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16. Leases to exploit natural resources such as mineral deposits

 The issue

One of the items for review in the update of the 1993 SNA was the treatment of leases and licences to use and exploit natural resources. Three different types of natural resources were considered:
a) Natural resources that have infinite lives and where use in production does not affect the nature or value of the asset. Examples include land and the radio spectrum.
b) Natural resources that are subject to replenishment and which can be used indefinitely providing their use is restricted. Examples include non-cultivated forests and fish.
c) Natural resources that are not subject to replenishment (at least on a human time scale) and whose use in production eventually exhausts them. Examples include mineral and petroleum deposits.

In respect of the first two types, the ISWGNA and AEG were able to reach what they considered a satisfactory conclusion, but in the case of the third type they were unable to do so. Finally, however, the ISWGNA concluded that the revised SNA should recommend that:  
d) economic ownership of the natural resource resides with the lessor;  
e) the lessee pays royalties (i.e. rent) to the lessor to use the natural resource; and
f) only the lessee, and not the lessor, is undertaking production.

 Reasons for inclusion in the Research Agenda

Several members of the ISWGNA felt that this was not an entirely satisfactory treatment and it should be put on the long-term research agenda.

Alternative treatments

For the most part, inanimate natural resources other than land are mainly used for extractive purposes. The lesssor retains ownership of the resource, though this diminishes as extraction takes place. The lessee takes control of the resource, in the sense of having power to make decisions on the rate of extraction (possibly within some limits laid down by the lessor), but does not acquire ownership of the whole resource.  

The Canberra II Group took the view that this implies ownership of the resource is divided between the lessor and the lessee, and recommended a treatment that was subsequently rejected by the AEG. This was to treat leases on sub-soil assets as financial leases. The argument being that when the lease allows the lessee to exploit a mineral or energy deposit over many years the lessee effectively becomes the economic owner of the deposit and the royalty payments can be viewed as payments of principal and interest on a financial lease. A refinement of the financial lease treatment is to have two loans: one corresponding to the value of the asset that is used up by the lessor (either by depreciation for a fixed asset or depletion for a sub-soil asset) and the other corresponding to the residual value of the asset when ownership reverts back to the lessee, but this received little support from the AEG.  

This approach has the advantage of recording the value of the sub-soil asset on the balance sheet of the extractor (i.e. the lessee) that is consistent with commercial accounting and a financial asset on the balance sheet of the lessor equal to the present value of the expected future royalty payments and the remaining value of the resource at the end of the lease. A major practical problem with the financial lease approach for sub-soil assets is the need to make revisions to the flows as revisions are made to its estimated remaining value.

A second alternative is to have the extractor working as if "on contract" to the owner without taking ownership of the deposit. The lessee retains some of the resource rent, enough to cover costs and make some profit and hands the rest over to the lessor. However, this is not how commercial accounting is done where the deposits are recorded in the extractor's accounts. It also implies that the lessor is a producer, and so it would lead to government being recorded as engaged in mining activity. Furthermore, it does not provide an ideal interface to environmental accounting.  

A third alternative is to treat the resource as inventories and to treat the lease as a contract for the sale of the resource. Hence, as the resource is extracted it would be recorded as a sale from the owner to the extractor. Appearances and disappearances of sub-soil assets would be made via the other changes in volume account as estimates of the volume of resource were revised. This would be a substantial change to the SNA, as there is currently no concept of inventories of non-produced assets and no concept of non-produced assets as intermediate inputs. Payments for the use of sub-soil assets would be treated as payments for a good, while payments for the use of resources not subject to depletion, such as land, would continue to be treated as rent.


Apart from the first alternative, all the above options were considered at length during the preparation of the 1993 SNA. The first alternative is described in detail in Leases and Licences (Part 2), prepared by Anne Harrison, and a worked example comparing it with the recommendation in 1993 SNA Rev. 1 can be found on the UNSD website.

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