UNCLOS participation would require U.S. to transfer significant royalties to International Seabed Authority
If the U.S. accedes to UNCLOS, it will be required pursuant to Article 82 to transfer royalties generated on the U.S. continental shelf beyond 200 nautical miles (nm)—an area known as the “extended continental shelf” (ECS)—to the International Seabed Authority.
[ Page 7-8 ]
Exploitation of resources from the U.S. ECS is expected to generate royalties in the near future, and the United States will forgo some of those roy- alties if it joins UNCLOS. The potential financial impact of joining UNCLOS is evident from a brief review of how revenue is generated from activities currently taking place on the U.S. outer continental shelf within the 200 nm line.
A wealth of mineral resources (e.g., oil and natural gas) lies below the surface of the U.S. OCS. Alaska’s OCS alone may contain almost 10 billion barrels of oil and 15 trillion cubic feet of natural gas.29 Massive known reserves of oil and natural gas also lie beneath the OCS in the Gulf of Mexico.
The Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) in the U.S. Department of the Interior manages the nation’s oil, natural gas, and other mineral resources on the OCS.31 One of BOEMRE’s primary activities is managing sales of offshore oil and gas leases. Through BOEMRE, the United States leases OCS tracts to companies for exploration and exploitation. The companies bid competitively for leases, and the winning company is required to make certain pay- ments to the Secretary of the Interior for deposit into the U.S. Treasury.
[ Page 9 ]
Both the Alaskan OCS and Gulf OCS will continue to generate revenue for the United States for many years to come. According to Interior Depart- ment estimates, the U.S. OCS contains 8.5 billion barrels of oil and 29.3 trillion cubic feet of natural gas in proved and unproved reserves and another 86 billion barrels of oil and 420 trillion cubic feet of natural gas in as yet undiscovered resources.
Such vast resources will continue to generate billions of dollars in royalty revenue for the United States. A recent report by the Institute for Social and Economic Research at the University of Alaska evaluated further development of the Alaskan OCS, focusing on the Beaufort Sea OCS and the Chuk- chi Sea OCS, the two OCS areas off the northern shore of Alaska. Assuming a minimum royalty rate of 12.5 percent, mineral exploitation in these two areas would generate almost $92 billion in royalty revenue over the next 50 years.
[ Page 11 ]
The United States will likely soon begin to exploit the oil and natural gas resources on its ECS. The BOEMRE has already issued exploration leases for areas located, at least in part, on the U.S. ECS. Indeed, during the bidding process, the BOEMRE has given notice to companies bidding on offshore leases about UNCLOS Article 82. Since at least 2001 and as recently as 2008, BOEMRE has advised companies that the Article 82 royalty payment provisions would apply if the United States joins the convention.
The BOEMRE is not alone in its opinion that activities on the ECS will commence sooner rather than later. The report commissioned by the Authority predicts that, while Article 82 “has been dormant since the adoption of the Convention,” it “will soon awaken,” and royalties from that provision may come due to the Authority as early as 2015.
In sum, under current U.S. law and policy, all royalties and other revenue generated from exploitation of the U.S. ECS and owed to the United States would be deposited in the U.S. Treasury to be dispensed in the best interest of the United States and the American people. However, if the United States accedes to UNCLOS, potentially billions of dollars in royalties would instead be transferred to the Authority pursuant to Article 82. How the Authority would dispense those “internationalized” royalties is less clear.
[ Page 342 ]
While Moore’s view is also that Article 82 is a “small quid pro quo”,11 the Article may nonetheless have undesirable consequences. For example, Rainer Lagoni observed in New Delhi in 2002 that in providing for five years where the revenue share is nil per cent before slowly climbing by one per cent a year there is an incentive of the mining industry to extract resource at a far faster rate than they might otherwise do.12 This may lead to an inefficient, even wasteful use of resource, particularly when taking into account the gearing of refinery resources to the raw resource available.
[ Page 6 ]
However, the actual treaty insists that in return for the acknowledgement of such claims, coastal states must provide compensation to the rest of the world. The most blatant application of this concept concerns mineral extraction on the continental shelf beyond the 200-mile limit. UNCLOS allows claims to the limit of the continental shelf or up to 350 miles from the shoreline, whichever is less.8 However, to claim such additional drilling rights the state must first accept delineation of its continental shelf by a special Commission on the Limits of the Continental Shelf, established by UNCLOS with a requirement that the Commission’s membership show for “equitable geographical representation” in its membership.9 If it chooses to exercise drilling or mining rights in this area beyond its EEZ, a state must provide a portion of revenue derived from such activity—increasing at 1 percent a year up to a rate of 7 percent per year—to the Deep Seabed Authority, an agency established by UNCLOS for general supervision of deep sea development.10
The United States government already provides sizable contributions—often over extended periods—to international aid organizations for programs—such as vaccination, schooling, and road building—which it considers likely to improve conditions in developing countries. UNCLOS does nothing to advance this. Instead, it requires states that are able to extract mineral wealth from the seas to compensate those that are not—while the non-extracting state contributes nothing to the equation.
[ Page 2 ]
One area where the U.S. can expect to experience significant costs—with no appreciable benefit—is in its compliance with Article 82 of the Convention: “Payments and contributions with respect to the exploitation of the continental shelf beyond 200 nautical miles.”
If the U.S. accedes to UNCLOS, it will be required pursuant to Article 82 to transfer royalties generated on the U.S. continental shelf beyond 200 nautical miles (nm)—an area known as the “extended continental shelf” (ECS)—to the International Seabed Authority. These royalties will likely total tens or even hundreds of billions of dollars over time. Instead of benefiting the American people, the royalties will be distributed by the Authority to developing and landlocked nations, including some that are corrupt, undemocratic, or even state sponsors of terrorism such as Cuba and Sudan.
[ Page 4 ]
Member states begin to pay these “international royalties” during the sixth year of production at the drilling site. Starting with the sixth year of production, UNCLOS members must pay 1 percent of the value of the total production at that site to the Authority. Thereafter, the royalty rate increases in increments of 1 percentage point per year until the twelfth year of production, when it reaches 7 percent. The rate remains at 7 percent until production ceases at the site.
As such, if the United States accedes to UNCLOS it would be obligated to transfer to the Authority a considerable portion of the royalties generated on the U.S. ECS that would otherwise be deposited in the U.S. Treasury for the benefit of the American people. For example, the royalty rate of the majority of blocks currently under an active lease on the U.S. ECS is 12.5 percent. Beginning in the twelfth year of production on such an ECS block the U.S. would be required to transfer 7 percent—more than half—of its royalty revenue to the Authority and do so each year until production ends on that lease. The remaining 5.5 percent of the royalty would be retained by the Treasury.