October 6, 2014

“The Gold Rush?”

Increasing demand for rare minerals and developments in mining technology has shifted mining companies’ focus to deep sea mining. The realistic opportunities to excavate industrial metals and rare earth elements (“REE“) over vast areas have been a likened to the gold rush of the 19th century. David Cameron believes that the deep sea mining industry has the potential to contribute up to £40bn to the UK economy, and the value of gold on the seabed is estimated to be ten times the US gross domestic product. However, the complexity and uncertainty of the mining process has led to certain commentators arguing that the effects of deep sea mining are a real cause for concern. In any circumstance, insurers need to be aware and understand the risks that they are writing and the extent to which they can be liable when insuring deep sea mining.

Deep sea mining is not a new concept. Attempts were made during the 1960s to locate and excavate polymetallic nodules. Nodules are lumps of compressed sediment containing, amongst other things, manganese, iron, nickel, copper and cobalt. Technical challenges, on-shore opportunities and the decreasing price of metal meant that deep sea mining of nodules was abandoned. An alternative form of mining was discovered in the 1970s, which is being used by the world’s first deep sea mine in Papua New Guinea. Hydrothermal vents release extremely hot seawater laced with minerals and metals obtained from being filtered through the seabed. The fluid then reacts when released into the cold alkaline sea and creates deposits on the sea floor, which are called seafloor massive sulphides (“SMS“). SMS is mined by breaking up the top layer of the seabed and pumping the SMS into piles. The piles of SMS are then sent up to an awaiting vessel above the sea to be transported and then refined.

Opportunities like the deep sea mine in Papua New Guinea are approved by the International Seabed Authority (“ISA“). ISA was set up in 1994 after being enshrined in the 1982 United Nations Convention on the Law of the Sea. Deep sea mining contracts are issued by ISA and allow companies to explore specific sections of the seabed for 15 years:

  • 75,000km² for nodules; and
  • 10,000km² for SMS.

Companies must partner with a nation state to be able to obtain a license from ISA. To date, 26 exploration licenses have been sanctioned.

Environmental campaigners believe that deep sea mining will jeopardise sections of the sea bed and in certain cases cause the extinction of certain life forms. Scientists have said that as well as the physical destruction of habitats, this type of mining could smother deep-sea species with suspended plumes of sediment. Species could also be disturbed by noise, light pollution and exposure to toxic metals and other chemicals released by the mining. However, the effects to the environment are speculative and are yet unknown. ISA believe that compared to on-shore mining:

“Seabed mining has a smaller footprint, and has a more environmentally friendly process than landing mining.  It does not impact waterways, has reduced carbon emission as a result of limited heavy machinery with less overburden meaning a smaller volume of non-valuable rock is removed and disposed of before the resource is exposed. Additionally, seabed mining does not require additional roads, surface ore-transport systems, buildings or other permanent infrastructure that could be disruptive to indigenous or native populations”

Insurers should be careful of the risks that may arise from deep sea mining. The vast opportunities could lead to a variety of risks. The lack of history in the sector means that this is a relatively unknown market and risk. As the market expands, the knowledge of the risks will grow. Two distinct risks that deep sea mining companies will want covered, similar to offshore energy risks, are:

1. Product liability

  • Physical damage; and
  • Loss of hire.

2. Environmental liability.

The products being used to deep sea mine are new and experimental, they will be untested in harsh environments under water. Therefore, they are highly at risk to both physical damage and loss of hire.  As regards environmental liability, insurers are already wary of pollution and environmental risks from a financial and reputational perspective. ISA recognises that deep sea mining will cause “inevitable environmental damage”.

Although the technology is largely unproven, the increasing demand for industrial metals and rare earth elements for smart phones and flat screen TVs, amongst other products, means that the opportunities could outweigh the risk.  Insurers will need to determine whether they want to wait and establish whether this is a safe market or be a front runner and take a larger portion of the result, be that success or failure. Determining the extent and limit of liability on the risks will be an unknown quantity.

If you found this article useful, please share it using the buttons below.