Petronas vs Petros: Resolve it once and for all

Not many lawyers are aware of item 3 Part V of the Federal Constitution with regard to additional sources of revenue to the states of Sabah and Sarawak, which is among the clauses clearly spelling out oil royalty for Sabah and Sarawak is 10%.

It was NEITHER 20% as Anwar once promised in past campaigns as opposition leader NOR was it 5% as spelled out in the Petroleum Development Act (PDA) put together by Tengku Razaleigh. 

Part V, which most lawyers tend to skip reading, spelled out the irrevocable Federal and State list.

This knowledge would come in handy in the erupting issue of oil royalty between the state of Sabah and Sarawak with the Federal government. As of late, the Sarawak side are bluntly calling Petronas officials in the face as robbers. 

Oil royalty dispute

Its been a while since the last posting on Sarawak in February, "Post-Taib Sarawak". 

Thee oil dispute was not touched yet. The on-going eruption over oil royalty was expected since Petronas staff were denied working permit and thrown out of Sarawak in 2016 when Taib was still alive. 

In fact, the oil royalty issue have been simmering since former Foreign Minister, Dato Anifah Aman organised a forum at the Universiti Malaysia Sabah, Kota Kinabalu in March 2015. 

He was joint head of a Ministerial committee established as part of the initiative of Najib to resolve the 50-year revisit of the Malaysia Agreement 1963 (MA63). 

Since 2021, Anifah has chugged aside diplomacy and openly blatant on MA63 demand. He quit UMNO as promised in 2018 should government fail to fulfill MA63.

The difficult engagement between Petronas and Sarawak government now gained public attention and led a lawyer to privately express concern on the fate of Petronas if Sarawak were to get its way. 

That's RM30-40 billion short in revenue annually for Petronas i.e. Federal government. 

Read Politikonomi's September posting, "Petronas vs Petros: How Sarawak’s fight for their right could bankrupt Malaysia" and Edge 2013 contribution from Anas Alam Fazli, "Malaysia's Oil Royalty Rumble".

Rakyat first

Looking at the still remain economically deprived rakyat in the interiors of Sabah and Sarawak after the formation of Malaysia from 1963, the attitude towards Petronas and the consistent recepient of fat annual bonus staff is one of indifference. 

The priority is for Sabah and Sarawak to be delivered their rights for a better and decent life. Sabah takes a conciliatory approach to resolve the impasse with Petronas, while Sarawak is in the bargaining positioning to go head-on. 

Does not matter of the approach because they are not buckling from ensuring the rakyat of Sabah and Sarawak get the life they appropriately deserve.

 

Dr Mahathir been taking them for granted and remain adamant to justify his past negligence. He chose to be cynical to request high-income Sarawak assist other poorer states. 

In the same interview with FMT, Tengku Razaleigh argued that other states helped Sarawak when they were poor. 

That plea for reason fell on deaf ears. 

According to DagangNews.com, Petronas-Petros negotiation may have broken down. 

Yesterday, Sarawak's Minister for Utility and Telecommuncation, Dato Seri Julaihi Narawi adamantly insisted Petrolium Sarawak Berhad (Petros) role as sole gas aggregator is final and non-negotiable. 

He expressed the anger of Sarawak and its people at the Sarawak State Assembly. Video below:

Short-charged

Sarawak believe the state contributed RM1 trillion to Petronas revenue but only received RM50 billion through the years. 

It is believed that 90% of Petronas's LNG export came from Sarawak but the state was expected to sacrifice and being deprived of the gas energy needed to propel its development.

Sources claimed a former Petronas executive alerted the Sarawak side the underhanded practises of Petronas to underdeclare revenue from the upstream activity for royalty payment and further short-changed by transfer pricing via Petronas subsidiaries as downstream activities.

It was the handy work of one former top official of Petronas. He has since been requested to resign due to conflict of interest. Some other suckers have taken him in as PLC CEO.   

That revelation infuriated Sarawak towards Petronas. Only top level discussion at Anwar's level could resolve this long standing problem.

The sentiment in Sabah and Sarawak to demand their denied right is strong. Its has unite the people of Sabah and Sarawak. 

Yet one political coalition still taking Sabah and Sarawak for granted to continue with politics-as-usual attitude and had the audacity to seek for GRS and GPS to join and be under them.  

Resolving the impasse

Contrary to Politikonomi's October claim that other oil producing states will emulate Sarawak, Sabah did not. Sarawak was heard to be in-communicado with Terengganu and Kelantan, but situation are different.

UNCLOS applies for Sabah and Sarawak, but not for Kelantan and Terengganu. The sea boundaries between states in West Malaysia are not demarcated.

The concern on the significant decline in the revenue for Petronas i.e. Federal Government is real. Najib was aware of this but dare not commit. 

Both Mahathir and Najib had too many plans that needed the oil and gas revenue from Sabah and Sarawak to finance.

Its believed that Anwar Ibrahim insisted on the principle to return what is due for Sabah and Sarawak. This came to the dismay of the self serving Federal bureaucrats and Petronas officials whose been resisting and dragging their feet.

For a start, the least Petronas could do for the outstanding short-changed royalties is to name the two twin towers at KLCC as Menara Sabah and Menara Sarawak. 

Jokes aside, the realistic solution left is to transfer the ownership of KLCC and perhaps TNB to Sabah and Sarawak state governments.

This has been in discussion for more than 10 years. Judging from the video above, Sarawak has basis for their actions.

Its time for a solution and sought a workable compromise that is win-win to both sides. If interest and ego takes precedent over principle, then once and for all let the court decide.

Even the PDA worked on by the late Sarawakian statesmen Rahman Yaacob has flaws. One being the 5% royalty to Sabah and Sarawak.

The PDA was enacted in 1974 under the 1969 announced Emergency rule. Emergency Ordinance was repealed together with the abolishment of the Internal Security Act by Najib in 2011. 

The PDA could be now considered as null and void. Sabah and Sarawak has that trump card!

Furthermore, MA63 is an international treaty. Be mindful that secession has entered the conversation. 

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Tricia Yeoh gave an overview of the issue on Singapore's ISEAS Yusof Ishak Institute website, Fulcrum, below: 

Tug of Wealth: Malaysian States Seek a Fairer Deal in Oil and Gas

Published 18 Nov 2024

Tricia Yeoh

A potential legal tussle between Sarawak and Petronas has implications for Malaysia’s approach to development and for the country as a whole.

In early September, Sarawak issued an ultimatum to Petronas, Malaysia’s national oil company, to surrender all rights over the distribution and sale of liquefied natural gas (LNG) to its state-owned oil and gas company, Petros, by 1 October. Following this, reports confirmed that Petronas was mulling legal action to defend its monopoly over the country’s natural resources.

Since then, the deadline has passed with no news of legal action. Sarawak Premier Abang Johari’s office issued a statement on 24 September confirming that negotiations were ongoing between the Sarawak state government, Petronas and Petros. This would be concluded soon, the statement added, stating that all parties should abide by federal and state laws. Most recently, reports quoted the Sarawak premier as saying that Petronas has unofficially agreed in principle for Petros to be the sole gas aggregator in the state, with an official letter to follow. He also said that he is ready to go to court if any party disrespects Sarawak’s right to do so.

If true, this is a major development since ceding rights to Petros would impact Petronas’ access to LNG supply in the state. Sarawak contributes almost 90 per cent of Malaysia’s LNG exports. Moreover, Putrajaya is focused on fiscal consolidation, and petroleum-related revenue is declining. In 2009, petroleum-related revenue contributed as much as 41.3 per cent of the federal government’s total revenue. However, this has fallen to 19.6 per cent in 2024. This is projected to further decline to 18.3 per cent in 2025. Moreover, a federal concession to Sarawak may encourage other state governments to follow in Sarawak’s footsteps.

Disputes over oil and gas resources by individual states, however, are not new.

Both Peninsular Malaysia’s east coast states of Kelantan and Terengganu have a long history of this. Under the National Front (Barisan Nasional) administration in the 1990s, oil royalties contractually agreed upon as part of production-sharing contracts were denied to both state governments when they were under the rule of Parti Islam SeMalaysia (PAS). Under the Pact of Hope (Pakatan Harapan) administration in 2018, wang ehsan (goodwill grants in lieu of royalties) were transferred to both states but not in full.

The current Anwar Ibrahim administration has made similar transfers, but the Terengganu state chief minister has claimed that these amounts have only been partially received. Negotiations with the federal government are often required to obtain full transfers. This ought not to be the case since the producing states possess the right over oil royalties as enshrined in the original production-sharing contracts (PSCs).

While the Petroleum Development Act 1974 provides for Petronas’ monopoly on oil and gas exploration and extraction, it is the three-way PSCs signed by Petronas, oil companies and state governments that spell out the revenue-sharing formula. This is made up of oil royalties (5 per cent to the federal government and 5 per cent to the producing state government); cost of oil (between 50-70 per cent as cost recovery to oil companies); and profit of oil (the remaining 20-40 per cent is split among Petronas, oil companies and PITA, or profit-income tax allowance paid to the federal government). It is unclear how the revenue-sharing formula would change if Petronas cedes its LNG monopoly to Petros but this would be one key element of negotiation among all parties involved.

The demands over state natural resource autonomy come most aggressively from East Malaysia. In 2020, Sabah and Sarawak won a court case resulting in their ability to impose a 5 per cent sales tax on petroleum-related products, paid by Petronas. In 2021, regulatory power for gas supply was transferred to Sarawak and, in 2023, to Sabah. While Sarawak had the pre-existing Oil Mining Ordinance 1958, Sabah enacted the Sabah Oil and Gas Ordinance 2020 to assert its rights over oil and gas.

The verdict is still out on whether Sabah and Sarawak will eventually succeed in their bid to fully control oil and gas resources. These recent developments, however, are clear signals for stakeholders to be concerned.

Both states have rejected the Territorial Sea Act 2012, which limits their territorial waters to three nautical miles from the coast. Sabah and Sarawak dispute the 2012 Act and argue that their maritime boundary — and hence their claims to their respective resources as part of the continental shelf, vis-à-vis the Malaysian federal government — should be 200 nautical miles.

Sabah cites the colonial-era North Borneo (Alteration of Boundaries) Order in Council 1954, which details a “continental shelf… contiguous to the territorial waters of North Borneo”. The 1954 document does not state that the continental shelf spans 200 nautical miles but the Sabah government has “opined that its sea boundary should be more than 200 nautical miles”. Similarly, Sarawak says its Sarawak Land Code defines its territory as extending to the continental shelf, up to 200 nautical miles out to sea. Here, the key question is what constitutes the continental shelf. When a similar colonial-era document — the Sarawak (Alteration of Boundaries) Order in Council in 1954 — was issued, the concept of “continental shelf” was not resolved.

The Terengganu state legislative assembly has also recently rejected the Act. Its chief minister has stated that the Act infringes upon the state’s right to explore resources and generate revenue within its maritime borders. The federal government’s only response has been to issue a statement saying that “the Act is still valid and applicable” and that it is the federal government’s responsibility to ensure Malaysian waters are always protected.  

Given the grave importance of natural resources and their contribution to the nation’s coffers, much more clarity and stronger communication are needed.

The verdict is still out on whether Sabah and Sarawak will eventually succeed in their bid to fully control oil and gas resources. These recent developments, however, are clear signals for stakeholders to be concerned. First, if this happens, Petronas will lose its monopoly control and access to the two states’ resources. This is important, given that they hold 70 per cent of Malaysia’s oil and gas reserves.

Second, international oil and gas players more accustomed to dealing with Petronas would have to cultivate relationships directly with Petros and the Sarawak and Sabah state governments.

Third, and most importantly, this would have implications for the approach towards development and, more broadly, for the nation as a whole. The central government has always aimed to address existing regional imbalances through financial and developmental means. If the federal government collects less revenue, this would lead to lower expenditure. If Sabah and Sarawak eventually take over policy and programmatic execution, this may be the solution to ensuring that the federal government does not assume responsibility — and therefore expenditure — of all policy matters. For example, the issue of education is being slowly devolved to Sarawak.

Malaysia is an asymmetric federation, with Sabah and Sarawak possessing significantly more state autonomy than Peninsular states. Although unlikely in the near future, given both states’ current lack of technological capacity in the sector, handing over oil and gas rights to them would be a major shift, both economically and politically. These developments should be watched closely as they may ultimately impact Malaysia’s future.

2024/349

Dr Tricia Yeoh is a Visiting Fellow at the ISEAS – Yusof Ishak Institute and Associate Professor of Practice at the University of Nottingham Malaysia's School of Politics and International Relations.