How a US mining firm sued Mexico for billions – for trying to protect its own seabed

The Guardian | 31 January 2024

How a US mining firm sued Mexico for billions – for trying to protect its own seabed

by Laura Paddison

Local fishers helped halt underwater mining off Baja California’s coast in 2018. But then an obscure international legal process was put into motion.

The ship

When it first appeared, it looked like a floating city. For months in the summer of 2012, the ship just sat there – a hulking, confusing presence off the Pacific coast of Baja California Sur.

Florencio Aguilar was worried. A stranger in the waves was a threat. Like many others in the tiny fishing towns of San Juanico, Las Barrancas and others in north-west Mexico, Aguilar relies for his livelihood on the lobsters, octopus and abalone that thrive here. The pristine waters are also home to endangered sea turtles, a breeding ground for giant grey whales and a magnet for surfers, who flock here to ride one of the world’s longest waves.
Aguilar ticked off the possibilities: the enormous ship wasn’t one of the research vessels that edged along the Baja coast to survey the rich marine life, and it didn’t look like one of the big fishing ships that sometimes came to scoop up shrimp.

The news eventually filtered down to him from some fellow fishers. The ship belonged to the Florida-based Odyssey Marine Exploration, which had obtained a concession across a huge area of Mexican seabed to mine phosphate, a key ingredient in commercial fertilisers.

Aguilar was horrified. The project, which could see dredging happen for 50 years, overlapped directly with the fishing concession belonging to the Puerto Chale cooperative, an alliance he leads of more than 120 fishers whose families have lived off these waters for generations. “Constant dredging would finish marine life and all life in our fishing sector,” Aguilar says.

The discovery was just the beginning – the trigger for years of disruption as Aguilar and the cooperative fought against a mine they saw as an existential threat. There were angry public meetings, accusations of corruption, appeals to the Mexican president.

At last, six years later in 2018, Mexico’s government eventually rejected the mine because the potential environmental impacts would be too damaging. Aguilar and the community celebrated. For once, their story seemed to buck the trend of mining corporations trampling the tiny communities that stand in their way.

But Odyssey had an ace up its sleeve.

In 2019, it sued Mexico. To do so, it used an obscure tool of international law called investor-state dispute settlement (ISDS), which allows companies to bypass domestic courts. Suddenly, the fate of this seabed mine mattered far beyond this desert-fringed coast. Odyssey’s lawsuit had opened a window into an opaque legal system, one with the power to fatally undermine the abilities of countries to protect their own environments – just as the world teeters on the edge of climate and biodiversity breakdown.

The company

Ironically, considering the impact it could end up having on mining worldwide, Odyssey has never operated a mine before. Its roots lie in a very different kind of seabed extraction: it was set up in 1994 as a shipwreck-hunting company.

The two founders, Greg Stemm, an ex-ad man, and John Morris, a former property developer, already had a long history in the business. That same year, they were battling charges of fraud and insider trading in relation to their previous company over allegations they had misrepresented the value of a Florida Keys wreck. (They successfully beat the charges in 1997.)

The next decade was spent scouring the ocean for more valuable wrecks, and in 2007 they hit the jackpot: 17 tonnes of silver and gold coins, worth hundreds of millions of dollars, found in a wreck off Portugal’s Algarve coast. Odyssey named the ship the Black Swan, hauled the coins to the surface, loaded them into plastic buckets and flew them to Florida.

Spain protested. It said the Black Swan was one of its frigates, sunk by the British in 1804 along with more than 200 crew – and claimed the treasure legally belonged to Spain. In 2012, US courts agreed, forcing Odyssey to return the coins and pay $1m to Spain for what a judge called its “continuous, core campaign of bad faith, deception, and deflection that pervaded this litigation from the start”.

With the risks of shipwreck hunting mounting – laws were tighter and investor dollars fewer – Odyssey turned its attention to a new industry, one that could make use of its specialised ocean skills: the potentially lucrative world of seabed mining.

The reporter

When rumours about Odyssey’s underwater mine first reached the ears of Carlos G Ibarra, a journalist based in the Baja California Sur capital of La Paz, he was immediately suspicious.

Sitting outside a busy beachfront bar in La Paz on a sweltering September evening, Ibarra explains that he has lived his whole life in the shadow of mines. He spent his childhood in a salt-mine town and his adult career as a reporter, covering the impact of extractive companies here.

At first, the rumours were vague. He didn’t know exactly where the underwater mine would be placed, or anything about the company. Then he read an investor report that sent his curiosity into overdrive.

Written in 2013 by Ryan Morris, the founder of US hedge fund Meson Capital, the report was scathing. Morris claimed that since 2000, Odyssey executives and directors received $20m in cash compensation but had made losses of $180m. “We believe the purpose of [Odyssey] is to serve as a vehicle for [Odyssey] insiders to live a life of glamor hunting the ocean while disappointed investors foot the bill,” the report concluded.

An Odyssey spokesperson dismissed the report as having “factual errors, incomplete information and erroneous conclusions”. But for Ibarra, it was a cue to dig further. He approached Aguilar, who urged him to keep digging into the mining project. Ibarra then spoke to government officials, and checked the permits Odyssey had applied for.

He discovered the company had obtained a 50-year concession over nearly 270,000 hectares (667,000 acres) of seabed through a Mexican subsidiary, Exploraciones Oceánicas. When Odyssey then declared it had found one of the most significant phosphate deposits in the world – more than 580m tonnes, making it enough, the company claimed, to meet most of North America’s fertiliser needs for 100 years – Ibarra’s heart sank, and he began to write about it for anybody that would publish him.

The mine

Ibarra knew exactly how the mine would be pitched to the community. The corporate narrative of extractive projects tends to follow a well-worn path: the resource plays a vital role for humanity, mining it will benefit the local community, and there will be no permanent environmental damage.

Odyssey was no different. It claimed the fertiliser would secure Mexico’s food self-sufficiency and promised jobs and millions of dollars for Mexico through tax revenues and economic development.

The company also had an environmental pitch. Most phosphate is mined by ripping up land. Extracting it from beneath the waves would be more sustainable.

It said its large ships would dredge the seafloor, separate the phosphate on deck, and then pump unwanted material – which it said would be made up of “unaltered” sediments – back into furrows on the seabed.

Unlike deep-sea mining, which involves scooping up minerals from up to four miles (6km) down in international waters, this mine would be located in the shallower waters of Mexico’s continental shelf. This type of seabed mining is sometimes presented as environmentally preferable because coastal waters are better understood than the deep sea.
Three bottlenose dolphins jump out of the sea

But while shallower waters may lack the mysteries of the ocean’s abyssal plains, they still hold fragile ecosystems bursting with life.

Odyssey told the Guardian that seabed mining projects can “provide a clean, sustainable, and economical opportunity to source much-needed minerals”, and that the project “would employ extensive measures to limit environmental impacts”.

But some experts say that no one knows for sure what the impacts could be of the sediment plumes kicked up by dredging, or the noise, or how many organisms might be sucked up along with the phosphate. Nor do they know how quickly coastal seabeds can repair themselves.

No phosphate mining project on the seabed has ever gone ahead. In 2015, New Zealand’s Environmental Protection Authority turned down a similar proposal on the basis that it would cause “significant and permanent adverse effects”. More recently, attempts in Namibia have stalled amid heavy opposition.

“Mining will always destroy part of a habitat,” says Laura Kaikkonen, a marine scientist at the University of Helsinki who has researched shallow water mining. “It’s not an easy solution to get minerals just because it’s in shallow areas.”

Aguilar goes further. On a sleepy September Sunday in Las Barrancas, sitting in a concrete outbuilding tacked on the side of a house, with his sunglasses tucked neatly into his light purple shirt, he explains that they consider stopping the mine a matter of survival.

“We have a large body of water on the peninsula, and when it is poisoned – because that is how we describe it – fishing income and progress would obviously end,” he says.

Odyssey said references to poisoning were “incorrect”, and mining operations “would not interfere with the fishing operations”. It also pointed to support from other regional fisheries organisations.

But, over the past decade, Aguilar and the cooperative have refused to back down, fighting the mine in public consultations, and meeting the president, Andrés Manuel López Obrador, with protest banners when he visited the region.

It has been a rocky road. In 2014, Odyssey named Aguilar and Ibarra in a criminal complaint – something Ibarra only discovered when he read an article in the El Sudcaliforniano newspaper – by a representative for Odyssey’s subsidiary Exploraciones Oceánicas. He called them “pseudo-environmentalists” and accused them of extortion and “attacking consumption and natural wealth” by resisting the mine – crimes that carry a potential prison sentence of up to 10 years.

“They said that we were to blame for its lack of approval and a financial loss of millions of dollars,” Aguilar says.

“This was an intimidation strategy,” adds Ibarra.

A spokesperson for Odyssey said it “took appropriate legal actions to defend itself from an extortion attempt”, and did not intend to “intimidate or dissuade opposition to the project”. Both Aguilar and Ibarra vigorously reject accusations of extortion, and although they were eventually told no lawsuit would be progressing, for Ibarra the stress caused him to all but abandon journalism for years.

But for a while, the ordeal seemed to have been worth it. Twice the Mexican government turned down the mining permit – once in 2016, and again, definitively, in 2018, saying the mine “sought to uninterruptedly dredge the seafloor” of a place “that constitutes a natural treasure and of utmost importance for Mexico and the world”.

“We felt very satisfied,” Aguilar says, but adds, “We knew it was just a rest, and not total victory.”

He was right. In 2019, Odyssey sued Mexico itself for billions of dollars – the hypothetical future profits of the mine.

The case

ISDS (investor-state dispute settlement) is an acronym so dull it almost seems deliberate, considering the power it holds. The most benign description is a system giving companies a way to protect themselves if the country where they’re operating does something to damage their investment.

Advocates say ISDS – which is not a single law but rather a system established through clauses in more than 3,000 trade agreements and investment treaties – is a win-win, reassuring companies while incentivising investment in developing countries. But others believe it has developed into a secretive legal process that lets companies override countries’ environmental, climate and human rights laws.

It is “the wild, wild west of international law”, says George Kahale III, an international arbitration lawyer and chair of Curtis law firm in New York.

In Odyssey’s case, it claimed Mexico had breached its rights under the North American Free Trade Agreement (Nafta) by making what it described as a politically motivated decision to reject the mine, disregarding scientific evidence. It said the value of its investment had been destroyed, along with future profits, and demanded $3.54bn (£2.8bn), later reduced to $2.36bn.

The process for ISDS claims is opaque. Hearings are not held in courts, but in meeting rooms at, for example, the World Bank, conference centres or hotels. Claims are decided by a panel of three arbitrators: one chosen by the company, one by the state and one by mutual agreement. Decisions cannot be appealed, only annulled in very limited circumstances.

Kahale calls it a “caricature of a legal system” that has been “consistently interpreted more expansively against the host countries of investment in favour of investors”. (He has recently been instructed by the Mexican government to help with ISDS claims but has no involvement in Odyssey’s case.)

Since the 1990s, the volume of these cases has exploded. About 60% of claims are made by companies based in wealthy countries, predominantly the US, Canada and western Europe, against lower-income countries, says Jen Moore, an associate fellow at the US thinktank the Institute for Policy Studies. A quarter of all known claims have been filed by oil, gas and mining companies.

As well as protecting corporations from physical expropriation of their assets, these trade and investment treaties also protect them from “indirect expropriation”. Companies often resort to ISDS when a country rejects their projects for threatening human rights, climate or the environment.

“Mining companies often haven’t even been able to get a shovel in the ground – but then they bring these outrageous suits,” says Moore. She calls it “mining for profits through arbitration”.

As the frequency of claims has increased, so too have the amounts. The Odyssey case – where a relatively small investment has resulted in a claim of more than $2bn – is no longer abnormal, says Kahale. Some investment firms will even fund companies to do it, in exchange for a cut of the award: Odyssey’s own claim is being financed by the hedge fund Poplar Falls.

And companies are winning. In 2016, an arbitration tribunal ordered Venezuela to pay $1.2bn plus interest– a huge amount for a country facing insolvency – to a Canadian mining company, Crystallex, after Venezuela refused permits for a goldmine in a national forest reserve, citing concerns for the environment and Indigenous people. Crystallex claimed Venezuela had expropriated the mine.

This kind of thing casts a “policy chill”, Moore says. In Guatemala, for example, freedom of information requests apparently showed the government citing the threat of ISDS proceedings as a reason not to suspend another Canadian-owned goldmine, despite human rights groups saying it violated Indigenous rights.

In such cases, merely the threat of arbitration can work as “political leverage”, says Carla Garcia Zendejas at the Center for International Environmental Law (Ciel).

Odyssey said its arbitration proceedings are “not shadowy or secretive” and added that it has not used arbitration as a “threat” or for political leverage. “Odyssey used the only remaining tool available to it to attempt to address Mexico’s unlawful action and to protect its substantial investment in Mexico and its shareholders’ interests,” the company said.

Yet for many experts, ISDS could not be more shadowy and secretive. The proceedings are literally behind closed doors, Moore points out. “Arbitration is an esoteric thing” for most people, she notes, while providing “a convenient way to hide the fact that a company is trying to bend the hand of the government”.

The community

For Aguilar, ISDS also meant shutting out local communities like his. The Puerto Chale cooperative found this out when, with the help of Ciel, it asked to give evidence to the ISDS panel about how the mine would affect them. Their request was rejected in December 2021 by a majority of the panel – two people – who ruled that the cooperative “did not have a significant interest” in the dispute because Odyssey is seeking compensation, not a new permit.

The dissenting arbitrator, environmental lawyer Philippe Sands, issued a stinging rebuke to the decision, calling it “deeply regrettable” and writing that it would “only serve to undermine perceptions as to the legitimacy of these proceedings”. “We felt unprotected,” says Aguilar.

Zendejas notes that it is common for the communities where the projects are located to have no voice in the proceedings. “It’s a system where communities aren’t welcome.” She adds that there is nothing to stop Odyssey and Mexico from discussing a settlement that could leave the door open to a second look at the mining permit.

The future

What’s happening in Baja California Sur is being watched closely in other parts of the world.

Nearly 5,000 miles away in the South Pacific, the government of the Cook Island has handed out an exploration licence to a company called CIC to investigate mining the seabed for potato-like nodules that contain cobalt and other metals used for the green economy.

Odyssey is an investor in CIC, and is paid for services it provides to CIC. The founder of CIC? Odyssey’s own Greg Stemm.

Some environmental campaigners worry that the Cook Islands could prove reluctant to reject a future seabed mine for fear of a multibillion-dollar claim like Odyssey’s in Mexico. “Here is this company who were denied an environmental permit to mine in Mexico, and now they’re suing,” says Kelvin Passfield of Te Ipukarea Society, a Cook Islands environmental nonprofit organisation.

Odyssey’s claim in Mexico “is a warning”, argues Duncan Currie, an international lawyer with the Deep Sea Conservation Coalition. He says that countries that hand out seabed exploration permits – particularly to companies already suing other countries for billions of dollars – are putting themselves at risk. “While some countries see sea mining as a potential source of riches, I think these are really good examples that countries need to tread very carefully.”

One way they can protect themselves is by rejecting the whole international arbitration system, Moore argues.

Pakistan, Ecuador and Bolivia are among those that have started terminating agreements with ISDS provisions. Doing so can be a tricky process, however. “The myth that international investment agreements are necessary to attract foreign direct investment remains strong,” she says.

The ISDS clause was also removed between Canada and the US in the renegotiated Nafta (now called the USMCA) which went into effect in July 2020. Chrystia Freeland, then Canadian minister of foreign affairs, said at the time this was one of her proudest achievements: “ISDS elevates the rights of corporations over those of sovereign governments. In removing it, we have strengthened our government’s right to regulate in the public interest, to protect public health and the environment.”

ISDS provisions still remain between the US and Mexico under the renegotiated agreement, but are more limited – oil, gas and transport cases can go directly to ISDS but others must first go through the domestic courts. Yet ISDS provisions remain in many other trade agreements Mexico has signed, including with Canada.

Mexico currently faces more than $11bn in ISDS claims, according to a recent calculation.

For those who have spent years battling the mine, it’s a waiting game. Ibarra has steadily returned to journalism, digging into the mining companies and mega-tourism developments springing up across Baja California Sur; he still keeps one eye on Odyssey’s plans.

The fishers who have spent the last decade in fear of the mine, meanwhile, still get up every day at 5am. On San Juanico’s wide, sandy beach, lights bob about in the inky darkness as men with head torches circle a small fishing boat – loading lobster traps, checking the motor, fixing the radio. When they’re ready, a truck pulls the boat towards the ocean, roaring in the quiet pre-dawn. They wait for the right wave, push the boat out into the surf and speed towards the exact location where Odyssey wanted to mine.

People here agree that Baja California Sur needs development: better roads, more reliable electricity, better healthcare. But most don’t believe they will benefit from a mine they see as a threat to fishing and tourism – the region’s lifeblood.

“To give it all up for a project that will just bring destruction, that will make a few people rich and will make thousands of families poor, and future generations poor …” says Aguilar, trailing off.

If Odyssey wins a second look at the mining project, he says they are prepared to keep fighting. “We would raise up all the people throughout the peninsula to organise leadership from point to point, and in absolute opposition.

“I don’t know what we would do out in the sea – but we would have to do something to stand our ground.”

source: The Guardian