Royalties
Quicktabs: Keywords
Opponents of the Convention often cite its imposition of royalties on ECS production as an important reason to reject the Convention. Under the Convention, parties must make payments to the ISA based on the value of resources extracted from sites on their extended continental shelves. Production companies would be able to keep the entire value of production at each site for the first five years, subject to any licensing fees imposed by the U.S. Government. Payments to the Seabed Authority would begin at 1% of the value of production in the 6th year of exploitation at a site and rise 1% per year to a maximum of 7% in the 12th year and following years. These royalty rates were negotiated by the U.S. Government with extensive input from U.S. oil and natural gas interests. As oil and natural gas companies have recognized, the royalties are reasonable in view of the immense value of the resources that would be made subject to the United States’ exclusive sovereign jurisdiction. The oil and natural gas companies – and the U.S. Treasury – would be able to retain much more than the U.S. would be required to pay to the Seabed Authority. Notwithstanding the required payments to the Seabed Authority, joining the Convention would be overwhelmingly beneficial to U.S. economy and the U.S. Treasury.
Exploitation of resources from the U.S. ECS is expected to generate royalties in the near future, and the United States will forgo some of those roy- alties if it joins UNCLOS. The potential financial impact of joining UNCLOS is evident from a brief review of how revenue is generated from activities currently taking place on the U.S. outer continental shelf within the 200 nm line.
A wealth of mineral resources (e.g., oil and natural gas) lies below the surface of the U.S. OCS. Alaska’s OCS alone may contain almost 10 billion barrels of oil and 15 trillion cubic feet of natural gas.29 Massive known reserves of oil and natural gas also lie beneath the OCS in the Gulf of Mexico.
The Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) in the U.S. Department of the Interior manages the nation’s oil, natural gas, and other mineral resources on the OCS.31 One of BOEMRE’s primary activities is managing sales of offshore oil and gas leases. Through BOEMRE, the United States leases OCS tracts to companies for exploration and exploitation. The companies bid competitively for leases, and the winning company is required to make certain pay- ments to the Secretary of the Interior for deposit into the U.S. Treasury.
One of the ISA’s key functions is to redistribute royalties generated from resource production on the outer continental shelf to other countries. Treaty opponents have suggested the ISA could agree to a distribution formula that would pay out royalties to U.S. enemies.
True, the treaty does contain revenue-sharing provisions. Companies are allowed to operate royalty free for the first five years of production, then are subject to payments to the ISA of 1 percent of production value beginning in year six and increasing 1 percent per year after that, maxing out at 7 percent in year 12. But this is where opponents’ trumped-up fears about paying terrorists parts ways with reality.
As Secretary Clinton pointed out at the Foreign Relations Committee hearing, the treaty specifically provides the United States with a permanent seat on the ISA council, a key decision-making body, effectively giving us veto power over how distribution would occur.
Yes, as the Heritage Foundation reports, final decisions would be made by the ISA’s general assembly. But the assembly would only be voting on policies the council recommended unanimously, meaning we could block any proposal from even getting to a vote at the general assembly. This de facto veto power means the United States would always be able to prevent royalties from being distributed to countries we have designated as state sponsors of terrorism.
To put this in terms treaty opponents can better understand, it would be as if every senator on the Foreign Relations Committee had to approve the Law of the Sea treaty before it could be considered by the full Senate for ratification. Under those circumstances, would the treaty ever see a ratification vote?
Ask Sen. Risch. Then think about how likely it would be for the United States to approve a payment formula that would send cash to Somalia or the Palestine Liberation Organization. It’s just not going to happen.
If the words “United Nations” are a red flag to some, the concept of a foreign entity taxing a U.S. corporation is anathema. This is what some, including Senator Risch, see in UNCLOS. He argues that since 1776, the United States has never ceded its authority to tax anyone else.29 As Secretary Clinton pointed out, UNCLOS is a royalty agreement related to drilling and extraction in areas beyond 200 nautical miles from a coast.30 She has stated that U.S. companies already pay royalties to at least one commission—the Inter- national Telecommunication Union—so a precedent exists.31 U.S. oil and gas companies routinely pay royalties to foreign nations based on profits made from the materials pumped or extracted in these countries. Another leading isolationist, Senator James Inhofe of Oklahoma, argued that the royalties were taxes paid to a foreign entity. The Chairman of the Committee, Senator John Kerry, responded that President Reagan renegotiated this issue “with the oil companies and gas companies at the table” and they all agreed to the royalties. He also pointed out that the UNCLOS royalties were far less than the royalties paid in the Gulf of Mexico. Indeed, while certain isolationists may object to these royalties, those who would be paying them—the Exxons, Shells and Lockheed Martins—support UNCLOS. These companies realize that 93 percent of some profit is much better than 100 percent of nothing, as they are wary of drilling on the Continental Shelf since the United States has not ratified UNCLOS.
Some opponents of ratification have objected to the Convention’s provisions concerning revenue sharing of proceeds from the outer continental shelf. Under the Convention, no payments are owed for the first five years of production (which are typically the most productive). Beginning in year six, payments equal to 1 percent of the value of production at the site, increasing 1 percent each year to a maximum of 7 percent, are owed to the International Seabed Authority.
Significantly, the U.S. oil and gas industry, which would likely make these payments, does not oppose the Convention’s revenue sharing provisions. After noting “the significant resource potential of the broad U.S. continental shelf,’’ Paul Kelly of Rowan Industries, representing the American Petroleum Institute and other major industry groups, told the Senate Foreign Relations Committee in October 2003 that “on balance the package contained in the Convention, including the modest revenue sharing provision, clearly serves U.S. interests.’’