1. 7.1 METHODOLOGY FOR THE VALUATION OF NATURAL RESOURCES Peter van de Ven Head of National Accounts, OECD Advisory Expert Group (AEG) on National Accounts Washington D.C., September 8 – 10, 2014

2. Introduction (1/2) Physical stocks: –The measurement of physical stocks is a necessary intermediary step before valuation can start –The international comparability of physical stocks needs to be improved –Moving to the classification advocated by the SEEA 2012 is difficult in practice 2

3. Introduction (2/2) Valuation: When computing NPVs, several issues have to be considered: –How to forecast commodity prices when they are volatile? –How to compute NPVs that do not only rely on currently observed prices? –How to ensure that production and price forecasts are consistent? => Statistical / Economic modelling may help 3

4. International comparability of physical stocks of natural resources (1/2) 4 Overview of existing classifications AbbreviationFull NameSubject Resource Latest edition (first edition) CRIRSCO, Committee For Mineral Reserves International Reporting Standards Minerals 2013 (2006) SPE-PRMS Society of Petroleum Engineers – Petroleum Resources Management System Fossil Energy (crude oil and natural gas) 2007 UNFC-2009, United Nations Framework Classification for Fossil Energy and Mineral Resources Minerals and Fossil Energy 2009 (1997) SEEA-2012 System of Environmental-Economic Accounting – Central Framework Renewable and non- renewable natural resources and land 2012 (2003)

5. International comparability of physical stocks of natural resources (2/2) 5 Australia’s subsoil assets as measured by ABS, BP, EIA, and USGS, and how these definitions relate to SEEA-2012

6. Valuation of natural resource stocks (1/5) 6

7. Valuation of natural resource stocks (2/5) 7 Nominal and real oil prices (U.S. dollars per barrel)

8. Valuation of natural resource stocks (3/5) 8

9. Valuation of natural resource stocks (4/5) 9 Classical reference in the literature: Brennan-Schwartz (1985) – Evaluating natural resource investments NPV of a mine as a function of the current resource price:

10. Valuation of natural resource stocks (5/5) Admittedly, relying on statistical/economic modelling involves crucial assumptions: –Identifying the main sources of uncertainty (here, we only considered price uncertainty) –Specifying the right stochastic process for commodity prices –Specifying how extraction costs depend on current production or remaining reserves. Difficult task given the current scarcity of data on extraction costs, but one more reason for environmental accountants to consider the improvement of these data as a priority However … providing convincing unit rent and production forecasts is also problematic when one wants to directly compute the NPV of a natural resource stock 10

11. Issues to be addressed by the AEG Does the AEG agree that the volatility of commodity prices is a key issue for the valuation of natural assets? Does the AEG agree that relying more heavily on modelling (dynamic optimisation) may be a reasonable way forward for the valuation of natural resources (and possibly other assets)? 11

12. Thank you for your attention! 12