Petroleum: Producing States Of Malaysia in Arms Against PETRONAS

• The cancellation of the East Coast Railway Link(ECRL) inflamed the East Coast states of Terengganu and Kelantan as it will likely retard future growth there. These  are two  Malay states,  governed by PAS, poor yet contributing substantially to the Federal coffers.

It appeared that these two Islamic states are unlucky. Has God foresaken them?  Has God forgotten about fairness? Across  the South China Sea, Sabah and Sarawak also face the same predicament in the same country. This may  just simply be the curse of petroleum  for these states. Malays are too familiar with the movie ‘sumpah orang minyak’, except that this one still happens in the era of Malaysia Baru. Or rather, is this also a curse for Malaysia?

Since  the Petroleum Development Act 1974 was introduced it was Sarawak, Trengganu and Sabah subsidizing the other states in the country.  Recently, Kelantan  joined this unfortunate group of poor states now jointly milked by PETRONAS, with only meagre cash compensation  to keep them quiet. No wonder that these states, particularly Sarawak and Sabah question the existence of this Act.

Yet  West Malaysians, particularly those living  in the Klang Valley, the major beneficieris of oil money, were never thankful, but instead  looked down upon East Malaysians and other poor states. Don’t blame the Klang Valley people  to feel that way, they are actually cleverer, at least in the sense of being winners in getting Petroleum money.

Many  Malaysians from Borneo states may feel proud of the modern and world class infrastructure such as toll roads, MRT, electric trains, KLIA , Putrajaya administrative capital and skyscrapers, in particular the PETRONAS Twin Towers they see in Kuala Lumpur and its suburbs. However, few realise that these structures were actually built from resources taken from poor petroleum producing states.

69% of the country’s oil and gas production actually comes from Borneo states, Sarawak accounting for 40% and Sabah 29% while the rest come from Peninsular states, mainlyTerengganu. Together these states’ oil and gas resources financed up to 40% of the Federal Government Budget.

Sarawak was lucky to have Tan Sri Adnan Satem as Chief Minister who died in office about two years ago. Tok Nan, as he was affectionately called by Sarawakians,  was the first Borneo state leader who started effective fight for  petroleum and territorial rights  for Borneo states under MA63. This was taken over by Abang Jo as soon as he succeeded Tok  Nan and luckily he had a sympathetic ear of PM Najib who promised to return all Sarawak rights that had been taken away.  Not to be seen as unconcerned, Tun Mahathir and Pakatan Harapan also promised likewise. It was a promise for Petroleum royalty of 20%.

Sarawak demand actually goes farther than the above. Sarawak indeed has its Oil Mining Ordianace 1958 better known as OMO58. This Ordinance existed prior to Malaysia day, never been repealed, so legally is still in operation until today and protected by the Malaysian Constitution.

The Ordinance’s existence, area of operation and rights to regulate oil and gas exploration and production is also protected by Malaysia Agreement 1963 (MA 63) signed by the representatives of  Malaya, Singapore, Sarawak and Sabah for the purpose of forming  the Federation of Malaysia.

On the other hand Petroleum Development Act 1974 was passed by Parliament but was never ratified by the Sarawak DUN as required by the Malaysian Constitution.

It should be noted that the Chief Minister of Sabah Datuk Seri Shafie Apdal has also declared the state’s stand to demand for 20% petroleum royalty based on gross value of production which is similar to Sarawak’s stand and as promised in the Pakatan Harapan election manifesto.

BN government under Najib would not face problems in fulfilling major portion  of its royalty promise as it has adequate GST fund to meet the resulting shortfall in  Federal Government revenue. But the PH government under Tun Mahathir backtracked and suddenly found that it didn’t have the money. Tun Mahathir even changed the term ‘Petroleum Royalty’ in his efforts to convince the producing states to accept lesser amount.

Tun Mahathir recently announced  his government would honour the promised 20% oil royalty payment, only to later confirm that the 20% cash payment would be based on Petronas profit as against percentage of gross production currently.

This disappointed and angered the oil producing states but now they are wondering the implications of this change in the calculation. So far nobody came out with a satisfactory answer, least of all PETRONAS. I am now volunteering a calculation that should help the public to understand this issue and whether the oil producing states should accept the offer. The calculation results  are given below:

OIL AND GAS ROYALTY EXPECTED FROM PETRONAS  FOR SARAWAK AND SABAH

(IN RM BIL)

The above table shows a comparison between what petroleum producing states were estimated to have received under the existing royalty payment and what they expect to receive should they accept PH offer of 20% of profit. The PETRONAS audited financial statements were used in the analysis for period of the last 5 years from 2013 to 2017. In view of the absence of figures for the producing states,  a process of apportionment is used to estimate figures for those states.

During the above period, year 2016 is picked to represent the worst case scenario when crude oil price was at USD 46 per barrel and year 2014 the best best scenario with crude oil price of USD 87 per barrel.A 20% royalty based on gross production value should mean that Sarawak is expected to receive a minimum of RM 5.68 bil and the maximum of RM 10.08 bil.

In contrast, the new offer from Pakatan Harapan should see Sarawak receiving a 20% profit share of RM 1.27 bil at the minimum and RM 3.88 at the maximum. Even this is assuming  royalty at 20% of gross profit figure rather than net profit figure which will be even lower. The Sabah scenario can also be read from appropriate  columns of the above table.

Kindly note that these are the best estimates computed from the actual published  audited accounting data of PETRONAS and oil and gas production data published by the Department of Statistics Malaysia. People familiar with the industry are aware of the conditions imposed under the Production Sharing Contracts(PSC),  but maximum limits for cost of oil are  maximum limits  only as the term suggests, and are therefore higher than the actual cost of oil incurred in the production of those oil and gas. This factor has positive impact on gross profit calculation.

Based on the above analysis it does not make any sense for the producing states to accept the new cash payment offer by Pakatan Harapan government which is much lower than the promise they made in their election manifesto.

The above analysis also indicates that PETRONAS can afford to pay out 20% of its gross revenue based on production or alternatively pay out 40% of its gross profit in addition to the current 5% royalty.

As such, Azmin Ali the Minister in charge, being a new person in the field and a bright hope for the country, should have attempted to understand and weighed the data carefully before making the recent offer to the petroleum producing states. In any case the petroleum resources belong to the states.

DAH IKHWAN

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