Oil Royalty: Calling the brave ones

Sarawak is now in a unique position as it is now motivated and able to redress the inequity in the management of its oil and gas resources and its constitutional rights as enshrined in MA63.

COMMENT

By Suarah Petroleum Group

Petronas’ Group Strategic Communications wrote a letter to the editor of The Edge to clarify the outdated PSC terms used in their article “The black gold conundrum” dated July 30, 2018.

It highlighted the improper use of the Production Sharing Contracts (PSC) Cost/Profit oil split of 70/20 which is no longer in use and any calculation on the distribution of wealth using the outdated split was wrong.

Petronas also provided an illustration of the Revenue/Cost (R/C) PSCs split which are in use today.

Apart from The Edge, many others had tried to calculate the ‘profits’ from the PSCs, using the now contentious PSC splits, with regard to Sarawak’s claim for the 20% of royalty from revenue for its oil & gas resources and recent Pakatan Harapan’s (PH) offer for a 20% royalty from profits.

Animah Kosai (founder at Speak Up, on Linkedin July 26, 2018) had 50% Cost Oil to the Operator. Azman Ujang (“The real deal behind Oil Royalty” the Sundaily, July 27, 2018) had it at 70% for the recovery of the cost of production. However, in June 2014, Azman had wrote that “…20% goes to what is known as ‘cost oil’ to recover the cost of production” (“The Oil Royalty Poser”, the Sundaily, June 9 2014). Azman did get a heated roasting from Sarawak Headhunter’s Al Tugauw (“Whose Oil & Gas is it?” Al Tugauw’s Facebook post on July 28, 2018) for what seems to be a shift in his description and propagation of the PSC splits.

However, Azman did have a valid point in the conclusion of his 2014 piece. He said, …“And for Petronas, I think it needs to launch a publicity blitz on the workings of oil royalty formula to educate the public and politicians”. That we presume has fallen on deaf ears.

As ‘Data is King’, Petronas is known to keep close to their chest all the technical and commercial information on Sarawak’s oil & gas resources (including work and data from previous concessionaires and PSC contractors) and shares them out selectively as and when they see fit, including the oil royalty formula. As to why Petronas did not rightfully advise the government and especially the economic affairs minister on his (and PH’s) erroneous definition of Royalty remains a mystery.

Azmin Ali told Parliament that the PH’s manifesto on royalty, while having the objective of ‘equitable distribution’, was crafted based on restricted data. But as long as ‘data’ remains the privilege of Petronas, we all remain at best making dangerous assumptions based on limited information.

We are continued to be thrown ‘red herrings’ and many, including the public and our politicians, are caught hook, line and sinker on the arguments about royalty and profits. For SPG, royalty and profits are mere ‘outcomes’ and we are more concerned about the sustainability and ‘generativeness’ of national oil & gas exploitation policies and strategies. We are determined to help Sarawak to redress these and the imbalances in the revenue sharing and distribution after more than 40 years of poor value creation.

In this new Malaysia, it seems that the opaque management of our most precious oil & gas resources remains status quo under the direct privy of the PM. All the brouhahas and one-upmanships on the oil & gas royalty issue between the state and federal government showed the continued and complete disregard for the rights of the actual stakeholders, and in Sarawak’s case, the rightful resource owner. Petronas, let us not forget, are currently mere custodians to those resources, vested upon them by the rightful owners. Friends in Petroans are saying that they are ‘rimas’ (stifled/suffocated) by Sarawak’s demands. Indeed, while Sarawak needs to be more convincing in their demands, Petronas on the other hand, needs to be reminded of their custodial responsibilities and that this responsibility must not be usurped by their commercial objectives.

Sarawak needs to influence the arguments from the view of being the rightful owner of the resources, on how it has been managed in the past and what will be equitable for the future based on what is constituted under Malaysia Agreement 1963 (MA63). Let’s leave that for a discussion in future.

For now, let us look at some recent and significant numbers:

Based on The Edge report dated July 30 2018, Sarawak received RM1.5 billion as ‘cash payments’ in 2017. Let us assume that it was indeed the 5% Royalty from revenue. As such, 20% royalty would be RM6 billion and an additional RM 4.5 billion is required to make up for the extra 15% royalty.

All else being equal, there should be no issue of Petronas being ‘bankrupted’ as it will be the Federal government who will have to ‘cough out’ the additional RM4.5 billion. Given that they would also have taken an equal amount of RM1.5 billion for its 5% royalty, the Federal government will only need an additional RM3 billion, which is less than 9% of the RM 33.4 billion of taxes & dividends it received from Petronas in 2017. Mechanisms can be put in place such that existing cost oil & profit oil arrangements with contractors will not be disturbed.

We can make another comparison of the amount of cash payments received by Sarawak with revenue ‘forgone’ by Petronas in respect to the regulated gas supply to Malaya. Sarawak got cash payments amounting to RM1.5 billion in 2017, totalling RM33 billion for the last 41 years.

Petronas forgo revenues worth RM6.4 billion for 2017, totalling RM247.8 billion for the last 20 years for gas users in Malaya.

But the royalty and profits are not really the fundamental issue moving forward.

For SPG, these debates between what is ‘royalty’ and the notion that Petronas will be ‘bankrupted’ by the 20% Royalty request are just more ‘red herrings’ being thrown to distract us from discussing the real issues.

From our estimate, Sarawak contributed about 26% of Petronas’ total revenue and over 50% of upstream revenue in 2017. GlobalData projected that the upcoming upstream development will mainly be gas projects offshore Sarawak and its contribution will be up to 60% of Malaysia’s fiscal take in 2025.

Sarawak is now in a unique position as it is now motivated and able to redress the inequity in the management of its oil and gas resources and its constitutional rights as enshrined in MA63. It is also in place to put regulatory controls on the authority to manage and distribute revenues derived from its oil and gas resources.

What Sarawak needs is to find the courage to get it done. We have enough of the rhetoric.

Sarawak, Petronas and the Federal Government must be committed in being open and transparent in sharing and analyzing its oil & gas data.

Let’s not repeat the mistake of creating manifestos and promises based on restricted data.

But it is not for the Federal government to decide or dictate what ‘equitable distribution’ of its oil and gas resources means to Sarawak. Obviously, there has not been ‘equitable distribution’ in the past and an increase in the distribution of upstream revenues, be it from revenue or profits, is not sufficient to redress the deficit. Why should Sarawak continue and allow it to be left behind in the development of its own oil and gas resources?

‘Opportunity losses’ in terms of ‘value creation’ from the other opportunities in the oil and gas value chain that have been diverted away from Sarawak, include the spin-offs of such development need to be addressed.

Let’s have the courage for an open and honest discussion. As Petronas reports directly to the prime minister, surely Mahathir Mohamad has the courage to open up the oil and gas data on Sarawak. If it turns out to be another ‘Pandora’s box’, so be it. Is this not ‘Malaysia Baru’? Haven’t we had enough of the bailouts, unfair subsidies and regressive policies, mismanagement and waste through the years? Or are there still hidden agendas and skeletons in Petronas’ cupboard?

If there are any issues that cannot be resolved or accommodated under the current petroleum regime, have the courage to rethink and reform and come up with the ‘new rules of the game’. It cannot be business as usual, especially when the purported ‘equitable distribution’ has never been equitable to Sarawak.

With Sarawak’s own Oil Mining Ordinance (OMO) on hand, what stops Sarawak from crafting its own equitable and progressive petroleum regime for its own petroleum resources, especially when the Federal government through Petronas has apparently not given Sarawak an equitable rather poor value creation from its resources over the years?

Where are the “Bujang Berani” ?

Suarah Petroleum Group is a think tank comprising Sarawakian professionals in the oil and gas industry. -FMT