Hydraulic fracturing has transformed the shape of world energy markets, turning the US into the world's top oil producer. But what is less well known, outside the energy industry, is that it did this largely without making any money.
For most of the last 30 years, fracking companies have earned below their cost of capital. Every time the industry has looked to be getting close to profitable, its own success has put the ceiling on the market, bringing energy costs back down. There is a lesson there for commodity producers. No matter what your demand forecast is, if you can't get out of the right-hand side of the cost curve, you will eventually find yourself out of the money.
This is a lesson that investors should be mindful of, as the mining industry seems to be experiencing one of the periodic resurgences of interest in deep sea minerals.
The history of deep sea mining is one of long periods of inactivity, punctuated by brief episodes of exuberance, which usually last just long enough for serious money to be lost. The first such boom was triggered in 1974, as the mining ship Glomar Explorer, owned by tycoon Howard Hughes, began operations in the Pacific Ocean, purportedly in search of polymetallic nodules.
But in a bizarre twist, the Glomar Explorer was not actually looking for minerals. The ship, operated by the CIA, was in fact recovering a sunken Soviet submarine from the deep ocean, and its supposed mining activities were in fact only a cover story.
Despite this, the apparent evidence of an advanced deep sea mining project spurred a brief boom in interest in the 1970s, which saw hundreds of millions of dollars sunk in surveys of the ocean floor. But interest ebbed away as the practical constraints of such a project became clear.
Still, the Glomar incident was enough to cement the existence of polymetallic nodules in the minds of hopeful investors. These nodules are precipitated out of seawater and take the form of potato-sized polymetallic lumps that lie evenly spread on or slightly below the seabed, at depths of 4km and below.
The predominant metal by weight is typically manganese, at 20-30%. But although high-purity manganese is a valuable battery mineral, there is no evidence that these modules would be a better feedstock than the amply available terrestrial manganese ore, which is predominantly used in steelmaking.
Of more economic interest would be the nickel and cobalt usually found in these manganese nodules. These battery metals have constricted supply outlooks, even as demand is expected to soar. The existence of a single untapped resource containing many of the key minerals needed in a battery has proved an exciting one.
What Norway's deep sea mining plans show, and the failure of Nautilus underlines, is that hype and investor money do nothing to shift the underlying economic realities.
Since then, deep sea mining has been an idea that won't die. In addition to the polymetallic nodules found on the abyssal plain, companies have also started to take an interest in the copper-rich massive sulphide deposits found near hydrothermal vents, and cobalt-bearing manganese crusts which can be found on the top of sea mounds.
But anyone taking these mining plans seriously should have a long look at the history of Nautilus Minerals, which listed on the TSX in 2007 with a plan to exploit a massive sulphide deposit off the coast of Papua New Guinea. Nautilus was seen as the market leader in deep sea mining for several years, until its heavy cash burn, dubious economics, and the massive unanswered environmental questions around the project led it toward a drawn-out bankruptcy which saw it delisted from the TSX in 2019, with the Papuan government forced to write off an investment of around US$120 million.
Now deep sea mining is back in the news, this time spurred less by an individual country, and more by rising international debate over how to regulate it.
The future of deep sea mining is increasingly pushing countries into opposing sides. The greater number are those such as Germany, France, Spain, Chile, Costa Rica, New Zealand and Panama which have opposed deep sea mining.
These countries have called for the UN-affiliated International Seabed Authority (ISA) to push back the deadline for deep sea mining regulations past July 2023, which would be essentially a moratorium on projects.
The ISA regulates mineral rights on any seabed areas outside jurisdiction, which in effect gives it veto over any project more than 12 miles offshore, and which sits beyond the limit of a nations' continental shelf.
Some nations, including Brazil, the Netherlands, Portugal, Singapore and Switzerland have not called for an international moratorium, but stated that they would not approve any mining contracts, regardless of the decision of the ISA, until further environmental safeguards are enacted.
But other countries, particularly smaller nations with larger areas of minable seabed, want to accelerate.
Leading that charge is Nauru, a Pacific Island nation with a population of around 11,000 residents, which in 2021 triggered the process to enforce the ISA's July 2023 deadline.
Nauru has been working with the current most high-profile deep sea mining company, The Metals Company (TMC). The Canadian company plans to apply for a licence in July, if permitted. TMC has also partnered with other Pacific nations, including Tonga and Kiribati, to explore offshore for minerals.
But the most powerful proponent of deep sea mining is China. In March the government-owned China Daily newspaper reported that the country would invest in deep sea mining research, amid fears it was lagging behind western nations. The state-owned commodities trader China Minmetals is one of a number of Chinese corporations that already has an exploration licence with the ISA.
The latest country to pitch into the deep sea mining debate is Norway, which on June 20 outlined plans to open 280,000 km2 of sea floor to commercial exploration and mining.
A statement from Norway's Petroleum and Energy Minister Terje Aasland, suggested that deep sea mining could be an "important source of minerals" for the green energy revolution.
"If proven to be profitable and extraction can be done sustainably, seabed mineral activities can contribute to value creation and employment in Norway while ensuring the supply of crucial metals for the global energy transition," Aasland said.
But a closer look at Norway's deep sea mining prospects will underline just how much the fledgeling industry is built on high hopes and hot air.
In the latest batch of seabed survey results, released by the Norweigen government in 2020, sampling of the Mohn ridge, the most prospective region, returned an average of less than 1% copper, with no standout hits and negligible cobalt content.
These are not numbers that would attract any excitement for a terrestrial mining project, let alone one thousands of metres below the surface.
And bear in mind that deep sea mining projects are seabed operations, with no prospect of improving economics by going deeper into the deposit.
Samples of the Mohn ridge released in 2018 showed better results, with a couple of standout hits of over 10% copper, with decent cobalt content, but also plenty of duds, from a series of highly selective samples taken from around hydrothermal chimneys. The samples averaged about 4.5% copper, and 0.3% cobalt.
For context, the Papuan project Nautilus Minerals failed to make progress, Solwara, had a mineral resource estimate with indicated resources of over a million tonnes, at 7.1% copper and 5g/t of gold.
It would be a real pity, for miners and for the energy transition, if the next upswing of the commodity cycle bought money into the mining space, only for that money to be tossed fruitlessly into the sea.
What Norway's deep sea mining plans show, and the failure of Nautilus underlines, is that hype and investor money do nothing to shift the underlying economic realities. Mining on the land is hard. Mining deep underwater is going to be much harder, much more expensive, and much less predictable.
Consider the fact that the worlds deepest offshore oil project, Shell's Perdido platform, in the Gulf of Mexico, operates at a water depth of about 2450m, while most supposed deep sea mining prospects are at nearly double that depth. Decades of exploration have failed to uncover the sort of eye-watering grades and tonnages that would even begin to justify operating in such extreme environments.
And all of that is without taking into account the scale of environmental effects. Deep sea mining would involve uncontrollable release of debris and tailings into the open ocean on a massive scale, at a time when terrestrial miners are having to work ever harder to secure their social licence to operate.
But all these objections pale in comparison to one overwhelming one. At a time when high-quality projects are sitting unfunded, when exploration in many jurisdictions has ground to a halt, and when both equity markets and banks seem to have turned their back on the industry altogether, why would deep sea mining be a sensible allocation of capital?
With a bullish enough price forecast, almost any project starts to make sense. So it isn't possible to say definitively that commercially viable deep sea mining operations will never be operational. But it is a mathematical certainty that if or when prices start to rise, the companies to benefit will be those on the left-hand side of the cost curve. And given nobody has been able to suggest how a deep sea project could get there, it would make much more sense for metals bulls to sink their money into one of a host of terrestrial copper, nickel, or cobalt projects that are currently languishing.
Mining has had a long wait for its time in the sun. Investors have a tendency to be distracted by sexier industries, with overvalued fly-by-night startups like Juicero, Theranos, and WeWork generating more column inches than many of the biggest mining companies combined.
And the recent flashy failures of Silicon Valley should underline the fact that momentary investor exuberance can be based on the flimsiest of foundations. Even as metal supply and demand forecasts slip ever deeper into deficit, crypto mining attracts more attention than mineral mining. It would be a real pity, for miners and for the energy transition, if the next upswing of the commodity cycle bought money into the mining space, only for that money to be tossed fruitlessly into the sea.