An increase in oil royalty and KL Takes All: A Slue to Fallacy

Time and again, we have listened to the opposition's over the top vitriol on two very emotive issues to Sabahans; the promise of 15% increase in oil royalty to Sabah and the allegation of federal government taking away all Sabah resources and in return, giving almost nothing back to Sabah. These issues must be answered factually and timely to prevent anyone from being deceived into emotional shadow boxing by the opposition. 

Let's start with the 15% increase in oil royalty issue. While on the surface it sounds quite appealing, there are serious concerns over the mechanics needed to bring the notion to fruition. Making promises is one thing; executing them is another thing all together.

AN OVERVIEW 

The petroleum business is not a business arrangement for the Average Joe. The capital outlay, technical challenges and financial risks are so great and prohibitive that only the companies which have specialized expertise and bottomless bank accounts normally dare enough to go into it.

Imagine trying to lower drilling pipes, 4.5km from the sea level, in an intensely-pressurized environment to search for the elusive black gold. It requires special and extremely expensive equipment and expertise which only the world’s oil major players (the likes of Shell, Murphy Oil, ExxonMobil, etc) possess. The cost of exploration drilling could run into hundreds of millions of dollars which would go to absolute waste should no oil be found in vicinity of choice.  

The nation’s oil company, Petronas, like her counterparts in other  developing countries (Indonesia, Venezuela and Nigeria etc), does not have the capacity to absorb the financial risk mentioned above. 

It is not financially equipped to spend billions on research and development and take on the financial risks in the exploration and production phases when the same billions are very much needed to be spent on the country’s development. 

In addition, unlike Petronas - which primarily operates within Malaysia’s waters - the oil majors  enjoy economies of scale. They operate all over the world which helps to defray the costs of R&D, the exploration and production phases.

In the event that oil is actually discovered, the capital that needs to be spent in the subsequent phases is even more substantial. It is reportedly said that the cost of the oil production phase could reach as much as RM2 billion. Sometimes even more.

To cushion such uncertainties and spread the financial risk, Petronas enters into a joint-venture agreement (known in the industry as Production Sharing Contract or PSC and later, a variant called RSCs or Risk Sharing Contracts) with multinational oil companies like Shell, Murphy Oil or ExxonMobil and others.

These giant oil companies are given a percentage of the oil revenue generated in return of them bearing the financial risk and sharing technologies worth billions in Research & Development.

PETRONAS TAKES ALL?

The opposition always paint the perception that Petronas has been unfairly profiting from Sabah’s oil revenue, so according to them, it is only right for Petronas to give 15% extra oil royalty to Sabah.

Can it be done? Is it even doable? Let’s explore the realities.

While the following example will not be able to capture every essence of all the JV partnerships Petronas entered into, none the less, it is suffice to give a fair view of what the realities are on the ground.

The illustrations below explain how much Petronas makes from Sabah oil. 

For every RM100 revenue derived from Sabah oil, 5% goes to the state’s coffer while another 5% to the Federal coffer. Approximately 45% goes into recovery cost, and the remaining 45% goes to the joint venture’s gross profit.

In the end, it is clear that Petronas’ profit, after splitting revenue with others and after paying taxes, is only around 16.74%. If Petronas is asked to pay up the extra 15% from its profit margin, this will effectively render them unable to pay their overheads, financial commitments and re-investment for future income. The end result is financial blow which may lead to bankruptcy!

If Petronas is unable to pay without jeopardizing its very existence, where would the additional 15% come from then? Obviously there are two other choices left; the PSC partner or the federal government.

It is very unlikely for the PSC partner to give up what was already agreed in the contract between them and Petronas. Furthermore, lower profit percentage would make oil exploration in Malaysia unattractive to them. 

If the joint venture partners refuse jobs in Malaysia, we will not be able to extract our oil in an economically viable manner. This may lead to a serious energy security problem for Malaysia: with no one extracting oil, we may end up importing all of our energy requirement!

With Petronas and its joint venture partners unable to commit the extra 15% (or about RM12.5 billion) to the oil producing states of Sabah, Sarawak and Trengganu, the toher option is of course to take it from the federal government which receives dividend around RM30 billion annually from Petronas.

This option is not without its own ramifications.

With reduced dividend from Petronas, the federal government will have less money for its development budget. This means there will be less public spending on subsidies, schools, hospitals, police stations, roads and other infrastructures. Obviously, the most impacted would be the non-oil producing states. 

Anwar Ibrahim must have the moral courage to inform the non-oil producing states that as a Prime Minister, he will cut their federal allocated budgets by RM12.5 billion. Unfortunately this is not happening. 

The last option available to Anwar Ibrahim is to increase Sabah’s oil royalty by 15% but in order to ensure he has enough funds available for the rest of the country, he will have to cut Sabah’s federal allocation. Remember, cutting Sabah’s federal allocation is within his prerogative as a Prime Minister. This option is plausible given the fact he has never given any assurances publically that he would not cut Sabah’s federal allocation which, at the moment, is one of the highest among all the states in Malaysia.

It is actually funny how Anwar hardly shares the specifics of his promise of 15% increase in oil royalty with the rest of the country. Perhaps he knows very well that he won't be able to provide explanation for them. Apparently, keeping Malaysians in the dark makes the illusion easier to perform. In fact, I remember asking opposition members, including Anwar Ibrahim himself, in Parliament of the specifics but instead of an answer, I got a blank response followed by sharp stares!

FEDERAL GOVERNMENT COLLECTS MORE THAN IT SPENDS IN SABAH

This is yet another irresponsible claim by the opposition to gain sympathy votes in Sabah. It is a very powerful lie which if not countered factually, could result in deep division and hatred towards the Barisan Nasional federal government.

Let's address this issue objectively and see if it is true that the federal government has been taking so much of Sabah's resources (including oil money) but giving back so little in return.

The following two illustrations show what federal government collected in Sabah in 2011 and how much it had spent in Sabah in the same year. 

Contrary to lies spawned by the opposition, the federal government actually spent more (by a whopping RM4.736 billion) in Sabah in 2011 compared to what it collected in the same year!

The statistics, which were made available to me by Bahagian Analisa Cukai dan Bahagian Pengurusan Belanjawan, Kementerian Kewangan Malaysia, went as far back as 2007 and had breakdowns for each federal ministry.

It showed the same consistent trend of federal government spending more in Sabah than what it collected in each year. Nothing is more revealing than the truth and fact! Statistics, in the end, don't lie.

For the year 2012 onwards, there is no reason to believe the trend will reverse itself especially when Dato Sri Najib Tun Razak has made it very clear that special emphasis will be placed on Sabah's development under his economic transformation program.

Towards this, Barisan Nasional Sabah is happy to note that to date, the Prime Minister has not disappointed Sabahans.

Thank you.