Though it seems closer than ever, deep-sea mining has always been driven in part by an abundance of optimism. In his 1974 treatise on The Control of the Sea-Bed, Evan Luard estimated that the pace of exploration and technological development for polymetallic nodule extraction was such that “it will therefore probably only take a few years before these minerals are exploited commercially.” We are now approaching the fifth decade of commercial deep-sea mining being less than ten years away.
When the UN Convention on the Law of the Seas was conceived, seafloor resources in areas beyond national jurisdiction were deemed the Common Heritage of Mankind–they belonged not to a single claimant, but to everyone. This Common Heritage principle has shaped the discussion surrounding deep-sea mining in the Area, and is especially critical to developing a payment regime. Permitted mining contractors can profit from exploitation of seafloor resources, but part of that profit must go towards toward supporting the International Seabed Authority as well as be distributed among member states, regardless of whether those states actively engage in deep-sea mining. The Open-Ended Informal Working Group is focused on the development of this payment regime and has been a central feature over the last several years of ISA negotiations.
Deep-sea mining is not without significant risk, especially for the first contractors to attempt it. Those contractors invest significant resources on an as-yet unproven industry and bear a much greater financial risk than the contractors who will undoubtedly emerge as the industry matures into commercial sustainability. These “pioneer” contractors naturally want any financial model to reflect this inherent risk.
In addition to payouts to member-states under the Common Heritage principle, the ISA also needs to raise enough funds to sustain itself while fulfilling its dual mandate to promote the development of the industry and protect the marine environment. Currently, the ISA is supported by dues paid by member states (though an undisclosed number of member states have failed to pay some or all of their dues). As the industry transitions into commercial production, a larger portion of the ISA’s budget will be covered through fixed fees from contractors, though the size of those fees, whether they’ll be assessed per contractor, per lease block, or per area, or through some other metric has yet to be determined.
The challenge of developing a fair payment system is further compounded by the fact that contractors may be either private companies or state-sponsored entities, which creates radically different profit models depending on how states levy taxes against mining contractors. Though the Open-Ended Informal Working Group recommended in the first ad-hoc meeting that corporate taxes were a matter of State concern, those cost still need to be reflected in the model and national tax regimes should be considered during review of payment plans. To that effect, contractors operating in the private sphere indicated support for a purely ad valorem model as it better levels the playing field and a purely profit-based model will be more challenging to reconcile between private and state-sponsored contractors.
Last July, the Working Group discussed variations on three specific payment systems, including a fixed ad valorem system based on the gross metal value of collected nodules with a 4% fixed royalty over the lifetime of the prospect; a two-stage ad valorem with a 2% royalty rate for the first five years and then 6% for the remaining life of the prospect; and a blended system with a 2% fixed ad valorem rate and a profit-based rate of 15% after the first five years. The final system would ensure a minimum return to the ISA, but would be much more difficult to assess and monitor.
Leading into the next meeting, the Working Group briefing recognized that a variable ad valorem system with an initial 2% royalty rate for the first five years, followed by a rate that varies from 5% to 9% depending on the value of the ore would provide the best balance between ensuring a minimum return to the ISA while accounting for uncertainty in the future value of deep-sea ores. The Working Group still needs to establish the most appropriate mechanism to create an environmental compensation fund to address any environmental liability not covered by the contractors.
One cause for concern among some stakeholders is that the current model proposed by MIT may overvalue some critical ores. The model assumes a long-term price of cobalt much higher than its current value and more in line with prices seen during the cobalt boom of 2018, a value that many are skeptical it will return to. Similarly, nickel is overvalued in the model compared to current prices. For some contractors, cobalt and nickel represent over half of the projected revenue, so a payment regime based on the assumption of those higher values could have major impacts on their bottom line.
Among other details is the question of what happens if and when deep-sea mining supplants terrestrial production of the same minerals. Is there a place in the financial model for displacement fees paid out to land-based competitors?
During the third Open-Ended Informal Working Group, delegates will continue to discuss the system and rates of payment, centered on a suite of options prepared by the ISA ahead of the meeting. They will also address how the financial model will support the ISA’s mandate to protect the marine environment, whether the financial regimes should be different for polymetallic nodules, seafloor massive sulphides, and cobalt-rich crusts. While the working group is not expected to issued final recommendations, progress made in the third ad-hoc meeting will undoubtedly inform much of the negotiations at the Council Meeting that will commence soon after.
Disclosure: we reached out to several stakeholders involved in the ad-hoc working group to provide background and additional insight, however, due to the ongoing nature of negotiations, they were not willing to provide statements on-the-record at this time.
Image from the third meeting of the Open-Ended Informal Working Group briefing note.