Case closed on 20% oil royalty

At a dialogue session organised by the Malaysian French Chamber of Commerce and Industry, Prime Minister Dr Mahathir Mohamd played down the state-federal tussle over the 20% oil royalty. The increase was promised to Sabah and Sarawak by the Pakatan Harapan government (PH) if it came to power.

After a long period of procrastination, it is clear and transparent that the PH government has no intention of keeping its promise. The hope for more oil royalty for development funds has now been marked down as another election promise meant to be broken.

Mahathir has now made it certain that it’s the end of the road as far as the 20% royalty goes.

The end note will be more talks and more negotiations over the table till kingdom come, or as some say, till the cows come home. There will be more brickbats from the East Malaysian side who feel strongly that their resources and rights have been trampled upon. But that’s about all.

One ex-federal minister from Sabah that I talked to said we were foolish to expect the federal government to accede to the request of Sabah and Sarawak. He said the Petroleum Development Act 1974 that gives Petronas sole oil and gas rights in Malaysia and the federal government’s dependency on Petronas as its cash cow, will make it difficult for any government to give more to oil producing states. Perhaps PH did not do its homework before it made the promise, but nevertheless, it has left a bad taste.

Mahathir’s shared prosperity vision is nothing more than a zero sum game. It can be said “prosper thy neighbours” but at the same time it could also be “beggar thy neighbours”. One state gains and the other loses.

Say oil money is pumped out from Sabah and Sarawak and shared with other “poorer” states like Kelantan.

Kelantan is then given a one-off allocation for assistance amounting to RM400 million from the federal government. As widely reported, the Kelantan government bought new Mercedes Benz for the state executive councillors and gave a one time payout of RM50,000 to each state exco member.

Sabah and Sarawak are deprived of badly needed funds while some state excos in Peninsular states are driving brand new Mercedes Benzes with money in their pockets. Who is looking out for the welfare of the people in this Islamic state?

Petronas is an important cash cow for the federal government. In March 2019, Petronas announced it will pay RM54 billion in dividends to the government, including a special dividend of RM30 billion. That’s a whopping RM84 billion in one year. This dividend does not include taxes Petronas pays to the federal government.

Mahathir was reported as saying at the dialogue that Malaysia was a federation. “The states rule themselves in certain areas such as land. But they feel that they do not get the full amount of money from the oil industry. We paid 5% royalty from oil production, which is a huge amount of money. They are asking for 20%. If we give the oil-producing states 20%, Petronas will cease to be among the Fortune 500 companies,”.

There are so many twists and turns in his statement. The 5% is not a huge sum of money when the oil is coming from your state boundaries and when the other 95% is taken elsewhere. It was Mahathir who reiterated his promise in Parliament to deliver the 20% oil royalty, only to backtrack later.

In December 2019, Petronas CEO Wan Zulkiflee Wan Ariffin gave a lengthy explanation that increasing the oil royalty to 20% was not possible, as production costs were high and profit margins low. He said the company only made a profit margin of 3.7% from oil production locally, after accounting for matters such as production costs, oil royalty, and tax.

The problem with Petronas is that nobody really knows its true production costs and whether it has benchmarked itself with the best in production on cost per barrel basis.

It would be good if Petronas could give us its cost per barrel production figures against industry leaders like ExxonMobil and Shell. The bottom line is whether Petronas is an efficient producer when benchmarked against the world’s leading players.

For the Sabah and Sarawak governments, they should not go into high risk oil and gas exploration to get additional revenue from their oil resources. If risk is high and margins are low as Wan Zulkiflee himself explained, it is best to leave it to the private sector. The money in the state reserves should be protected and used for the welfare of the people.

The Exxon Valdez and BP Gulf of Mexico environmental disasters are stark reminders that you need billions when things go wrong or when you hit consecutive dry wells. The people of the two states should not be subjected to such risks. In the search for more oil revenue you may end up with greater losses than you bargained for.

So where do we go for now? Increase in oil royalty is no longer there. General election 15 is two and the half years away. What do we want to talk about? Sabah’s economy, which has become more dependent on tourism receipts and will be in the doldrums because of Covid-19? The trickle down economy from tourism receipts has benefited Sabah greatly creating jobs from bus drivers, boatman, hotels, Airbnb, and tourism souvenir shops – virtually everybody in the supply chain benefits.

Oil royalty will still be at 5% while the state needs more development funds. The problem of 600,000 or more illegal immigrants will still be there and nowhere near a resolution. With Kuala Lumpur locked in its political battle over race and religion, political parties playing musical chairs, controversies over the teaching of Khat and Jawi and now the teaching of mathematics and science in English, there is very little to offer on any party platform.

Perhaps new NGOs, like Maju led by Siti Kassim, will be the new voice or the “third force” to turn Malaysia on its head. We need something radical, we need something new, we need the energy of the young people.

There’s some wishful thinking there.

The views expressed are those of the writer and do not necessarily reflect those of FMT