Foreign Affairs

Law of Sea Treaty Could Cost U.S. Trillions

It’s the year before a presidential election, so it must be time to debate the Law of the Sea Treaty (“LOST”) again. As recently as last Thursday the Chief of Naval Operations pleaded for the U.S. to join the treaty. The Obama Administration has supported Senate action on LOST since at least May 2009 when it released its Treaty Priority List.

The last time LOST came up was in 2007 when the Senate Foreign Relations Committee, then chaired by Sen. Joe Biden, held hearings. But the treaty was never brought to the floor for a vote. 2011 is beginning to feel a lot like 2007.

Sen. John McCain recently spoke at the Center for Strategic Studies regarding U.S. interests in the South China Sea. He called on the Senate to “decide whether it is finally time to ratify the Law of the Sea Treaty.” McCain accused China of “working within the Convention to advance fringe views that aim to deny access to international waters.” The United States, he lamented, lacks “a seat at the table” since it has not acceded to LOST.

This charge is overblown, to say the least. When it comes to LOST, there is neither a table nor chairs to sit on.

LOST is much more than the navigational provisions that McCain supports. The freedom-of-navigation provisions—relating to the high seas, territorial waters, international straits and archipelagic waters—represent the proverbial “baby in the bathwater.” LOST cannot be judged solely on the positive navigational provisions without regard to the negative “bathwater” provisions.

One of LOST’s “bathwater” provisions, Article 82, would cause the United States to lose a significant amount of revenue. If the U.S. ratifies LOST, it would be required under Article 82 to forfeit royalties generated from oil and gas exploration on the continental shelf beyond 200 nautical miles, an area the U.S. calls the “extended continental shelf” (ECS).

Under current law, oil companies are required to pay royalties to the U.S. Treasury (generally at a rate of 12½% to 18¾%) for oil and gas exploration in the Gulf of Mexico and off the Northern coast of Alaska. The Treasury retains a portion of those royalties, while the rest goes to Gulf states and the National Historic Preservation Fund.

But if the U.S. was a member of LOST, it would be required to transfer a portion of that royalty revenue—now considered “international royalties”—to the International Seabed Authority, a UN-style organization created by the treaty and based in Kingston, Jamaica.

How much are we talking about here? It’s difficult to estimate the volume of the oil and gas on the ECS, but the U.S. Extended Continental Shelf Task Force, an interagency project currently mapping the extent of the ECS, estimates that the ECS resources “may be worth many billions, if not trillions of dollars.”

If the U.S. joined LOST, it would be required to pay “international royalties” beginning in the sixth year of production at each exploration site on the ECS. Starting in year six, it would pay 1% of the total production to the authority. Thereafter, the royalty rate increases in increments of 1 percentage point per year until year 12, when it reaches 7%. The royalty rate remains at 7% until production ceases. In sum, starting in the 12th year of production, about ½ of the revenue that would otherwise go to the U.S. Treasury would instead be sent to the authority.

So who would benefit from this American largesse? The final say regarding distribution of Article 82 royalties is the “assembly,” a body made up of more than 160 countries. The United States would be powerless in the assembly, where it has only a single vote, to prevent the transfer of royalties to repugnant regimes. The assembly may vote to distribute royalties to undemocratic, despotic or brutal governments in Belarus, Burma, China or Zimbabwe—all members of LOST.

Perhaps the funds will go to regimes that are merely corrupt. Thirteen of the world’s 20 most corrupt nations according to Transparency International are parties to LOST. Even Cuba and Sudan, both considered state sponsors of terrorism, could receive these “international royalties.”

Those who favor U.S. accession to LOST must ask themselves why the United States should siphon off wealth from its own continental shelf for the benefit of foreign countries that cannot or will not spend the necessary resources to develop their own continental shelves. Instead of diverting U.S. revenues to such dubious purposes, the Treasury should retain any wealth derived from the U.S. ECS for the benefit of the American people.

As much as McCain and others would like to keep just the “baby” navigational provisions of LOST, it is impossible to do so without swallowing the treaty’s “bathwater” provisions, including Article 82.

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