ocean mineral revenue sharing

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Ocean mineral revenue sharingVincent J. Nigrelli a ba Coaltex International , Munhall, Pennsylvaniab Bristal Metal Products , West Mifflin, PennsylvaniaPublished online: 16 Nov 2009.

To cite this article: Vincent J. Nigrelli (1978) Ocean mineral revenue sharing, Ocean Development & International Law, 5:2-3,153-180, DOI: 10.1080/00908327809545610

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Ocean Mineral Revenue SharingVINCENT J. NIGRELLI*

Abstract This article considers the importance of ocean mineral revenuesharing, from both the oil and gas of the continental margin and the man-ganese nodules of the deep seabed, at the United Nations Law of the SeaConference. First the paper examines margin revenue sharing as proposed inArticle 82, Informal Composite Negotiating Text. It estimates the amount ofoil and gas in offshore areas, the potential value of these resources to thecoastal state, the potential revenue to be shared with an international author-ity, and when these resources will be exploited. The paper concludes thatrevenue sharing from the margin will yield little if any revenue to an interna-tional authority. The article then discusses deep seabed revenue sharing. Itestimates several possibilities, including nodule production by the mid-1980s; the value of operations to the exploiting state(s)—particularly theUnited States; revenues to be shared with an international authority; theimpact of nodule mining on land-based producers of seabed minerals; andthe uses of revenue sharing funds by an international authority. The paperconcludes that revenue sharing will not exert much influence on negotiationsat the United Nations Law of the Sea Conference.

The purpose of this paper is to consider the importance of ocean mineral revenuesharing in achieving agreement on a comprehensive ocean treaty at the UnitedNations Law of the Sea Conference (UNCLOS). Negotiations show that a majorobjective of both developed and developing countries is to achieve control overocean areas beyond exclusive national jurisdiction, including control over accessto minerals that exist on the deep seabed. In general, the developing countriesbelieve the best way to assure access by all states to deep seabed minerals is torequire that all activities in the area be conducted directly by the Authority: "TheAuthority is the organization through which States Parties shall organize andcontrol Activities in the Area, Particularly with the view towards the administra-tion of the resources of the A r e a . . . " as stated in the Informal CompositeNegotiating Text (ICNT) of July 1977, Article 155-1. On the other hand, de-veloped countries want to be sure that "control" permits an assured, long-termright of access for their firms to mine deep seabed minerals profitably.1

A compromise between these two positions that is frequently discussed pro-poses a parallel or joint system of access that would enable both an industrial firm

*Vincent J. Nigrelli is currently with both Coaltex International, Munhall, Pennsylvania, andBristal Metal Products, West Mifflin, Pennsylvania.

Ocean Development and International Law Journal, Volume 5, Numbers 2 and 3 1530090-8320/78/0815-0153$02.00/0Copyright © 1978 by Crane Russak & Company, Inc.

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154 VINCENT J. NIGRELLI

and an international authority to conduct mining operations, assuming of course,that the authority would some day have the means to conduct such operations. Toeffect this compromise, the rich nations might trade off a share of the revenuesgenerated by their firms' mining operations if the poor nations agree that thesefirms be guaranteed access to seabed minerals.2

This paper seeks to determine whether revenue-sharing funds might be suffi-cient to induce the developing countries to accept the compromise and guaranteeaccess for the firms of developed countries to deep-seabed minerals. Such anoutcome appears unlikely.

Revenue-sharing proposals extend also to an area subject to national jurisdic-tion; this paper also examines the significance of such sharing on the continentalmargin. Most countries at UNCLOS generally accept a revenue-sharing plan forthe benefit of developing countries for revenues derived from minerals, primarilyoil and gas, on the margin beyond 200 nautical mi. Margin revenue sharing is anissue between coastal states and landlocked/geographically disadvantaged states,unlike deep-seabed revenue sharing, which is an issue between rich and poorcountries. Although margin and seabed revenue sharing are separate issues, itmay be inferred that a developed coastal state that has agreed to share marginrevenues' may. try to use these revenues to influence a deep-seabed revenue-sharing plan. Due to the high demand for oil and gas and the potential supply onthe margin, it might appear that such revenue may be substantial in the nearfuture. This conclusion seems dubious.

This paper examines (1) the boundaries of ocean areas designated for revenuesharing by the ICNT; (2) the estimates of possible wealth the minerals in theseareas represent and the revenues that may be derived-from them for sharing; and(3) those who may benefit from these revenues. For illustrative purposes, thereferences to developed countries focus on the United States.

BoundariesAlmost all the oil and gas that exist under the ocean floor are believed to liebeneath the continental margin. The ICNT, Article 76, limits national jurisdic-tion by defining the continental shelf as follows:

The continental shelf of a coastal State comprises the seabed and subsoil of the sub-marine areas that extend beyond its territorial sea throughout the natural prolongation ofits land territory to the outer edge of the continental margin, or to a distance of 200nautical miles from the baselines from which the breadth of the territorial sea ismeasured where the outer edge of the continental margin does not extend up to thatdistance.

The continental shelf as defined above is composed of the continental shelf,the continental slope, and the continental rise (see Figure 1). Together they arereferred to as the margin.4

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.TERRITORIAL.SEA

-MARGIN-

. EXCLUSIVE ECONOMIC.20NE|EEZ):

NO REVENUE SHARING

SHORELINE12 NAUTICAL 200 METERSMl WATER DEPTH

COASTAL STATE RESOURCEJURISDICTION

REVENUE SHARING

' UNDER ARTICLE 82. ICNT "

BASE SEAWARDOF THE 60 NAUTICAL MILES EDGE

200 NAUTICAL CONTINENTAL FROM BASE OF OF THEMI SLOPE THE SLOPE RISE

SSamiNUi MLF

•SOA% ,

U.S.: 55-70%

World: 55-70%

Ste,*&%

U S : 75-94%

Wot Id: 60-95%

US.: 86-99%World: 90-98%

U.S.: 98-100%

World: 98-100%

• Sea Level -

~S2»»%»*MSP

U.S.: 1-12%World: 2-8%

World: 0-2% A A *

Figure 1. Estimated range of percentage distribution of potential ultimately recoverablepetroleum within various boundaries offshore. Source: Petroleum Council, Ocean Petro-leum Resources (March 1975), p. 17. Permission granted for republication.

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According to the ICNT, the coastal state has exclusive rights over the naturalresources of the margin up to 200 nautical mi with no revenue-sharing obligation(Articles 56, 57, and 58). The coastal state also has resource jurisdiction overminerals to the outer edge of the margin but under the ICNT it would be obligatedto share with an international authority a percentage of the gross value of theminerals exploited on the margin beyond 200 nautical mi (Articles 81 and 82).The ocean floor beyond the outer edge of the margin is considered the deepseabed and is referred to as the '.'Area" (Article 1-1). It is generally accepted thatno state has jurisdiction in the Area over the minerals of the seabed and thesubsoil thereof (Article 137).

MineralsThis section will attempt to determine roughly who may get what from seabedwealth. The discussion will deal first with the oil and gas of the continentalmargin and then with the manganese nodules of the deep seabed. The lattercontain many minerals—copper, nickel, cobalt, and manganese are the mostimportant for U.S. interests.

There appear to be incentives for the developed countries to exploit the oil andgas of the continental margin. The most important of these include the greatdemand for hydrocarbons, the high percentage of imports these minerals repre-sent, the possible consequences of cartelization among foreign land-based pro-ducers, the potential supply of these minerals on the margin, and the increase inproduction systems technology for ocean mineral exploitation.

In 1973 the world consumed approximately 56 million barrels of oil per day, ayearly production/consumption rate of over 20 billion barrels of oil.5 The UnitedStates depends on oil and gas for approximately 75% of its total energy consump-tion.6 It consumed 17.2 million barrels of oil per day or 6.3 billion barrels peryear, which accounted for 29.9% of the world consumption. U.S. consumptionis expected to rise at the rates of about 3.8% per year.7 This means that theUnited States will consume 9.5 billion barrels of oil per year by 1985.

In 1973 the United States imported 35% of its total petroleum requirement, or2.2 billion barrels of oil. The percentage of imports is expected to rise to approx-imately 65% of the U.S. total petroleum need in 1985.8 The current price of oil isabout $11 per barrel and is expected to stay between $11 and $13 (constant 1974$U.S.) per barrel through 1990.9 This indicates that the value of oil imports in1977 will be about $35 billion. If these trends continue, the United States couldbe importing 6.3 billion barrels of oil, valued between $70 billion and $80billion, per year by 1985.

The U.S. dependence on oil basically leaves it two choices: remain dependenton foreign oil or attempt to become energy independent. Because of the extent towhich the United States depends on the OPEC nations, it seeks greater energy

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OCEAN MINERAL REVENUE SHARING 157

independence. Offshore oil potentially can increase U.S. domestic production.The National Petroleum Council believes that "the frontier areas of the continen-tal shelf and slope offshore the United States have the potential for arresting andpossibly reversing the current decline in U.S. petroleum production and thusshould be subjected to an accelerated leasing and development program."10 TheUnited States has a large potential (ultimately recoverable) oil supply offshore.The U.S. Geological Survey estimates that the United States has approximately100-1,000 billion barrels of ultimately recoverable oil offshore, while the worldhas approximately 733-7,068 billion barrels.11

The oil is distributed unevenly over the continental margin. Table 1 estimatesthis distribution within various boundaries. By applying these distribution per-centages to the high and low estimates of potential oil reserves, estimates can bemade of the amounts of oil within these boundaries. The potential offshore oilreserves in billions of barrels are expressed in Table 2. Although the potentialoffshore oil supply is great, production from known reserves on the margin isincreasing slowly, as shown in Table 3 . u

Table 2 enables estimates to be made as to who may get what from offshore oilexploitation. There are two principal revenue-sharing plans. The first is based onthe value of production at an extraction site—embodied in Article 82, ICNT.13

The second is profit sharing and can be disposed of quickly because of difficul-ties in determining deductions that can be made to compute net revenues. Such asystem, according to the United States, would produce uncertainty in view ofunpredictable costs of operation in great water depths.14

Article 82, ICNT, proposes revenue sharing between coastal states and aninternational authority based on payments made annually by the coastal stateaccording to the value of all production at a given site. Under this plan, thecoastal state would be allowed a five-year grace period to enable its exploitingindustry to recover its initial investment. The sixth year the coastal state would beobliged to pay a percentage of the volume or value of production at the site. Eachyear thereafter the rate of payment would increase by a certain percentage untilthe tenth year, when the rate of payment would freeze. A U.S. proposal, in-

Table 1Oil Distribution Within Various Boundaries on the

Continental Margin0

Shoreward of 200 nautical miSeaward of 200 nautical mi-

"Source: Figure 1.

% of All Offshore Oil

United States

75-946-25

World

80-955-20

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Table 2Potential Offshore Oil

%ofall Oil"

TotalOffshore Oil"

Oil Shorewardoj'200 Nautical Mi"

Oil Seawardof 200 Nautical Mi"

United States 13 100-1.000 75-940 6-250World 87 733-7,068 587-6,714 36-414

The potential value of this oil at $11-513 (constant 1974 $U.S.) per barrel would be inbillions of dollars:

United States 1,100-13,000 825-12,220 66-3,250World 8,063-91,884 6,457-87,282 403-18,377

" National Petroleum Council, Ocean Petroleum Resources, p. 16.'Frezon, op. tit., pp. 157-159. In billions of barrels.

eluded in the ICNT in Article 82, stated that "after the fifth year the coastal statewould contribute one percent of the value of production at the site (wellheadvalue). This rate would increase thereafter by one percent each year until itreached five percent in the tenth year, where it would remain thereafter. Weindicated that if we assumed a given field would produce 700 million barrels ofoil through a 20 year depletion period, and value of $11 per barrel, the totalamount would be $140 million per field (total revenue, collected over the last 15years of a 20 year depletion period). The oil and other minerals themselves, andrevenues collected by the coastal state would of course remain with the coastalstate."" If the oil were valued at $13 per barrel, the yield would be about $165million per field.

Stretching this example to apply to all offshore oil in the revenue-sharing zone,estimates may be made as to the share that would go to the international author-ity, using the percentages specified in the ICNT. If it is assumed that all oil

United StatesWorld

CumulativeOffshore

Production(1973f-''-e

5.436.8

Table 3Offshore Oil Production Statistics

All OffshoreKnown

Reserves(I973fj>-C

7.6693.1

Ratio:Offshore/Onshore(1973f

17.4%NA

All OffshoreProduction

(yearly)(I975f-d

0.511NA

Seaward of200

Nautical Mi(1977)

00

" National Petroleum Council, Ocean Petroleum Resources, p.* Frezon, op. tit." In billions of barrels.* U.S. Bureau of Mines, Monthly Petroleum Statements, ibid.NA = not available.

44.

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beyond 200 nautical mi could be found in neatly packaged 700-million-banel oilfields, each of which yields at least $140 million for the international authorityover the last 15 years of a 20-year depletion period, the possible revenues can beestimated, as shown in Table 4.

The gross estimates in Table 4 seem to indicate that the major benefits wouldbe gained by the exploiting coastal state. Oil and gas revenue sharing under thisproposal yields about $.20-$.24 per barrel to the international authority. Thisyield, though largely guesswork, seems reasonable under the economic con-straints of exploitation in deep water under varying climatic conditions. Whenthe economic yield of this plan is compared with present U.S. foreign aid per-centages, it offers the international community a contribution/value of productionratio of about 1.8%, in contrast to the U.S. foreign aid/GNP ratio of about0.3%.18

This percentage is also greater than the developing states request for 0.7%GNP as foreign-aid donations from developed states.17 However, when this yieldto an international authority ($.20-5.24 per barrel) is.compared with the lowestgovernment "take" from major exporters of oil, which is over$l per barrel,18 itseems insignificant. There is also a great disparity between this yield (1.8%) andthe royalty rate of 16.7% (about $2 per barrel) that the oil industry generallyassumes it will have to pay on all oil extracted outside the United States."Examined in this light and remembering that these ocean areas were once consid-ered the common heritage of mankind, the revenues possibly available to theinternational community under this plan do not seem a significant portion of thetotal benefits.

The natural gas situation is similar to that of oil. The total U.S. consumption ofnatural gas, about 23 trillion cubic feet (TCF) annually, is expected to double bythe year 1985—a yearly growth in consumption of 6%.20 Currently, importscomprise 4% of the total gas consumed by the United States, and offshoreproduction accounts for about 5% of all U.S. production.21 Using the same

Table 4Potential Revenue from Offshore Oil Production Beyond 200 Nautical Mi"

Possible Contri-No. of 700-Mil- buttons to the

Billions of Bar- lion-Barrel Oil Value to the Coastal Authority ($relsofOil Fields State ($ billions)1' billions)'

United States 6-250 8-357 61-4,641 1.1-58.9World 36-1,413 52-2,020 400-18,369 7.2-333

* Sources: National Petroleum Council, Ocean Petroleum Resources, p. 16, and Frezon, op. cit., pp.157-159

4 Assumes $11-S13 per barrel of oil in constant 1974 $ U.S.

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160 VINCENT J. NIGRELL1

distribution percentages for gas as oil on the continental margin, potential gasreserves are identified in Table 5.

The 1973 price per thousand cubic feet of gas was $.22, or a total value to theUnited States of $4,894 million" (see Table 6). Assuming the samecontribution/value of production ratio as that for oil (1.8%), the potential value ofgas to the United States, the world, and the international authority may look likethat in Table 7.

The purpose of the above analysis is to suggest who may get what under therevenue-sharing provisions of Article 82, ICNT. It indicates that there are sub-stantial oil and gas reserves on the continental margin and that if these resourcescan be fully exploited, revenues may be available to the international authorityover a period of time. In terms of costs and benefits, however, it seems thatexploiting coastal states will benefit the most. They will be the ones who gener-ate a new industry, besides gaining the major share of the revenues derived fromexploitation. In most cases the developed countries would benefit from the in-come effect of producing equipment and supplies for the industry; supplyingemployment for production, processing, and transportation; and gaining somedegree of independence from foreign oil producers. The countries whose onlybenefits will be gained from revenue-sharing funds would only receive a fractionof the total revenues (see Tables 4 and 7) generated from oil and gas exploitationbeyond 200 nautical mi.

Since the minerals that exist on the margin beyond 200 nautical mi are of novalue unless they are harvested, this analysis considers when these resources willbe tapped. To accomplish this task, the financial and technical capabilities of theexploiting industry, the offshore reserves of oil and gas, and the expected in-crease in demand for oil and gas must be examined.

The technical capabilities of the petroleum industry are increasing rapidly. TheNational Petroleum Council (NPC) reports:

. . . drilling in water depths to 6,243 meters (1974-5). One hole was reentered at awater depth of 3,939 meters... a third hole was drilled to 4,310 feet penetration belowthe seabed in 4,549 meters water depth.Blowout preventers and control systems have been designed and tested for use in water

Table 5Potential Offshore Gas"

All Offshore Gas Gas Shoreward of Gas Seaward of% Total Gas (TCF) 200 Nautical Mi (TCF) 200 Nautical Mi (TCF)

United States 55 1,000-10,000 750-9,400 60-2,500World 45 1,818-18,180 1,454-17,271 90-3,636

"Source: Frezon, op. cit.. pp. 156-162 and Figure 1.

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Table 61973 Offshore Production

Ratio: Onshore/OffshoreCumulative Pro- 1973 Production Production Beyond for Cumulativeduction (TCF)a (TCF)a 200 Nautical Mi Production

United States 23.1 4.0 0 5%World 48.0 19.8 0 8%

" National Petroleum Council, Ocean Petroleum Resources, pp. 14-15.

depths of about 3,000 meters Ability to dynamically position drilling vessels inwaters deeper than 6,000 meters has been demonstrated. Water depth is thereforelimited only by subsea equipment.23

Production systems have not yet been developed to match drilling capabilities.For production systems to come into use, technical advances must be made,including diving capabilities, seafloor systems, storage, and transportation.Table 8 estimates the dates for exploiting the seafloor.

The United States has few areas of the continental margin that extend beyond200 nautical mi within forecasted depth-production capabilities (1000 m). Theseareas are in the Atlantic Ocean, Gulf of Mexico, Chukchi Sea, and possiblysections of the Bering Sea. The Chukchi Sea and Bering Sea contain margins 200m deep or less while the margins of the Atlantic Ocean and the Gulf of Mexicoare in the 500- to 1000-m depth range. Although these areas are within theforecasted exploitation depths, their climatic conditions must be examined.

The Alaskan margin poses a particular problem for exploitation. It is charac-terized by very severe climatic conditions—earthquakes in the Bering Sea andicebergs in the Chukchi Sea. The Chukchi Sea is ice laden 100% of the year andthe Bering Sea is ice laden up to 75% of the year. Technological advancementshave not yet been made to cope adequately with these climatic conditions, whichare considered worse than severe in Table 8. Thus these areas are beyond presentand forecasted production capabilities.24

Table 7Potential Revenue from Offshore Gas Beyond 200 Nautical Mi"

Value of Potential Gas Potential Contribution to theBeyond 200 Nautical Mi (S billions) International Authority ($ billions)

United States 12.9-566.8 0.233-10.2World 19.6-786.4 • 0.353-14.1

° All figures are in constant 1973 U.S. dollars. Sources: Frezon, op. cit., and U.S. Bureau of Mines,Minerals Yearbook (1973), pp. 924-925.

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162 VINCENT J. NIGRELU

Table 8Estimated Exploitation Dates for Seafloor Oil Production"

Water Depth, Meters

200300500

1,000

Mild

nownow19801980

Climatic Conditions

Moderate

nownow19801980

Severe

nownow19801980

° Source: National Petroleum Council, Ocean Petroleum Resources,p. 17. Permission granted for republication by the National Petro-leum Council.

Exploitation of the margin beyond 200 nautical mi is further hindered by timerequirements. Only a minute portion of the U.S. exploitable margin areas are indepths of 500 m or less where climatic conditions permit exploitation. Productionsystems for depths of 500 m or more will not be ready until 1980. What is more,once a site has been located, it is between six and ten years before it is ready forproduction in areas of the Atlantic where most exploitation beyond 200 nauticalmi is likely to occur.25 Add to this total the five years allowed the industry torecover its investment and it will be 1991-1995 before any payment would bemade by the United States to an international authority.

Financial considerations of the oil industry also indicate that there is little hopethat the oil beyond 200 nautical mi will be exploited in the future, especiallyconsidering that there is presently no offshore production on the East Coastwithin 200 nautical mi. Operating costs are dependent on four criteria: (1) reser-voir size (oil), (2) water depth, (3) climatic conditions, and (4) government"take." The government "take" includes the cost of leases, royalty payments,taxes, government bonuses, and additional government payments. Operationsare usually more costly in deep water, severe climates, and small reservoirs. Indetermining if a site is economically feasible for exploitation, the industryweighs these factors plus the cost of extraction and depreciation to determine theprobable yield on investment. If a site seems unlikely to yield a 20% return oninvestment (ROI), it is probable that the oil company will not exploit it.4" Table 9summarizes the economics of oil exploitation on the margin. It indicates thatthere are very few conditions under which oil beyond 200 nautical mi will beexploited at depths over 500 m with moderate to severe climatic conditions suchas exist in the United States.

The extension of operations into areas beyond 200 nautical mi also depends onthe amount of oil that exists within 200 nautical mi, which is usually at shallowerdepths. Approximately 55-70% of all oil lies in water 200 m deep or less." Thisarea constitutes a potential oil supply of 55-700 billion barrels (see Table 2 and

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Figure 1). At 1973 U.S. consumption rates (total), this supply would last at least8 and possibly as many as 100 years. At 1973 offshore production rates, thesupply would last a minimum of 137 years. Even if the assumption is made thatoffshore production doubles as a ratio to onshore production within the next fewyears, say by 1980, the U.S. total production stays the same as 1973 (assumingonshore production reverses its decline over the last few years because of theU.S. energy-independence objective) the United States would be producingabout 1.3 billion barrels of oil in offshore areas in 1980. If this amount isincreased at a rate such that it compensates for the total increase in U.S. demandand the United States retains current import levels, the oil supply within 200 mwill last at least until 1992. If this expansion rate were assumed for offshoreproduction up to the 200 nautical mi boundary, an additional five years would begained, making the supply last until 1997. Achieving zero imports would onlysubtract about a year from this estimate.

This discussion indicates that even under the best conditions it will be at least

Table 9Indicated Economics of Offshore Exploitation

Under Alternative Levels of Government Financial Take"

Water Depth(meters)

200500

1,000

200500

1,000

Mild

EE

EEE

Large Reservoir

Moderate Severe

ICffo ReturnEEE20%

EE

- 1 . 5 E

EE

-1.5E"

Climatic Condition:

Medium Reservoir

Mild Moderate Severe

Small Reservoir

Mild

on Investment, Low Government Take*E EE E

-1.5E -1.5EReturn on Investment, Medium i

E-1.5E

- 2 E

E EE -1.5E

-1.5E -2 E

E-1.5E-2.5E

EE

- 2 E

Moderate

E-1.5E-2.5E

Government Take'-1 .5E-2.5E-3.5E

E- 2 E- 3 E

E- 2 E

-3.5E

Severe

-1.5E-2.5E-4.5E

-2 E-4 E

-6.5E20% Return on Investment, High Government Take'

200 E E -1.5E E E -1 .5E E -1.5E -2.5E500 E -1.5E - 2 E -1 .5E -1.5E -2 .5E - 2 E -2.5E -4.5E

1,000 -1.5E -1.5E -2.5E - 2 E - 2 E - 4 E -3 E -3.5E -6.5E

" Source: National Petroleum Council, Ocean Petroleum Resources (March 1975). Permission granted for republi-cation.b No royalty or bonus; tax provisions similar to those that currently apply to U.S. federal offshore leases.c E = Economic (20% ROI as a guide) at projected long-term value of seabed crude oil ($11-$13/Bbl inconstant1974 dollars).* Negative multiples of E are uneconomic and indicate the degree by which such cases would fail to meetassumed economic standards.' Substantial royalty, no bonus, and moderate taxes.'Substantial royalty, moderate taxes, and $1.00/Bbl additional government payment

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the early 1990s before the oil beyond 200 nautical mi is exploited and the UnitedStates makes payments to an international authority. It is more than likely thatcombinations of conditions will push the date of oil exploitation beyond 200nautical mi well past the year 2000 if it occurs at all. The possibility of the UnitedStates formulating a firm energy policy to reduce oil imports further decreasesthe chances of oil being exploited beyond 200 nautical mi. The employment ofalternative energy sources and energy-conserving measures could curtail oil de-mand considerably by the year 2000."

A world analysis of oil exploitation beyond 200 nautical mi yields resultssimilar to those for the United States. The only place in the world that oil may beexploited beyond 200 nautical mi is in the North Sea. The reasons for this are thatthe water depth is 200 m or less, the coastal states of the North Sea have thetechnical and financial capabilities to exploit the oil, and, generally, these stateshave high demands and import levels. However, the revenue-sharing area be-yond 200 nautical mi and less than 200 m deep is small and unlikely to yieldmuch oil even if it is exploited.

The natural gas situation is similar to that for oil. Assuming the technical andfinancial arguments made for the oil industry, a base year of 1991 is calculatedfor exploitation to yield revenues to an international authority. Natural gas ismore bountiful in the U.S. offshore areas than oil.*9 Technical capabilities aside,if all natural gas production were shifted to offshore areas by 1980, for a yield ofabout 5-34.6 TCF, and the increase in demand stayed at 6% per year, the UnitedStates would have a supply within 200 m that would last until 1991 and within200 nautical mi to 1995. Considering that offshore gas now supplies about 4% ofthe U.S. demand, and that its huge land-based gas reserves supply about 92% ofits total needs, these estimates serve to demonstrate the unlikelihood of theUnited States exploiting gas beyond 200 nautical mi for some time to come. Atcurrent production rates, assuming a 6% yearly increase in offshore production,production within 200 m could supply the United States until at least 2010 andthe supply within 200 nautical mi until about 2020.

The conclusion from this analysis of the margin revenue-sharing proposal isthat there simply will not be enough revenue to share soon enough to affect theacceptance of an ocean treaty significantly. It will probably be after 2000 beforethere are revenues to share, if at all, and when they do exist, they are likely to bea small percentage of the total revenues (see Tables 4 and 7).

Deep Seabed MineralsThe most commercially attractive minerals for exploitation on the seabed arecontained in manganese nodules. Four minerals from these nodules are particu-larly important—nickel, copper, manganese, and cobalt. Because these mineralsare used in heavy industry and high percentages of them are imported by the

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United States, there is an incentive for mining them. Nickel is used in stainlesssteel alloys, which are strong and corrosion resistant. Nickel-alloy steels are usedin high-temperature applications such as jet engines and turbines, as well as inelectroplating, pollution control equipment, the chemical industry, and pipes andtubing. Manganese is used in steel making, primarily as a scavenger for remov-ing sulfur, oxygen, and trace impurities. Used as an alloy, manganese makessteel more resistant to shock or abrasion. Cobalt has important magnetic andchemical properties, and is resistant to high temperatures. At lower prices, cobaltcould substitute for a number of metals such as nickel.30

In 1974 the United States imported 98% of its cobalt, 98% of its manganese,73% of its nickel, and 18% of its copper.31 In 1972 the imports of these mineralswere valued at $1.1 billion.32 The United States consumed33 273,000 short tons(2,000 lb) of nickel, for a 3.0% increase per year in consumption; 2,194,000short tons of copper, for a 3.5% increase; 1,880,000 short tons of manganeseore, for a 2.0% increase; 1,115,000 short tons of ferromanganese, for a 2.0%increase; and 9,431 short tons of cobalt, for a 3.0% increase. The nickel camefrom Canada, 68%; Norway, 8%; New Caledonia, 6%; Dominican Republic,5%; and other countries, 13%. The copper was from Canada, 33%; Peru, 22%;Chile, 17%; Republic of South Africa, 6%; and others, 22%. The cobalt camefrom Zaire, 47%; Belgium-Luxembourg, 29%; Finland, 7%; Canada, 4%; andZambia, 2%. The manganese was from Brazil, 35%; Gabon, 31%; Australia,9%; Republic of South Africa, 8%; and others, 17%.3<

As can be seen, relatively few producers supply the United States with thesematerials. Nine of these countries—Brazil, Canada, Chile, Finland, Gabon,Norway, Peru, South Africa, and Zaire—supply more than 90% of U.S. importsof these minerals.35 Presently only the copper producers have organized, byforming CIPEC.38 However, developing countries are calling for a "New Inter-national Economic Order" that would give raw-material producers better termsof trade and increase the transfer of real resources to developing countries. TheUN General Assembly acted in this direction by adopting a resolution entitled,"The Charter of Economic Rights and Duties of States."

Commenting on this resolution, Mr. Northcutt Ely, an adviser to aspiringmining firms, believes, " . . . (it is) important here because it articulates theaspirations of mineral exporting nations... not one (of the nine above) joinedwith the United States to vote against the resolution."37 The conclusion is thatthe United States may be faced with cartels formed by these land-based producersthat could control the supply of vital raw materials. The apparent success of theOPEC cartel appears to justify U.S. fears. On the other hand, the seabed miningfirms may cartelize, seriously damaging developing countries dependent on theseminerals for a significant portion of their export revenues. There is also evidencethat suggests difficulties in cartelization among producers of nonfuel minerals.38

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What is more, Article 150-l(e), ICNT, provides for the security of supplies toconsumers of raw materials originating in the Area which are also producedoutside the Area . . . . "

The minerals of the deep seabed are a potential source of great wealth. Most ofthe commercially attractive sites are beyond the limits of national jurisdiction. Itis estimated that about 1.5 trillion tons of manganese nodules exist on the seabedof the Pacific Ocean alone, and these nodules are forming at the rate of about 10million tons per year.39 Of this total it is estimated that only between 10 and 500billion tons are economically minable.40 But even the low total of 10 billion tonsis enough to keep 100 1-million-ton (expected size) mining operations going for100 years. The length of time mineral reserves in Pacific Ocean nodules wouldlast at 1960 consumption rates is copper, 6,000 years; nickel, 150,000 years;cobalt, 200,000 years; and manganese, 400,000 years. Land reserves at 1960consumption rates would last for much less time: copper, 40 years; cobalt, 40years; and nickel, 100 years (but the supply of manganese is limitless).41

The determination of the economic aspects of the unborn deep-seabed miningindustry involves much speculation. The present task is to arrive at some conclu-sions as to the expansion of seabed mining operations, the quantity of seabedminerals to be harvested and processed, the estimated prices of these minerals,based on supply and demand, the gross revenues of seabed mining operations,and the possible revenues available to an international authority.

The Area will most likely be mined by private enterprise. These industrialfirms are consortia composed of both U.S. and foreign firms. Of these, DeepseaVentures Inc. and Kennecot Copper Corporation could possibly start productionby about 1980. Sixty-six other U.S. firms and 100 others around the world arerepresented in consortia in various aspects of seabed mining.42 In all the interna-tional consortia in which U.S. firms are involved, U.S. participants controlbetween 20 and 50%.43

Seabed mining could greatly reduce U.S. imports of these minerals. Withmining expansion based on nickel demand, assuming no major delays fromtechnical problems or an international authority, a worldwide production of 15million metric tons of dry nodules could be reached by 1985.44 Because only afew firms are prepared to mine the seabed, a worldwide production of 15 millionmetric tons by 1985 would indicate rapid expansion into seabed mining by thesefirms. Since the United States would control between 20 and 50% of thesenodules, it would probably process and market about 5-7 million tons ofnodules.45 The U.S. government estimates for the percentage of imports thatnodules might supply in the years 1985 and 2000 are given in Table 10. Table 10assumes entry of about 7 firms in 1985 and 14 in 2000.4' However, there is noguarantee that the expansion would be based on the demand for nickel. Consider-

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ing the number of firms involved in various aspects of seabed mining, it seemslikely that more than 14 firms will be mining the seabed by 2000.

Ocean-mining operations will generally come in two forms: those that recoverfour minerals, and those that recover only copper, cobalt, and nickel. The firmsthat mine four minerals will be 1 million ton per year operations in whichmanganese is the major mineral produced and the major source of profit. Firmsthat extract three minerals from the nodules will be 3 million ton per yearoperations in which nickel will be the primary source of profit. Presently onlyone firm, Deepsea Ventures, plans to mine manganese.47

The nickel market is expected to pace the expansion of production in thenodule industry. In other words, nickel will be mined to the extent the supplyfrom nodules meets some percentage of the increase in world demand. Thiswould keep nickel prices stable, which is important to the nodule industry be-cause nickel will provide its major source of profits. Basing nodule production onthe nickel market is also widely accepted by developing countries. Article 150-B(i), ICNT, states that nodule production will be based on the total growthsegment for nickel for an interim period of seven years, beginning January 1,1980. Thereafter production would proceed at a rate to satisfy not more than 60%of the nickel growth segment. It seems, then, an accurate assumption that theprice of nickel will remain at about $1.40 a pound, even with nodule mining.48

However, when nickel is mined, so are manganese, copper, and cobalt. Thus,

Table 10Projected U.S. Consumption and Percentage of Imports Satisfied by Nodule

Mining in 1985 and 2000°

Projected U.S. Con-sumption in Short

Tons"

Estimated Recovery % of U.S. % Reductionfrom Nodules by Consumption from of U.S. Imports

U.S. Interests' Nodules from Nodules

Mineral 1985 2000 1985 2000 1985 2000 1985 2000

Manganese0 420,000 560,000 400,000 500,000 95.0 90.0 95.0 90.0Nickel 340,000 530,000 60,000 120,000 18.0 23.0 24.0 31.0Copper 3,400,000 5,600,000 52,000 105,000 1.5 1.9 8.5 10.4Cobalt 13,000 23.000 12,000 24,000 92.0 100.0 94.0 100.0

" Seabed production in this table is based on satisfying 100% of the nickel growth segment. Source:Ocean Manganese Nodules, p. 47.* One short ton = 2,000 lb.c Assumes recovery of 5 million tons (dry weight) of nodules per year by 1985 and 10 million tonsper year by 2000. For manganese materials, assumes recovery from 1.6 million tons per year in 1985and 2 million tons per year in 2000.d Manganese refers to manganese materials, including silicomanganese and low- and medium-carbonferromanganese.

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168 VINCENT J. NIGRELU

these minerals may be mined at rates disproportionate to the increase in theyearly demand growth increments for these minerals. The disproportion betweenthe nodule mineral supply and world demand is stated in Table 11.

Table 11 indicates that if some amount of nickel is mined to equal the increasein world demand for nickel, the weight of that nickel will equal the 4% growthincrement in nickel demand, which also equals 4% of the nodule. While the priceof nickel may remain unchanged, the prices of the other minerals may be af-fected, since the minerals are locked into each nodule in fixed proportions differ-ing from the demand for them.

Seabed mining is not likely to disturb the price of copper. The proportion ofcopper mined would only equal 4.5% of the demand growth increment forcopper, which is about 40% (see Table 11). The price of copper can be estimatedat about $.60 per pound.49

The price of cobalt is likely to fall. The proportion of cobalt in the nodule isabout six times greater than its demand growth increment (Table 11). The marketfor cobalt is small and inelastic. Nodules are expected to supply the United Stateswith 100% of its cobalt needs in 1985 and nearly half the world demand for thatsame year.50 Even with the first mining operations, the cobalt market will besufficiently penetrated (assuming no new uses) that the price of cobalt can beexpected to drop to the price of nickel, its nearest substitute. The drop would befrom about $3.00 to $1.40 per pound.51

The prices of some types of manganese are likely to fall. The proportion ofmanganese in the nodule is close to twice as large as the demand growth incre-ment for manganese in world markets (Table 11). The market for manganese israther inelastic but fairly large for most types of manganese. If manganese canonly be recovered in ore grade equivalent, the price per ton of ore is not likely tobe significantly affected. But if manganese is recovered as high-gradeferromanganese equivalent—low- and medium-carbon ferromanganese and

Table 11Disproportion Between Nodule Mineral Supply and

World Mineral Demand

Proportion in a Proportion of QuantitiesMineral Typical Nodule Demand in World Markets

Manganese 90.0% 56%Copper 4.5% 40%Nickel 4.6% 4%Cobalt 0.9% 0.15%

100.0% 100%

"Source: Osgood, op. cit., p. 165.

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silicomanganese—as expected, the prices for these types of manganese will dropbecause of the inelastic demand and small market size. One 1-million-ton miningoperation could supply a large fraction of the world demand for high-gradeferromanganese.52 Two operations this size could recover 500,000 tons of high-grade ferromanganese, well over the projected U.S. demand of 420,000 tons in1985. High-grade ferromanganese prices may drop from about $300 to $200 perton with the first mining operations, while the price of manganese ore willprobably remain at about $50 per ton.53 The minerals and gross revenue producedby the first nodule mining operation are outlined in Table 12.

Article 150-l(c) ICNT, provides for the "transfer of revenues and technologyto the Authority" and Article 151-9 states that the "Authority shall establish asystem for the equitable sharing of benefits derived from the Area " Annex IIin paragraph 7(c)(i)(ii) and (d)(i)(ii)(iii) lists three types of payments that contrac-tors might be required to pay to an international authority. These include anannual fixed charge to mine; a production charge based on a percentage of themarket value or of the amount of processed metals extracted from the contractarea; and a share of the net proceeds, which would be based on a contractor's rateof return.54

Profit-sharing plans will be considered first. Assuming nodule productionworldwide in 1985 is 15 million tons, that this production is done by four 3million ton per year (three minerals) and three 1 million ton per year (fourminerals) operations (see Table 10), and that the U.S. share is between 20 and50% or an average of 35%, then three 1 million ton per year operations at $115million would provide $345 million gross revenue, and four 3 million ton peryear operations at $195 million would provide $780 million, for a total 15 millionton per year production of $1,125 million. The 35% U.S. share would equal$394 million.

The ICNT in Annex II, paragraph 7-B, 1 and 2, lists development and operat-

Table 12Possible Mineral Production and Revenue from First Nodule Operation"

Mineral

NickelCopperCobaltManganeseTotal withTotal with

Annual Productionfrom I Million Tons

of Dry NoduleslYr (short tons)

15,00012,0002,500

250,000no manganese recoveredmanganese recovered (high purity)

Approximate MarketPrices (SU.S.)

1.40/lb.60/lb

1.40/lb.10/lb

Approximate GrossRevenues (SU.S., in

millions)

42167

5065

115

1 Sources: Ocean Manganese Nodules, p. 21, and UN Doc. A/AC 138/136, p. 55.

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ing costs to be subtracted from gross revenues to calculate net revenues. Mostrecent estimates indicate a total project's cost from $200 million to $500 millionfrom development and evaluation through commercial operations.55 Operatingcosts are expected to run between $100 million and $160 million annually.58

When these costs are compared with the gross revenues, it seems that seabedmining will occur only if a firm can achieve a 15% ROI." If costs of operationsare high, $160 million per operation annually, or if the costs of the originalinvestment are high, $500 million per operation, or both, then seabed mining willnot be economically feasible, considering the maximum gross revenue that a firmwill be able to achieve (see Table 13).

Table 13 suggests (although it does not compute all possibilities for achievinga 15% ROI) that based on likely gross revenues of $ 1,125 million per year (sevenfirms), a firm could only achieve a 15% cost of capital if yearly operating costswere low or possibly medium. For example, it may be possible to achieve a 15%ROI on an initial investment of $400 million per operation under low operatingcosts. On the other hand, a firm with medium operating costs could only achievea 15% ROI if its capital costs are low. It seems reasonable, then, to assume thatthe total yearly net revenue to seabed mining firms will be between $215 millionand $425 million [see Table 13(c), based on medium and low annual operatingcosts].

If profit-sharing plans are employed in revenue sharing, the exploiting stateand the international authority could split the profits 50-50.58 An equal splitunder the above plan would yield about $107-$212 million to each, with theU.S. share between $37 million and $74 million. This also assumes that theexploiting state would compensate its firms if the contribution paid to an interna-

Table 13Estimated Results of Nodule Production by Mid-1980s"

(a) Estimated gross revenue (SU.S., in millions)(b) Estimated operating costs(c) Estimated net revenue(d) Estimated U.S. share [35% of (c)](e) Estimated total investment(0 Return on total investment

High

1,1251,120

425148

3,50030.4%

Medium

1,125910215

751,750

12.3%

Low

1,125700

51.75

1,4000.1%

" High estimated net revenue (c) calculated: high (a) minus low (b); and low (c) calculated: low (a)minus high (b). High return on total investment (f) calculated: High (c) divided by low (e); low (f)calculated: low (c) divided by high (e). These figures are based on seven firms producing 15 millioninitial investment. Production is assumed to begin about 1980. Source: Official Records, UnitedNations Conference on the Law of The Sea, pp. 28, 31, 34; and Ocean Manganese Nodules, pp. 21and 43.

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tional authority made it uneconomical for the industry to operate. These totalsalso assume that all seven firms are in operation by about 1980.

Revenue-sharing contributions based on the value of production at a miningsite are also being considered. This type of system has already been widelyaccepted for oil and gas revenue sharing on the continental margin in Article 82,ICNT. Concerning the percentages of contribution of the total value of produc-tion or the "tax bite," Raul Branco says:

The calculation of total taxes due is always a complicated affair in the mining industry.In addition to (initial) lump payments for the concession, a schedule of royalties, leasefees and taxes on profits must be calculated (although these payments may be exemptedduring the first three to seven years of operation). Taking all these factors into account,it has been estimated that in most mining operations the total "take" of the governmentfalls between 5 percent and 30 percent of the gross value of mineral/metal production."

Using the above percentages and assuming that production begins about 1980with a three to seven year investment recovery period and that there is aworldwide production of 15 million tons of dry nodules per year from sevenfirms, the potential tax revenues would be as estimated in Table 14. The actualrevenue available to an international authority will be less if the exploiting statesretain a portion of these taxes for themselves. Under the above assumptions, amid-value of about $170 million may be available to public authorities in 1985.

In summary, the tax revenues available to an international authority dependsomewhat on the type of revenue-sharing plan that is employed. Nonetheless,based on the economic constraints of seabed mining, no matter which system isemployed for revenue sharing the revenues available to an international authoritywill have a medium value of about $160-$ 170 million annually. The range underprofit-sharing plans is likely to be between $107 million and $212 million annu-ally, while the spread for the value of production method is $56-$338 million.The U.S. contribution to an international authority would range from $20 millionto $118 million, with a mid-value of $50-$70 million. If seabed mining expandsfaster than the production percentages specified in the ICNT for the nickel

LowMediumHigh

Potential

TaxPercentage

5 x1530

Table 14Tax Revenue from

Gross Revenues

$1,125 million

Seabed Mining"

Total Tax

$56 million$169 million$338 million

U.S. Firm's TaxPayment (35% share)

$19.7 million$59.1 million

$118.1 million

"Sources: Ocean Manganese Nodules, p. 21; UN Doc. A/AC 138/136, p. 55; and Branco, op. cit.,p. 202.

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demand between 1985 and 2000 it is likely that there will be more than thepredicted revenues available to an international authority in 2000 and cheaperminerals.60

Seabed mining is likely to have adverse effects on some land-based producersof minerals mined on the seabed. Specifically, cobalt producers will suffer asignificant price drop, and some damage will be done to manganese, copper, andnickel producers.

Nodules are expected to supply the United States with 100% of its cobalt in1985 and nearly half the world demand for that same year (Table 10). Cobaltfrom nodules is anticipated to supply 30,000 of the 60,000-ton world demand in1985.61 Assuming that the land-based producers of cobalt supply the same per-centages of world land-based production in 1985 as in 1971, the world land-based production is 30,000 tons, and the price drop is about $1.60 per pound,62

possible estimates as to the "loss" incurred by developing countries that producecobalt are given in Table 15. The totals in Table 15 only reflect a price drop.They do not include all possible losses that may befall cobalt producers. A UNstudy sets the figure for total losses at up to $120 million at 1970 prices."3

Ninety-five percent of the U.S. demand for high-purity ferromanganese wouldbe satisfied by seabed mining in 1985. It takes about 2.4 tons of manganese oreto make 1 ton of high-purity forms of manganese.64 Because the manganesemarket is rather inelastic, land-based producers of manganese would lose about

.960,000 tons of ore sales from the United States alone in 1985. This wouldrepresent a sales loss to land-based manganese producers of about $48 million.About 86% of this manganese comes from developing countries,65 which wouldindicate a loss to them of about $41 million from lost sales to the United Statesalone. Like the above cobalt total, this figure only reflects part of the damagedone to manganese producers. The United Nations estimates that from man-ganese the developing countries would sustain a foreign exchange reduction of

Table 15Possible Price Drop Losses for Selected Cobalt Producers

Possible LossCountry" % World Demand? Tons Produced" % of Total Exports" ($U.S.)

Zaire 57.22 17,166 5.2 $54,931,200Zambia 8.86 2,658 0.6 8,505,600Cuba 6.67 1,971 — 6,307,200Morocco 4.17 1,251 — 4,003,200

Total 76.92 23,046 $73,747,200

" Osgood, op. tit., p. 166, among others.* Ocean Manganese Nodules, p. 54.

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$52.4 million yearly.66 From cobalt and manganese alone the loss to developingcountries could be in excess of $170 million annually.

It is difficult to determine the damage done to the producers of copper becauseof the downward pressure on mineral prices combined with decreases in produc-tion caused by seabed mining. Although copper prices are not likely to drop,developing countries that produce copper may lose up to $200 million annually inexport earnings.67 The damage done to the developing countries' mineral exportsof all four minerals has reached estimates as high as $300-$400 million yearly bythe mid-1980s.68

Former Secretary of State Henry Kissinger stated that one of the goals of theUnited States at UNCLOS is to compensate land-based producers of seabedminerals for losses sustained with the commencement of seabed mining.69 Thedeveloping countries have also indicated that compensation is important by pro-viding for it in Article 150, ICNT. Paragraph l(g) provides for "the protection ofdeveloping countries from any adverse effects on their economies or on theirearnings resulting from a reduction in the price of an affected mineral, or in thevolume of that mineral exported, to the extent that such reductions are caused byactivities in the Area. . . and, D . . . a system of compensation for developingcountries which suffer adverse effects on their export earnings or economies...to the extent that such reduction is caused by activities in the Area."

The most popular method of compensation among economists is direct dollar-for-dollar compensation to the affected countries. If developing countries arecompensated for losses before other expenses are considered, it seems that theinternational authority will have few funds remaining, if any. With revenues toan international authority estimated at between $56 million and $338 million andlosses to land-based producers estimated at between $300 million and $400million annually by the mid-1980s, chances are that the revenues available to aninternational authority will not quite equal the losses to developing countries whoare land-based producers.

Another set of costs that should be dealt with are those associated with theoperations of the new international authority. The ICNT, Article 170-2, statesthat "All receipts of the Authority arising from activities in the Area . . . shall bepaid into the General Fund." Article 172-1 enumerates the expenses of theAuthority, as "Administrative expenses, which shall include costs of the staff ofthe Authority, costs of meetings, and expenditure on account of the functioningof the organs of the Authority... shall be me t . . . out of the General Fund "The authority's organizational structure will be patterned after the United Na-tions, which seems to indicate that it will be of substantial size. It will consist ofan assembly of possibly 140+ members, a 36-member council, a tribunal of 21members, and a secretariat. There are also an economic planning commission of18 members, a 15-member technical commission, a 15-member rules and regu-

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lations commission, an enterprise with a governing board of 15 members and adirector general, and special commissions that may be established. Even if theauthority's expenses reach half those of the United Nations—$225 million in1973™—few funds will be left for sharing. If administrative expenses are consid-ered first, compensation to developing countries for losses sustained from seabedmining will be far from adequate. What is more, expenses will be incurred by theauthority in establishing a seat in Jamaica (Malta or Fiji) and by undertakingseabed mining operations. All expenses considered, the authority may well oper-ate at a net loss.

It seems there will be insignificant revenues, at best, available for sharing tosatisfy other purposes of the developing countries. A UN report proposed twoplans for distribution, which were determined by the amount of revenue availableto an international authority. They were:71 •

1. administrative expenses2. international community purposes3. land-locked states4. developing capabilities of contracting

parties5. prevention/relief of disasters

Plan AMaximum revenue

$50 million

30%20%

—40%

_

PlanBRevenue in excess

of $50 million

20%10%15%50%

5%

As can be seen by these distribution plans, many countries have aspirations as tohow the excess revenues from seabed mining will be used. It seems these aspi-rations will not be fulfilled.

Summary and ConclusionsBased on the ICNT this paper first assumed that revenue sharing will occur inocean areas beyond 200 nautical mi of a coastal state's shoreline. Two geologicalareas exist beyond 200 nautical mi: the continental margin and the deep seabed.Each of these areas has different minerals that will be exploited. Revenues forsharing from the continental margin will be derived primarily from oil and gas,while deep-seabed revenue-sharing funds will come mostly from nickel, copper,cobalt, and manganese from manganese nodules.

Margin revenue sharing, although no longer a point of contention at UN-CLOS, was analyzed to see if it was likely to supply "significant" funds to theinternational community. Examination of margin revenue sharing revealed that:(1) there are potential oil and gas reserves in significant quantities, (2) substantialrevenues may be available for sharing some day, and (3) compared with thebenefits to the exploiting coastal state the revenues derived from margin plans isnot likely to be seen as "generous" or "significant" to developing countries.

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What is more, based on (1) the technical and financial constraints of the exploit-ing industry, (2) the vast potential oil and gas supply within 200 nautical mi ofshore, and (3) the likelihood of consumer developed countries initiating energy-conserving measures and finding alternative energy sources makes it improbablethat oil and gas will be exploited on the margin beyond 200 nautical mi until wellafter the year 2000, if at all.

The sharing of revenue derived from the minerals of the deep seabed was thenexamined. Revenue-sharing funds derived from deep seabed minerals could beavailable to an international authority by the mid-1980s. It was concluded that (1)there is a vast potential supply of minerals on the deep seabed; (2) at present themost commercially attractive of these minerals are copper, cobalt, manganese,and nickel contained in manganese nodules; (3) production and processing ofthese minerals will proceed based on some percentage of the demand for nickel,(4) revenues will be available to an international authority, (5) the foreign ex-change earnings of land-based producers will be adversely affected—cobalt pro-ducers, in particular, will experience a significant price drop; (6) the revenuesavailable to the international authority may not quite equal the "loss" incurredby land-based procedures of seabed minerals that are developing countries; and(7) few if any funds will be available for any other UN purposes.

Table 16 provides a brief summary of the revenue-sharing split. A determina-tion may now be made as to the importance of revenue sharing from seabedminerals on negotiations at UNCLOS. Revenue sharing, to be an effective

Table 16Summary of Costs and Benefits"

BenefitsSource of

RevenueOil and

GasNodulesTotal

CostsSource of

CostsOil and

GasNodulesTotal

Year

1985200019851985

1985200019851985

World

Totalmineral value

NoneNegligible$1,125$1,125

Revenue-sharing contribution

NoneNegligible$56-$338$56-$338

United Slates

Totalmineral value

NoneNegligible$394$394

Revenue-sharing contribution

NoneNegligible$19-5118$19-5118

Developing Countries

Gained fromrevenue sharing

NoneNegligible

$56-$338$56-$338

Mineralexport losses

NoneNegligible$300-5400$300-$400

Costs associated with the operation of an international authority were not included. All figures are in SU.S.nillions.

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176 VINCENT J. N1GRELU

trade-off, should satisfy to some degree the objectives of both developed anddeveloping countries at UNGLOS. Since the industrial countries are basicallyoffering revenue sharing as an inducement for developing countries to grant thefirms of developed countries guaranteed access to seabed minerals, it must par-ticularly satisfy developing countries' goals.

The significance to the developing countries of the revenues collected for theinternational community will probably be judged in terms of the impact they havein establishing a "New International Economic Order."" The funds available tothe international authority under the possible U.S. revenue-sharing plan seemunlikely to influence the positions of developing countries to grant guaranteedaccess to seabed minerals to the firms of developed countries. If the operatingcosts of the authority are to be satisfied, the remaining funds will be lucky tocover any of the loss to the foreign exchange earnings of developing countriesthat are land-based producers of seabed minerals—a goal of both developed anddeveloping countries.

If funds remain after compensation, they will undoubtedly be insignificant interms of establishing a "New International Economic Order." Even if no dam-age were done to developing land-based producers, no administrative costs con-sidered, and a high value of $300 million were available annually to an interna-tional authority, this sum would only constitute an added value to developingcountries with a GNP per capita of under $250 of about $.25 per capita." What ismore, once industrial countries begin seabed mining operations, they will destroythe effectiveness of any possible land-based mineral cartels in the future, whichis the potential source of much of the developing countries' economic and politi-cal leverage.

To conclude, it seems that revenue sharing is unlikely to exert much influenceat UNCLOS. Too little revenue will be available to an international authority.Revenue sharing on the margin does not appear to be an effective trade-off foraccess to deep seabed minerals by developed countries. There would be little toshare for some time to come from developed coastal states such as the UnitedStates and developing coastal states that aren't exempt from sharing can beexpected to show reluctance in sharing with their landlocked neighbors. Theremay be some revenue available to the international authority for sharing fromminerals mined on the deep seabed. But these revenues are likely to be insuffi-cient to cover the costs of the new authority (overhead) and compensate land-based producers of seabed minerals, let alone provide revenue for developingcountries in general. Thus, if one agrees with the conclusions of this paper, itseems that revenue sharing will not influence the developing countries to accept aparallel system of seabed exploitation that would guarantee access to seabedminerals by the firms of developed countries.

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Notes1For a more detailed account of negotiation that addresses the question of control see Edward Miles,"An Interpretation of the Geneva Proceedings—Part 1," Ocean Development and International Law.vol. 3, no. 3 (1976), pp. 187-225. Also, see Jonathan I. Chamey, "Law of the Sea: Breaking theDeadlock," Foreign Affairs (April 1977), particularly pp. 604-607 and 617-625.2U.S. Delegation Report, Hearing on Law of the Sea Conference, Subcommittee on Oceans andInternational Environment of the Senate Committee on Foreign Relations, 94th Congress, 1st ses-sion. May 22, 1975. See the conversation between Senator Pell and John N. Moore, pp. 30-32.3According to Article 82, ICNT.4The Symposium on the International Regime of the Seabed (Rome: Accademia Nazionale dei Lincei,1970). Cited by Wolfgang Friedmann, The Future of the Oceans (New York: Braziller, 1971), p. 12.See also John Temple Swing, "Who Will Own the Oceans," Foreign Affairs (April 1977), p. 529,for another description of the margin. The problem of defining the outer edge of the continentalmargin still remains. Exact formulas do exist for determining the margin's end. These includeformulas based on water depth and depth of sediments on the continental rise. In a private conversa-tion, Mr. John Garrett of the Gulf Oil Corporation stated that the Hedberg formula was the one mostlikely to gain acceptance in UNCLOS. This formula permits a coastal state to set the outer limit of themargin 60 nautical mi from the toe of the slope. Precise measurements determining the toe of theslope are technically possible and noncontroversial (May 3, 1976).5U.S. Bureau of Mines, Minerals Yearbook (1973), p. 924. U.S. consumption statistics in thisparagraph are also taken from this source.6Amory B. Lovins, "Energy Strategy: The Road Not Taken?" Foreign Affairs (October 1976), p.68.7Southwestern Legal Foundation, "New Methods, New Ideas, New Developments," Explorationand Economics of the Petroleum Industry, vol. 12 (1974), p. 62.8National Petroleum Council, U.S. Energy Outlook (December 1972), p. 24.9National Petroleum Council, Ocean Petroleum Resources (March 1975), p. 34.10Ibid., p. 7.11Sherwood Frezon, A summary of Oil and Gas Statistics for Onshore and Offshore Areas of 151Countries, Geological Survey Professional Paper no. 885 (Washington, D.C.: GPO, 1974), pp.157-159. Admittedly this is a wide range but it does not hinder the analysis in the paper. It merelyillustrates the imprecision of making such estimates. In general this paper assumes that the lowerestimate is more correct.12It should be noted that the production of offshore oil and gas in U.S. offshore areas was greater in1973 than in 1974 or the first half of 1975. Therefore, 1973 statistics were sometimes referred to as"current." See U.S. Bureau of Mines' Mineral Surveys, Monthly Petroleum Statements (January1974-May 1975).13For more on different types of revenue-sharing plans see the U.S. Delegation Report, supra, note 2,p. 31. Also, see Official Records Third United Nations Conference on the Law of the Sea, vol. 3(1975), pp. 32-33.14U.S. Delegation Report, Hearing on the Law of the Sea Conference, Senate Committee on Interiorand Insular Affairs, June 4, 1975, p. 1233.15Ibid., p. 1232.16I am thankful to David Stottlemeyer, economic advisor to the U.S. Mission to the United Nations,for this point.17Ibid. See also Jahangir Amuzegar, "The North-South Dialogue: From Conflict to Compromise,"Foreign Affairs (April 1976), p. 556.18Kanenas, "Wide Limits and 'Equitable' Distribution of Seabed Resources," Ocean Developmentand International Law, vol. 1, no. 2 (Summer 1973), p. 152.

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178 VINCENT S. NIGRELLI

19National Petroleum Council, Ocean Petroleum Resources, p. 90.20Ibid., pp. 4-5.21Ocean Manganese Nodules: Report, Hearings Before the Senate Committee on Interior and InsularAffairs, 94th Congress, 2nd session, February 1976, p. 50.22U.S. Bureau of Mines, Minerals Yearbook (1973), pp. 924-925. The price of natural gas has risenconsiderably since 1973.23National Petroleum Council, Ocean Petroleum Resources, pp. 30-31.24Ibid., p. 26, Table 6. Most of the discussion in the above two paragraphs was derived from Table 6.25Ibid., p. 19, Table 4.26Ibid., pp. 35-37.27Ibid., p. 17.28Lovins, "Energy Strategy," pp. 65-97.29Frezon, "A Summary of Oil and Gas Statistics," pp. 156-162.30Ocean Manganese Nodules, pp. 48-50. The discussion in this paragraph is primarily taken fromthis report.31Ibid., p. 50.32Hearings on Status Report on Law of the Sea Conference, Subcommittee on Minerals, Materialsand Fuels of the Senate Committee on Interior and Insular Affairs, 93rd Congress, 1st session,September 19, 1973.33Ocean Manganese Nodules, pp. 46 and 50-54.34Ibid., p. 46.35Northcutt Ely, Mining Rights in the Deepseabed, presented before the American Mining Congress,San Francisco, October I, 1975, p. 13 (Reprint).36Southwestern Legal Foundation, "New Methods, New Ideas," p. 64, footnote 10. CIPEC standsfor "Le Conseil Intergovememental des Pays Exportateurs de Cuivre" (Intergovernmental Councilof Copper Exporting Countries).37Ely, Mining Rights. See also C. Fred Bergsten, "Commodity Shortages and the Ocean,' Perspec-tives on Ocean Policy, ed. Robert Osgood et al. (Washington, D.C.: National Sciences Foundation,1974), pp. 169-176. He addresses the issue of cartelization.

38Bension Varon and Kenji Takeuchi, "Developing Countries and Non-Fuel Minerals," ForeignAffairs (April 1974), pp. 497-510.39John Mero, "Potential Economic Value of Ocean-Floor Manganese Nodule Deposits," inFerromanganese Deposits on the Ocean Floor, ed. R. D. Horn (Washington, D.C.: National ScienceFoundation, 1972), p. 195.40Ibid., p. 202.41Ibid., p. 196.42Ocean Manganese Nodules, p. 70.43Ibid., p. 46.44Ibid., p. 40.45Ibid., p. 46.46I have assumed seven firms will recover minerals. Others have assumed different numbers of firms.See Official Records Third United Nations Conference on the Law of the Sea. vol. III, note 99, p. 24.47Robert Osgood et al., Toward a National Ocean Policy: 1976 and Beyond (Washington, D.C.:National Science Foundation, February 1976), p. 167.48The price of nickel (as well as the other minerals) is generally agreed on in the following sources:U.S. Bureau of Mines, Minerals Yearbook (1973), p. 865; Ocean Manganese Nodules, p. 21 andthroughout the report; and UN Doc. A/Ac. 138/36, May 1971, Possible Impact of Seabed Mineral

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Production in the Area Beyond National Jurisdiction on the Developing Countries: A PreliminaryAssessment, p. 55.49U.S. Bureau of Mines, Minerals Yearbook, pp. 465-466. The price assumptions for these mineralsare not forecasted prices for 1985. They are merely for comparison using present cost estimates.50Ocean Manganese Nodules, p. 55.51Based on current world market prices. See U.S. Bureau of Mines, Minerals Yearbook (1973), pp.405 and 865.52Manganese will probably be recovered as electrolytic metal that will be substituted for low tomedium carbon ferromanganese (high purity) and silicomanganese.53Ocean Manganese Nodules, p. 43.54Also see UN press release SEA/277, July 20, 1977, p. 12. Since this paper was written the ICNThas been issued. The specification of the types of payments a contractor must make to an internationalauthority is new. The text indicates that a contractor will probably but not necessarily be required topay all three types of fees. Since any one of these contributions may be excluded, the analysis willdeal first with contributions based on profit sharing alone and then on all three kinds of payments.55Ocean Manganese Nodules, p. 36. See also U.S. Delegation Report, supra note 2, p. 27.56Deep Seabed Hard Minerals Act: Report, Senate, 94th Congress, 2nd session, April 14, 1976, pp.48-51. Cited in Margaret Galey, "From Caracas to Geneva to New York: The International SeabedAuthority as a Creator of Grants," Ocean Development and International Law, vol. 4, no. 2 (1977),p. 178.57Mining officials have set as a target a 15% ROI for new seabed mining operations. See OfficialRecords Third United Nations Conference on the Law of the Sea. p. 28.58Report of the U.S. Delegation, supra note 2.59Raul Branco, "The Tax Revenue Potential of Manganese Nodules," Ocean Development andInternational Law, vol. 1, no. 2 (Summer 1973), p. 206.60Ibid. Branco covers many possible contingencies of nodule tax revenue potential based on a varietyof assumptions in Table 4, p. 207.61Ocean Manganese Nodules, p. 54.62Based on current nickel and cobalt prices. See notes 48 and 49.63Official Records Third United Nations Conference on the Law of the Sea, p. 156.64U.S. Bureau of Mines, Minerals Yearbook (1973), p. 718.65Ibid., p. 748.66Official Records Third United Nations Conference on the Law of the Sea, p. 154.67Ibid.68Ibid. See also B. Varon, J. Foster, and K. Takeuchi of the Development Policy Staff, IBRD,Energy and Raw Materials: Outlook for LDC's and Selected Issues (December 10, 1973), p. 12.Cited in Galey, "From Caracas to Geneva," p. 181.69Henry Kissinger, Speech: The Law of the Sea: A Test of International Cooperation, New York,April 8, 1976, p. 7.70Yearbook of the United Nations 1972, vol. 26, pp. 697-698.71United Nations, GAOR, 28th session, Report of the Committee on the Peaceful Uses of the Seasand Ocean Floor Beyond the Limits of National Jurisdiction, supplement 21, vol. II (A/9021), PartII: International Machinery Article 344, par. 24, "Equitable Sharing," Proposal B, pp. 93-95. Citedin Galey, "From Caracas to Geneva," p. 186.72The importance of establishing a "New International Economic Order" to developing countries isexpressed in these documents among countless others: The UN General Assembly, "The Charter ofEconomic Rights and Duties of States," A/RES/3281 (XXIX) January 15, 1975; The "CocoyocDeclaration" and others, reprinted in Beyond Dependency: The Developing World Speaks Out, eds.

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Guy F. Erb and Valerina Kallab (Washington, D.C.: Praegar, 1975), pp. 175 ff; and FranciscoOrrego Vicuna, "Latin America," pp. 75-86, and Francis Njenga, "Africa," pp. 81-105 inPerspectives on Ocean Policy (Washington, D.C.: National Science Foundation, 1974).73The World Almanac (Cleveland: Newspaper Enterprises Association, Inc., 1976), pp. 681-682(population statistics).

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ocean mineral revenue sharing

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