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 1990s Globally, rent value of oil discovered in 2000-2008 = $38 trillion (current prices)

Reserves are Growing for Most Minerals

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1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

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Australia Canada Chile China Cyprus

Indonesia Mexico Papua New Guinea Peru Philippines

Poland South Africa Turkey United States Russia

Kazakstan Zaire/Congo Zambia Other

• Copper reserves have grown since the 1930s, even as output is continuing to increase.

• Imputed discovery for copper over 2000 -2008 was 70% of reserves in 2000

Copper Proven Reserves

Copper Cumulative Production • For most minerals, imputed discovery over 2000-2008 averages 40% of 2000 reserves

• Oil 40%; Cobalt 17%, Phosphate 67%, Iron 23%

• Some reserves have declined but this can be due to political decisions to declassify reserves (coal) rather than exhaustion

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.