The United Kingdom’s (UK) mineral wealth has been looted in plain sight. Two estimates show that the people of UK lost 35–39% of the value of their North Sea oil inheritance. Why do politicians want to expand fracking extraction, when more wealth would be lost?
Natural resources are a shared inheritance. It is our duty to ensure that future generations inherit at least as much as we did. Only if we do that, may we consume the fruit. A loss is a loss to our children and all future generations. This is the principle of intergenerational equity.
In the foreword to its 25 year Environmental Plan (25YEP), the UK government states ): “Our natural environment is our most precious inheritance. … We hold our natural environment in trust for the next generation. By implementing the measures in this ambitious plan, ours can become the first generation to leave that environment in a better state than we found it and pass on to the next generation a natural environment protected and enhanced for the future.”[1] The 25YEP has the goal of leaving the environment for future generations in a better condition than today.
The picture with inherited mineral wealth is very different. Mining is effectively the sale of the minerals. Royalties and other proceeds from mining are received in exchange for the minerals. Naturally the goal should be to ensure that the mineral is sold for its full value, ie, the loss should be zero, and the entire sale proceeds be invested by the state in trust for the people and future generations.
The UK, which was at the center of the Industrial Revolution, has extracted large amounts of coal, oil and gas, and once ruled over a global empire. It is remarkable that the IMF recently estimated that UK’s public sector balance sheet has run up a negative net worth of approximately 125% of its GDP[2]. The UK’s entire coal and North Sea oil inheritance, the common wealth of the British people, has been squandered, cheating their future generations of their inheritance. This is not sustainable. How did this happen? What went wrong?
Evidence of large losses and inadequate savings
Two high quality studies of the UK’s experience with North Sea Oil have estimated that the UK has lost between 35–39% of the value of its oil. In 2014, the Natural Resource Governance Institute (NRGI) commissioned a study on National Hydrocarbon Accounting for the UK[3]. At a 12% reasonable post tax return on capital employed, over the period 1979–2012, the mineral value (after extraction costs and the 12% reasonable return) worked out to GBP 298 billion. Against this, the government received GBP 183 billion. In other words, the loss was GBP 115 billion, at a Loss Rate of 39%.
A 2016 paper by Giles Atkinson and Kirk Hamilton from the Grantham Research Institute on Climate Change and the Environment at the LSE estimated that the UK captured 65% of the value of the North Sea oil. This means that 35 of every 100 was lost, a Loss Rate of 35%. This works out to a loss of GBP 152 billion on minerals valued (after full extraction costs) at GBP 436 billion.
This underpricing of minerals is clearly unfair. Since UK’s population in 2012 is estimated at 63.7 million, if we take NRGI’s estimates, each person in the UK lost GBP 1,803. Everyone lost equally, while a few are becoming super-rich. This is looting economics, not trickle down economics.
Miners have all incentives to extract as quickly as possible, before the people realize what is happening. This haste causes enormous damage to the environment and human rights. It leads to widespread corruption and uncaring governance. While the UK has made a few people rich and consumed the rest of its mineral inheritance, it has avoided the more damaging consequences of oil, such as conflict, civil war and authoritarian governments. But how did such large losses go unnoticed?
Politicians love “revenue”
An important cause of UK’s wasted mineral wealth is a long standing error in how governments across the world treat the royalties and other proceeds of selling our mineral wealth. The current government finance statistics treats the proceeds from mining as “revenue” or “income”. The goal of the mining ministry is usually to increase extraction and “revenue” to the budget. In this perspective, lowering royalty rates leads to additional mining translating into greater revenues. Low loss rates isn’t an objective, nor even a measure.
The politicians like calling royalties “revenue” as they do not have to raise taxes and it gives them space for clientelism. The voters like it as their taxes will not increase, and they may even benefit from some patronage. However, the reality is that a fire sale of minerals is taking place. To take the NRGI estimates for North Sea oil, the UK government received GBP 183 billion and treated it as “revenue”. More drilling means more “revenue”.
However the reality is that the UK government sold minerals worth GBP 298 billion for only GBP 183 million, a net loss of GBP 115 billion. For every 100 of minerals extracted, 35 is lost. Every time the UK extracts a drop of oil, they are becoming poorer by a third of its value. This loss of wealth is hidden due to this error in government financial reporting standards.
Further, since the sale proceeds are treated as “revenue”, originating from a windfall, it is highly likely to be consumed. Atkinson and Hamilton (2016) estimated that if North Sea oil extraction were properly accounted for, for the period 1975–2010, the UK’s net national savings would have been “less than 4% of GNI and it approaches 0 in some years.”
It is likely that this obvious error in accounting is not being rectified as it goes against the interests of politicians in resource rich nations. The IMF estimates around a third of its members are resource rich nations.
What should the UK do?
Natural resources, including minerals, are a shared inheritance with the state as a trustee for the people and future generations. Mineral extraction is effectively the sale of the family silver, and must be treated as such. Royalties and other payments are the consideration received in exchange for the mineral wealth. Minerals can only be extracted once. Therefore, if the mineral wealth is extracted and sold, three steps are essential
1) When selling the minerals, achieve Zero Loss, ie capture the entire sale value minus extraction costs, including a reasonable profit for the extractor. Any loss is a loss to the people and all future generations.
2) Like Norway, save the entire proceeds from extraction in a Future Generations Fund, also held in trust for the people and especially future generations. Spending any of the proceeds is stealing the children’s inheritance.
3) The fund is created from selling the minerals. Only the real income of the fund may be distributed, only as a Citizen’s Dividend, equally to all as a right of ownership. Future generations would benefit from the dividend in their turn.
Economic results should be positive — no one can argue that Norway did poorly by saving the entire proceeds of North Sea oil in a fund instead of spending it domestically. Atkinson and Hamilton (2016) conclude that “a SWF [from North Sea Oil like Norway] would have been a sound public investment.”
Whether fracking ultimately takes place or not, the UK should consider implementing these principles for managing all its mineral wealth going forward. This would at least stem the rot, and put the UK government on a sustainable path going forward.
Rahul Basu is the Research Director of Goa Foundation, an environmental NGO in India. The Future We Need is a global movement asking for natural resources to be viewed as a shared inheritance we hold as custodians for future generations. This work is based on the practical research of the Goa Foundation.
Whose Mine Is It Anyway is a campaign to make government finances and national income statistics treat mining as the sale of minerals. Read Mitigating the Resource Curse by Improving Government Accounting, Government Accounting and the Resource Curse — Response to FAQs and Goa Foundation’s letter on the SEEA.
The Goenchi Mati Movement is advocating these ideas for all mining in Goa, India. A joint campaign is asking for this principle to be part of India’s National Mineral Policy.
[1] https://www.gov.uk/government/publications/25-year-environment-plan
[2] https://blogs.imf.org/2018/10/09/the-wealth-of-nations-governments-can-better-manage-what-they-own-and-owe/
[3] https://resourcegovernance.org/sites/default/files/National_Hydrocarbon_Account.pdf