Krittika Singh is a Researcher and PhD Candidate in the doctoral programme: Arctic in a Changing World
The International Seabed Authority (ISA) is currently in its 27th session in Kingston, Jamaica to discuss the regime for exploitation of minerals from the ‘Area’, or the seabed in areas beyond the jurisdiction of States. The ISA is an ‘autonomous’ international organisation, in charge of both protecting the marine environment, as well as administering the resources that form part of the ‘common heritage of mankind’. Member States of the ISA sponsor contractors for mining in the Area, and as per the system, the ISA is entitled to receive compensation or ‘royalties’ for transferring this common ownership of minerals from humankind to deep sea mining contractors [UNCLOS Articles 136, 137,140], who may be private or public or jointly operating with the Enterprise, the commercial arm of the ISA. Should deep sea mineral exploitation actually take place in the future, currently in the exploration phase, these royalties would be utilized towards the functioning of the ISA. Profits over and above might also go to sponsoring states that are members of the ISA, but these modalities are currently being discussed. The Finance Committee of the ISA will decide on disbursement of these royalties through a system of equitable sharing of financial and other benefits from deep seabed mining.
A royalties payment system for metals from deep sea mining - no size fits all!
But first a payments system for deciding the rate of royalties to be charged is currently being discussed. At the live telecast of the session on 22nd March, MIT Professor Richard Roth presented a study on the financial modelling of royalties. Four options were discussed: one stage with a fixed ad valorem, two stage with a fixed ad valorem, blended profit plus fixed ad valorem, two stage with a variable ad valorem. A fixed royalties system would ensure continuous payments, while a variable rate would ensure higher payments in the later stages. According to Professor Roth, a two stage model would allow contractors to break even, and for the ISA to “capture a good amount of upside benefits with only limited downside risk; this can be designed to give higher overall revenues to ISA accepting slightly lower revenues in the first stage”. It would take years for deep sea mining contractors to start making revenue, considering the complex technology required and heavy initial investment. A delegation discussed creating incentives in the royalties system for technological options that cut environmental costs. The risks of applying a purely profit based system are that companies invest in auditors to legally find loopholes in the regime to avoid taxation, by shifting expenditure bases, for instance, allocating more expenses towards R&D. Contractors might even sell or transfer their licenses, which come at a heavy price. Currently, the institutional resources at the ISA might not be adequate or for that matter have the mandate to track these transactions.
Now to the way royalties are calculated. First, the MIT model discusses royalties only for polymetallic nodules (the other two mineral resources in the deep sea are sulphides and crusts). The speaker explained that the product that comes out of the deep sea is unlike ‘ore’ derived from land based mining. It is a rock that contains about 27% manganese, then cobalt, copper, lithium and trace amounts of other elements but which are not economically viable. Only these four metals were considered for the model: cobalt, copper, lithium, and manganese. Out of these, manganese presents some peculiar challenges as it is not derived as ‘pure’ metal like the others. It is an intermediate product, used in the steel industry. Because of its high percentage in the rock, it cannot be dropped from the equation either and the other three metals would need this ‘extra’ profit from manganese to be economically viable collectively. Different ‘products’ of manganese came up for discussion - electrolytic manganese, ferro or silica-manganese. The most interesting candidate was rock minus Co-Co-Li, a concentrate mostly of manganese and trace amounts of other metals. Apparently, this ‘rock’ could also be of demand in the market. This wide variety makes the royalty payments system harder to design as they have to arrive at some base formulae for the model. A country delegation also suggested using a ‘mass’ based model, in which they could simply calculate the rate based on the weight of this rock removed from the ocean. This isn’t that straightforward either as metal prices are an important determinant for deciding on a royalties system. Followers of the London or Shangai exchange are perhaps aware of the fluctuations. MIT proposed that a ‘hybrid’ mass as well as price system could be considered.
Competition with land based industries
Another consideration is land based mining industries, which may be in competition with deep sea mining. Africa for instance has a heavy manganese industry and might suffer losses if deep sea mining were to kick off. The South African delegation, on behalf of 47 African countries negotiated hard with the phrase: “nothing is agreed until all is agreed”, the principle that the ISA applies to agree on all rules. Miners pay a range of taxes on land, and deep sea mining contractors must match these. A suggestion in the discussion was also to utilize the experience of these countries in processing of manganese, and in deciding the ‘product’ to be traded. The Special Representative of the Enterprise also raised the issue of keeping royalty calculation simple as a complex system might hamper the formation of joint ventures, and the Enterprise functions in those. These are some of the technicalities that came up in the design of a royalties system for minerals derived from mining in the ‘Area’. Now it is to the ISA to come up with legal rules for this financial payments system, after selecting one.
Should deep sea ecosystems pay for our electric cars in the future?
Some delegations asked if ‘environmental costs’ were already considered in the financial payments model. The MIT Study did not have the task to cover these. Delegations then asked for creating ‘incentives’ for considering environmental costs, how to internalize costs associated with externalities (heavy lobbying by Germany, supported by others). Costa Rica called for including the valuation of ecosystem services and natural capital in the royalties model.
Observers to the ISA, and representing environmental interests, the Deep Sea Conservation Coalition, Deep Ocean Stewardship Initiative Earthworks, Pew Charitable Trusts (amongst others) tried to drive home the point of how priorities are skewed more in favour of mineral exploitation than considering the value of ecosystem services or natural capital. Alongwith the International Union on the Conservation of Nature (IUCN), their vote lies for a moratorium on deep sea mining. It might also be time to consider where we stand, as global citizens, as guardians of the planet. Metals from the deep seabed might fuel our electric cars in the future, but deep sea ecosystems have been the origin of all life. This raises also a question on the ethics of deep sea mining. At the very least, there is a need for more data on baseline environmental conditions and impacts, for research on the value of ecosystem services and natural capital. Also for more inclusive and broad based research. As Panama noted, research should not only come from ‘capital’ that wants to exploit these resources.
And while we monitor these developments relating to mining in international waters, closer to home, the Norwegian Petroleum Directorate is conducting studies in the continental shelf of Norway (Mohns Ridge) and considers opening process for mineral activities – sulphides, manganese crusts and nodules as early as 2023. It will have to be seen how the international regime will influence domestic regulation.
Krittika Singh, Researcher and PhD Candidate, University of Lapland
23nd March 2022