Presentation at the HLEG thematic workshop on "Intra-generational and Inter-generational Sustainability", 22-23 September 2014, Rome, Italy, http://oe.cd/StrategicForum2014

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

3. Background

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*

23. Conclusions

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

26. Thank you!
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