Impediments to U.S. involvement in deep ocean mining can be overcome report to the Congress

[From the U.S. Government Printing Office, www.gpo.gov]

101, ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ / ?//~

BY THE COMPTROLLER GENERAL

lepr To Th Congress

OF THE UNITED STATES

Impediments To U.S. Involvement In

Deep Ocean Mining Can Be Overcome

The abundant resources on the deep seabed
could help relieve the Nation's almost total re-
liance on foreign sources for certain critical
minerals. The 1980 Deep Seabed Hard Miner-
al Resources Act was passed to facilitate U.S.
involvement in developing the seabed mineral
resources. At present, however, continued
U.S. involvement is quite uncertain.
The uncertainty sterns from strong opposi-
tion, from the mining industry and others, to
many of the mining provisions in the United
Nations' current draft Law of the Sea Treaty
which would govern deep seabed mining in
international waters.
In this report, GAO reviews the implemen-
tation of the 1980 act; and analyzes the ma-
jor impediments to U.S. involvement in deep
seabed mining, particularly as they relate to
the draft Law of the Sea Treaty, and offers
recommendations to the Congress to over-
come them.

TN i
291 . 5
U 55
11982 EMD-82-31
FEBRUARY 3,1982

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COMPTROLLER GENERAL OF THE UNITED STATES
WASHINGTON D.C. 20548

B-2058~76 P-VoPe8,tY Of CSC Library

US.DEPARTMENT OF COMMERCE NOAA
COASTAL SERVICES CENTER
2234 SOUTH HOBSON AVENUE
CHARLESTON , SC 29405-2413

The President of the Senate and the
Speaker of the House of Representatives

This report discusses impediments to U.S. participation in
developing the vast mineral resources on the deep ocean floor,
and offers recommendations to tbe Congress to help overcome those
impediments.

We made this review because of the considerable congressional
interest in using the seabed minerals to augment the Nation's
supply sources.

We did not obtain agency comments on this report, because,
at the time we were completing the study, the administration was
reconsidering its stance on the draft Law of the Sea Treaty and
had not taken an official position on it.

Copies of this report are being sent to the Secretaries of
Commerce, State, and the Interior; the Administrator, National
Oceanic and Atmospheric Administration; and the Director, Bureau
of Mines.

Comptroller General
of the United States

10 g

COMPTROLLER GENERAL'S IMPEDIMENTS TO U.S.
REPORT TO THE CONGRESS INVOLVEMENT IN DEEP
OCEAN MINING CAN BE
OVERCOME

DIGEST

The world's deep seabeds contain enormous
quantities of potato-shaped, metal-bearing
nodules--referred to as "manganese nodules"--
which contain potentially valuable deposits
of manganese, nickel, copper, and cobalt.
Some 20 to 30 other elements, which are not
presently considered to be economically recov-
erable, are found in the nodules in varying
amounts. (See p. 5.)

The United States is heavily import-dependent
for nickel, manganese, and cobalt, which have
all been identified as critical and strategic
materials under the Strategic and Critical
Materials Stockpiling Act (50 U.S.C. 98 et
seq.). In 1980, imports of these three
commodities alone totaled over 1 billion
dollars. (See p. 5.)

Increasingly concerned about future availabil-
ity of minerals essential to the U.S. economy
and national defense, the Congress passed the
Deep Seabed Hard Mineral Resources Act of 1980
(P.L. 96-283, June 28, 1980) to facilitate
orderly development of the deep ocean resources
by U.S. companies pending satisfactory conclu-
sion of the United Nations' sponsored Law of
the Sea Treaty. (See p. 1.)

The mining industry has invested hundreds of
millions of dollars to develop seabed mining
technology to recover the mineral resources.
In recent years, however, that investment has
declined markedly, primarily because the indus-
try, with considerable congressional support,
contends that the current draft Law of the Sea
Treaty does not offer sufficient protection for
further mining investment. (See p. 1.)

GAO undertook this review to provide the
Congress with information it may need in

Tear~b~ i END-82-31
FEBRUARY 3, 1982

ensuring proper implementation of the 1980 Act,
in offering policy guidance to the administra-
tion on the Law of the Sea Treaty negotiations,
and in responding to administration initiatives
concerning those negotiations.

FINDINGS

GAO found that full implementation of the 1980
Act is inextricably tied to the status of the
Law of the Sea Treaty negotiations. The first
stated objective of the Act is to encourage
successful conclusion of the treaty. The Act
also provides for continued seabed mining tech-
nology development and actual mining operations
pending conclusion of the treaty. (See p. 45.)

The status of the treaty and, therefore, full
implementation of the Act presently are quite
uncertain. GAO believes that the goals of the.
1980 Act are important and worth striving for
and that the Nation's interests in augmenting
reliable mineral supply sources can best be
served if it is a party to a comprehensive Law
of the Sea Treaty, but only an amended treaty
that properly addresses U.S. interests. (See
p. 45.)

Opposition to the draft Law of the Sea Treaty
has principally been focused on:

--Access to mine sites. The mining consortia
believe that they must have guaranteed
access to mine sites after they have gone
to the expense of exploring them. (See p.
15.)

--Long-term investment protection. The con-
sortia do not believe the current draft
treaty adequately assures that they will
have reasonable mining opportunities beyond
the first generation mines. (See p. 17.)

--Interim investment protection. The consor-
tia's considerable prior investment in sea-
bed mining technology will stop unless their
investments are protected. (See p. 19.)

---Production controls. The consortia fear
that these controls may preclude the possi-
bility of making a fair market return on
their investment. (See p. 20.)

--Technology transfer. The consortia oppose
mandatory technology transfer on both legal
and financial grounds. (See p. 23.)

--Dispute settlement. The consortia believe
that dispute-settling mechanisms in the
draft treaty will tend to favor developing
countries. (See p. 28.)

The mining consortia are supported in their
opposition by many members of the Congress and
the administration.

GAO analyzed each of these areas and believes
that in some of the cases, the industry concerns
are valid and their interests are not being
adequately protected. in other cases, however,
GAO believes the concerns either are not as
serious as portrayed or are premature in that
they have not yet been fully negotiated.

if there is a resurrection of U.S. deep seabed
mining activity, assuming that the major impedi-
ments to further U.S. involvement are overcome,
GAO feels that the Congress should evaluate
current industry plans for mining and disposing
of four principal nodule minerals. If it is
determined that those mining plans, which,
as now formulated, call for disposal of mangan-
ese, are not consistent with the intent of the
1980 Deep Seabed H~ard Mineral Resources Act,
the-Congress should consider amending the
legislation to assure the conservation of such
strategic and critical minerals as manganese.
(See p. 49.)

With respect to the environmental provisions of
the 1980 deep seabed mining act, GAO found that
the National Oceanic and Atmospheric Adminis-
tration (NOAA) has done considerable work on
the required~ environmental assessments. If the
United States proceeds with deep seabed mining,
it will be up to the Congress to ensure suffi-
cient appropriations to adequately assess all
environmental impacts. (See p. 49.)

RECOMMENDATIONS TO THE
CONGRESS CONCERNING THE
LAW OF THE SEA TREATY

The role of the Congress has been critical to
seabed mining activities in the United States,
and the Congress will continue to be instrumen-
tal in determining U.S. approaches. GAG recomn-
mends that the Congress:

--Accept reasonably assured access to mine
sites. The Congress should accept the fact
that guarantees for access to mine sites
are unrealistic in the absence of sovereign
rights to mineral resources; that the
absence of such absolute rights is not in
itself a fundamental shortcoming of the
draft treaty; and that reasonable access
can be provided under provisions of the
draft treaty, especially since the specifi~c
implementing rules and regulations have
yet to be negotiated. (See p. 50.)

--Insist on long-term investment protection.
The overall viability of seabed mining is
contingent upon access to mine sites beyond
first generation mining, and reasonable
assurances for that access must be pursued.
The Congress should insist that the "Review
Conference" not be capable of fundamentally
altering the terms of access. (See p. 50.)

--Reassert the need to protect interim invest-
ments. The Congress has agreed, through the
1980 Act, to the need to assure that in-
vestments made prior to entry into force of
a treaty should be protected. (See p. 51.)

--Insist on alternative means of protecting
developing countries' economies. The objec-
tive of protecting these economies, sought
with inclusion of production controls in the
draft treaty, warrants congressional sup-
port. But, because the current production
control provisions would be cumbersome to
apply and perhaps counterproductive to
investment, and certainly not the only
means of achieving the objectives, the
Congress should insist on the careful
development of alternatives for achieving

income protection objectives while minimiz-
ing disincentives. (See p. 51.)

--Ensure that compensation for transferred
technology is adequate to protect the
developer's investment, and thatrecipients
of proprietary technology safeguard it
against unauthorized disclosure.
(See p. 51.)

--Concentrate now on minimizing issues
potentially subject to dispute settlement
procedures. GAO does not believe that
acceptability and/or feasibility of dispute
settlement mechanisms can be realistically
divorced from the nature and number of
issues which might have to be subject to
formal dispute settlement procedures. (See
p. 51.)

OTHER RECOMMENDATIONS
TO THE CONGRESS

On the assumption that the United States pro-
ceeds with the Law of the Sea Treaty process,
GAO recommends that the Congress:

--Make sure that industry plans for mining
and disposing of all four primary nodule
minerals are evaluated and monitored for
consistency with conservation goals of the
1980 Act. Efforts to continue or expand
Federal research and development into new
markets for manganese should be considered.
(See p. 51.)

--Make sure that appropriate support for
environmental research is available for
NOAA's Office of Ocean Minerals and Energy,
consonant with environmental assessment
activity mandated by the 1980 Act and
necessary prior to commercial recovery
operations. (See p. 51.)

--Direct that NOAA carry out assessments of
industry pining activities. Of particular
concern should be activities which evaluate
the impacts of new engineering and equip-
ment. (See p. 52.)

At the time GAO was completing this study, the
administration was having the draft Law of the
Sea Treaty reviewed and had not taken an official
position on it. For that reason, GAO did not
obtain agency comments on this report.

CONTENTS

Page

DIGEST i

CHAPTER

1 INTRODUCTION 1
Problems Confronting Ocean Mineral
Development 1
Background 4
Prior Studies 6
Congressional Interest 6
Objectives, Scope, and Methodology 7

2 PROBLEMS ENCOUNTERED IN CCMPLETING A
'LAW OF THE SEA TREATY 10
Background and Status of the Law
of the Sea Treaty 10
Proposed United Nations' Organization
to Govern Seabed Development 12
Major Objections to Mining
Provisions of Draft Treaty 14
Access to Mine Sites 15
Long-term Investment Protection 18
Interim Investment Protection 19
Production Controls 20
Technology Transfer 23
Dispute Settlement 28

3 CAPITAL AVAILABILITY AND TECHNOLOGY
DEVELOPMENT 30
Status of Consortia Investment 30
Adequate Commercial Financing Depends
on Treaty Modifications 31

4 CONSERVATION OF SEABED MINERAL RESOURCES
MUST BE ASSURED 34
Planned Disposition of Seabed
Minerals 35
Possible Government Action Needed
to Conserve Seabed Minerals 36

Page
CHAPTER

5 ENVIRONMENTAL ASPECTS OF SEARED MINING 39
NOAA is Responsible for Determininq
and Regulating Environmental Impacts 39
NOAA is Fulfilling Environmental
Requirements of the Act 39
Environmental Inpacts Associated
with Mining Activities 40
Environmental Impacts Associated
with At-Sea Nodule Processing 41
Environmental Impacts Associated
with Transportation of Nodules
to Port 41
Processing Waste Disposal is a
Major Environmental Consideration 42
Some Concerns About Manganese Nodule-
Mining and Processing Voiced by
Environmental Organizations 43

6 CONCLUSIONS AND RECOMMENDATIONS 45
Conclusions 45
Conclusions Regarding the Law of
the Sea Treaty 45
Treaty offers reasonable
assurance of access to
mine sites 45
Long-term investment
protection is needed 46
Interim investment protection
remains to be negotiated 47
Production controls threaten
mining economics 47
Technology transfer provisions
should be modified 48
Areas of potential dispute
must be minimized 4P
Conclusions Concerning Mineral
Conservation 49
Conclusions Concerning Environmental
Protection 4
Recommendations 50
Recommendations Concerning the Law
of the Sea Treaty 50
Recommendations Concerning Mineral
Conservation 51
Recommendations Concerning Environ-
mental Protection 51

Page
APPENDICES

I PROPOSED DEEP SEABED MINING
LEGISLATION: 1971-1980 53

II TECHNOLOGY TRANSFER: FAIR AND
REASONABLE COMMERCIAL TERMS
AND CONDITIONS 54

III PRINCIPAL ENVIRONMENTAL PROTECTION
FEATURES OF P.L. 96-283 WHICH
NOAA IS REOUIRED TO ACCOMPLISH 56

ABBREVIATIONS

CLSP - Center for Law and Social Policy

DOMES - Deep Ocean Mining Environmental Study

GAO - General Accounting Office

NOAA - National Oceanic and Atmospheric Administration

OOME - Office of Ocean Minerals and Energy

PEIS - programmatic environmental impact statement

UNCITRAL - United Nations Conference on International
Trade Law

I
I
I
I
i

CHAPTER I

INTRODUCTION

increasingly concerned about future availability of minerals
essential to the U.S. economy and national defense, the Congress
passed the Deep Seabed Hard Mineral Resources Act of 1980 (P.L.
96-283, June 28, 1980) in an effort to encourage commercial recov-
ery of abundant mineral resources found on the deep ocean floor.
The Act was to facilitate orderly exploration and development of
the deep, ocean resources by U.S. companies pending satisfactory
conclusion of the United Nation's sponsored Law of the Sea Treaty
which, when formally ratified, would govern treaty signatories'
development of these resources.

Due to widespread congressional interest in these issues, we
evaluated the status of implementation of the 1980 Act and imipedi-
ments to achieving its objectives. We found that some progress
was being made, but not all objectives of the Act were being
achieved. The major impediments to continued U.S. involvement in
deep sea mining stem from strong industry, congressional, and
administration opposition to many of the mining provisions in the
draft Law of the Sea Treaty. We agree that a number of the provi-
sions need modifications and offer recommendations to the Congress
to help remove these impediments.

PROBLEMS CONFRONTING OCEAN
MINERAL DEVELOPMENT

in addition to generally poor market prices and high interest
rates that have discouraged investment, there are two primary
factors limiting recovery of ocean minerals. in the first place,
deep seabed mining is a very expensive venture for which all
necessary technology has not yet been developed. Secondly, there
are unresolved legal questions regarding ownership of resources
in international waters.

Due to the very high costs of developing the necessary
technology to explore and recover deep seabed minerals, companies
have banded together to form multi-national consortia in order
to reduce costs and share the risks. As shown in table 1, there
currently are four major ocean mining consortia in which U.S.
companies are involved.

Although the consortia have invested hundreds of millions of
dollars to develop the technology necessary to explore and mine
the deep seabed, much remains to be done. Current estimates are
that it'will take at least 10 years and over one billion dollars
before a full-scale commercial mining operation could be in place.

Concerning the legality of mining the seabed, the unilateral
recovery of seabed mineral resources by any nation is the subject

TABLE 1

Major Mining Groups

Percentage share
holdings in outstanding
commom Stock
Ocean Mining Associations (OMA) (at present holly
DEEPSEA Ventures, Inc. osned by US natis) Ocean Management, Inc. (OMI) Nationality

Essex Minerals Co. (U.S. Steel) 19.35% International Nickel (INCO), Ltd. Canada
Union Seas, Inc. (Union Miniere 19.35% AMR (composed of
S.A.-Belgium) Metallgesellschaft AG, Preussag
Sun Ocean Ventures, Inc. (The 19.35% AG, & Salzgitter AG) FRG
Sun Company-U.S.) 19.35% Deep Ocean Mining Co., Ltd.
Sanaim Ocean, Inc. (Sociera (DOMCO) (composed of
Azionaria Minero Metallurgica Sumitomo, Nippon Mining,
S.P.A., E.N.l.-italy) Dows Mining, and others) Japan
Tenneco Corporation (Tenneco 22.60% SEDCO, Inc. USA
Inc.-U.S.)

Kennecott Corporation (Operator) Nationality Ocean Minerals Company (OMCO) Nationality

Kennecott Corporation USA Amoco Ocean Minerals Co. USA
Rio Tinto Zinc Deep Sea Mining Standard Oil Co. of Indiana )
Enterprises, Ltd. UK Lockheed Systems Co., Inc USA
Consolidated Gold Fields, Ltd. UK (Lockheed Corporation)
Noranda Exploration, Inc. USA Ocean Minerals, Inc.
Mitsubishi Corporation Japan composed of:
British Petroleum Development, Ltd. UK Lockheed Missiles & Space Co.
Inc. (Lockheed Corporation) 41.1% USA
Billiton, B.V. (Royal Dutch/Shell) 45.5% UK/Neth.
BRW Ocean Minerals (Royal Bas
Kalis Westminister Group N.V. ) 13.4% Netherlands

NOTE: Pursuant to the purchase of Kennecott Corp.
by Standard Oil of Ohio, in which B.P. Ltd.
holds 53 percent interest, B.P. has majority
control of the Kennecott group.

SOURCE: Data in table 1 extracted from Soundings, The United Methodist Law of the Sea Project,
Vol VI, No. 1, April- May 1981...

of dispute. The guiding theme of the Law of the Sea Conference,
as it pertains to seabed resource recovery, has been the 'common
heritage of mankind' concept. This concept was first brought to
the attention of the United Nations in 1967, and subsequently set
forth in the 1970 "Declaration of Principles Governing the Sea-Bed
and the Ocean floor, and the Subsoil thereof, beyond the Limits
of National Jurisdiction," United Nations General Assembly Resolu-
tion 2749 (XXV). While the common heritage concept has received
prominent attention, there has never been any kind of consensus
on its definition. In fact, a stated objective of the 1980 Deep

Seabed Hard Mineral Resources Act is to encourage successful con-
clusion of the Law of the Sea Treaty wherein the common heritage
concept will be given legal definition.

In view of the many years of investment yet needed to develop
the technology to recover seabed minerals on a commercial scale,
the Congress determined that domestic legislation was necessary to
encourage continued investment so that these minerals could be
available when needed. Consequently, the 1980 seabed mining act
was passed to establish an interim legal regime under which tech-
nology development and mineral exploration and recovery involving
U.S. companies could proceed pending final resolution of a Law of
the Sea Treaty. That resolution is quite uncertain at this moment.
Private industry investment to develop seabed mining technology
has markedly declined. The primary reason is that the mining
industry, with considerable congressional support, contends that
the current draft treaty does not offer sufficient protection for
further mining investment. This is a main reason why the adminis-
tration is having the entire treaty restudied.

Pending ratification of the Law of the Sea Treaty, which
could take as long as six or seven years after the treaty negoti-
ations have been successfully resolved, the National Oceanic and
Atmospheric Administration (NOAA), under the authority of the 1980
act, has proceeded to conduct environmental assessments and estab-
lish licensing procedures to govern exploration and development of
deep seabed mineral resources by U.S. firms. In addition, NOAA has
initiated actions to establish a "reciprocating states agreement,"
required by the 1980 act, under which nations having the capability
to mine the deep seabed would agree to respect the mining claims
of other such nations.

Along with the licensing procedures, the reciprocating states
agreement was seen as a desirable part of an interim legal frame-
work to permit seabed mining pending adoption of an international
treaty. Current parties to reciprocating states negotiations in-
clude the United Kingdom, France, Belgium, Japan, the Netherlands,
and West Germany. Progress bas been made in developing these
interim procedures, and the countries involved have been consider-
ing using them as a longer term 'mini treaty'. Whether seabed min-
ing operations, especially commercially financed U.S. operations,
would take place under them in the absence of a comprehensive Law
of the Sea Treaty is highly uncertain. As discussed in chapter 3,
the principal financial institutions that underwrite seabed mining
ventures told us they would not finance further technology develop-
ment or actual mining operations--which was envisioned under the
1980 act--without a satisfactory Law of the Sea Treaty, and that
they did not consider the reciprocating states agreement as a
viable alternative. In addition, during a November 1981 briefino
of the President's Law of the Sea Advisory Committee, his Special
Representative to the Law of the Sea Conference indicated the
strong likelihood that without a Law of the Sea Treaty, to which
the United States is signatory, "there will be no seabed mining
industry in the United States."

According to participants and observers at the Law of the
Sea Treaty negotiations, it is increasingly likely that a United
Nations' sponsored treaty will be concluded and ultimately ratified.
The key questions are whether the United States will be a signatory
to that treaty, or whether it will contemplate further support for
some form of a reciprocating states "mini treaty."

BACKGROUND

Known land-based resources of minerals worldwide are adequate
to meet the demands of a growing world economy for many years to
come. However, access to these minerals is less certain, partic-
ularly in the case of those for which the United States is highly
import-dependent.

Deep ocean mining has received widespread attention in recent
years because the seabed offers a potential increased supply of
minerals currently important to the U.S. economy and national
defense; it offers the potential to improve the U.S. balance of
payments position; and it offers a 'diversity of supply for minerals
upon which the United States is highly import-dependent.

Ocean mining involves the commercial recovery of metal-bearing
nodules (referred to as "manganese nodules") which are found on the
world's seabeds. Primary commercial interest is in those nodule
deposits found in three to five miles of water. These deep seabeds,
ocean areas beyond national jurisdictions, constitute vast areas
estimated at about one half the earth's surface. World distribution
of manganese nodules is shown in figure 1 below.

FIGURE 1
WORLD DISTRIBUTION OF SURFICIAL MARINE MANGANESE NODULE
DEPOSITS BASED ON CORE AND DREDGE DATA

~~~ ~ ~ ~ ~~~~~~*FE~~~~RROMANGANESE
CHINA NORTH DEPOSITS
AMERICA .

...~~~~~~~~.. .%. ..~ . ' . ~ ~�.

� HSoaM.. W D it:'
pp. 46..
:'. , ~,~: .;':
c~~~~~~~~~~~~~'2 '*:.*
�~~~ .

Source: Horn, 0., 8. Horn, and M. Delach, 1972. Worldwide Distribution and
Metal Content of Deep-Sea Manganese Depoaita in Manganese Nodules
in the Pacific, Symposium/Workshop Proceedings, October 16-17, 1972.
Department of Planning and Economic Development, State of Hawaii,
pp. 46-60.

These areas contain enormous quantities of the potato-shaped
nodules which contain potentially valuable deposits of manganese
(about 24 percent by volume), nickel (about I percent by volume),
copper (about .53 percent by volume), and cobalt (about .35 percent
by volume). Metal content varies, 'however, from one location to
another. Some 20 to 30 other elements, which are not presently
considered to be economically recoverable, are found in the nodules
in varying amounts. Estimates are that U.S. requirements for the
four major minerals could be totally met for decades with commercial
recovery of manganese nodules.

The United States is heavily import dependent for nickel,
manganese, and cobalt. In recent years, we have imported about 98
percent of our cobalt, principally from Zaire; about 97 percent of
our manganese, principally from Gabon and South Africa; and about
73 percent of our nickel, principally from Canada. In 1980, imports
of these commodities alone totaled over I billion dollars. The
three minerals 'have all been identified as critical materials under
the Strategic and Critical Materials Stockpiling Act (50 U.S.C. 9S,
et seq.). Manganese is an essential component in iron and steel
production. Cobalt is critical to the basic tools industry and in
applications such as high-temperature resistant alloys for jet
engines. Nickel is critical because it imparts corrosion resis-
tance, strength, and other properties to alloy steel.

It is worthwhile noting that the economic attractiveness of
the seabed as a source of increased world nickel production capacity
is enhanced by the prospect of difficulties with future land-based
production. According to a Canadian mining company official
(Canada is the world's leading nickel producer), maximum new land
based world supply is estimated at about 1.6 billion pounds of
nickel per annum, plus about 100 million pounds of anticipated
"definite" capacity additions. (Total world production in 1980 was
1.44 billion pounds.) He stated that should additional land-based
production capacity be required

II* * * it will be expensive capacity. This relates
to the preponderance of laterites in the world nickel
ore reserve picture, and the expense incurred in both
developing (remote locations) and operating (energy costs)
these deposits. For just these reasons, there are no
major nickel projects scheduled to get "off the drawing
board" beyond the 100-plus million pounds of additions
mentioned earlier."

The Congress has long been interested in the commercial re-
covery of seabed minerals to reduce U.S. dependence on the export
policies of other countries. Recognizing that America's industrial
and defense mineral requirements will continue to expand and that
dependence on foreign minerals will continue to be risky, the
Congress has promoted the development of the deep seabed metal-
bearing nodules.

Additionally, through the expenditure of hundreds of millions
of dollars, private industry has demonstrated a long-standing
interest and commitment to develop ocean mineral resources.

PRIOR STUDIES

We have issued a number of reports on this general subject.
In a 1976 report 1/, we addressed the need to complete NOAA's
environmental assessment studies to resolve environmental impact
questions. In a 1978 report 2/, we identified the need for domes-
tic legislation to resolve potential seabed mining constraints
having to do with guaranteed site tenure and environmental impact
assessments. In addition, we have issued a series of reports on
the continuing Law of the Sea Treaty negotiations.

CONGRESSIONAL INTEREST

Since 1971, when the first deep seabed mining bill was intro-
duced, legislation has been introduced in every Congress from the
92nd through the 96th when the 1980 Act was passed and signed. 3/
Bills have been introduced and hearings held by over a dozen
committees and subcommittees during that period.

A 1980 report 4/ of the Defense Industrial Panel of the House
Armed Services Committee reflects the nature not only of defense
industry concerns but also of general congressional interest in
developing alternative supply sources:

"A shortage of critical materials, combined with a
resulting dependence on uncertain foreign sources
for these materials, is endangering the very foun-
dation of our defense capabilities. These shortages
are a monumental challenge to the Congress, the
Department of Defense, the defense industry, and the
civilian economy."

Given this widespread congressional interest in recovering
deep seabed minerals and in accomplishing the objectives of the

l/"Deep Ocean Environmental Study--Information and Issues,"
PSAD-76-135, Sept. 21, 1976.

2/"Deep Ocean Mining--Actions Needed to Make it Happen,"
PSAD-77-127, June 21, 1978.

3/Appendix I shows the progress of seabed mining legislation
since the introduction of the first mining bill in 1971 to
passage of P.L. 96-283.

4/"The Ailing Defense Industrial Base: Unready For Crisis,"
Committee on Armed Services, House of Representatives, Commit-
tee Print No. 29, Dec. 31, 1980, p. 1.

1980 deep seabed mining act, and given the uncertainty of the
administration' s position on the pending Law of the Sea Treaty,
we undertook this review to provide the Congress with information
it may need in responding to administration initiatives.

The Chairman and the ranking minority member of the National
Ocean Policy Study, administered by the Senate Commerce Committee,
and the Chairman of the Subcommittee on Mines and Mining of the
House Interior and Insular Affairs Committee have requested that
we provide them with the results of the review.

OBJECTIVES, SCOPE AND METHODOLOGY

In this study, we sought to determine whether the Congress'
stated purposes in passing the 1980 deep seabed mining act were
being achieved and to identify the primary impediments to their
successful implementation.

Stated purposes of the act are:

--To encourage successful conclusion of a Law of the
Sea Treaty.

--To establish an international revenue sharing fund.

--To establish an interim program to regulate exploration
and commercial development of seabed minerals.

--To accelerate necessary environmental assessment programs,
and encourage the conservation of such resources while
promoting the safety of life and property at sea.

--To encourage continued development of necessary mining
technology.

While we did not attempt to evaluate the overall merits of
the Law of the Sea Treaty, we did analyze those provisions dealing
with seabed mineral development that most appeared to stand in the
way of realizing congressional objectives.

In the event that an acceptable Law of the Sea Treaty cannot
be negotiated, other options might be available. Some form of the
previously mentioned reciprocating states alternative might be
considered an option to the treaty, and be extended beyond its
originally intended interim scope. There are other options which
are outside the scope of this study. For example, the United States
might depend on access to deep ocean mineral supplies through an
international authority or mining consortia headquartered in other
countries, or it might rely on alternative forms of government-to-
government negotiations and agreement as to how deep ocean minin
might be sponsored and protected, either through private sector
agents or governments directly. These two options would surface
sets of issues for government policy decisionmaking requiring

analyses and assessments different than and independent from the
kinds of issues considered in this report.

Ultimately, the viability of any option could be determined
by how critical the Nation perceives the need for developincg
alternative mineral supply sources. This study, 'however, does
not attempt any min~eral-specific assessment of criticality.

During the course of the review, we had interviews with and
reviewed documents provided by officials from the Departments of
Commerce, State, the Treasury, and the Interior; the Congressional
Research Service; the American Mining Congress; industry trade
associations; investment bankers; House and Senate committee staff
members; officials of the tUnited Nations; academic institutions
actively involved in seabed mining issues, such as the Center for
Ocean Law and Policy at the University of Virginia, and the Ocean
Coastal Law Program at the University of Miami School of Law; the
four principal ocean mining consortia; and representatives from
concerned environmental groups, notably the Center for Law and
Social Policy.

Our review addresses policy'and related actions deserving
congressional attention if commercial recovery of seabed mineral
resources is to become technically and economically feasible dur-
ing the coming decade. This was the intent of the 1980 Act.

We identified three problem areas that we believe are most
deserving of congressional attention and further policy guidance
as they are impediments to deep seabed mineral resource recovery.
Of top priority were present impediments to successful conclusion
of a Law of the Sea Treaty. Issues related to resource conserva-
tion and protection of the ocean environment were also deemed in
need of priority congressional review. We found that progress was
being made toward other policy objectives of the 1980 Act, such as
establishing an interim revenue sharing fund, licensing procedures,
and the reciprocating states agreement.

The Congress will continue to play a major role in developing
policy guidelines for ocean mineral development because of its
involvement in the Law of the Sea Advisory Committee, review and
evaluation of the new administration's position on the Law of the
Sea Treaty, treaty ratification hearings, and implementing legis-
lation. These responsibilitie's provide the Congress with a con-
tinuing opportunity to assure that the commercial recovery of
seabed mineral resources is realized in the most orderly manner.

In chapter 2, we address those provisions of the Law of the
Sea Treaty that are impediments to successfully concluding the
treaty. Chapter 3 addresses the availability of capital to finance
the development of seabed mining technology and, eventually, seabed
mineral exploration and development. In chapter 4 we address the
need to ensure that seabed mining operations do not inadvertently
cause the waste of other potentially valuable mineral resources.

Chapter 5 addresses the environmental aspects of seabed mining and
the progress NOAA has made in assessing environmental impacts.
Chapter 6 presents our conclusions and recommendations.

CHAPTER 2
PROBLEMS ENCOUNTERED IN COMPLETING A
CO MPREHENSIVE LAW OF THE SEA TREATY

In 1970, the United Nations' General Assembly adopted Resolu-
tion 2749 which stated that "the seabed and ocean floor and subsoil
thereof beyond the limits of national jurisdiction, as well as the
resources of the area, are the common heritage of mankind," and
that "no state or person natural or juridical shall claim, exercise,
or acquire rights with respect to the area or its resources incom-
patible with the international regime to be established and the
principles of this declaration." The United States supported this
declaration of concepts, while still maintaining in principle the
right of U.S. companies to engage in mining the deep seabed.

By passing the 1980 deep seabed mining act, the Congress con-
cluded ten years of effort to pass domestic legislation which, among
other goals, was intended to facilitate the successful completion
of a United Nations Conference on the Law of the Sea. Negotiations
at the United Nations, however, are facing an uncertain future main-
ly because of strong opposition to certain draft treaty provisions
from private industry, many members of the Congress, and members
of the administration.

The draft Law of the Sea Treaty is generally seen by develop-
ing countries as adequate to meet their concerns about seabed
mineral development. In addition, previous U.S. negotiators,
though agreeing that certain flaws in the treaty text need to be
overcome, see the text as an unprecedented achievement in multi-
lateral negotiation, accommodating diverse national interests.

In this chapter, we discuss the current status of the Law of
the Sea Treaty, and the major concerns over the treaty's mining
provisions that have prompted the U.S. Government to reevaluate it.

BACKGROUND AND STATUS OF THE
LAW OF THE SEA TREATY

The Third I/ Law of the Sea Conference was convened in 1973
with a primary goal, among others, of formulating a legal inter-
national regime to govern the exploration and recovery of seabed
resources beyond national jurisdictions. Through seven years of
negotiations, agreement has been reached on many other important
issues while seabed mining issues have proved most difficult to
resolve.

The difficulty of negotiating an acceptable treaty among more
than 150 nations representing a wide diversity of levels of economic

I/The current Law of the Sea Conference is the third plenipoten-
tiary meeting sponsored by the United Nations to draft a treaty
addressing certain unresolved problems developing from the
increased use of the oceans.

development and national interests is apparent. The difficulty is
magnified by basic conflicting objectives regarding seabed mineral
resources. Developing nations which are land-based producers of
these commodities look upon the seabed minerals as a threat to their
economies, whereas the major consumers of the commodities look upon
seabed development favorably, because it can ultimately reduce
their costs.

Developing countries have sought from the beginning of Law of
the Sea negotiations to assure that a system evolved which would
guarantee them economic benefits from seabed mining operations and
provide the technological capability to mine the seabed themselves.
They have fought hard for a strong voice in managing seabed mineral
development as well as for means to protect developing country land-
based producers of minerals which would face competition from devel-
opment of ocean resources.

In 1976, the Secretary of State responded to developing country
seabed mining concerns by making proposals aimed at development of
a "parallel system," whereby seabed mineral development could pro-
ceed both by private or national firms as well as under the auspices
of an international mining regime representing the interests of all
nations. These proposals included means for financing an interna-
tional authority to govern seabed mining, means for assuring the
availability of technology for these countries, and procedures for
setting up conferences to review major provisions of a comprehensive
international treaty. Earlier in 1976, the United States had pro-
posed establishing mechanisms to limit production during an initial
temporary period.

Since 1976, negotiations have centered on efforts to assure
that the interests of all countries are represented in a basic
"parallel system." The current draft treaty reflects compromises
between the demands that developing and developed countries have
made. The treaty provisions have all been carefully negotiated
with the objective of balancing the national interests of about 150
nations without, at the same time, constituting an unmanageable
framework for commercial recovery. Although mining company
officials have tried to assure that access to mine sites would be
guaranteed under treaty provisions, and that the opportunity to make
a fair market value return would not be precluded, they contend that
their continuing efforts to develop the technology needed to mine
the seabeds are severely impaired due to the impending draft text.
Some industry representatives oppose the basic tenets of the "paral-
lel system." However, mining company representatives principally
object to the way that the parallel system is to be implemented
in the current draft treaty.

The fundamental conflict over the adequacy of the protection
of United States interests has resulted in at least a temporary
standstill in the negotiations. The United States has asked for
"time out" so that the new administration can have the opportunity
to thoroughly reevaluate the current draft treaty. The administra-
tion's decision to reevaluate the treaty stems mainly from strong

congressional, private industry, and administration concerns that
the treaty, as now written, would not be in the United States' best
interest. Consequently, the ability to conclude a treaty which is
acceptable to the international -community while providing adequately
for U.S. interests, as well as the interests of the seabed mining
consortia, is currently uncertain.

PROPOSED UNITED NATIONS' ORGANIZATION
TO GOVERN SEABED DEVELOPMENT

As currently proposed in the draft Law of the Sea Treaty, deep
seabed mineral development would be governed by an International
Seabed Authority (see figure 2) consisting of an Assembly, a Coun-
cil, a Secretariat and an Enterprise. The Assembly is the supreme
6-r-an which provides general policy direction, elects the Council,
elects the Secretary-General to run the Secretariat, and elects the
Governing Board and Director General of the Enterprise. The Coun-
cil is the executive organ of the Authority, responsible for super-
vising and coordinating implementation of the treaty, issuing
directives to and exercising contro'l over Enterprise activities,
etc. The Secretariat provides administrative support, and the
Enterprise is the operating arm of the Authority.

Additionally, means are established by the draft treaty for
settling disputes between parties or disputes relating to the
interpretation or application of the comprehensive treaty.

All signatory nations to the Law of the Sea Treaty are members
of both the international Seabed Authority and its related Assembly.

The Council will consist of 36 members of the Authority elected
by the Assembly. Each member of the Assembly has one vote. The
election is to take place generally as follows:

--Four members from among the nations having the largest
investments in deep ocean mining, including at least one
"Eastern (Socialist) European " nation.

--Four members from among those major consuming and/or
importing nations, including one "Eastern (Socialist)
European" nation.

--Four members from among the major exporting nations of
those minerals to be mined from the seabed, including "at
least two developing countries whose exports of such
minerals have a substantial bearing upon their econo-
mies. ..

--Six members from among developing nations representing
special interests including-large populations, land-
locked or geographically disadvantaged, major importers
of the minerals to be mined on the seabed, potential
producers of such minerals, and least developed nations.

INTERNATIONAL SEABED AUTHORITY
ORGANIZATION AND FUNCTIONS

IINTERNATIONAL SEA-BED AUTHORITYJ

I ~ ~~~~~ASSEMBLY
COUNCIL supreme organ
executive organ members of Authority
36 members (specific numbers allocated establishes general policy
to special categories by Treaty) decisions by tiered voting structure
decisions by tiered voting structure elect Council
establishes, in conformity with Treaty Et elects Secretary-General
general policies of Assembly specific selects Sea-Bed Disputes Chamber
policies of Authority elects Governing Board & Director-General
supervises Et coordinate implementation of Enterprise I SECRETARIAT
of Treaty approves assessment of contributions to
propose Secretary-General candidates to budget ISecretary-General - chief
Assembly considers Et approves budget j administrative officer
recommend to Assembly candidates for adopts rules, regulations, Et procedures for
ENTERPRISE Enterprise Governing Board Et equitable sharing of financial benefits
Director-General establishes systemn of compensation
(A ~~~operating arm of Authority enter into agreements with other inter- suspends members
carries out activities in Area directly national governmental organizations final adoption of rules, regulations, Et
activities subject to directives Et control on behalf of Authority, subject to procedures after provisional adoption by
of Council Assembly approval Council
operates 8- is structured in conformity issue directives to Enterprise Et exercise adopts financial regulations
with Part Xi Et Annex III of Treaty control over Enterprise activities
approve plan of work for conduct of activities
exercise control over all activities in area
adopt measures to protect against
adverse economic effects
make recommendations to Assembly for
system of compensation
adopt Et apply provisionally, rules,
regulations, Et procedures
review collection of all payments
recommend to Assembly rules on equitable
sharing of benefits
submit budget to Assembly
recommend suspensions of members

Economic Planning I Legal and
I omsso Technical
~~~~~~Commission Cmiso

SOURCE: Draft Convention on the Law of the Sea, October 1, 1981

--Eighteen members to assure equitable geographical
distribution with at least one member each from Africa,
Asia, Eastern Europe (Socialist), Latin America and
Western Europe and others.

The nominations for Council seats will be made through a "caucus
nomination" process; whereby, the members of the categories listed
above will nominate candidates from among their group. This is to
assure that each group's interests are represented.

As indicated, "Eastern (Socialist) European" nations are
guaranteed at least three seats on the Council. Many of those who
oppose the mining provisions in the current draft treaty see this
as another potentially harmful situation for U.S. interests. They
believe this may lead to a voting imbalance on the Council and
could ultimately affect the access of U.S. mining companies to the
seabed minerals since there is no assurance the United States will
be represented on the Council.

The Enterprise shall, at the direction and control of the
Council, directly carry out activities including mining, trans-
porting, processing, and marketing seabed minerals.

The Enterprise is envisioned as representing the interests of
all nations. it will have the right to purchase most of the mining
technology employed by the mining consortia, and will receive con-
siderable funding in the form of application fees, ground rents,
production charges, and profit-sharing charges that the mining
consortia would be required to pay.

The funding and technology transfer provisions of the draft
treaty are designed so that the Enterprise can undertake actual
mining operations. This is to assure that developing nations can
participate in and benefit from the mining itself rather than
simply share in royalties paid by the mining consortia.

MAJOR OBJECTIONS TO MINING
PROVISIONS OF DRAFT TREATY

The key concerns raised by the seabed mining consortia to the
currently defined parallel system have to do with:

--Access to mine sites. The consortia believe that they
must have guaranteed access to mine sites after they have
gone to the expense of exploring them. They contend that
the present draft treaty does not give this guarantee.

--Long Term Investment Protection. The consortia do not
believe the current draft treaty adequately assures
that they will have reasonable mining opportunities
beyond the first generation mines.

--interim investment protection. The consortia have made
considerable investment in developing seabed mining
technology, but say these investments will stop unless

they are given adequate assurances that they will be
able to recover costs incurred on mine sites prior to
entry into force of an international accord.

--Production controls. The current draft treaty provides
for production controls to protect the land-based min-
eral industries. The consortia fear that these controls
may preclude the possibility of making a fair market
return on their investments.

--Technology transfer. The treaty provides for mandatory
transfer of technology at "fair and reasonable commercial
terms and conditions" to the Enterprise and to developing
countries. The consortia oppose this on both legal
and financial grounds.

--Dispute settlement.' The draft treaty provides
several means for resolving any disputes. The
consortia believe these dispute-settling mechanisms
will tend to favor developing countries.

Access to Mine Sites

The draft treaty reflects the need for "the enhancing of oppor-
tunities for all States Parties, irrespective of their social and
economic systems or geographical location,.to participate in the
development of the resources of the Area and preventing of monopo-
lization of activities in the Area." Since the resources belong to
all mankind, no "State or natural or juridical person shall claim,
acquire or exercise rights with respect to the minerals of the Area
except in accordance with the provisions of this Part."

W'hile the United States accepts the concept of common heritage
regarding these resources, it requires, under the 1980 deep seabed
mining act, that any international agreement to which the United
States becomes party must "provide assured and nondiscriminatory
access, under reasonable terms and conditions, to the hard mineral
resources of the deep seabed for United States citizens..."

Exploration activities as provided for in the draft treaty are
to be carried out under a plan of work approved by the Council.
Exploration is to be carried out only in areas specified in the
plan of work, and under rules, regulations, and procedures speci-
fied therein. The plans confer on the operator exclusive rights
for the exploration of the specified categories of resources in
the specified area. However, each application for a mine site will
be for an area sufficiently large to support two separate mining
operations, one of which (the "reserved" site) will be set aside
solely for the conduct of activities by the Authority. Applicants'
plans of work will be evaluated on the basis of compliance with
basic rules and regulations, nationality of applicant, financial
and technical capabilities of the applicant, and acceptance of
control by and policies of the Authority with respect to activities
in the area.

In the view of some mining industry officials, after bearing
exploration costs, the applicant has no assurance that the Enter-
prise will not be able to mine even the 'unreserved' site. We
believe that for the Authority not to allow the exploring firms or
consortia to develop the unreserved site would be contrary to the
basic premises on which the parallel system was established. Fur-
ther, the treaty provides that even the reserved area shall not be
designated as such, until a plan of work for the nonreserved area
is approved and the contract actually signed.

A second major "access" problem concerns decisionmaking on
applications for access to mine sites. The Council's Legal and
Technical Commission will review and make recommendations on all
applications for access. Although the current text provides for
virtually automatic approval of contracts that are recommended for
approval by the Legal and Technical Commission, the outcome of the
Commission's decisionmaking process itself remains the greatest
threat to assured access to mine sites.

in the Council, there is a tiered voting structure requiring
approval anywhere from a simple majority up to a consensus depend-
ing on the importance of the particular issue. Consensus issues
currently include proposed measures to protect developing countries
from adverse effects on their economies due to seabed mining (i.e.
production controls); revenue sharing measures; rules and regula-
tions relating to prospecting, exploration and exploitation of the
area; and amendments regarding the seabed mining provisions.

Any nation having a seat on the Council would be able to block
the vote on any consensus issue. While the members of the Council
have not been selected and there is no assurance that the United
States or any other specific nation will have a seat, the draft
treaty does assure that Eastern European (socialist) nations will
have at least three seats. As discussed on p. 12, the draft treaty
also assures that the Council membership will include nations with
similar interests to the United States, if not the United States
itself. Many believe having like minded nations on the Council
would assure that U.S. interests are adequately protected on con-
sensus voting issues. others, however, believe that the United
States must have a guaranteed Council seat in order to protect
its interests. The anticipated admininstration position will be
to strive for direct U.S. representation on the Council.

if the Legal and Technical Commission recommends approval of
an application, the Council will approve the plan unless a Council
member makes a written objection charging noncompliance with basic
qualification requirements. After a conciliation process, the only
way for the Council to overturn a Commission recommendation to
approve a plan would be by a consensus (excluding the sponsoring
state) vote for disapproval.

The Legal and Technical Commission, which is charged with
reviewing work plans and making recommendations as to approval or
disapproval for access, is to be composed of members having qualifi-
cations in relevant fields and representing an equitable geographic

distribution. However, given that these members will be elected by
the Council, not the Assembly, the Commission's makeup will most
likely reflect the Council. makeup.

'The draft treaty calls for the highest degree of professional
competence for Commission members, the application of non-political
criteria in their selection, and the provision of explicit reasons
for any negative decisions rendered. Although Annex III of the
draft treaty identifies procedures to be used by the Legal and
Technical Commission, the actual criteria to be employed in Commis-
sion decisions on access applications have not yet been clearly
defined. Further definition of criteria to be used would reduce
uncertainty regarding Commission deliberations. Some believe the
logical forum for the clarifications would be the contemplated
Preparatory Commission which is to be convened subsequent to draft
treaty signature to prepare all rules, regulations, guidelines,
etc., required prior to final treaty ratification. Cthers believe
these criteria should be resolved during the treaty negotiations,
because it is mandatory for a nation to sign the treaty before it
can participate on the Preparatory Commission.

With regard to demands for unrestricted access to mine sites,
it appears that the United States is increasingly alone in insisting
on such guarantees. According to one source:

"The question of who is to mine the resources of the Area,
and at what pace, will be determined by the system or
rules granting access. The question of access in general
has already been discussed as it pertains to the relation-
ship between the Enterprise and the mining companies. In
addition to a strong North-Scouth disagreement regarding this
relationship--and unlike any issue discussed thus far--there
is also a significant split among mining nations themselves
over access. More specifically, the United States is
virtually isolated in the world community in its insistence
upon guaranteed access to the Area for all technically
qualified enterprises on a nondiscriminatory basis." I/

Given the nonnational ownership status of seabed mineral
resources in waters beyond national jurisdictions, some discre-
tionary power over the disposition of those resources by the
International Seabed Authority is to be expected. However, with
further definition of criteria to be used by Legal and Technical
Commission members (to be established in Preparatory Commission
meetings) and if combined with insistence on the application of
non-political criteria by Legal and Technical Commission members
in evaluating applications, it would appear that nondiscriminatory
access could be achieved.

1/Deep Seabed Resources, Politics anG Technology,
Jack N. Barkenbus, Macmillan Publishing Co.,
Inc., 1979, p. 139.

Long-Term Investment Protection

A second major concern of the ocean mining industry pertains
to mining beyond first generation ventures. Eecause of the new;ness
of technology for recovering seabed minerals, and the vast finan-
cial outputs for research and development, first generation seabed
mining is not projected to provide companies a profit on develop-
mental investments. Fair market return levels of profits may not
accrue until second and third generation mining. Consequently, the
extent to which mine sites will be available in the future is a
major factor in even current private sector investment decisions.

While some assurance that mining companies can continue mining
beyond first generation mining contracts is necessary, the draft
treaty is open ended in that changes in the basic principles of the
parallel system are possible which could deny private mining coin-
panies the right to mine independent of the enterprise. The draft
treaty provides for "periodic reviews" (every five years after
mining begins) of the international regime, and a Review Conference
(15 years after mining begins) to consider amendments to the mining
system (not to existing contracts).

The purpose of the periodic review by the Assembly is to
"undertake a general and systematic review of the manner in which
the international regime of the Area established in this convention
has operated in practice." The purpose of the Review Conference
by the Assembly is to "...consider in detail, in the light of the
experience acquired during that period, whether the provisions of
the Part governing the system of exploration and exploitation of
the resources of the Area have achieved their aims in all respects--
taking into particular consideration the interests and needs of
the developing States."

The provisions for the Review Conference exist because the
developing countries have taken the position that the parallel sys-
tem must be a temporary one unless there is agreement at the Review
Conference to continue it.

The miners state that the Review Conference provisions in the
treaty would allow changes in the basic rules in the middle of the
game, and that conditions essential for economically viable mining
could be altered.

,in the periodic review, the Assembly is allowed to adopt
measures to improve the regime. Since neither "measures" nor
"improvements" are defined, the Assembly appears to be left with a
good deal of discretionary power.

The Review Conference has 5 years to come to an agreement
about proposed changes. if agreement is not reached at that
time, the conference has one more year to decide, by two-thirds
vote on proposed amendments, which must then be ratified by
two-thirds of the member nations.

Rights under existing contracts are protected against changes
from either the periodic reviews or the Review Conference. The

treaty states that contracts "shall provide for security of tenure.
Accordingly, it shall not be revised, suspended, or terminated..."
except in accordance with certain articles. One article provides
for penalties for illegal activities. Another article protects
against unwanted revision of contract, stating that "Any contract
... may be revised only with the consent of the parties."

While first generation production is protected from review
conference proceedings, we believe the mining companies have a
legitimate concern about future access, a concern that must be
addressed in future negotiations.

Interim Investment Protection

In passing the 1980 Deep Seabed Hard Mineral R~esources Act,
Congress cited as a principal objective of the Act that it
encourage the continued development of technology necessary to
recover the hard mineral resources of the deep seabed. A major
impediment to accomplishing this goal has been the lack of any
provision that would assure that investments made prior to entry
into force of a treaty would be protected under treaty guidelines.

If all parties to the treaty reached full agreement today,
it could still take as long as 6 or 7 years before the treaty
were ratified and put into operation. This interim period would
include a signing ceremony, a 2-3 year period during which the
Preparatory Commission will be in session, and whatever time is
necessary for individual nations to approve the action (e.g.,
congressional approval in the United States) , final ratification,
and signing by 60 member nations to the treaty.

Companies planning to mine the seabeds have made substantial
investments in developing seabed mining technology and hardware.
Investment has dramatically declined, however, and industry offi-
cials maintain that they will not continue their investments during
this interim period unless protection is provided for in the treaty.

The 1980 seabed mining act directed the National Oceanic and
Atmospheric Administration (NCAA) to "submit to Congress proposed
legislation necessary for the U.S. to implement a system for the
protection of interim investments that has been adopted as part of
an international agreement..." NOAA responded to its legislative
mandate in a June 24, 1981, letter to the Congress by citing the
need to wait until the makeup of the new U.S. negotiating posture
is known before formulating new interim investment protection propo-
sals so they will be consistent with the U.S. negotiating position.

Additional information provided to GAO by NOAA officials
reflects the need to

--protect mining company investments made prior to
entry into force of a treaty, and

--assure that such mining companies meet all treaty
obligations (e.g., revenue sharing, technology

transfer, etc.) that subsequent minina ventures
will be responsible for.

The current draft of the treaty contains no provision for
interim investment protection. (Such provisions were scheduled to
be negotiated in the 1981 spring session of the Conference, but
were deferred.)

Production Controls

The draft Law of the Sea Treaty includes production controls
to protect the economies of developing countries that are land
based producers of the minerals to be extracted through deep sea-
bed mining operations. The United States proposed these controls,
which would be limited to a 20-year period, in order to get the
land-based producers' support for the "parallel system." While
the objective of protecting developing country economies is an
important one, the proposed means of doing so are contended by many
to constitute a major impediment to efficient and effective mining
of the deep oceans.

Proposed controls are linked to the amount of nickel that
would be recovered from seabed nodules, because nickel is the key
mineral that holds most promise for making seabed mining an econ-
omically viable proposition. Production of other nodule metals--
such as copper, manganese, and cobalt--is not to exceed levels
which could have been produced from the quantity of nodules needed
to reach the nickel production limit.

Production controls in the draft treaty limit the total amount
of nickel that may be produced from the seabed for a 20-year
interim period after the first mine begins production. The compli-
cated formula to determine the actual limit is based on projected
growth in world nickel consumption, and would limit seabed nickel
production to only an increment of growth in nickel demand (con-
sumption) over that which would otherwise be satisfied from land
based production. According to a State Department analysis of
the current draft treaty text:

--The basic production control formula is the sum of (1) the
tonnage growth of nickel consumption in the five years
prior to the first commercial production from the seabed,
and (2) 60 percent of the tonnage growth in nickel consump-
tion from the first year of commercial production to the
year for which the allocation is being made. The produc-
tion limit is recalculated durina each year of the 20-year
interim period, based on the most recent data. Since the
application for a production limit may be submitted up to,
but not more than, five years prior to the beginning of a
company's commercial production, the production limit must
be calculated from estimates about future nickel consumption
rates. These estimates are made by using a trend line,
which projects future tonnage consumption on the basis of
the most recent 15 years of past consumption data.

--The basic production limit is modified by provision for a
"floor," which was developed to allow at least a minimum
level of seabed production even if nickel consumption had
been stagnant. If the compound growth of nickel consumption
on the trend line is less than 3 percent annually, a new
trend line would be calculated as if there had been 3 per-
cent compound annual growth; this trend line would pass
through the original trend line value of nickel consumption
for the first year of the 15-year data base. The basic
production limit formula would then be applied to the new
trend line in order to calculate the allotted annual seabed
tonnage.

--The application of the "floor" would be subject to the
restriction that nickel production from the seabeds may not
exceed the total growth of nickel consumption at any time
during the interim period. The total growth of consumption
is calculated from the original trend line used in the first
step of the calculation.

--The production limitation formula implicitly restricts the
number of entrants into seabed mining. The formula relates
to the maximum volume of nickel that can be produced. Since
the Enterprise is guaranteed production for at least one
mine site, only 3-4 sites will be available for full-scale
commercial production in the first year and at most 15 dur-
ing the entire 20-year interim period. Five mining consortia
from Western industrialized countries have already seriously
engaged in prospecting and technology development and will
probably require at least 2 mine sites apiece during the
interim period. Since the Enterprise, the existing consor-
tia, and Eastern European nations could already account for
most of the available seabed mining production, potential
new investors are likely to shy away from seabed mining.

Proposed production control provisions have met with severe
opposition from both industry and government officials (a) because
of the potential impact that they may have on the profitability
of what are already 'high-risk investments; (b) because they have
only a tenuous relationship to initial objectives of the provis-
ions; and (c) because their very existence constitutes a deterrent
to investment.

While proposed production controls guarantee some share of the
market for seabed minerals, and while this share might be increased
if demand exceeds projections, there is no assurance that alloca-
tions will in fact be increased. By potentially restricting ocean
output, scarcity of minerals availability could be induced. Fur-
ther, production controls relating only to a percentage of increase
in overall nickel demand would grant a sanctity for land-based
production which would not take into account any consequential
changes in the economics of production. The land-based producers'
volume of production would be guaranteed regardless of relative
costs of production.

As to the second objection, it is difficult to relate the
controls as now fashioned to the overall objective of protecting
developing country economies since the majority of land-based
nickel production is in developed countries. The countries most
likely to benefit from nickel controls are the large land-based
producers such as Canada and Australia, not the developing coun-
tries. Only about one-third of world nickel production comes from
developing countries.

Third, the very existence of the production control provisions
constitutes a major deterrent to current industry commitments for
investments for developing technology and for securing future com-
mercial financing.

Information we obtained through interviews and in reviewing
studies 1/ suggests that seabed production would have minor economic
impact on any land-based mineral production and that this would
most likely be limited to cobalt producers. Conclusions were
expressed that absent production controls, copper would be derived
from the seabed in such small quantities (less than one percent of
world demand) as to negligibly affect prices, and that ocean nickel
production would have only slight impact on market prices (could
effect developing country nickel production by about 2 percent). It
was projected, however, that cobalt could have a significant affect
(25-35 percent decline in market prices). Current projections are
that seabed manganese will not be competitive with land-based
manganese production, as reflected by the fact that three out of
the four major consortia do not even plan to recover the manganese.

In the face of the major impediments associated with proposed
production controls, and projections suggesting minimal adverse
impacts associated with seabed mining, fundamental alternatives
warrant serious examination. The objective of protecting developing
country economies could still be supported. Following are examples
of three alternative options for cobalt, not related to production
controls, which might be employed during the 20-year interim period.

First is an option that would entail no production controls but
would require all cobalt producers to join in a new international
marketing agreement 2/ so that cobalt sales are accomplished with
explicit regard for protecting developing country market shares.
This option could necessitate producers having to stockpile cobalt
at their own expense during periods of less than maximum demand.

1/Reddy, B.J., and J.P. Clark, The Effects of Deep Sea Mininc on
International Markets for Copper, Nickel, Cobalt and Manganese,
Deep Sea Mining, Report on a symposium held at the Massachusetts
Institute of Technology, December 1978-January 1979, pp. 107-125.
Hollick, A.L., U.S. Foreign Policy and Law of the Sea, Princeton
University Press, 1981, p. 292.

2/Market arrangements affecting U.S. commerce would have to be
consistent with U.S. laws.

A second marketing alternative would be to restrict sales of
ocean produced cobalt to only a percentage of total demand, or a
percentage of growth in demand (up to 100 percent) over a defined
base volume. Producers would have to judge on their own the amount
of potentially available cobalt which ought to be processed from
the nodules for current consumption, with the remainder stockpiled
either for later sale or for host country security reasons, or
disposed of as uneconomical tailings.

A third alternative might entail processing and selling the
cobalt solely on the basis of producer judgement of overall market
demand. To insure developing country protection under this alter-
native, however, the producers/sellers would have to agree to
paying an additional amount into the Authority's revenue sharing
trust fund for dispersement to impacted, developing country pro-
ducers. All mining revenues are already to be taxed at a rate of
.75 percent (three-fourths of one percent) of their fair market
value, and this rate could be selectively increased for otherwise
unrestricted mineral sales which induced an adverse impact on
developing country incomes.

The foregoing is not perceived as an exhaustive list, but
does, in our judgement, illustrate that clear alternatives to
achieving the developing country income protection objective do
exist, and appear to pose lesser problems for efficient develop-
ment of ocean mineral resources than the currently proposed
production controls.

Technology Transfer

Assured access to technology that will guarantee the Enter-
prise and developing countries the capability to mine the deep
seabed is a highly controversial aspect of the current draft Law
of the Sea Treaty. The mandatory nature of the transfer provision
requiring the sale of technology to developing countries has met
with severe opposition from U.S. companies. They maintain that
the provision is neither in their best interest nor in the national
interest. Disagreement on this issue is a major impediment to
successful conclusion of the treaty.

Originally proposed by the Secretary of State in 1976 as part
of a package designed to win support for the "parallel system",
some form of mandatory technology transfer has been integral to
seabed mining negotiations ever since.

The parallel system was proposed to assure the developing
countries that they would be able to participate in the actual
mining of ocean minerals, not simply in a revenue-sharing capa-
city. Since that time, the developing countries have maintained,
and U.S. negotiators have confirmed, that the technology transfer
provisions would provide the only assurance that the parallel
system could be made workable. They suspect that technology
will not otherwise be available to them.

Technology transfer provisions of the draft treaty require
that operators make that technology 1/, which they use in mining
the deep seabed beyond national jurisdictions and which is legally
transferable, available on reasonable commercial terms and condi-
tions to the Enterprise and to developing countries when requested.
This agreement may be invoked only if the Enterprise finds that it
is unable to obtain adequate technology on t'he open market on
reasonable terms. A further stipulation is that the technology
involved is restricted to the actual mining and not to other
activities such as processing. Technology transfer obligations
remain in effect for ten years from the time that the Enterprise
commences its initial commercial operations.

The focus of opposition to technology transfer provisions in
the draft treaty is in the following areas:

--It does not protect proprietary technology.

--It does not assure adequate compensation for
transferred technology.

--It does not adequately protect defense-sensitive
technologies.

Proprietary Technology

Because the draft convention requires that companies agree
to transfer all technology they use to the Enterprise or to
developing countries, they oppose the provision on the grounds
that it will compromise their proprietary information.

A 1978 report 2/ assessed the implications of deep ocean min-
ing technology tran-sfer for the U.S. Bureau of Mines and shed light
on this issue. The report cites the minimum of information con-
sidered proprietary as mine site data, detailed methodologies
for statistically treating mine site data to characterize a mine
site, system design, system requirements, computer software for
system operation, and mine planning. In addition, there are several
new technologies involved, i.e., deep pumping, nodule collecting,
nodule processing (or conversion of nodules to normal processing
feeds), ship control, and specific hardware (dump valves, collector
weighing systems, etc.) for which the industry has products or
trade secrets that they consider highly proprietary. The report
concluded, 'however, that this proprietary information is available
to any similarly technically competent investor willing to make an

I/Technology includes the specialized equipment and technical
know-how, including designs, operating instructions, training,
and technical advice and assistance necessary to assemble,
maintain, and operate a viable system.

2/A Preliminary Study of the Consequences of Deep Ocean Mining
Technology Transfer, Science Applications, Inc., 1978.

investment of similar magnitude, and noted that proprietary status
has only a limited lifetime, normally less than ten years and often
of the order of only five or six years.

A subsequent report 1/, also for the Bureau of Mines, found
that adequate sources of deep ocean mining technology were available
on the open market. Two basic categories of technology were iden-
tified as

--component supplier technology which is hardware-
intensive and characterized by packaged technology
and manufacturing knowledge, and

--system technology which is characterized by a
select skilled labor base having knowledge of
hardware system design, integration, operation,
maintenance, and overall management.

The report concluded that "because of the relatively large number of
suppliers of systems and component technology that is available ...
there is no apparent reason why the Enterprise could not compete
quite favorably in the deep ocean mining industry given the proper
approach." Thirty-four companies from both developed and developing
countries capable of originating system technologies were listed,
and sources of supplies for all the component elements were listed.

It must be kept in mind that, as discussed on p. 1 and in
chapter 3, many years and hundreds of millions of dollars will be
required to develop all the technology necessary for a full-scale
commercial mining operation. However, to the extent that deep ocean
mining technology has been developed, the findings of these two
reports suggest that open market sources of the technology would
be adequate to allow the Enterprise to design a deep ocean mining
system itself, or to acquire a system from a systems technology
contractor. This is consistent with information we developed from
discussions with engineers, ocean mining company officials, and
others actively involved with these issues.

The likely availability of future technology on the open market
is reflected in the increasing number of companies and countries
which are either acquiring deep ocean mining technology or getting
involved in related research and development. For example:

--The current major ocean mining consortia are all
composed of companies from a variety of countries.
These four consortia consist of over 20 companies
from eight countries.

--Japan has set up an industrial ocean minerals
association of 38 countries and is this year

I/Alternative for Technology Transfer to the Enterprise, Science
Applications, Inc., July 1980.

authorizing a $105 million project to develop
technology.

--A Norwegian firm actively-solicited customers
for its technology research and development
program during the course of the Spring 1981
session of the Law of the Sea Conference.

--in order to begin mining manganese nodules, India
has ordered a research ship from West Germany for
nodule surveying, a geo-technical ship from France,
and is purchasing a third ship with Danish aid.

--The West German foreign minister signed an
agreement in New Delhi giving India a loan
worth $72.8 million for deep seabed research.

--A previously cited Bureau of Mines study con-
cluded that "no aspect of deep ocean mining
requires unique, unorthodox,'or highly inno-
vative ideas to develop. Development is
primarily a matter of the competent and efficient
utilization of engineering principles."

Fair And Reasonable Commercial
Terms And Conditions

ocean mining companies maintain that their bargaining position
for the sale of new technology of uncertain long-term value will be
weakened by their obligation to sell. They feel that the massive
investments they have put into ocean mining technology will not be
reflected under "fair and reasonable commercial terms and condi-
tions."

The draft treaty provides that compensation to the suppliers
of technology shall be made on "fair and reasonable commercial
terms and conditions." At stake are both technology that has
been developed by third party suppliers and sold to ocean mining
consortia, and technology developed by the consortia itself. A
reasonable price for technology developed by third parties would
appear to be easily established based on the price that technology
was initially sold to the consortia. 'The price for technology
developed by the consortia itself could prove difficult to establish
and the potential for disputes is great. Disputes as to whether
offers made by the contractor are within the range of fair and
reasonable terms and conditions may be submitted by either party
to binding commercial arbitration in accordance with the United
Nations Conference on International Trade Law (UNCITRAL) arbitra-
tion rules.

In an effort to clarify terms and ultimately minimize the
potential for disputes, the United States delegation to the Law
of the Sea convention compiled a list of what is generally regarded
in commercial transactions as fair and reasonable (See App. II).

Utilization of this type of clarification in efforts to modify the
draft treaty, in conjunction with UNCITRAL arbitration procedures,
would appear to constitute an effective means of minimizing dis-
putes.

UNCITRAL arbitration rules were designed to facilitate the
arbitration of disputes arising out of international trade trans-
actions. A special attribute of the rules is that they were
established for worldwide use. They have been found to offer a
well-balanced and modern set of arbitration rules prepared by
experts from all over the world.

Defense-sensitive Technologies

The draft negotiating text requires miners to guarantee that
they will transfer all technology, not only that which they own
but also that of their suppliers, to the enterprise or to develop-
ing countries when such is unobtainable on the open market. Oppo-
sition to the provision has focused on the possible breach of
national security restrictions that it entails because some
technologies used in deep ocean mining could be defense-sensitive
and subject to export restrictions. The extent to which the
Treaty's provisions would run counter to the 1979 Export Adminis-
tration Act, which controls the export of defense-sensitive
technologies, has aroused considerable concern.

A primary objective of U.S. export control legislation is to
control exports of goods and technology which could make a signif-
icant contribution to the military potential of any other nation
or nations when this would prove detrimental to the national secur-
ity of the United States. On the other hand, these controls are
to be applied so as to result in the minimum interference in the
normal conduct of commercial trade. Full compliance must be assured
with U.S. export regulations pertinent to defense-sensitive
technologies which may be used in ocean mining systems.

As already shown, there appear to be plentiful sources of
necessary technology on the open market. However, there are those
who feel that some technologies, such as equipment for position-
ing ships over mining sites and bottom profiling equipment, are
defense-sensitive.

We believe that protection of U.S. national security interests
is provided for by article 302 of the draft treaty which states that
"nothing in this convention shall be deemed to require a state party
in the fulfillment of its obligations under the relevant provisions
of this convention, to supply information the disclosure of which
is contrary to the essential interests of its security."

Given the enormous private investment yet required before
seabed mining technology is fully developed, it is imperative that
the Law of the Sea Treaty adequately protect that investment. With

appropriate modifications, there appears to be minimal harm asso-
ciated with mandatory technology requirements of the draft treaty.
And, given the very specific objectives of the provision (to assure
the viability of the parallel system) and its temporary nature (set
to expire ten years from the time the Enterprise commences opera-
tions), objections based on its implications as a precedent in
international economic negotiations appear unwarranted.

On the contrary, with appropriate modifications, the
provisions are consistent with U.S. initiatives in drafting the
International Code of Conduct on the Transfer of Technology and
other policy statements, such as are included in the 1979 Export
Administration Act, in which the United States has concurred with
developing countries on the importance of transferring technology
to them. One of the Code's many objectives is "to facilitate and
increase the flow of proprietary and non-proprietary technology for
strengthening the growth of the scientific and technological capa-
bilities of all countries, in particular the developing countries,
so as to increase their participation in world production and
trade."

Dispute Settlement

Consortia interested in mining the deep seabeds are concerned
over the highly complicated structure for settling disputes under
the draft treaty, and the potential for bias in the exercise of
discretionary authority involving disputes that might arise from
the implementation of a parallel system.

it is exceptionally difficult to gauge the possible abuse of
international discretionary powers over deep seabed mining operations,
particularly since the Preparatory Commission, which will not meet
prior to finalization of draft treaty negotiations, will be estab-
ishing rules, regulations, and overall operating guidelines.
However, protection of the vital interest of countries supporting
seabed mining operations has been greatly improved by revised
council voting structures and strict adherence to non-political
criteria. We believe they would be further improved with modifica-
tions such as those recommended in this report.

If parties are unable to resolve disputes, the draft treaty
provides recourse to several dispute resolution bodies.

The International Tribunal for the Law of the Sea, which will
deal with disputes regarding all parts of the treaty, is to consist
of 21 members. Members must have the "highest reputation for fair-
ness and integrity and be of recognized competence in matters
relating to the law of the sea." They must also represent the
principal legal systems of the world and equitable geographical
distribution. To ensure this result, no state can have more than
one member on the Tribunal and each geographical area (African,
Arabic, Eastern European, Latin American, Western European, and
other groups, the last group including the United States) must have
at least three members. members shall be elected by all states
with each state having one vote.

Most disputes regarding seabed mining would be handled by the
establishment of a Sea-Eed Disputes Chamber, a subset of the
Tribunal consisting of 11 members elected by and from among the
Tribunal members. While the Chamber would have no general juris-.
diction over the Authority, it would have jurisdiction in disputes
between the Authority and any nation over alleged treaty violations.

To deal with particular disputes, an ad hoc chamber of the
Sea-Bed Disputes Chamber consisting of 3 members can be formed.
One is appointed by each party in the dispute, and the third is to
be selected by the two parties or, if they cannot agree, by the
President of the Chamber. Members of this chamber cannot be
nationals of or in the service of any of the parties to the
dispute, nor can they be totally biased against one party.

Disputes may also be resolved through binding arbitration,
but if the dispute involves a question of interpretation of the
treaty, then this question must be resolved by the Sea-Bled
Disputes Chamber before the arbitration panel may proceed. The
applicable law in these disputes will be the treaty and other
compatible rules of international law.

Mining industry officials believe that the composition of
the Scea-Bed Disputes Chamber will be unfavorable and prejudicial to
their interests, and that disputes brought before this body may
not be fairly resolved. They are also concerned with the limita-
tions on the jurisdiction of the Chamber and about the absence of
a n ap~pellate body with jurisdiction to review actions of the
Authority. They state that the strict circumscribing of judicial
review in these matters would raise obvious problems for indus-
trialized nations' miners when one examines the extent of dis-
cretion and implied powers that would be granted the Authority
and its subsidiary organs.

A former U.S. participant in the treaty negotiations told us
that the treaty language dealing with the Sea-Bed Disputes Chamber
was " necessarily ambiguous" in order to get agreement on leaving
it in the treaty. How the Chamber will actually operate will
require interpretation of the treaty provision. The U.S. inter-
pretation is that while the Chamber cannot overrule the Seabed
Authority or question its rules and regulations, it can rule on
whether the Authority has overstepped or abused its powers.

2 9

CHAPTER 3
CAPITAL AVAILABILITY AND
TECHNOLOGY DEVELOPMENT

A stated congressional purpose in passing the 1980 deep seabed
mining act was to "encourage the continued development of technology
necessary to recover the hard mineral resources of the deep seabed."
Recognizing that it would take years for final ratification of the
Law of the Sea Treaty, the Congress felt it important that techbnol-
ogy development continue during the interim period.

We found that investment in technology development has prac-
tically come to a standstill. A.ccording to consortia officials,
the 1980 Act does not offer them much incentive to continue invest-
ment because the Law of the Sea Treaty is looking over its shoulder
and, when ratified, will supersede the Act.

It is currently estimated that the mining consortium will need
over $1 billion to develop the technology, purchase the 'hardware,
and set up and begin a deep seabed'mining operation. The availa-
bility of commercial financing to underwrite these ventures is
critical to the future of deep seabed mining.

The mining consortia say they are unwilling to make further
investment until they 'have assurance that their investments will
be protected. We also met with representatives of many major
banks that have had some involvement with seabed mining ventures.
The bank officials say that financing will not be available until
the draft treaty is agreed to, and that the treaty itself needs
numerous changes.

STATUS OF CONSORTIA INVESTMENT

The consortia 'have reduced the amount that they 'have been
spending on the preliminary steps to seabed mining. Consortia
officials estimate that ocean mining budgets have been slashed by
75 percent. For example, one consortium has cut its expenditures
from approximately $25 million a year to $5 million; another, which
'has spent $50 million total, has cut expenditures to zero. The
consortia estimate that the prototype equipment development stage
will cost between $80 million and $250 million for each consortium.
Consortia officials said that the prototype stage will not take
place until the ambiguities in the treaty are eliminated and it is
ratified. They generally agree that a treaty is essential for
future financing and fullscale investment by the consortia.

The prototype stage of investment is considered to be develop-
mental and will be totally equity financed according to consortia
officials. Costs for commercial development, however, will be
partially equity-financed and the rest project-financed. All
possible sources of funds will be considered, including bonds,
banks, and the World Bank (for any developing nations that may
enter seabed mining).

ADEQUATE COMMERCIAL FINANCING
DEPENDS ON TREATY MODIFICATIONS

Bank officials believe that the 1980 Act and pending treaty
contain provisions which will impede the financing of these ven-
tures. Changes will have to be made to the current treaty text
for financing to occur. Banks require an operating environment
where mine site tenure is guaranteed and where mining is not
subject to arbitrary influence from political entities. They
believe that neither the current treaty text nor the 1980 Act
provide these assurances. Several of the bankers we spoke with
clearly indicated that, unless changes are made to the treaty,
financing will not occur.

Deep seabed mining projects entail capital expenditures
beyond the means of individual mining companies to finance from,
retained earnings, depreciation, and depletion. Consequently, the
formation of joint ventures and reliance on commercial financing
have increased. One form of financing being considered by the
mining consortia is project financing which consists of raising
capital solely on the assets and future cash flows of the project
for debt repayment. The source of repayment is not expected to
come from the general funds of the sponsoring company itself.
The main attraction of project financing is the ability to pass
certain risks to the lenders.

To meet the need for external financing, commercial banks and
other financial institutions have established "acceptable risk"
criteria for mineral industry financing. Before financial insti-
tutions will consider participating in such a venture, it will
have to withstand a critical evaluation of certain risk factors.

Particular provisions of the current treaty text and the 19P0
Act will make it difficult for banks to finance these projects.
These provisions produce risks which bankers are not willincT to
assume. Based on our discussions with bank officials, there are
three particular risks posed by these provisions--political risks,
production risks, and market risks. Political risk is the risk
that government authorities will impose restrictions, regulations,
or levies which will hurt the project's cash flow and ability to
service debt. According to bank officials, there are provisions
within both the Act and draft treaty which magnify political risks
associated with deep seabed mining.

As mentioned previously, the National Oceanic and Atmospheric
Administration (NOAA) is authorized to negotiate a "reciprocating
states' aqreement" with those nations capable of mining the deep
seabed. There are eiqht nations that NOAA is negotiating with to
form a reciprocating states' agreement. Reciprocating states are
foreign-nations which, among other things,, provide

lan internal legal framework for exploration and
commercial recovery which does not unreasonably

interfere with the interest of other States in
their exercise of the freedoms of the hiah seas,
as recognized under general principles of international
law."

Bankers do not consider the Act as providing adequate protection
if a nonreciprocating state should encroach upon an established
mine site. Some bank officials believe that, because all nations
will not be part of a Reciprocating States' Agreement, there may
be a question whether ventures have clear title to minerals
recovered.

Bank officials believe these provisions add uncertainty to
the security of tenure, access to the minerals, and the overall
operating environment. Officials reported that deep seabed
minerals ventures are extremely capital-intensive and result in
very protracted periods of paybacks. To mitigate bankers' risks,
they need evidence that the project will have clear cut access to
the area to be mined.

Production risk is essentially the uncertainty whether the
project will continue to be capable of producing projected volumes
of salable product at predictable costs over the life of the pro-
ject's debt financing. Production risk is also known as operating
risk. It has two interrelated components--technical risk (relating
to technology and experience of staff) and economic risk (relating
to cash flow analysis for determining whether project revenues will
cover project costs). We found that there were various provisions
within both the 19R0 Act and the treaty which increase the produc-
tion risks associated with these projects.

Several provisions within the treaty were cited by banking
officials as adversely affecting production risk, particularly
production controls which could affect a project's cash flow and
its ability to repay financing. Officials at several banks also
believed these controls exacerbated the political risks associated
with the treaty, because the limits will be set by a political
entity--the 36-nation Council. Bank officials believed that the
treaty would allow the Council through production controls to
affect the price at which the recovered minerals can be sold,
which in turn could reduce the project's cash flow.

Officials at another bank believe there is technological un-
certainty with regard to these projects. They said that recovery
technology on a long-run basis has not proven that it can recover
the nodules. The transfer of technology provision of the treaty
was considered by some banking officials as being a serious prob-
lem. They believe this provision is a disincentive both to the
banks and the consortia, because it will result in the loss of a
competitive edge. In addition, they believe the definition of the
technology to be transferred and of the developing (recipient)
countries is vague and could lead to abuse. The requirement will
also burden the consortia to educate recipients as to the

technology. One bank official pointed out that political risks
cannot be separated from economic consequences. He said adverse
decisions by political entities always affect the economics of a
venture.

Market risk is the uncertainty that, with production at
anticipated volumes, there will be sufficient revenue to cover
operating expenses and debt service over the life of the project's
debt financing. Market risk is amplified when tonnage cannot be
sold, production declines, or the product sale price falls. Banking
officials stated that production controls within the treaty will
affect market risk and the project's cash flow generation as well
as inhibit bank financing.

CHAPTER 4
CONSERVATION OF SEABED MINERAL
RESOURCES MUST BE ASSURED

The availability of manganese and cobalt are of foremost
concern to the Congress, because the United States has no signi-
ficant domestic production of either mineral and because future
sources of supply are considered problematic.

In the case of manganese, few countries 'have reserves, and
projections are that by the year 2000 the United States could be
entirely dependent on South Africa for its total requirements.
The problem was recognized in congressional deliberations on the
1980 deep seabed mining act. Congress found the manganese situ-
ation to be severe-- "conditions exist in the world metal markets
that indicate... a significant possibility of short-term... supply
interruptions." Seabed mining was deemed to be in the national
interest as one means of decreasing potential supply constraints.

Of the four ocean mining consortia with U.S. participation,
only one definitely plans to produce manganese from the nodules.
The other miners believe manganese production may not be prof it-
able. What the consortia do not produce becomes process waste and
must be discarded. If disposal consists of ocean dumping, the
resource will be lost forever. Even if the waste is retained on
land, the manganese may never be economically recoverable.

over 90 percent of manganese is used in the production of
steel and there is no known acceptable substitute for it in steel
making. It is generally 'held that manganese consumption is directly
proportional to steel production, illustrated by the fact that the
U.S. with about 16 percent of the world's steel production capacity
uses about 16 percent of the world's manganese. The United States
consumed about 1.2 million tons of manganese in 1980, off somewhat
from prior years because of a decline in U.S. steel production.
The Bureau of Mines estimates that by the year 2000, U.S. consump-
tion will nearly double to about 2.1 million tons.

The National Materials Advisory Board of the National Academy
of Sciences issued a report I/ on manganese in July of 1981. It
concluded that even though thme world manganese reserves are ade-
quate until the year 2000, their availability to the U.S. may be
increasingly strained or subjected to disruption. One cause is
that communist bloc countries will continue to expand their pur-
chases in the free-world market; another is the small number of
manganese suppliers in the free-world market. The report recom-
mended implementing a national materials policy which would
recognize U.S. dependence problems, with consideration to develop-
ment of new sources of supply, such as deep seabed nodules.

1/"Manganese Reserves and Resources of the World and Their
Industrial Implications," National Materials Advisory Board,
National Academy of Sciences, N-MAB-374, 1981.

Because of its importance and U.S. import dependency, man-
ganese is designated as a strategic and critical material and
included in the National Strategic and Critical Materials Stock-
pile. In March 1981, the stockpile contained about 3.5 million
tons of stockpile grade manganese in its various forms, enough to
meet U.S. needs for 3 years.

PLANNED DISPOSITION
OF SEABED MINERALS

The manganese nodules contain about 20 to 30 different
minerals, many in only trace amounts. of the four key minerals,
manganese is by far the largest component. The percentage varies
among samples, but the prime mining area in the Pacific Ocean
contains nodules with 25 to 35 percent manganese cont ent. Nodules
also contain iron which, when combined with manganese, becomes
ferromanganese, the primary form of manganese used for steel
production.

The one U.S. ocean mining consortium that plans to produce
manganese (in the form of ferromanganese) believes its product
will be economically competitive with the ferromanganese produced
from land deposits. The other three consortia have not reached
that conclusion. They believe the current manganese market value
is not high enough to make manganese profitable. The reason for
th'is disparity is that a variety of metallurgical processes is
available, and the consortia have proceeded in different directions.
The one definite manganese producer claims to have an integrated
process (one in which a single process yields more than one product)
that the others do not 'have. The others state that they are keeping
all options open, and if they later determine nodule manganese to
be economically producible they could enter the market.

The consortia are planning on different mining rates, which
are not fixed yet, but the most commonly discussed range is 2 to
3 million tons of nodules per year. Assuming the four U.S. consor-
tia each mine nodules at a rate of 2 million tons per year, total
ferromanganese production could be about 2.4 million tons per year
(at a nodule content of 30 percent manganese), or nearly double
the total U.S. consumption in 1980. Obviously, U.S. manganese
demand could be fully met by just a few ocean mining ventures. if
production would exceed demand, the United States could become a
net exporter.

Such a sizable new supply in the world market might well 'have
a depressing effect on manganese prices. The National Materials
Advisory Board's findings, 'however, show a decline in developing
countries' landbased manganese reserves, and point to the possi-
bility of higher prices. Predicting the economics of manganese
production from nodules is highly speculative at this time.

Manganese is not the only nodule component that may be
neglected. Of the 20 to 30 unproduced components, most are in

extremely small proportions. Many are also designated strategic
materials and included in the U.S. strategic stockpile. They
would also not be produced for economic reasons, i.e., the produc-
tion cost would be higher than the competitive value.

The following table shows a sample nodule assay from the
primary mining area in the Pacific Ocean. It also shows which
components are included in the stockpile.

Table 2 1/

Sample Pacific Nodule Mineral Composition

Component Percent

Nickel 1.5*
Copper 1.3*
Cobalt .2*
Manganese 33�4*
Iron 6.1
Silicon 6.5
Aluminum 2.4*
Sodium 2.2
Calcium 1.7
Magnesium 2.1
Other (19) 3.2

*In Strategic Stockpile

Any of the nodule components that are not deemed economical
to produce must be disposed of as waste. Waste disposal is a
major problem for any mining industry. For nodule processing,
only about 3 percent of the contents would be produced in cobalt,
copper, and nickel, leaving a large quantity of waste materials.
Storage on land would require large amounts of land. The quan-
tity alone may cause the ocean miners to seek to dispose of the
waste in the ocean. Once the waste is dumped in the ocean, it
becomes virtually unrecoverable because it would disperse into
the seabed. Even if the waste is retained on land, its form may
present difficulty in reprocessing to recover its contents. Even
if technologically possible, the cost may make such reprocessing
uneconomical.

POSSIBLE GOVERNMENT ACTION NEEDED
TO CONSERVE SEABED MINERALS

Although manganese and other components of nodules may be
neglected by ocean mining enterprises for economic reasons, such

I1/V. E. McKelvey, et al, "Manganese Nodule Resources in the
Northeastern Equitorial Pacific," Marine Science, vol. 9, 1979.

business interests may not coincide with national interests. Some
of those minerals, including manganese, are designated U.S. stra-
tegic and critical materials and included in the National Defense
Stockpile.

Under the 1980 deep seabed mining act, NOAA has regulatory
responsibility for the ocean mining industry and is aware of the
potential problems related to manganese conservation. In its
Draft Programmatic Environmental Impact Statement for Deep Seabed
Mining, dated March 1981, NOAA recognized three alternatives:

--Let the market decide. The market would be
the sole criterion in determining the fate of
the manganese.

--Require four-metal operations. This could delay
mining until the manganese market opens up or the
Federal government becomes financially involved.

--Establish a means for manganese to be saved as
a resource for the future.

That document selects the third as the best alternative and says
"retention... .could be assured if... .saved at government expense for
the National Defense Stockpile." NOAA plans additional study of
the problem.

Federal inaction would treat the problem as strictly a matter
of economics with Federal intervention in a free enterprise economy
being undesirable. The resource would be viewed as belonging to
business and its owner would market or ignore it as befits a profit-
making enterprise, with the assumption that if the manganese supply
situation becomes bad enough the price will rise and the ocean
miners will have economic justification to market the resources.

Obviously, such Federal inaction would not assure prudent
resource conservation. if manganese disposal is allowed, there are
a number of potential problems which could adversely affect future
availability. First, any change in the economics of producing
manganese may occur too rapidly to allow enough lead-time to convert
processing capacity to meet the need. Related to this is the possi-
41 ~ bility that plants set up to process only the other three minerals
may not be conducive to conversion, making construction of new
plants necessary. Those not processing manganese may not have done
the necessary research and development to have the knowledge to
succeed at the new process. Second, if any significant gap occurs
between the start of ocean mining and the change in economic condi-
tions, deposits with high concentrations of manganese would 'have
been used and, if not stored on land, would be permanently lost.
Third, if the change in economics occurs because of an emergency,
such as in a war, the nodules may not be accessible. With mining
occurring in the high seas, operations could easily be disrupted.

Although the United States 'has been stockpiling materials
under the Strategic and Critical Materials Stockpilina Act, its
purpose has been to fill shortages in normal markets during a
national emergency; this precludes unlimited acquisition of mater-
ials beyond the stockpile goals. However, another purpose of the
stockpile is to "encourage the conservation and development of
sources of (strategic and critical) materials within the United
States."

The National Materials and Minerals Policy, Research and
Development Act of 1980 requires the Department of Commerce to
assess the option of economic stockpiles as a means of assuring
that material requirements can be met. If manganese is left in
the process waste and those miners do not opt to retain the waste
at their own expense, the Government could obtain the manganese
for an economic stockpile at minimal cost. However, industry
officials told GAO that reprocessing the wastes in a separate
process after the other three metals 'had already been extracted
would not be economically feasible due to the large amount of
waste in proportion to the remaining small metal content.

Alternative uses for mangan ese in the metals industries are
receiving increased attention. The Bureau of Mines 'has contracted
with the Massachusetts Institute of Technology to identify new
markets for manganese which might be derived from deep seabed
mining. Further Federal support of research and development into
enhanced manganese usage is seen as beneficial not only from the
standpoint of oversupply in the manganese market, but as a poten-
tial substitute for other critical alloying metals, such as
chromium, upon which the United States is hicghly import-dependent.

This discussion of conservation issues pertains to the
current status of treaty negotiations. Other issues may arise
in conjunction with potential alternatives to presently proposed
production controls as discussed in chapter 2. Conservation
aspects, therefore, will require attention and monitoring as
treaty negotiations progress.

CHAPTER 5
ENVIRONMENTAL ASPECTS OF SEABED MINING

The Deep Seabed Hard Minerals Resources Act of 1980 has estab-
lished a program whereby potential environmental impacts caused by
seabed mining are being addressed prior to their becoming impedi-
ments to exploration and development. Continuing studies will be
necessary to assure that evolving mining and processing technologies
do not cause currently unforeseen impacts.

NOAA IS RESPONSIBLE FOR DETERMINING
AND REGULATING ENVIRONMENTAL IMPACTS

In 1978, I/ we reported that a major problem impeding deep
ocean mining was the need to identify and regulate environmental
impacts. The report indicated that resolving the environmental
problem was necessary so industry could develop environmentally
acceptable mining and refining technologies. Subsequent to that
report, the Congress implemented the 1980 deep seabed mining act.
One of the five major purposes of the Act is:

"to accelerate the program of environmental
assessment of exploration for and commercial
recovery of hard mineral resources of the deep
seabed and assure that such exploration and
recovery activities are conducted in a manner
which will encourage the conservation of such
resources, protect the quality of the environ-
ment, and promote the safety of life and
property at sea..."

To assure the provisions of the Act are implemented, the Con-
gress designated NOAA as the agency responsible for issuing explor-
ation licenses and recovery permits to U.S. citizens. NOAA is also
responsible for publishing regulations for implementing the deep
seabed mining program while assuring the marine environment is
protected from the effects of exploration activities. Specific
responsibilities given to NOAA under the 1980 Act for safeguarding
environmental quality are shown in Appendix III.

NOAA IS FULFILLING ENVIRONMENTAL
REQUIREMENTS OF THE ACT

Thus far, NOAA has complied with its requirements, within the
established timeframes, and has produced several significant docu-
ments, two of which were specifically required by the Act. In
November 1980, NOAA prepared a draft Five-year Marine Environmental
Research Plan (1981-1985) for Deep Seabed Mining and Processing
Waste Disposal. In March 1981, NOAA issued draft deep seabed mining
regulations and a draft programmatic environmental impact statement
(PEIS), 'both of which have since been finalized.

l/"Deep Ocean Mining--Actions Needed to Make it Happen,"
PSAD-77-127, June 21, 1978.

NOAA's PEIS identifies, as discussed below, the principal
potential at-sea impacts on the environment as those associated
with mining activities, at-sea processing, and transportation to
port. The disposal of processing wastes on-shore, or the ocean
dumping of on-shore generated processing wastes, is a separate
topic and is covered in another section.

Environmental Impacts Associated
with Mining Activities

Hydraulic mining systems, which are favored by several of the
commercial mining consortia, are expected to result in both surface
and subsurface adverse environmental impacts.

Hydraulic systems use large collectors, up to 66 feet in
width, which are pulled or driven along the seabed. NOAA indi-
cates that collector action and the sediment disturbance next to
the collector track will probably cause unavoidable destruction
of benthic biota (sea stars, sea urchins, polychaete worms, and
sea anemones).

NOAA states in its PEIS that the effect of the disturbance
will depend on the kinds of equipment used and intensity of mining.
They claim none of the affected biota are mammals, vertebrates,
amphibians or other higher forms of life. NOAA is not aware of
any benthic endangered species inhabiting the area that may be
affected by bottom disturbance. NOAA's worst case impact estimate
stemming from its Deep Ocean Mining Environmental Study (DOMES)
program is that the benthic biota in or adjacent to the collector
track, in about one percent of the area studied, may be killed
due to first-generation mining activities.

Another impact may be caused by a benthic sediment plume or
"rain of fines" which will affect biota beyond the direct contact
zone. This plume can extend tens of kilometers from the collector
and last several weeks after mining ceases and can cause smothering
and interference with bottom feeding of small seabed bottom ani-
mals. This "rain of fines" may have the potential for adversely
impacting the biota in an estimated additional 0.5 percent of the
DOMES area.

NOAA has based its knowledge of potential environmental
impacts, as specified in its PEIS, on brief periods of pilot scale
mining. Therefore, NOAA intends to verify or update conclusions
in the PEIS by requiring monitoring of the demonstration scale
mining tests to be conducted by mining firms during the licensing
phase.

NOAA's PEIS summarizes potential biological impacts related
to mining activities, and indicates research projects NOAA pro-
poses for evaluating possible mitigation strategies.

Environmental Impacts Associated
with At-Sea Nodule Processing

At-sea processing of manganese nodules implies refining nod-
ules and disposing of wastes at sea rather than on land. NOAA's
Deep Seabed Mining PEIS states the potential impacts of at-sea
processing are not yet known, but its 5-year research plan addres-
ses the issue with planned research projects.

A recent study funded by NOAA determined that full or partial
at-sea processing of manganese nodules would probably not be
implemented during the industry's first generation. NOAA's 5-year
research plan states that industry has confirmed this finding.
The research plan explains that complete at-sea processing would
require the development of new technologies in metal separation
and reduction which are thought to be beyond the state-of-the-art.
Similarly, the economics of partial processing, which removes much
of the waste material from the nodules, as an alternative to
complete at-sea processing needs further study. Either full or
partial at-sea processing would eliminate the generation of the
solid portion of processing wastes onshore and reduce the size
of the onshore plant.

NOAA's Deep Seabed Mining PEIS states that should at-sea
processing be proposed a supplemental PEIS will be prepared to
discuss the specific impacts.

Environmental Impacts Associated With
Transportation of Nodules to Port

The third principal potential at-sea environmental impact
involves transporting the manganese nodules from the mining ship
to ore carriers and then to port.

In 1977, NOAA contracted for a study of manganese nodule
transportation and waste disposal systems. The report indicates
nodules may be moved from mining ships to ore carriers by slurry
pumping, mechanical conveying, or by pneumatic blowing. The
report states that slurry methods are most promising and are under
consideration by all mining consortia.

NOAA's Deep Seabed Mining PEIS considers the possibility that,
during nodule transfer from mining vessel to ore carrier in a sea-
water slurry, discharges of seawater and accidental discharges of
nodules are possible. The PEIS asserts that seawater discharges
from nodule transfer are unlikely to add significantly to discharge
associated with nodule recovery. If the nodules themselves are
inadvertently dumped, the PEIS states that a significant impact is
not expected because the nodules appear to be inert in their nat-
ural form.

The PEIS assumes that an average of one ore carrier ship per
day will travel between port and each mine site during first gen-
eration mining. NOAA has determined that this level of vessel

traffic should not significantly affect the environment, but claims
that this issue will be addressed in site-specific environmental
impact statements.

The ore carriers can be used to carry personnel, fuel, and
supplies to the mining ship on return trips from the processing
plant; consequently, there is a possibility that fuel spills
could occur. NOAA believes that possible oil spills from the ore
carriers are not significant because cargo oil holds are less
vulnerable than tanker hulls, and only small volumes of oil are
involved.

Bulk-carrying ships, such as ore carriers, especially U.S.-
built ships carrying the U.S. flag, are subject to extensive safety
and pollution control regulations administered by the Coast Guard,
the American Bureau of Shipping, the Environmental Protection
Agency, and the Intergovernmental Maritime Consultative Oraaniza-
tion. NOAA believes potential seabed mining countries generally
have safety requirements comparable to the United States, but
environmental laws which are less strict. NOAA asserts that prob-
lems, if any, are more likely to arise with "flag of convenience"
countries. These countries frequently have a poor record of
enforcement. While enforcement against foreign flag ships used
in conjunction with U.S. licenses or permits may be difficult,
NOAA can act against the licensee or prohibit their use of U.S.
ports.

Processing Waste Disposal is a
Major Environmental Consideration

In addition to at-sea environmental impacts, the disposal of
wastes generated by onshore processing creates additional impacts
which must be dealt with. It is difficult to determine the extent
of environmental impacts which may be caused by manganese nodule
processing wastes, because neither commercial scale nodule recovery
nor nodule processing have yet been demonstrated. In addition,
neither specific processing sites nor specific technologies have
been identified.

NOAA has sponsored studies of various technologies which might
be used for nodule processing and studies of geographic areas of
the United States where processing plants might be located. NOAA
found that although the metallurgical processes to be used in pro-
cessing nodules are different from those used in processing land
ores, the facilities and techniques are similar. The most signif-
icant differences between land ore and nodule facilities are the
make-up of the ore and the probability that more populated coastal
locations will be considered for nodule processing plants.

From an environmental standpoint, the disposal of processing
wastes will be one of the greatest concerns faced by the mining
companies in extracting valuable metals from manganese nodules.
NOAA considers the large quantities and the unknown chemical and
physical characteristics as two of the major concerns in disposing
of the wastes.

Over its operating life, a three-metal plant 1/ would generate
about 3.3 to 4.4 million tons of waste per year which, in total,
would cover an area of 2,000 acres to a depth of about 40 feet. A
four-metal plant 2/ would generate annually 0.55 to 0.82 million
tons of waste or, in total, cover an area of 400 acres to a depth
of about 40 feet.

The 1977 study prepared for NOAA examined six waste disposal
systems mentioned for potential use in the industry. Among the
possible alternatives were three land fill techniques, a slurry
evaporative technique, storage of waste as a manganese reserve for
future processing, and ocean dumping. The study described the
slurry waste disposal form as being the most common way of dispos-
ing of tailings.

SOME CONCERNS ABOUT MANGANESE
NODULE MINING AND PROCESSING VOICED
BY ENVIRONMENTAL ORGANIZATIONS

Environmental organizations have shown interest in deepsea
mining because of its potential for adverse environmental impacts.
A number of these organizations have been represented by the Cen-
ter for Law and Social Policy (CLSP), a Washington, D.C., based
non-profit public interest law firm.

Many of the earlier mentioned potential environmental impacts
associated with deepsea mining--impacts on the bottom dwelling
benthos, impacts on organisms in the water column and on the sur-
face, and processing impacts--are also concerns of the CLSP. How-
ever, the environmental organizations, through the CLSP, indicate
that much more research is required to determine the true nature
of the impacts, and they favor strong United States support of
the Law of the Sea Convention because they believe an international
regulatory regime is needed to provide a framework for protecting
the marine environment.

Attorneys for the CLSP have been working on behalf of environ-
mental organizations on Law of the Sea issues for about the last
7 years, and we were told that CLSP attorneys bad input into and
supported the Deep Seabed Hard Minerals Resources Act of 1980.
However, the CLSP is a strong advocate for the Law of the Sea
Convention, and their attorneys are of the opinion that the United
States cannot unilaterally expect to protect the environment, but
must cooperate with other nations in developing a sound regulatory
framework for deep seabed mining. In a letter to the U.S. Secre-
tary of State, the CLSP explains how an approved Law of the Sea
Convention can reduce environmental concerns:

1/One which processes nickel, cobalt, and copper.

2/One which also processes manganese, which is far more
abundant than the other three primary metals, thereby
greatly reducing the amount of waste.

"From the perspective of environmental concerns,
the Convention sets the groundwork for a compre-
hensive system of protection. A viable frame-
work for the protection ofthe marine environment
is greatly enhanced through such an international
regulatory scheme. While the environmental provi-
sions are not perfect, in general we believe they
constitute a significant advance over what customary
international law now provides, and that the inter-
national consensus reflected in the document will
lead to sound strategies and solutions in the
future. As for deepsea mining, we believe an
international regime provides the only mechanism
for achieving eventual protection goals and such
concepts as protected areas of the open ocean
where no commercial activities take place."

It is not yet clear exactly how significant some of the
probable environmental impacts from deep seabed mining will be.
However, judging from research work already completed, it is not
likely environmental impacts will be a major impediment to deep
seabed mining.

NOAA is required to complete a site specific environmental
impact statement for each license or permit application, and the
Federal Government has a number of environmental protection laws
which should adequately protect the environment. With these pro-
tections already in place, and with additional planned research
completed, environmental impacts related to ocean mining should
be minimized.

Environmental groups as well as some NOAA officials are ques-
tioning whether NOAA's Office of Ocean Minerals and Energy (COME)
will be satisfactorily funded to carry out its regulatory and
environmental research functions. For fiscal year 1981, the Con-
gress did not appropriate the money requested by the program.
Consequently, OOME has only 15 full-time permanent employees and is
depending on another 12 detailees and temporary positions supplied
by NOAA. Congressional support or non-support of the program
should become apparent at the beginning of fiscal year 1982 when
Congress determines the program's appropriation.

A NOAA official told us NOAA is considering the possibility
of having the mining companies take responsibility for conducting
or contracting research work that is included in NOAA's 5-year
research plan, with NOAA's approval of the results. This action
would place the bulk of the research expense with industry and
reduce NOAA's budget requirements.

CHAPTER 6
CONCLUSIONS AND RECOMMENDATIONS

CONCLUSIONS

The United States relies heavily on foreign sources for many
minerals critical to our economy and national defense. Reducing
supply vulnerability that may be associated with import dependency
is an important national-goal. By enacting the Deep Seabed Hard
Mineral Resources Act of 1980, the Congress intended to help
achieve the goal of lessened vulnerability by prompting develop-
ment of deep seabed mineral resources.

Full implementation of the 1980 Act is inextricably tied to
the status of the Law of the Sea Treaty negotiations. The first
stated objective of the Act is to encourage successful conclusion
of the treaty. The Act also provides for continued seabed mining
technology development and actual mining operations pending con-
clusion of the treaty.

The status of the treaty, and, therefore, full implementa-
tion of the Act, presently are quite uncertain. We believe that
the goals of the 1980 Act are important and worth striving for
and that the Nation' s interests regarding augmentation of reli-
able mineral supply sources can best be served if it is a party
to a comprehensive Law of the Sea Treaty, but only an amended
treaty that properly addresses U.S. interests.

In the absence of an acceptable treaty under which the United
States might be involved in deep ocean mining, other options might
be available. Some form of a reciprocating states alternative, an
interim framework provided for in the 1980 Act and already being
examined, might eventually be considered an option to the treaty
and be extended beyond its originally intended scope.

Conclusions Regarding the
Law of the Sea Treaty

Opposition to the draft Law of the Sea Treaty has princi-
pally been focused on provisions that would affect access to
mine sites, interim investment protection, long-term investment
protection, production limits, technology transfer, and the
settlement of disputes.

Treaty Offers Reasonable Assurance
of Access to Mine Sites

The Deep Seabed Hard Mineral Resources Act of 1980 stipulates
that any international agreement to which the United States becomies
a party should provide assured and nondiscriminatory access, under
reasonable terms and conditions, to the mineral resources of the
deep seabed.

Opposition to the provisions of the draft treaty stem primarily
from (1) the view that U.S. firms are not Guaranteed access to mine
sites, and (2) the opinion that, under the parallel system, even
the unreserved site might not he available to the mining companies.

Since "Eastern (Socialist) European" nations are Guaranteed
at least three seats on the Council, a auaranteed U.S. seat on the
Council is seen by some as a necessity in protecting U.S. interests.
However, others believe that the presence on the Council, which is
guaranteed, of nations with similar interests to the United States
can adequately protect U.S. interests.

We believe that further definition of criteria to be used by
Legal and Technical Commission members (to be established in
Preparatory Commission meetings), combined with strict application
of non-political criteria by Legal and Technical Commission members
in evaluating applications, would provide adequate assurance of ac-
cess for U.S. firms. We believe this would satisfy the requirements
of section 201 of the Deep Seabed Hard Mineral Resources Act of
1980.

Long-Term Investment Protection is Needed

The draft law of the sea treaty provides for review confer-
ences to take place 15 years after the time commercial production
begins. Strong opposition to the review conferences stems from
the possibility that rules governing mining operations could be
dramatically altered in an arbitrary manner. Private companies'
ability to obtain commercial financing for mining ventures is
adversely affected by potential review conference decisionmaking
which could limit private mining companies to first ceneration
mining during which costs are projected to exceed income.

Reasonable assurance that ocean mining companies will not be
prevented from obtaining a fair return on their investment must
be provided for. As it now stands, review conference proceedings
could culminate in dramatically changed conditions for access to
mine sites subsequent to first generation mining. The parallel
system could be abolished and the private mining companies' access
thereby severely restricted.

Basic chanaes in the parallel system which miaht affect the
ability of companies to gain access to and mine the deep seabeds
must be prevented. This could be done either by (1) restricting the
procedures in which the assembly might change the mining system,
either requiring a concensus in the assembly or providing that the
assembly cannot bring about changes without Council concurrence,
or (2) seeking limits to review conference authority to changes
that do not alter the basic operational structure under which minina
is currently taking place.

Interim Investment Protection
Remains to be Negotiated

A major declaration of congressional intent, regarding any
international agreement to which the United States becomes a party,
is that the agreement protect those interim investments made by
private companies which have undertaken exploration or commercial
recovery prior to entryinto force of an international agreement.

Draft treaty provisions do not provide that protection.
Mining companies cite the absence of any kind of assurance that
they will be able to mine on those sites in which they have inves-
ted as a major reason for the marked decline in seabed mining
technology development.

Negotiations on protecting investments made prior to passage
of an international treaty were scheduled for the Spring of 1980
United Nations' conference session, but were deferred pending
total treaty review by the United States. These negotiations must'
be pursued with first rights to mining sites provided for those
who have invested in them and explored them.

Production Controls Threaten
Mining Economics

Limits have been placed on the production of minerals from
ocean mining ventures to protect developing country land-based
producers from adverse impacts on their export earnings. The con-
trols are keyed to the amount of nickel that can be produced, and
all other ocean minerals' production limits are based on nickel
production. Land-based producers, such as Zaire, of nodule-type
minerals often depend heavily on a single commodity (i.e., cobalt)
for export revenue--and this source of revenue could be affected
by seabed mining.

The production controls proposed in the draft Law of the Sea
Treaty have elicited severe opposition because their existence
threatens the economic viability of deep ocean mining. Whether this
would in fact be the case is unknown at this time due to uncertain-
ties of market prices, demands, and numbers of mines that will
actually be operating.

Current projections are that of the four principal minerals to
be mined from the ocean, only cobalt is likely to have significant
impact on the economies of developing country land-based producers.

With projections of growth in demand for nickel and the
anticipation of high cost expansion of nickel production on land,
we believe it is imperative that other options be considered for
protecting developing country interests, alternatives which would
not threaten the economics of deep ocean mining. As discussed
on pp. 22 and 23, we believe that such alternatives are available
and should be considered.

Technology Transfer Provisions
Should be Modified

The draft Law of the Sea Treaty calls for the mandatory trans-
fer of technology to the enterprise or to developing countries in
the event that the technology is not available on the open market.

The mandatory technology transfer provision is an integral
part of the "parallel system" whereby developing countries are
guaranteed access to technology needed to mine the deep seabeds.
Major opposition to this provision centers on concerns havina to
do with proprietary information, fair and reasonable compensation,
and defense sensitive technologies. Some of the concern over these
issues appears overstated in the context of demonstrated and in-
creasing availability of relevant technologies on the open market.
Additionally, protection of defense sensitive technologies is pro-
vided for in article 302 of the text which limits the application
of the provision in any instance in which the security of a national
party is jeopardized.

Ocean mining consortia maintain that private venders of tech-
nology will not make their technology available to the consortia
under conditions requiring they also make it available to the
enterprise and third world countries. The lack of any protection
for proprietary data or control over its use, is central to indus-
try's concern. The absence of any accountability on the part of
potential recipients of proprietary technology is a fundamental
shortcoming of treaty technology transfer provisions.

Technology transfer provisions of the treaty can be markedly
improved by assuring that remuneration for transferred technology
be made at a level equivalent to compensation paid by the consortia
to outside suppliers of technology, and that recipients of propri-
etary technology under provisions of the treaty are held account-
able. Compensation for technology owned and developed by the
consortia is subject to negotiation. In the event of a dispute
over compensation to be paid to the consortia by the authority
or developing countries, the adequacy of compensation should be
determined by submission to United Nations Conference on Inter-
national Trade Law arbitration as now provided for in the text.

Areas of Potential Dispute
Must be Minimized

The overall vagueness of provisions of the draft treaty, and
potential for abuse of power by the Authority have been of major
concern to those involved with ocean policy formulation in the
United States.

It is extremely difficult to gauge the validity of concerns
about potential arbitrary use of discretionary powers of the

Authority. It is critical, at this time, prior to Preparatory
Commission meetings, that areas of potential dispute be minimized.
We believe dispute limitation can, to a very large extent, be
achieved by treaty modifications as have been suggested.

These modifications, in concert with new voting arrangements
in the Council, the strict adherence to non-political criteria in
the Legal and Technical Commission as the draft treaty calls for,
and, clarification of operating procedures to be taken up in Pre-
paratory Commission meetings, all will work to minimize the need
to resort to dispute settlement procedures for concerns vital to
ocean mining ventures.

Conclusions Concerning
Mineral Conservation

Since only one of the four major ocean mining consortia plans
to use the manganese from the nodules, there is potential for
discarding enormous amounts of this strategic mineral in a non-
recoverable form. This would be contrary to congressional intent
as stated in the 1980 deep seabed mining act. And, since manganese
is a designated strategic and critical mineral, its waste would be
contrary to the Strategic and Critical Minerals Stockpiling Act.

We believe that many of the Federal agencies having some
responsibility for these matters are unaware of the potential for
wasting manganese and other minerals.

On the assumption that the United States proceeds with its
involvement in the Law of the Sea Treaty process, we feel that the
Congress needs to evaluate current industry plans with respect to
the mining and disposition of all four principal nodule minerals.
If it is determined that those mining plans, which, as now formu-
lated, call for disposal of manganese, are not consistent with tbe
intent of the 1980 Deep Seabed Hard Mineral Resources Act, the
Congress should consider amending the legislation to assure the
conservation of such strategic and critical minerals as manganese.
Options should be weighed on the most efficient way to achieve con-
servation goals, the amounts of the minerals that might be stored,
and who will bear the burden of conservation costs. And, efforts
to continue or increase Federal research and development into new
markets for manganese, such as that now underway at the Bureau of
Mines, should be evaluated.

This discussion of conservation issues pertains to the current
status of treaty negotiations. Other issues may arise in conjunc-
tion with potential alternatives to presently proposed production
controls. Conservation aspects, therefore, will require atten-
tion and monitoring as treaty negotiations progress.

Conclusions Concerning
Environmental Protection

To the extent that seabed mining 'has progressed, we believe
that the provisions of the 1980 deep seabed mining act dealing

with environmental protection have been successfully implemented
by the National Oceanic and Atmospheric Administration.

NOAA will have increased responsibilities in the future.
Consequently, it is necessary for NOAA directly and in conjunction
with future mining activities to continue studies currently under-
way, and to monitor future seabed activities as certain of the
potential environmental impacts will only be understood on the
basis of evaluations of actual commercial-scale minina operations.

If there is a resurrection of U.S. deep seabed mining activ-
ity, assuming that the major impediments to further U.S. involve-
ment are overcome, it will be up to the Congress to assure suf-
ficient appropriations to adequately assess environmental impacts.

RECOMMENDATIONS

Recommendations Concerning
the Law of the Sea Treaty

The role of the Congress has been critical to seabed minina
activities in the United States, and it will continue to play a
major role in developing policy guidelines for ocean mineral devel-
opment because of its involvement in the Law of the Sea Advisory
Committee, review and evaluation of the new administration's
position on the Law of the Sea Treaty, treaty ratification hearings,
and implementing legislation. These responsibilities provide the
Congress with a continuing opportunity to assure that the commer-
cial recovery of seabed mineral resources is realized in the most
orderly manner. In this context, we recommend that the Congress:

--Accept reasonably assured access to mine sites. The Con-
gress should accept the fact that guarantees for access to
mine sites are unrealistic in the absence of sovereign
rights to mineral resources; that the absence of such abso-
lute rights is not in itself a fundamental shortcoming of
the draft treaty; and that reasonable access can be provided
under provisions of the draft treaty subsequent to Prepar-
atory Commission deliberations.

--Insist on long-term investment protection. The overall
viability of seabed mining is contingent upon access to
mine sites beyond first aeneration mining, and reasonable
assurances for that access must be pursued. The Conaress
should insist that chances to the basic nature of the
parallel system in the review conference proceedings not
be acceptable. Fundamental changes which could alter terms
of access must be assured aaainst by either (1) restricting
the procedures in which the Assembly might chanae the mining
system (either requiring a concensus in the Assembly or pro-
viding that the Assembly cannot brine about chances without
Council concurrence), or (2) seeking limits to review con-
ference authority to changes that do not alter the basic
operational structure under which mining is currently taking
place.

--Reassert the need to protect interim investments. The
Congress has agreed, through the 1980 Act, to the need to
assure that investments made prior to entry into force of
a treaty should be protected.

--Insist on alternative means of protecting developing
countries' economies. The objective of protecting these
economies, sought with inclusion of production controls
in the draft treaty, warrants congressional support. But,
because the current production control provisions would
be cumbersome to apply and perhaps counterproductive to
-investment, and certainly not the only means by which the
objectives of protecting developing country incomes might
be achieved, the Congress should insist on the careful
development of alternatives for achieving income protection
objectives while minimizing disincentives. (See pp. 22 and
23.)

--Ensure that compensation for transferred technology is
adequate to protect the developers' investments, and that
recipients of proprietary technology safeguard it against
unauthorized disclosure.

In addition, the Congress should concentrate now on gettina
the recommendations above implemented which will minimize issues
potentially subject to dispute settlement procedures. Acceptabil-
ity and/or feasibility of dispute settlement mechanisms we do not
believe can be realistically divorced from the nature and number
of issues which might have to be subject to formal dispute settle-
ment procedures.

Recommendations Concerning
Mineral Conservation

on the assumption that the United States proceeds with the
Law of the Sea Treaty process, the Congress should make sure that
industry plans for mining and disposing of all four primary nodule
minerals are evaluated and monitored for consistency with conserva-
tion goals of the 1980 Act. Efforts to continue or expand Federal
research and development into new markets for manganese should be
considered.

Recommendations Concerning
Environmental Protection

Also on the assumption that the United States proceeds with
the Law of the Sea Tr~aaty process, the Congress, to assure the
protection of the quality of the environment, should:

--Make sure that appropriate support for environmental
research is available for NOAA's Office of Ocean
Minerals and Energy, consonant with environmental
assessment activity mandated by the 1980 Act and
necessary prior to commercial recovery operations.

--Direct that N~OAA carry out assessments of industry
mining activities. Of particular concern should
be activities which evaluate the impacts of new
engineering and equipment.

APPENDIX I APPENDIX I

PROPOSED U.S. DEEP SEABED MINING LEGISLATION
FROM 1971 TO PASSAGE OF THE DEEP SEABED HARD
MINERAL RESOURCES ACT, JUNE 28, 1980:

Year Cong. Sess.

S.2801
1971 ti; (Sen. Metcalf)

H.R.13904
19-72 H.R.13076 H.R.14918
(Rep. Downing)

(Sen. Metcalf) (Rep. Downing)
S.113 4 H.R.9

1974 .2878 H.R.12233 H.R.7732
(Sen. Metcalf) (Rep. Downing)
-I-~-�.-----------
1975.28 H.R.12270 HR.6017

1976 S.713 H.R.11879
197 ~ (Sen. Metcalf) (Reps. Murphy/Breaux)

S.2053 H.R.3350 H.R.3652
1977 - (Sen. Metcalf) (Reps . Mur phy/Breaux ) .2
1977 S.2W8
(Sen. Metcalf) (Reps. Murphy/Breaux) S.2168

H .R.12988
1978 passed House (312 to 80)

S.493 H.R.59
' 7- passed Senate (Reps. Murphy/Breaux)
a ~~sT - , _passed House
1980 I
signed by Pres. Carter, 27 June 1980

APPENDIX II APPENDIX II

TECHNOLOGY TRANSFER: FAIR AND REASONABLE
COMMERCIAL TERMS AND CONDITIONS I/

During the Intersessional period the United States Delegation
undertook to ascertain with a greater degree of clarity what was
meant by the phrase "fair and reasonable commercial terms and con-
ditions". Although it was not possible to come up with a precise
definition of this terminology, the United States Delegation was
able to compile a number of examples of terms which would in general
be regarded in commercial terms as fair and reasonable. These
examples have been drawn from practices firmly established in com-
mercial licensing agreements and transactions involving technology
transfers.

It is not possible or appropriate to set out in advance what
would be fair and reasonable commercial terms and conditions in
all circumstances, or for all such transactions. Rather the list
compiled here represents examples which, in light of commercial
practices in relevant trades, are generally considered fair and
reasonable measures to protect the technology being transferred,
to ensure fair compensation to its owner and to protect the
recipient of the technology. These provisions include terms that:

(1) establish a price - in specie, in kind or in other
appropriate form - which provides a fair return to the owner for
the transfer of the technology and any related services provided
and which may be based on factors such as the cost of developing
the technology (including direct research and development costs,
overhead and other indirect costs, and taking into account the
cost of the total development effort including unsuccessful pro-
jects), the risk to which the owner was exposed in developing
the technology, the uniqueness of the technology, the profit or
benefits to be derived or passed on by the Enterprise and a reason-
able profit to the owner;

(2) provide security for payments by means of letters of
credit or other devices;

(3) limit the use of the technology by the Enterprise to
exploration and exploitation of the deep seabed;

(4) provide for termination of the agreement in the event
of substantial breach of the agreement;

(5) require that the Enterprise provide to the owner, on an
exclusive or non-exclusive basis and without royalties, any improve-
ments which it makes in the technology transferred to it (known as
"grantbacks");

I/Informal working paper provided by Elliot L. Richardson,
former U.S. Ambassador to the Law of the Sea Conference.

APPENDIX II APPENDIX II

(6) ensure appropriate protection and proper 'handling of
leased equipment;

(7) protect the secrecy of the technology, including restric-
tions on sub-licensing or assigning the technology to third parties;

(8) require indemnification by the Enterprise to the owner in
the event the Enterprise causes damage to others by misuse of the
technology and the owner is held liable;

(9) make appropriate provisions for the protection of the
Enterprise in its use of the technology, such as warranties as to
the validity of any patent;

(10) ensure that if there are any warranties of new
technology, they take into account the untested nature of the
technology; and

(11) provide for a commercial arbitration mechanism to
adjudicate any disputes arising within the scope of the contract
for the transfer of technology including questions of financial or
other damages to be awarded.

APPENDIX III APPENDIX III

PRINCIPAL ENVIRONMENTAL PROTECTION FEATURES OF
P.L. 96-2P3 WHICH NOAA IS REQUIRED TO ACCOMPLISH

--Environmental Assessment

1. NOAA is required to expand and accelerate the program
assessing the effects on the environment from explora-
tion and commercial recovery activities, including sea-
based processing and the at-sea disposal of processing
wastes.

2. NOAA is required to conduct a continuing program of
ocean research to support environmental assessment
activity through the period of exploration and com-
mercial recovery authorized by the Act. And, within
160 days of enactment of the Act, develop a 5-year
plan to carry out the research program.

--Programmatic Environmental Impact Statement

I. NOAA is required to develop programmatic environmental
impact statements (PEIS) if, after consultation with the
administrator of the EPA and other Federal aaencies,
it is determined such statements are required. A
PEIS shall be considered for each area of the ocean
where any U.S. citizen is expected to undertake ex-
ploration and commercial recovery. The Act sets
specific time frames for NOAA to prepare draft and
final PEISs for the area where initial activity
will occur.

--Environmental Impact Statements on Issuance of
Licenses and Permits

I. NOAA is to provide environmental impact statements
for each license or permit.

--Terms, Conditions, and Restrictions

1. NOAA must ensure that each license and permit issued
for exploration and commercial recovery contains terms,
conditions, and restrictions to assure protection of
the environment. Such terms, conditions, and restric-
tions are to be developed after consultation with the
Administrator of the Environmental Protection Agency,
the Secretary of State, and the head of whichever
department is responsible for the Coast Guard.

In addition to NOAA's environmental responsibilities, the Act
further requires the Secretary of State, in cooperation with the
Administrator of NOAA, to negotiate with other nations for the pur-
pose of establishing international stable reference areas in which

APPENDIX III APPENDIX III

no mining can take place. Within 4 years of the enactment of the
Act, the Secretary of State must submit a report to the Congress
on the progress in establishing such stable reference areas,
including the designation of appropriate zones to insure a repre-
sentative and stable biota of the deep seabed.

Each licensee or permittee is also required to monitor the
environmental effects of the exploration and commercial recovery
activities in accordance with NOAA guidelines, and to submit such
information as NOAA finds necessary to assess and mitigate adverse
environmental impacts.

(008437)

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