Opinion

Oil Royalties in Post-Election Malaysia


Last Updated: August 1, 2018 
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Here is a brief background story of the growing debate about the allocation of oil royalties in select states in Malaysia. 

The election that swept the former ruling coalition out of power in Malaysia three months ago was historic. Implementing the new Pakatan Harapan's election manifesto, however, has proven a bit more challenging as populist measures have been hampered by bureaucracy and inertia. And now, a new spat is brewing – Malaysian state rights over oil royalties.

At present, Malaysia's upstream extraction is conducted by Petronas on behalf of the federal and state governments. This unifies oil extraction under one national oil company, and has allowed Petronas to forge domestic and international pacts under the PSC system that has made it one of the best run state oil firms in the world. At present, Petronas pays a 10% royalty (based on gross production), 5% to the federal government and 5% to each state government. Of the remainder, 20% goes to cost oil to recover the cost of production, while 70% is split between Petronas and operators like Shell, Murphy Oil and Sapura Energy.

Malaysian states have long requested for their 5% royalty – paid twice yearly by Petronas regardless of field profitability – to be raised. In the past, east coast peninsula states Terengganu and Kelantan were the most vocal, particularly because they were intermittently ruled by (then) opposition parties, but East Malaysian states Sabah and Sarawak have increased their tone as well. This is particularly important given that the bulk of new finds and operations are focused on East Malaysia deepwater. Sarawak itself has gone as far as to create a state oil firm to participate in PSCs to increase its share of oil revenue. There are grouses elsewhere: in 1999, when opposition party PAS took Terengganu state, the oil royalty payment to the state stopped. In the leadup to the 14th General Election, Pakatan Harapan had promised to restore payments and increase the royalty to 20%. And now that it is in actual power, it seems to be backtracking.

New Prime Minister Mahathir Mohamed announced that the royalty would indeed be raised to 20%, but it would now be based on net profit instead of gross profit. Uproar ensued. Royalties based on gross production had always been the norm, and the new government was accused of moving the goalposts. Economic Affairs minister Azmin Ali claims that raising the royalty to 20% of gross profits would ‘destroy Petronas' and has not given a timeframe for the implementation of the new royalty rule, citing the need to federal-state discussions and a need to change the Petroleum Development Act 1974. The states are not happy – especially because they were instrumental in toppling the previous BN government – and this could play into the fragile balance currently holding the government together under Mahathir's sheer force of will.  Opposition parties have already begun capitalising on the ‘controversy'. A state seat by-election is scheduled for August 4, and will be seen as a litmus test for the effectiveness of the new government. A new government may be in place, but issues of old are still rearing their head.

Malaysian Oil Production By Area: 

  • Peninsula Malaysia: 20%
  • Sabah (Borneo): 50%
  • Sarawak (Borneo): 30%

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