The Terengganu state government this morning filed a suit in the Kuala Lumpur High Court against national oil company Petronas and the federal government, demanding for the oil royalty payments to the state be reinstated immediately.

The state's representative Salleh Abas said the annual oil royalty granted to the state contributed to about 75 to 80 percent of the state budget.

"With the withdrawal of the payments, the harsh truth is that the state government and the people are suffering," he told a press conference after filing the suit.

The state has received RM7.1 billion from Petronas since March 1978 to March 2000. From 1978 to November 1999, the state government was under the control of Umno, the main party heading the Barisan Nasional ruling coalition.

The withdrawal of the oil royalty payments coincided with PAS, an Islamic opposition party, winning the state in the 1999 general elections, prompting Salleh to say this was a political move by the federal government.

Also at the conference were state secretary Mazlan Hashim (photo), state executive council (exco) members Wan Abd Muttalib Embong and Mustafa Ali.

State struggling

Salleh, who is also a state exco member, said the legal action was the only alternative available to the state to regain the oil royalty payments, adding that they had "a strong and impeccable case".

"We have no other alternatives as the next election is far away. At the moment we need the money," he said.

Mazlan said that the non-payment of the oil royalty payments had forced the state to reduce its spending in order to cover just basic necessities.

"In previous years, the state budget would be in the region of RM700 million. This year, we have cut it down to RM300 million. We are struggling to even pay civil servants with this money," he said.

Mazlan said the lack of funds, with the absence of the oil royalty payments, had resulted in new projects that would benefit the Terengganu public being put on hold.

'Going to cronies'

Salleh said the wang ehsan (goodwill monies) paid by the federal government for development in the state in lieu of the oil royalty payments was not helpful at all as it "goes to the cronies of the government".

On Sept 5 last year, the Finance Ministry issued a statement on the implementation of a new method of disbursing development funds to Terengganu. Under this method, the state would no longer receive oil royalty payments but instead funds in the form of wang ehsan to be used for development projects.

In October, the federal government announced a RM560 million payment to Terengganu under the wang ehsan special payment scheme.

In its suit, the Terengganu state government wants Petronas to adhere to the two agreements it signed with the state government in 1975 and 1987, which stipulated that the oil company was to provide payments to the state for oil taken from its territory.

It said that Petronas has failed to make a cash payment amounting to RM850 million in September last year for petroleum obtained from the state during the first six months of 2000.

"Despite failing to make the said cash payment, Petronas continues to obtain petroleum from the state," said the suit.

The state also claimed that by not paying the oil royalties, Petronas was depriving the state of its property rights without adequate compensation.

Petronas in breach

It added that the oil company was also unfairly discriminative of the state in failing to make the payments while continuing to make such payments to other states. Terengganu also claimed that Petronas could not deny the legality, validity and enforceability of the two agreements it signed with the state.

In the 1975 agreement, the state claimed that Petronas agreed to pay the state annually the sum amounting to the equivalent of five percent of the value of petroleum drilled from the state's territory. The agreement provided that the payment would be made on two occasions every year, on March 1 and Sep 1.

The supplementary agreement signed in 1987 provided details relating to the computation and determination of the cash payments to the state by Petronas.

Terengganu also said in its suit that Petronas should not have heeded the instructions of the federal government to stop the payments but rather should have exercised its discretion independently and freely to decline the instructions.

By not making the payments, the state government said Petronas was in breach of the agreements.

Discriminatory practice

Terengganu said that the federal government, too, had acted wrongly by directing Petronas to stop the payments, adding that the federal government had taken into consideration irrelevant issues in giving the directions to Petronas.

It claimed that the federal government had acted in bad faith and malice in causing the payments to be stopped, knowing that the state government would face "insurmountable financial difficulties" in paying recurring expenditure without the benefit of the cash payments.

"The federal government gave an illegal directive to Petronas, causing the oil company to break the agreements. The federal government is also guilty of discriminatory practice against the state," said exco member Mustafa.

Against Petronas, the state is seeking for a specific performance of the agreements and an order seeking the cash payments which rightfully belong to the state. The state also wants damages from Petronas for the breach of the contract.

Against the federal government, Terengganu is seeking general, aggravated and exemplary damages for the loss of the oil royalty payments. The case is expected to be heard in six to eight months to come.