A new report by the World Bank said Pacific Island countries including Solomon Islands should be cautious over any plans for mining of the seabed.
It said that Deep Sea Mining will be a challenge for both the investor and the Government if countries intend to venture into this lucrative but unknown industry.
The report, “Precautionary Management of Deep Sea Mining Potential in Pacific Island Countries,” was released last week.
Solomon Islands under the Ministry of Mines records have shown offshore exploration the highest with tenements so far, unlike on land.
Currently, Papua New Guinea is the only country in the region to have granted a license for ocean floor mining.
Documents show Bluewater Minerals (SI) Ltd is seeking to explore a total of 81 tenements in the country’s waters.
Of those 81, 67 tenements are under valid exploration licence while 14 are still pending the minister’s signature.
All tenements are located within Temotu province, while one at Kana Keoki in Western Province.
The World Bank report said the difficulty to doing this should be adhered to, as there are no demonstrated findings to prove the theories.
“Unlike terrestrial mineral deposits, far less is known about the costs of finding and exploiting deep seabed deposits.
“Nor have enough data been collected to know the economics of the “average” deep seabed deposit or to predict the frequency of above and below average deposits.”
The report said there will be repercussions for sure to this unknown development.
“It will be especially hard to determine in advance how profitable mining will be, at least in the initial stages of development of DSM.
“Fiscal terms fixed in advance could turn out to be entirely unbalanced, favoring one side or the other far too much.
“Indeed, if terms were left to negotiation, the high level of uncertainty and risks borne by the investor would likely lead to the Government having to make large concessions to secure any investment.
“If, later on, it turned out that mining could in fact be done very profitably, the Government would not be in a position to share in those benefits, except by reneging on the agreement and changing terms in its favour.
“This problem, which is encountered in terrestrial mining as well, will be especially acute for DSM until the sector has matured.”
It added some governments in the region may see DSM as an opportunity to generate windfall revenue, even as early as when awarding rights to explore for exploit deep seabed minerals, through a system of cash bonus bidding, such as is commonly used in the oil industry.
“However, this is unlikely to be a viable approach so long as commercial risks remain very high and only a small field of players exist.
“Similarly, some governments may wish to participate financially in DSM, to gain direct access to profits.
“However, it should be recognized that such equity participation would be placing public funds in the riskiest of all mining ventures.
“Governments could be better off limiting or eliminating downside risks, while retaining an opportunity to participate in any upside through a resource rent tax.”
The report states that because of the new nature of DSM, Governments may be poorly placed to assess the counter-factual and unless incentive systems are very well defined and monitored, they can be open to abuse, denying Governments badly needed revenues.
“There is also likely to be pressure from investors to receive fiscal stabilization assurance for the same reason that DSM projects are high risk and the investor is acting as a pioneer.
“Companies will want to protect themselves from any temptation the Government may later have to renege on the fiscal terms to the disadvantage of the company.
“Care should be taken to limit the application of such stability assurances in terms of both duration and scope.”
By BRADFORD THEONOMI