First published in Offshore Support Journal
Seabed mining has been conducted for some time – with companies harvesting diamonds off the African shores and Nautilus’ project off the coast of Papua New Guinea. But the real treasure of rare earth minerals and commodities essential to next generation technology is ready and waiting in the depths of the Pacific Ocean in the form of polymetallic nodules. These nodules (caused by tectonic plate movements) lie unattached on the ocean floor ready to be scooped up, smelted and processed, and are a dense mix of precious metals and commodities. So what has been the hold up?
One of the challenges has been lack of proven technology to operate in five kilometre depths on the seafloor. Although the concept was proven in the 1970s, further work needs to be undertaken to ensure that equipment can be safely operated. Projects like Blue Nodules have been granted EU funding to develop the relevant capability, systems and tools in an environmentally sustainable manner, with industry players and research specialists working in close collaboration. A number of state enterprises, states and private companies are working on competing technology.
The other challenge has been the lack of legal framework to support these activities. The Clarion-Clipperton Zone, located in the Pacific Ocean lies in the “Area” in accordance with the UN Convention of the Law of the Sea. It therefore belongs to, and is for the benefit of, the whole of mankind, and is regulated by the International Seabed Authority (the ISA). The ISA have granted exploration licences to companies and states to explore in the Area, but have not yet published final regulations governing the exploitation/harvesting in the Area. So one can go and look, but one cannot yet take.
However, the updated draft exploitation regulations were published in July 2018 for consultation. These go a long way to providing a clear framework for exploitation or harvesting of minerals and more importantly, commercial viability. They set out a well drafted pathway to obtaining an exploitation contract for 30 years (with an option to renew) and, as would be expected, detailed provisions relating to environmental responsibilities and reporting.
Somewhat surprisingly, the draft exploitation regulations go some way towards catering to the investor community, recognising the need for assignment by way of security over exploitation contracts, change of control of contractors (to allow for initial public offerings of shares), sensible termination and suspension rights with cure periods and the usual risk mitigants. There could still be some improvements for the investment community, such as more objective tests and leaving fewer decisions at the discretion of the ISA and its various organs (ie the Commission and the Council), but in comparison to traditional mining projects, there is a good level of transparency and accountability.
One of the key areas which does require further development relates to payment of royalties. If the exploitation area were in the jurisdiction of a country, then the Government of that country would be setting the mechanics for calculation of royalties. Given that the Area is for the benefit of all mankind, the ISA will be requiring payment of royalties to it. The royalty payment mechanism under the current proposed draft exploitation regulations looks at the different minerals/commodities making up the polymetallic nodules and requires that the relevant company or state pays a royalty based on the value and amount of each such mineral and commodity. The difficulty with this approach is that underwater mining companies may be looking to capitalise on whichever mineral or commodity is most valuable to them at that time; if they have to pay royalties on commodities they are not looking to produce, then the activity could quickly lose its commercial viability. On the other hand, streaming structures do allow mining companies to potentially capitalise on unwanted by-products and therefore create a potential separate revenue stream. Further consultation and review is needed to ensure there is sufficient certainty to attract commercial investment.
As the ISA moves towards creating the final framework for exploitation, a number of mining companies and shipping/offshore vessel companies are looking to position themselves ready to commence realisation of these long-awaited projects. Interested parties and their financiers/investors have the opportunity to shape the exploitation regulations to help make underwater mining projects commercially viable. It is rare for the public to have the opportunity to engage in these discussions and make a difference; we would encourage you to do so.