Don’t count on higher oil royalties during slump, says analyst

A business analyst says oil and gas production in Malaysia has been stagnant. (Reuters pic)

PETALING JAYA: An oil and gas analyst has cautioned against expectations of higher oil and gas royalties because of the worldwide slump in the industry.

Renato Lima de Oliveira said an increase in oil royalties, a hot topic in the Sabah state election, was unlikely because the industry had yet to recover from the fall in oil prices in 2014, as well as the absence of new, significant reserves.

“Production of oil and gas from Malaysia has also been stagnant, so there is no incentive for oil and gas companies to revise existing contracts,” said de Oliveira, an assistant professor at the Asia School of Business.

He was commenting on recent remarks by Sabah Barisan Nasional chief Bung Moktar Radin that oil royalty payments for Sabah and Sarawak could not be raised to 20% as it involved pre-existing agreements with oil corporations, including international ones.

Renato Lima de Oliveira

In the event a revision of royalties was forced, de Oliveira said, it would push up costs for oil and gas companies making them too costly to operate.

“It will also discourage exploration in new fields because the break-even cost has increased, making it harder to bring new investments and replace reserves.

“To some extent, the states may be fighting a 20th century battle, when control of oil reserves was highly associated with money and power,” he said.

De Oliveira advised the two states to focus on a clear strategy to diversify their economy and invest in human resources.

“Oil and gas, as sources of revenues, will likely decline over the years as fossil fuels face increasing competition from renewable energies.

“Right now, we are in a bust, so trying to squeeze more revenues will put in more danger the ability of the industry to recover and invest in future production,” he said.

He said the stakeholders should discuss how revenues from oil and gas should be used, and ensure that oil producing states benefit more from natural resources and are able to thrive when natural resources are exhausted.