A BRIEF ANALYSIS OF ISA 24 (PART I)
“The world is watching and we have to deliver.” This opening remark by incoming Council President Olav Myklebust (Norway) made reference to the highest-profile issue on the agenda of the International Seabed Authority (ISA): the draft regulations for deep-seabed mining. The Council was tasked to consider the regulations together with Member States’ and stakeholders’ comments submitted in 2017 on the current draft, as summarized and thematically grouped in a note issued by the Secretariat. Even before arriving in Kingston, very few participants doubted that the “draft regs” would dominate discussions, given their role in unlocking the flow of monetary benefits into the ISA. Equally, quite a few Member States and stakeholders saw this meeting as an opportunity to ensure that the “regs” put in place the necessary environmental safeguards for a risky activity in the least known global ecosystem: the deep sea.
This brief analysis will assess progress in developing the “building blocks” of the draft regulations, and the priorities identified by the Council in moving forward in the context of the Authority’s transition towards assuming the role of “regulator” of mining activities in the deep seabed.
MANAGING COMPLEXITY IN THE EARTH’S LAST FRONTIER: THE DEEP SEA
The exploitation regulations have to “deliver big” in terms of detailing the rights, responsibilities, and obligations needed to manage the transition from exploration (assessing the mineral potential) to commercial exploitation of deep-seabed minerals. The ISA will have to operationalize the concept of the common heritage by regulating all aspects of commercial mining activities in the Area, providing a level-playing field for contractors and sponsoring states, while safeguarding the marine environment. To accelerate progress, the Council opted for an informal format for discussions on the draft regulations. Instead of negotiating a formal decision binding on the Legal and Technical Commission (LTC), the output was a President’s statement with guidance to the LTC.
Several delegations felt that this approach allowed a frank and more interactive exchange of views, rather than a search for common ground at this early stage in the development of the regulations. In addition, this format facilitated greater understanding of the multi-layered complexity of exploitation.
One of the biggest challenges is certainly the operationalization of the concept of common heritage itself―a legal construct from another era, the brainchild of the New International Economic Order and the efforts to balance power after decolonization and during the Cold War. The UN Convention on the Law of the Sea (UNCLOS), however, provides scant details on how to put it in practice. To bring it to life, the complexities surrounding the economics of deep-seabed mining operations need to be addressed, as well as the scientific and legal complexities around the roles and responsibilities of contractors, sponsoring states, and ISA organs to regulate sustainable mining in fragile oceanic ecosystems.
EXPLORING THE ECONOMICS OF DEEP-SEABED MINING
Following up on past recommendations to engage more with the scientific community to bring in additional expertise, Richard Roth from the Massachusetts Institute of Technology (MIT) was invited to deliver to the Council what many delegates found an informative and engaging presentation. Roth described an independent financial model prepared for the LTC’s consideration with a view to explaining the costs, risks, and advantages of different economic options.
Addressing solely polymetallic nodules, Roth’s presentation on possible sources of revenues and various sources of uncertainty was carefully crafted to address an audience of non-economists. Nevertheless, “familiarity with basic economic concepts is certainly needed to effectively participate in these discussions,” commented a negotiator. “Some key notions were not addressed in detail in the presentation, such as upfront capital expenses (CAPEX) and ongoing operational ones (OPEX), revenue accumulation, and price volatility. But these parameters will be decisive for the commercial viability of deep-seabed mining activities.” As Roth reminded participants, “investors will only take on a project if discounted future revenues are large enough to provide a return on their investment that is competitive with other investment opportunities.”
A further basic reality in investment practices to keep in mind, according to another expert, is that the higher the level of risk, the higher the rates of return for any given project would have to be to attract the required capital. And this is even more crucial for commercial deep-seabed mining, which is an activity never practiced before at the envisaged scale with unprecedented technological risks. “So, if we follow the traditional economic theory presented in the Council, a higher rate of return would be required to compensate for these increased risks,” commented a participant.
One of the main policy choices brought to the Council’s attention by Roth was on the different options for revenue sharing between contractors and the Authority as the guardian of the common heritage. As explained, the simplest option would be a mass-based model, where a certain amount of money would be paid per dry ton of nodule removed from the seabed. The relevant calculations for the applicable rates, albeit not trivial, are relatively straightforward and include the mass of nodules removed from the seabed and the rate of return required by investors. While this option provides certainty, since the revenue is calculated on the basis of nodule quantity upon extraction, it does not take into account the metals’ price, leaving no space for additional benefits for the common heritage in cases where the gross revenues of the private enterprises grow.
Price is, however, factored into the other two options: a revenue-based model, which was also referred to as “ad valorem” or “royalty-based” during the negotiations (creating confusion among the initiated participants); or a profit-based model that also takes into account costs. While both of these options allow consideration of additional parameters, like price volatility or profitability, they also have disadvantages. They are much more complex, as they require more data, common rules for calculating profitability, depreciation schedules and rates, as well as reporting and monitoring exercises.
They further necessitate more forecasting and, consequently, generate more uncertainty. Of the last two mechanisms, a workshop on the draft regs held in London in February underscored that the profit-based model may be unrealistic due to the fact that contractors will have to share data on profits, but such data and profit calculations are usually subject to varying business practices, which may raise transparency issues. Additionally, during the Council meeting, Roth also commented that the profit-based model raises more challenges in terms of monitoring, since contractors would have an incentive to under-report profitability with a view to paying a lower share to the ISA.
These considerations may explain why several states expressed a preference for considering hybrid options.While forecasting models can provide strong insights, they do not deliver definitive answers. As Roth reminded the Council, “even the most sophisticated statistical analysis can only capture past behavior and does not address structural changes on the supply and demand sides.”
On challenges ahead, Roth did not hesitate to lay down the inherent limitations of his scientific advice on this economic endeavor: when asked about “how much of the common heritage should be utilized and for how much money,” he responded, “this is not a question you want a natural resource economist to answer.” In addition, as Roth clarified following a question from the Deep Sea Conservation Coalition, the model prepared by MIT did not take into account environmental externalities and the valuation of ecosystem services.
As a senior participant with a background in economics noted, “While these environmental concerns are valid and of utmost importance, trying to incorporate them in an economic forecast model is adding further uncertain parameters and is not going to make our results any more certain.” Yet, as several delegations, including Australia, Jamaica, Chile, and Germany, underscored repeatedly at this meeting, environmental concerns require much more consideration in the draft regulations.
HOW TO ENSURE EFFECTIVE PROTECTION OF THE MARINE ENVIRONMENT?
The discussion of the environmental dimension of the regulations, albeit compressed into less than a day, served to identify a few bases upon which to expand the regulations. Certain delegations, however, were caught by surprise on the final day of the session when they saw the outcome document issued by the President, which condensed environmental matters into a single and, for some, vague paragraph. As President Myklebust only allowed two-minute interventions dedicated to any serious concern or gap in his draft, a series of record-speed interventions followed.
Many focused on the need to develop regional environmental management plans (REMPs), which has become a common refrain at ISA meetings. Pressure to deliver REMPs with regard to exploration areas has also been applied on the ISA by the UN General Assembly.
While the Secretariat is hard-pressed to find extra resources to carry out these exercises, the role of REMPs in the context of the exploitation regulations remains unclear. At the closing of the Council meeting, although certain delegations reiterated the point that REMPs should play a “fundamental role” in the regulations, the outcome merely invites the LTC to assess the written comments put forward by Member States and stakeholders on this issue, with a view to making recommendations to the Council in July.
Additional concerns included the need to improve provisions on best environmental practices, best available technology, environmental monitoring, the coherence between preservation reference zones and impact reference zones, chemical emissions, and seabed deformation. According to a veteran, while these concerns may be remedied with appropriate interventions in the draft regulations, “a more fundamental debate needs to take place that will eventually determine the desired level of environmental protection.” As it was, once again, highlighted in a side-event organized by NGOs and marine scientists, the interactions between deep seabed minerals and the host and neighboring marine ecosystems are still vastly unknown, both in terms of their bioprospecting potential and their life-sustaining functions, like oxygen generation.
Against this additional uncertainty, regulators will have to decide whether to “err on the side of precaution or on the side of best available science.” A sponsoring-state delegate argued emphatically: “We should impose, at first, very high environmental standards to deal with increased uncertainty. These standards may be progressively lowered as science advances.” But different views emerged on this underlying issue in the final minutes of the Council meeting, with some delegations emphasizing the importance to develop “commercially viable” regulations, and others prioritizing “technically, scientifically, and environmentally viable” ones.
What this choice arguably boils down to, according to an insider, is the uncomfortable fact that stricter environmental regulations increase upfront costs and reduce the margin for monetary benefits. Another long-standing participant, however, reasoned that UNCLOS calls for the “effective protection” of the marine environment because this is undoubtedly to the benefit of humankind.
TO BE CONTINUED…
The number of uncertainties that the ISA Council and LTC have to face in developing the exploitation regulations is staggering. Limited knowledge on essential elements of deep sea marine ecosystems has direct consequences for economic valuations in case of environmental harm: bioprospecting potential may be forever lost, while some of the functions currently performed by these ecosystems may prove costly or impossible to replace.
The economic side is not uncertainty-free either.In fact, it is quite the opposite, if one takes into account price volatilities, profit-computation problems, or other uncertainties of economic models. And this does not even take into consideration the complexity of determining how monetary benefits will be shared equitably, which is a separate decision-making process, at even an earlier stage under the Finance Committee.
While it is unlikely that the second part of this session of the ISA in July 2018 will entertain substantive discussions on benefit-sharing, it is expected that the Council will still have its plate full with revised financial models, possibly also for the other two minerals under the ISA’s jurisdiction (cobalt-rich ferromanganese crusts and polymetallic sulphides).
In addition, the Council will receive from the LTC a revised set of regulations, as well as a note identifying matters that require further study and a request for further guidance from the Council on certain issues. The requests for Council guidance, according to an observer, will be the “right place” to initiate a substantive discussion on REMPs. For its part, the Assembly will consider a draft Strategic Plan for 2019-2023, the first version of which was presented at a side-event during the Council meeting and will soon be made available for stakeholder comments.
Already thinking ahead to the second part of this annual session, a delegate pondered: “The draft strategy aims to frame the role of the Authority in a changed world. But other than relating existing obligations to the Sustainable Development Goals, can it also indicate more clearly how the regime will benefit the interest of present and future generations?”