background • Valuing stocks and their depletion • A volume index of subsoil assets for Australia plus some thoughts on sustainability • Conclusions
  • 4. 4 • Traditionally, much more effort to measure flows, in particular GDP, than to measure stocks • Flows are important but paint only part of the health card of an economy
  • 5. Recent developments 5 • Stiglitz Sen Fitoussi (2009) Commission makes a plea for more systematic measurement of wealth • The 2008 SNA foresees full balance sheets, including R&D assets • The System of Environmental-Economic Accounting 2012 Central Framework (SEEA) extends SNA asset base to broader set of environmental assets (e.g., international fish stocks)
  • 6. Data situation 6 • All OECD countries produce measures of produced assets (though not always comparable) • Only a minority of countries features complete SNA balance sheets (among them: Australia, France, Korea, Netherlands) • Single biggest gap: non-produced non-financial assets: methodological and data issues – Land (OECD/Eurostat Taskforce; Diewert and Shimizu) – Subsoil assets: this paper
  • 7. Valuing subsoil assets and their depletion
  • 8. • Consistent with valuation of produced assets: market prices • Possible when there are representative, observable transactions (e.g. land - sometimes) • Produced assets: observable transactions in new assets (investment) and estimates of retirement and depreciation are combined to yield current stock value at market prices • Subsoil assets: few if any transactions in assets in the ground, only sales of extracted resources 8 Valuation of subsoil assets
  • 9. ∞ 푝푆푡 푝푡푋푡 = 휏=0 +휏푆푡+휏 /(1 + 푟푡)휏 ptXt: price and quantity of asset in the ground 푝푆푡 +휏푆푡+휏 resource rent = income: price and quantity of asset extracted 9 Common approach: asset market equilibrium
  • 10. Shifting by one period to obtain user cost or resource rent equation: 푝푆푡 푆푡 = 푝푡−1푋푡−1푟푡 − 푝푡푋푡 − 푝푡−1푋푡−1 10 Common approach: asset market equilibrium (2) Return to capital Value of opening minus closing stock= additions - depletion + revaluation
  • 11. Typically: • For produced assets, pt can be observed and pt needs to be estimated s • For non-produced assets, ps t can be observed and pt needs to be estimated, unless Hotelling is called in. 11 Common approach: asset market equilibrium (3)
  • 12. 푆Harold Hotelling (1931): 푆푡 푡 rt = pt/pt-1-1 and St = -ΔXt (no additions) 푝푆푡=-ptΔXt  푝=pt : price of asset in the ground = unit resource rent • Widely used but restrictive (one asset, no discoveries, constant marginal costs…) • Not supported empirically • Potentially misleading results when valuing depletion 12 Common approach: asset market equilibrium (4)
  • 13. • Thus, to value stocks and depletion, the price of the asset in the ground must be estimated • NPV always requires some form of projection of extraction quantities and price develoments • ‘Impossibility theorem’ of valuing stocks just based on observable transactions? • Efforts should go into improving NPV estimates  OECD has started work 13
  • 14. Further decomposition of change in balance sheet values in user cost expression: 푝푡푋푡 − 푝푡−1푋푡−1 = 푝 푡 Δ푋푡 + 푋 푡 Δ푝푡 14 Measuring depletion, additions and revaluation Volume change in asset Revaluation
  • 15. Volume index of subsoil assets
  • 16. • Several subsoil assets i=1,2,… • Volume of subsoil assets is non-decreasing if: 푖 푡 Δ푋푖 푝푖 푡 ≥ 0 Note: • Valuation with average period prices is NA-compatible and significant for result • Statement about weak sustainability 16 Volume index of subsoil assets
  • 17. 17 Subsoil assets covered by the ABS Asset category (SEEA definition) Asset type in ABS balance sheets Oil resources Crude oil Natural gas resources Natural gas Condensate Coal and peat resources Black coal Brown coal Non-metallic mineral resources (excluding coal and peat) Diamonds Ilmentite Magnesite Rare Earth Elements (REE) Rutile Zircon Metallic mineral resources Antimony Bauxite Cadmium Copper Cobalt Gold Iron ore Lead Lithium Platinum Group Metals (PGM) Nickel Silver Tin Uranium Zinc Source: SEEA 2012 and Australian Bureau of Statistics (2012).
  • 18. 18 Volume index of mineral and energy resources, Australia 80,0 100,0 120,0 140,0 160,0 180,0 200,0 220,0 240,0 260,0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
  • 19. 19 Contribution of different mineral and energy resources to volume index Percentage points of average annual growth, 1989-2011, Australia -0,5% 0,0% 0,5% 1,0% 1,5% 2,0% Natural gas Copper Iron ore Nickel Magnesite Condensate Zinc Gold Cobalt Uranium Lead Silver Zircon Rutile Ilmentite Black coal REE Cadmium Antimony Lithium PGM Brown coal Tin LPG Diamonds Bauxite Crude oil
  • 20. • Upward trend • Not a price effect as revaluations are excluded • Only price effect in the sense that: – Rising prices may have triggered discoveries, i.e. recognition of resources as being economically demonstrated (i.e. classified as proven plus probable resources) – Relative prices may have changed, giving more or less weight to index components • Classic properties of any volume index 20 Volume index of mineral and energy resources, Australia
  • 21. • Does an upward trending index for exhaustible resources make sense? • Driven by new discoveries and ‘economic appearance’ • Option: include all known deposits (currently only commerically exploitable deposits)? – New discoveries of same asset or new asset may still happen ((sand oil, shale gas) – Relative prices and weights may shift – Market valuation of economically non-viable sources is not convincing • Meaningful: separate index of depletion and addition • Depletion-adjusted income 21 Sustainability
  • 22. 22 The importance of index number formulae 290.0 270.0 250.0 230.0 210.0 190.0 170.0 150.0 130.0 110.0 90.0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Laspeyres volume index Paasche volume index Törnqvist volume index Fisher volume index* Marshall-Edgeworth index*
  • 24. • Importance of stocks not matched by data availability although some work is under way • Natural resource stocks should be valued symmetrically to produced assets with the price of the asset in the ground, not the unit resource rent • Resource rents are the correct measure for income and the price of capital services from natural resources • Valuation of stocks, even near-market, nearly always implies imputations and forward-looking estimates • Need to invest in the quality of these estimates 24
  • 25. • Physical monitoring of quantities asset-by-asset is impractical • Upward trending measure of the stock of exhaustible resource is economically meaningful • But not a sufficient measure of sustainability • Needs complementing with information on other stocks to capture externalities from the use of subsoil assets 25