Out-Law Analysis | 08 Aug 2016 | 12:27 pm | 5 min. read
This is a positive step but a huge amount of work still needs to be done to finalise the regulations if they are to provide a sensible regulatory framework that incentivises mining companies to commit significant investment into deep seabed mining in international waters while addressing the concerns of NGOs and other environmental groups over the potential environmental impact.
The ISA is the international organisation established under the United Nations Convention on the Law of the Sea (UNCLOS) to organise and control activities on the part of the seabed that is beyond national jurisdiction, with a particular focus on mineral resources.
Last month's publication of the draft regulations and standard contract formed part of the ISA's remit to develop the mining code for this area of the seabed, and followed a number of stakeholder meetings, workshops and papers. The ISA has asked for feedback on the proposals by 2 November.
The draft regulations, along with a number of new position papers, have been published several months later than planned and the ISA made it clear that this is very much a work in progress. Proposals for important elements of the regulatory framework have yet to be published including the level of fees and royalties that contractors will have to pay, the environmental regulations that will apply, and the powers to be given to the ISA's proposed mining inspectorate. What is very clear is that companies keen to move from the current exploration phase to production still have a long wait ahead of them.
The ISA has entered into 25 15-year exploration contracts with 24 contractors. Contractors, which must have a sponsoring state, range from state-owned entities to privately owned companies. A number of these early exploration contracts have had to be extended recently as there was no regulatory pathway to exploitation.
Sixteen of the contracts are for exploration for polymetallic nodules in the Clarion-Clipperton Fracture Zone and Central Indian Ocean Basin. There are five contracts for exploration for polymetallic sulphides in the South West Indian Ridge, Central Indian Ridge and the Mid-Atlantic Ridge and four contracts for exploration for cobalt-rich crusts in the Western Pacific Ocean. Countries involved include China, Japan, South Korea, the UK, Russia, France, Germany and India.
ISA regulations governing prospecting and exploration for polymetallic nodules, polymetallic sulphides and ferromanganese crusts have been in place for quite some time and contractors have been pushing for regulations on exploitation, as without these they cannot proceed to the exploitation/mining phase.
The ISA, however, has been trying to manage the differing interests of its many stakeholders: UNCLOS state parties, sponsoring states, contractors, and NGOs including environmental groups who are against deep sea mining. Faced with budgetary issues plus a lack of commercial mining expertise within the ISA's own secretariat and the Legal and Technical Commission, it's no great surprise to industry observers that a process that began in 2010 with the aim of putting regulations together by 2014 has only just seen the publication of what the ISA is calling draft zero.
Now that the regulations have been published, contractors hoping for a workable regime are going to have to spend a significant amount of time and effort ensuring that their concerns are reflected in the next set of drafts. There is currently little in draft zero that provides incentives for early movers to move forward. Much will depend on the level of royalty that contractors will have to pay to the ISA on minerals recovered and this has yet to be proposed.
Current exploration contractors are also concerned by proposals to hold regulatory reviews after the first five years. These contractors have campaigned for regulatory stability for first movers to avoid more onerous regulation and cost increases that would threaten the economic viability of their projects.
Certainly those polymetallic nodules contractors who have already been granted exploration contracts over large areas of the Eastern Pacific Ocean will be concerned that the draft provides for an annual fee payable to the ISA based on the size of the relevant mining area.
Nodules are littered across vast areas of the Pacific Ocean at depths of between 4km and 6km and some anticipate that mining zones for nodules may well not be too dissimilar in size to nodules contractors’ current exploration areas, many of which are 75,000 square kms in size.
Other issues include indications that a vast amount of information and additional documents will be required for any application. It is clear that the ISA is taking a ‘more’ rather than ‘less’ approach when it comes to the amount of information required. Examples include proposals for the ISA to be provided with terms of each contractor's sub-contracts and, in relation to any financing, seeking to regulate a contractor's debt to equity ratios.
In addition to a royalty, the ISA is proposing a significant number of fees. A fee will be payable to the ISA for processing an exploitation application, and is expected to be significantly higher than the current exploration application fee. Fees are also planned for the renewal of exploitation contracts, for the transfer of interest in an exploitation contract, for the use of an exploitation contract as security, and for material changes to mining plans. With the ISA also considering environmental fees and setting up a trust fund for mandatory contribution by contractors, current contractors are concerned that the overall level of payments required will impact on the commercial viability of exploitation/mining projects.
The ISA is also likely to require some contractors, particularly non-state contractors, to provide a performance guarantee no later than the date on which they are scheduled to commence exploitation activities. The ISA has said it will develop guidelines setting out the circumstances under which this will be required.
An initial term of 20 years is proposed for exploitation contracts. While this does depend on resource size and estimated project life, it seems to give quite a short production period. Given that little in the way of investment will be made prior to contract award, there will be a significant period between contract commencement and first commercial exploitation. If it takes five years to get to first commercial exploitation, a contractor is only left with 15 years of production.
If the ISA fails to come up with a workable exploitation framework that encourages early movers to invest the billions of dollars necessary to proceed toward exploitation, a massive opportunity for this nascent industry will be lost.
Notwithstanding some of the issues highlighted above, the publication of the draft is a positive step for the industry if the ISA takes more account of contractors' concerns in revisions to the draft.
The draft and the proposed process for increasing stakeholder engagement, combined with the recent significant increase in the ISA's budget, the expansion of the ISA's Legal and Technical Commission and the election in July of the very competent Michael Lodge as the new Secretary General of the ISA, gives the industry hope for the future.
While plans to have the regulations ready for approval in two years seem optimistic, there is a good chance that when the newly extended exploration contracts near their expiry dates in five years' time there will be a pathway to exploitation.
Contractors need to play their part too, and it is essential they all provide the ISA with clear feedback on draft zero to help the industry come up with a workable exploitation framework.
Steve Potter is an energy and natural resources expert with Pinsent Masons, the law firm behind Out-Law.com.