The UNCLOS royalty: a debate in the deep blue sea

Statements made in the run up to the Norwegian general election highlighted a little known, but potentially significant, payment called the UNCLOS royalty. UNCLOS stands for the 1982 United Nations Convention of the Law of the Sea, which is best known for its use in maritime boundary disputes. However, Article 82 of the treaty dictates that coastal states must make royalty payments to the international community when it exploits non-living resources that lie beyond a country’s ‘exclusive economic zone’ (EEZ). Oil and gas exploration in countries such as Norway, Canada, Australia and Russia is now encroaching on this zone. Therefore, the 35-year-old Article, that has so far been only part of philosophical debate, will be put to the test. The royalty rates and timing are clear. However, the government may look to pass this liability on to the investor. Who should bear the final burden? We investigate the various options and impact on value.