ONE of the topics that have dominated media space in recent days has been the oil royalty issue. Putrajaya has pledged to look into a mechanism that will ensure fair distribution of oil and gas revenue to producer states in Peninsular Malaysia.A special committee will be set up to carry out a comprehensive study, taking into account all aspects of the claims, and will make appropriate recommendations to the federal government.
The committee will be chaired by former chief justice Tun Abdul Hamid Mohamad and members will comprise legal experts from within and outside the country as well as representatives from the Terengganu, Kelantan and Pahang governments, according to reports.
With few details for now, one wonders why the committee's scope covers only the eastern states of Peninsular Malaysia and not also the oilproducing states of Sabah and Sarawak. If that is the case — covering only Terengganu, Kelantan and Pahang — then would the original agreement that paved the way for cash payments for oil and gas discovered in the states, which was governed by the 1974 Petroleum Development Act (PDA), be more relevant?
A bit of history will support this point. When the PDA was formulated — which was followed by the establishment of national oil corporation Petroliam Nasional Bhd (Petronas) — it was the federal government's way of managing and distributing the country's oil and gas wealth in a better way in an industry long dominated by multinational corporations like Shell and Exxon.
Recapping what I wrote in this column a few years ago, the rationale for setting up Petronas and the PDA was a simple one for the then prime minister Tun Abdul Razak. As long as the country's wealth at the time, notably from rubber, tin, palm oil and oil,
was still owned by foreigners, independence was meaningless and national pride was held to ransom. Nationalism and independence were not just about politics but also about freeing the economy from the domination of foreigners.
In the case of the oil and gas industry, this quest for economic independence gave Petronas, through the PDA, enough
regulatory muscle to become a powerful caretaker of the country's hydrocarbon resources. Overnight, the MNCs that were once long-term concessionaires with lucrative terms became mere contractors of Petronas through the production-sharing contract (PSC) mechanism.
Petronas then came up with a formula to ensure that this new-found wealth was fairly distributed. As the exclusive owner of the country's oil and gas reserves, and in return for certain rights, Petronas signed a vesting deed agreement with all state
governments. Cash payments, sometimes referred to as royalty, would be paid to the federal government and the states where commercial oil and gas discoveries were made as stipulated in Section 4 of the PDA.
After the first PSC was signed in 1976, royalty was paid directly to the oil and gas producing states of Sarawak, Sabah and Terengganu. The cash payment, in simple financial terms, allowed for a 10% deduction from the gross production of oil and
gas, of which an equal 5% went to the federal and the state governments. Of course, on top of this, the federal government, as the sole shareholder of Petronas, got additional returns in the form of dividends and corporate tax, petroleum income tax and export duties.
As this was one way of ensuring fairer wealth distribution to the states, there was a lot of goodwill involved between Petronas and the state governments, and matters pertaining to the details and technical aspects of the agreement and the PDA were
never questioned by both sides.
The cash payments went on smoothly until 1999, when opposition party PAS took control of the Terengganu government.
While Petronas continued to make direct payments to the state government, its sole shareholder, the federal government decided to stop the practice and manage the fund separately in the form of wang ehsan — solatium or goodwill money.
That was when things became messy. What had worked well for 23 years and was the privilege and sovereign right of the state became unworkable politically for Terengganu simply because it was under an opposition party.
Some of the reasons given were that PAS had begun using the oil money to fund party activities and that it could not manage the money well. The counter-argument was that Umno feared that PAS could show the country that it could manage the money better as Terengganu, despite its vast oil resources, then had one of the highest incidence of poverty in the country.
Today, Terengganu, despite having a budget bigger than that of Selangor and with a population of just above one million, still has a high rate of poverty.
What was a goodwill gesture became a long-drawn legal tussle as PAS took Petronas and the federal government to court.
This remains unresolved until today and has, in fact, deprived the Umno-controlled Terengganu government — Umno regained the state in 2004 — of managing the oil money directly. Terengganu also claimed that it had been shortchanged over the years
and had not been given the royalty in full.
Not channelling the royalty directly into the state government's coffers — where there is likely to be a higher level of transparency and governance as the funds can be better monitored by the state treasurer and state assembly — is not a good
move. It has resulted in oil money becoming a political tool to buy support within factions in Umno Terengganu, leakages and the construction of big projects of not much economic importance.
So, when Kelantan asked in 2009 for its oil money entitlement in accordance with the PDA — from oil and gas fields that it says are within its shores, including those in Kelantan and overlapping Kelantan-Thailand, Kelantan-Vietnam and Kelantan-Terengganu waters — to be backdated to 2005, the federal government said it was "not going to entertain the new demand as there is no basis for the claim".
A technical definition raised in the court case involving the PAS-controlled Terengganu government was one of the main arguments used against Kelantan — that states are only entitled to royalty if oil or gas is discovered within their territorial rights of three nautical miles from the shore. Going by that, no oil and gas has been discovered in the states! Oil and gas discoveries further out, but within the country's exclusive economic zone and overlapping areas in Thailand and Vietnam seas, belong to the federal government.
This is not applicable because prior to 1999, Terengganu received royalty from Petronas for oil and gas from fields further away than three nautical miles. So did Sabah and Sarawak. So, why can't the status quo be maintained?
In the case of Sabah and Sarawak, the federal government argued that the three-nautical-mile provision was not applicable because oil was first discovered during British rule or before the vesting deed agreement was signed.
The PDA, in which there is a lot of goodwill, was intended to distribute wealth fairly to the oil and gas producing states. That piece of legislation is still around. It was the parochial politicians who cannot see things beyond narrow partisan politics who messed things up.
The special committee can do its job and iron out some of the details but in doing so, it should embrace the original spirit of the PDA and revert to the pre-1999 direct cash payment mode to the state governments. Anything less would render its
findings worthless.
Azam Aris is managing editor at The Edge. This story appeared in The Edge on Aug 13, 2012.