Canada: Current Issues In Seabed Mining

When the International Regime for Seabed Mining was introduced at the United Nations in 1994, as an amendment to the Law of the Sea Treaty (the Treaty) the then Secretary General of the International Seabed Authority (ISA) Ambassador Satya Nandan described the proposed regime as providing for: "a stable environment for investors in deep - seabed minerals under a market - oriented regime; it guarantees access to the resources of the seabed to all qualified investors; it provides for the establishment of system of taxation which is fair to the seabed miner and from which the international community as a whole may benefit;"

As of 2013 it is fair to ask what progress has been made towards these goals.

The Regime described to the United Nations by Ambassador Nandan concerned the development of a Seabed Mining Regime in respect of the ocean floor beyond the territorial limits of coastal states (the Area). A mining regime within the limits of the jurisdiction of a country does not involve the ISA; consequently the development of the necessary relationships to pursue mining are between the miner and the government of the coastal state. However, many of the issues are relevant to both mining areas.

Activity in coastal waters has been concentrated in the Southern Pacific. A number of Pacific Island countries have granted either exploration or exploitation leases and the Secretariat of the Pacific Community has identified seabed mineral potential in Papua New Guinea, Fiji, Federated States of Micronesia, Kiribati, Tuvalu, the Solomon Islands, Vanuatu, the Cook Islands, Samoa and Niue. In the Area, the ISA has granted seventeen contracts either directly to countries or to companies sponsored by a country (this is a requirement of the ISA). ISA contracts are for exploration; contracts granted in respect of mining in territorial waters may include rights to exploit the resource (this is the case with the lease granted by Papua New Guinea to Nautilus Minerals). The result of all of this is that both governments and private industry have interests in the development of seabed mining in territorial waters and beyond.

All this interest in seabed mining arises from a number of sources, two of which are the world need for more metal (including rare earth metals) and the possibilities of financial benefits for the countries that possess the metals. Using copper as an example, the US Geological Survey has estimated that world consumption of copper over the next 25 years will exceed all of the copper metal ever mined to date. The average reserve grade of land based copper projects as of 2009 stood at .61 %. Nautilus has estimated that the grade available in its Papua New Guinea seabed project is 7.2 %. As a potential beneficiary the Cook Islands estimate that mining the minerals in their waters has the potential to increase their GDP a hundred fold. The UN estimates that the current per - capita income of the Cook Islands is $12,200.

Seabed mining is not unlike other new industries attempting to establish themselves. In order to prosper there must be a legal framework in place and industry must have a social license from the relevant stakeholders. With a new industry in uncharted waters the attainment of a social license involves the development of a consensus that the activity is safe and that it does not adversely affect the environment in which it is conducted. This is frequently a substantial hill to climb for industries in new areas. The seabed is one such area. Mining for shale gas faced much the same developmental issues and one expects that methane hydrate mining will encounter similar hurdles.

The complete legal framework for seabed mining is not yet in place, what currently exists is a developing framework. There is no exploitation code for seabed mining in areas regulated by the ISA. Many ISA exploration licenses expire in 2016 and the current licensees will require guidance on an exploitation framework. The ISA has recently published a study describing what might be included in a regulatory framework for exploitation but currently it is just that, a study. In the South Pacific very few of the island nations have mining codes, although some are in progress, such as the Cook Islands. Part and parcel of the establishment of the regulatory framework is the development of a taxation/royalty regime to provide certainty for a developer assessing its risks. For activities in territorial waters this may be negotiated between the developer and the coastal state. The Finance Minister for the Cook Islands, Mark Brown, has recently stated that the Cook Islands would expect to receive stakes in mining companies for free as the price for granting rights to exploit the resources of the Cook Islands. In the case of ISA regulated leases one expects that a generic regime, including a royalty structure, will be developed to cover production in all ISA regulated areas. This will probably be a regime bereft of any individual negotiation between ISA and its individual licensees. It will be interesting to see whether the companies who have leases in ISA areas as a result of state sponsorship have the staying power to await an ISA articulated mining regime.

The attainment of a social license mine is very much a work in progress. There has been considerable opposition to seabed mining in territorial waters. To date there does not seem to be a political consensus as to whether seabed mining is acceptable. The lack of consensus is a continuing concern in assessing risk. In the case of a coastal state the political consensus which will eventually result in the granting of the social license will be directed to issues specific to the coastal state.

The ISA process involves the politics of the state members and their representatives members of the ISA. In formulating a social licence for seabed mining the ISA is guided by the Treaty, a main purpose of which is the protection and preservation of the marine environment. When the ISA determines the environmental regime to be applied to seabed mining its considerations will be based on the interests of state members and the dictates of the Treaty.

The leases granted by the ISA are in areas of the ocean floor beyond national jurisdiction. When the ISA puts in place a royalty regime it will be against the backdrop that the seabed (and its resources) over which it has regulatory authority are part of the common heritage of mankind and that all rights in these resources are vested in mankind as a whole. It is the responsibility of ISA to act on behalf of mankind. Bearing this in mind, the ISA has, on a number of occasions, discussed whether the granting of leases should be done such that monopolization of the resource is avoided. Since in some cases leases are granted to member states and in others to companies sponsored by a state the ISA has mooted whether the objective should be to prevent monopolization by a single applicant for a lease (regardless of whether that is a state or state sponsored enterprise) or alternatively whether the objective is to prevent monopolization by a single State member of the ISA. It is a complicated and undecided issue. This year at the ISA annual meeting, the report of the Legal and Technical Commission (the ISA entity tasked with detailed consideration of applications for leases) commented: "the Commission also held a general discussion on the issues of monopolization of activities in the Area. It noted that in recent years new business models of business arrangements had begun emerging that required the attention of the Commission. It was considered that in light of current developments...the Commission's work on this matter should be prioritized and the Council may also wish to give further consideration to the potential for monopolistic behaviour in relation to polymetallic nodules."

The requirement of the Treaty that the ISA act on behalf of the common good of mankind may have to be considered along side potential state, or state sponsored enterprise, monopolization of the resource.

In summary there are many issues which investors will need to address as the industry and its legal frameworks develop.

First published in Mining Journal on October 18, 2013

Norton Rose Fulbright Canada LLP

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