Revenue sharing agreements in UNCLOS are not a reason to reject the treaty
Opponents of UNCLOS often point to the royalty payments required under Article 82 of the convention as a reason to reject ratifcation. However, on closer examination many of the criticisms of the revenue sharing agreeements do not hold up. The actual amount the U.S. would have to pay pales in comparison to the revenues that would be generated, a significant reason why industry represenatives have consistently been in favor of UNCLOS. Additionally, the concern that royalty payments would go towards anti-U.S. states and non-state actors could be mitigated if the U.S. were a full member of the treaty.
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Every financial concern raised against UNCLOS has been expressly rebuked by US industry; in fact, nearly every major US business possessing maritime interests has publicly and unequivocally supported US accession to the Convention.101 For example, the American Petroleum Institute (API) has repeatedly asserted that its members will not risk investing the billions of dollars required to drill in the US ECS without the legal certainty UNCLOS offers.102 Consequently, as long as the US remains outside the UNCLOS framework, it cannot receive any of the royalties it would otherwise be entitled to from the petroleum industry were ECS drilling to commence. As one UNCLOS proponent expressed, “it’s better to have 93% of something, than 100% of nothing.”103 Therefore, as it stands today, it would be more accurate to characterize UNCLOS, as it relates to the costs to comply, as a squandered source of revenue, as opposed to a financial liability.
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Opponents of the Convention often cite its imposition of royalties on ECS production as an important reason to reject the Convention. Under the Convention, parties must make payments to the ISA based on the value of resources extracted from sites on their extended continental shelves. Production companies would be able to keep the entire value of production at each site for the first five years, subject to any licensing fees imposed by the U.S. Government. Payments to the Seabed Authority would begin at 1% of the value of production in the 6th year of exploitation at a site and rise 1% per year to a maximum of 7% in the 12th year and following years. These royalty rates were negotiated by the U.S. Government with extensive input from U.S. oil and natural gas interests. As oil and natural gas companies have recognized, the royalties are reasonable in view of the immense value of the resources that would be made subject to the United States’ exclusive sovereign jurisdiction. The oil and natural gas companies – and the U.S. Treasury – would be able to retain much more than the U.S. would be required to pay to the Seabed Authority. Notwithstanding the required payments to the Seabed Authority, joining the Convention would be overwhelmingly beneficial to U.S. economy and the U.S. Treasury.
Regarding the third concern, the taxation on resource extraction in exclusive economic zones amounts to just over 2 percent on average, a price that mining and hydrocarbon companies have signaled they are willing to pay as the world’s energy markets hunger for new resources and prices of commodities climb. As for revenue redistribution, opponents too often overlook the fact that following renegotiation of the Law of the Sea, the United States is guaranteed the only permanent veto on how funds are distributed. It is also exempt from any future amendments to the treaty without Senate approval. In other words, the United States would enjoy a position of unequaled privilege, not unfair treatment, within UNCLOS.
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Granted, as UNCLOS critics are quick to point out, access to the ECS under UNCLOS is contingent upon payment of royalties to the Interna- tional Seabed Authority (ISBA) for oil and gas development beyond 200 nautical miles (nm).26 However, the royalty framework is relatively insignifi- cant compared to the fee-sharing arrangements for overseas oil and gas development and the enormous economic benefits anticipated from off- shore resource development. Revenue sharing does not begin until the 6th year of production of a particular well or site, starts at 1% of the value of production and increases 1% per year. By the 12th year and remaining years thereafter, the royalty is 7% of the value of production, paid either in kind or in dollars.27 During the 1970s, these revenue sharing provisions were negotiated in consultation with the U.S. oil and gas industry.
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Payments are to be distributed by the ISBA to States Parties of UNCLOS in accordance with Article 82(4) on the basis of equitable criteria that take into account economic development factors. Of note, this distribution is distinct from the distribution of revenues generated from deep seabed mining operations under Part XI of the Convention. As a State Party to UNCLOS, the United States would have a permanent seat in the ISBA to ensure both kinds of distributions are made in ways acceptable to the United States—Section 3(15) of the Annex to the IA guarantees the United States a seat on the ISBA Council in perpetuity.28 Any ISBA decision regarding revenue sharing must be approved by the Council.29 Additionally, if distributions are made to a country that is already receiving U.S. foreign aid, the United States could offset aid to that country by the amount of distributions paid by the ISBA, in essence eliminating any increase financial burden to the American taxpayers.
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Is there a cost involved in exploring this far frontier? The Convention provides a reasonable compromise between the vast majority of nations whose continental margins are less than 200 miles and those few, including the U.S., whose continental shelf extends beyond 200 miles, with a modest obligation to share revenues from successful minerals development seaward of 200 miles. Payment begins in year six of production at the rate of one percent and is structured to increase at the rate of one percent per year to a maximum of seven percent. Our understanding is that this royalty should not result in any additional cost to industry. Considering the significant resource potential of the broad U.S. continental shelf, as well as U.S. companies’ participation in exploration on the continental shelves of other countries, on balance the package contained in the Convention, including the modest revenue sharing provision, clearly serves U.S. interests.
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The settlement we made with Mexico now makes it possible for leases in the Gulf of Mexico issued by the Department of the Interior’s Minerals Management Service (MMS) to be subject to the Article 82 “Revenue Sharing Provision” calling for the payment of royalties on production from oil and natural gas leases beyond the EEZ. According to MMS, seven leases have been awarded to companies in the far offshore Gulf of Mexico which include stipulations that any discoveries made on those leases could be subject to the royalty provisions of Article 82 of the Convention. MMS also reports that one successful well has been drilled about 2.5 miles inside the U.S. EEZ. Details on how the revenue sharing scheme will work remain unclear, and without ratification the U.S. Government’s ability to influence decisions on implementation of this provision is limited or non-existent. This creates uncertainty for U.S. industry.
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The Convention provides a reasonable compromise between the vast majority of nations whose continental margins are less than 200 miles and those few, including the U.S., whose continental shelf extends beyond 200 miles, with a modest obligation to share revenues from successful minerals development seaward of 200 miles. Payment begins in year six of production at the rate of one percent and is structured to increase at the rate of one percent per year to a maximum of seven percent. Our understanding is that this royalty should not result in any additional cost to industry. Considering the significant resource potential of the broad U.S. continental shelf, as well as U.S. companies’ participation in exploration on the continental shelves of other countries, on balance the package contained in the Convention, including the modest revenue sharing provision, clearly serves U.S. interests.
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Third, it might be argued that the United States should not join the Convention because we would have to pay a contribution based on a percentage of oil/gas production beyond 200 miles from shore. However, the revenue-sharing provisions of the Convention are reasonable. The United States has one of the broadest shelves in the world. Roughly 14% of our shelf is beyond 200 miles, and off Alaska it extends north to 600 miles. The revenue-sharing provision was instrumental in achieving guaranteed U.S. rights to these large areas. It is important to note that this revenue-sharing obligation does not apply to areas within 200 nautical miles and thus does not affect current revenues produced from the U.S. Outer Continental Shelf. Most important, this provision was developed by the United States in close cooperation with representatives of the U.S. oil and gas industry. The industry supports this provision. Finally, with a guaranteed seat on the Finance Committee of the International Seabed Authority, we would have an absolute veto over the distribution of all revenues generated from this revenue-sharing provision.
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Caitlyn Antrim, executive director of the Rule of Law Committee for the Oceans, a nonpartisan educational group whose purpose is to inform public discourse regarding U.S. interests in accession to the Convention, expanded further on the history of the revenue-sharing issue. She said it is based on a package deal proposed in 1970 by then-President Richard M. Nixon in which a moderate royalty payment from sea-floor energy and mineral exploitation beyond the 200-meter “isobath” would be shared between the coastal state and the rest of world in return for recognition of the coastal state’s jurisdiction over minerals to the outer edge of the con- tinental margin and assured access for private develop- ers to minerals on the deep ocean floor.
“Over the course of the conference, negotiators reduced the area subject to revenue-sharing by moving the inner boundary of the region out to 200 nautical miles,” Antrim said. “The concept of sharing royalties from development of seabed resources beyond national boundaries has been endorsed by every president since Nixon, including President Reagan. The Convention is critical because industry will not invest billions of dollars without the international recognition of claims and title to recovered minerals it provides.
“The Convention also guarantees the U.S. a permanent seat on the council of the International Seabed Authority, the organization created to recognize min- ing claims beyond the continental margin, with veto power over rules and regulations, amendments and distribution plans for royalty payments,” she said. “The Authority will receive royalty payments whether or not the U.S. is a party, but the U.S. will only be able to exercise its veto over how those funds are distributed if we join the Convention.”