Stem the loss: how Canadians’ futures are being impoverished

For years, Statistics Canada has published data that indicate enormous wealth transfers from the people to extractors. Puzzlingly, no one seems to have noticed.

Background

In Canada, ownership of oil, gas & minerals is complex. In many locations, First Nations own the sub-soil, having never ceded sovereignty. In other areas, the Crown notionally owns the minerals, with title residing with the Provincial governments like Alberta. There are land parcel where minerals are privately owned. By and large, minerals in the ocean belong to the Federal government. In general, minerals are a shared inheritance, usually owned by some level of the state, which holds them in custody for the nation.

Extraction of oil, gas or minerals usually results in the sale of the minerals by the government to the extractor. The mineral owner receives royalties, production shares, etc. as the consideration for the minerals extracted and sold.

In a fair transaction, the mineral owner should receive the in-situ value of the minerals extracted. The value of the minerals prior to extraction is their market sale value minus the costs of extraction, costs including a normal profit for the extractor. This in-situ value is known as “economic rent” or “resource rent”.

Naturally the goal of the mineral owner is to ensure that they receive the full value, i.e., zero loss. Put simply, if the extracted minerals are worth 100, how much did the government receive as mineral sale proceeds, and how much was lost? We can define Loss as Resource Rent minus Mineral Sale Proceeds, and Loss Rate as Loss divided by Resource Rent. The goal for both is zero.

In earlier work, the IMF has estimated “effective tax rates”, which imply loss rates of 15%-35% for hydrocarbons and 35–55% for minerals[1]. By contrast, using audited financial statements of the largest extractor, Goa Foundation has found loss rates in Goan iron ore of 95% over an 8 year period. Data from the Australian Bureau of Statistics indicates a loss of 82% over the decade 2000-2010. The World Bank (2021) recently estimated that the top 5 gold producers, which includes Canada, have loss rates well over 70% with occasional exceptions (See chart below). We have collated a number of other studies in our ongoing article, Global Estimates of Loss Rates.

Source: Lange, G.M., Wang X., Naikal, E., 2020. Improving the estimates of mineral rent and asset value for the Changing Wealth of Nations 2021. World Bank. Appendix 6 on page 56

Canada

Since December 2015, Statistics Canada has been providing estimates of national natural resource wealth on a quarterly basis, disaggregated by sector – government, corporate and household. The methodology (explained briefly below) is set out in their paper, Natural Resource Wealth Statistics in the National Balance Sheet Accounts (StatCan 2015). The paper says “The situation in Canada is one where governments have a custodial function with respect to natural resources, holding them “in trust for the nation”. … Governments in Canada do not account for natural resource stocks in their financial statements (public accounts), which is the general off-balance-sheet treatment for assets held in trust. Notably, the inclusion of natural resource stocks on government balance sheets is not included in the IMF Government Financial Statistics manual.

For the nation, “The natural resource asset value is calculated in two steps: a) resource rent is derived as resource sales revenue less extraction costs ; and b) the discounted sum (or net present value) of the stream of resource rents is estimated.

The natural resource wealth of the government is “the government’s share of natural resource wealth on the net present value (NPV) of the expected revenue stream paid by resource extractors to governments (i.e. (that is to say), royalties and special taxes).

Household natural resource wealth is estimated at zero – very few either own natural resources prior to extraction or hold extraction contracts.

The corporate sector natural resource wealth “is calculated as total resource wealth less the above NPV (net present value) of the expected stream of royalties and special taxes. This residual amount is allocated to the corporate sector as its share of resource wealth. Assuming that the government’s share is estimated accurately, this is equivalent to the value of an intangible corporate asset reflecting the government-conferred right to extract and sell the nation’s natural resources.” (our highlights). Note that since natural resource wealth is based on resource rents, which in turn ensures a normal profit for the extractor, this is a pure wealth transfer.

In effect, corporate sector natural resource wealth is NPV of future Resource Rent of extracted minerals minus NPV of the future mineral sale proceeds to be received by the mineral owning government. In other words, the corporate sector natural resource wealth is the NPV of the future stream of Losses (NPV Loss). Ideally, this should be zero. And we can estimate a NPV Loss Rate defined as the Corporate Sector Natural Resource Wealth (or NPV Loss) divided by the total resource wealth.

Results

Statistics Canada’s quarterly natural resource wealth data series begins with Q1 1990. The results are pretty shocking. NPV Loss Rate varies between 44% and 86%, and is mostly above 60%.

Source: Statistics Canada’s quarterly natural resource wealth data series

The latest data point, as of 31-Mar-2022, indicates Canada has $1,239.328 billion worth of minerals – measured as the NPV of future resource rent streams. Of this value, the government will receive only $282.785 billion, effectively losing $956.543 billion! The NPV Loss Rate is 77%. Such losses are effectively a hidden per-head tax which make a few extractors and their cronies super-rich. Inequality grows sharply. This is the economics of loot.

Statistics Canada estimates the total population on the same date at 39,566,248. In effect, this implies that the total national natural resource wealth was $31,323 per Canadian. However, due to the way the oil, gas & minerals are managed by the government as trustee, each Canadian is committed to lose $24,176 of their wealth.

Consider the political implications of this wealth transfer. Nearly $1 trillion of common wealth has been captured by corporates. It is not hard to see that much smaller political contributions would make it difficult to change the prevailing system.

Conclusion

At the heart of the responsibilities of any custodian or trustee over wealth is a requirement to ensure that the value of the asset does not diminish. As we can see clearly, the government is failing miserably in fulfilling its responsibilities. As we argue elsewhere, responsible mineral owning governments would adopt the Goa Foundation Benchmark:

  1. Get all: Ensure Zero Loss when selling minerals
  2. Save all: Save the entire mineral sale proceeds in a Future Generations Fund, invested in a global portfolio of low cost index funds (Vanguard funds)
  3. Share all: Only distribute the real income of the fund only as a citizen’s dividend, a right of ownership.

If followed, Canada would end up with a future generations fund with nearly $1 trillion corpus. Even if it earned a 3% real return, it would amount to $37.180 billion, or a real dividend of $940 for every Canadian. In perpetuity!

Will ordinary Canadians push for an improved mineral wealth management system?

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