COMMENT | Recently, Economic Affairs Minister Mohamed Azmin Ali told Parliament that Pakatan Harapan’s election promise of giving a 20 percent ‘royalty’ to oil-producing states was based on “a loose definition of the word… The term cash payment is not used generally, but it is generally understood to mean a royalty.”
He said that a special cabinet committee had been formed to negotiate with the oil-producing states on how to increase the 15 percent payments to them, on top of the existing five percent of gross profit cash payment under the Petroleum Development Act 1974 (PDA).
Opposition lawmakers from Sarawak have since accused Pakatan of reneging on its promise of not only giving 20 percent royalty on gross production of oil, but also failing to uphold and restore the rights of Sarawak to the Malaysian Agreement of 1963.
What if Sarawak had stayed out?
Sarawak gained its independence from the United Kingdom and was a sovereign state when it joined the Federation of Malaya, Singapore and North Borneo in the formation of Malaysia in 1963. During that short span of their self-government, Sarawakians owned their own oil resources.
They agreed to join the Malaysian Federation based on the Malaysia Agreement 1963 executed by the United Kingdom and the federation. The agreement provided safeguards for Sarawak and Sabah.
Then under the PDA, then-chief minister Abdul Rahman Yaakub gave away Sarawak’s oil rights in perpetuity without the consent of the people of Sarawak. Like many other controversial laws, the PDA was passed at a time when a state of emergency was in place following the May 13, 1969 riots. The emergency was only lifted in 2011.
The PDA created Petroliam Nasional Bhd (Petronas). Nevertheless, as an international legal document, the Malaysia Agreement supersedes the PDA and the Federal Constitution.
Since the 1970s, the NEP has been largely funded by the exploitation of offshore oil which, by 1985, contributed 26 percent of all government revenues when oil registered a 29.6 percent share of major commodities export.
Tengku Razaleigh Hamzah, who was the founding chairperson and chief executive of Petronas, has been quoted as saying that Putrajaya has been using the oil and gas firm as a cash cow, especially in bailing out government-linked outfits of financial trouble.
He said that since its inception in 1974 and until 2011, Petronas had paid the government RM529 billion in dividends, taxes, petroleum proceeds and export duties. He said the reliance on Petronas to help government-linked outfits out of financial trouble had been going on since 1985 during Dr Mahathir Mohamad’s first term as prime minister.
A finance minister from 1976 to 1984, Razaleigh said Petronas had rescued Bank Bumiputra with a RM2.5 billion bailout in 1985, and again in 1991, when it coughed up another RM1 billion.
Razaleigh said Petronas also had to rescue Mahathir’s son’s financially ailing Konsortium Perkapalan Berhad for RM2 billion in 1997. He added that Petronas was made to underwrite the construction of the Twin Towers, located in the heart of Kuala Lumpur, for RM6 billion and the building of the extravagant Putrajaya, the administrative capital of the Federal Government, for RM22 billion.
Razaleigh said the exorbitant amount of the bailout and construction of these projects that was forced onto Petronas had deprived the company of the much-needed cash build-up for reinvestment, which would ensure its business sustainability. As he has said, that is the reason Malaysia has failed to build a sizeable sovereign wealth fund like that of Norway’s.
And now, with the abolishment of the GST, Petronas cannot afford to pay the promised 20 percent royalty to Sarawak. One could say the Sarawakians have now been deprived of their oil royalties because of the tax holiday enjoyed by the rest of the country with the abolition of the GST.
Plundered for decades
Since the formation of Malaysia, Sarawak’s natural resources, especially oil and gas, timber and land have been exploited by West Malaysian interests with the connivance of their local elite for decades.
Multibillion-ringgit megaprojects, such as the Bakun Dam, have been implemented with federal backing at the expense of the local indigenous peoples. Thus, after more than 50 years, Sarawakians and Sabahans are among the poorest Malaysians in the federation.
The late Sarawak chief minister Adenan Satem initiated the call for higher oil royalties than the present five percent from the federal government and in 2014, the Sarawak legislative assembly unanimously passed a motion to ask for 20 percent oil royalty.
When Malaysia was formed, Sarawak’s boundary was 12 nautical miles, but after the passing of the Territorial Sea Act 2012 (TSA), it is now only three nautical miles.
Sarawak’s oil and gas as well as hydrocarbon deposits mostly occur beyond the three-nautical-mile line. Sarawak has yet to enact any law accepting the changes under the TSA. Now, if the seabed beyond three nautical miles does belong to Sarawak, Petronas would be required to obtain a mining lease to extract the oil and gas resources found there.
Lesson from Norway and Scotland
Norway and Scotland are two nations that can be compared to Sarawak as far as revenue from oil and gas is concerned. Both have oil reserves and both have small populations like Sarawak’s, and yet Norway is now sitting on a national pension fund worth over US$1 trillion, one of the largest in the world.
It was only set up in 1990, initially to help cope with the rising costs of pensions for a population that was living longer, and also accommodate changes in oil prices.
When North Sea Oil was discovered in the waters of Scotland and Norway in the late 1960s, Norway, a smaller nation than Scotland with worse maritime weather, reaped the benefit of being in sole control of their oil revenues because it had stayed out of the European Union.
If Scotland had become independent shortly after the first devolution referendum of 1979, could Scotland have accumulated a similar fund by now? It is often said that countries with the "black gold" can go it alone in a way others cannot.
It is tempting, is it not, to dream of how Sarawak could have developed if it had decided, like Brunei, to stay out of the Malaysian federation?
And who gets the oil in the event of Scottish independence? If you go by the geographical median line drawn across the North Sea from the border then 90 percent of the oil tax revenues will accrue to Scotland.
The Geneva agreement on natural resources under the sea divides the spoils based on the median lines. The Geneva approach is the standard approach which gives Scotland 90 percent of revenues. This means drawing a dividing line on which all points are the same distance from the Scottish and rest of the UK (RUK) coastline.
This was the method used when the North Sea was originally divided between the UK and other countries in the 1960s. It is the same principle as the United Nations Convention on the Law of the Sea.
In their GE14 manifestos, both BN and Pakatan Harapan stated clearly that they would restore Sarawak and Sabah’s status as an equal partner in the federation as enshrined in MA63.
Just as Scotland has exclusive rights to the North Sea oil even while being part of the UK, Sarawak and Sabah should likewise have exclusive rights over their resources instead of waiting for Putrajaya to dish out ‘cash payments’ or ‘profits’ whether by BN or Harapan.
KUA KIA SOONG is the adviser for Suaram.
The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.