Newsbreak: Sarawak sidesteps PDA and oil ownership issues

This article first appeared in The Edge Malaysia Weekly, on March 12, 2018 - March 18, 2018.
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LAST week, two major announcements in Sarawak caused a stir nationwide.

First, the state said it was taking full regulatory authority over the local oil and gas industry from July. Second, it launched its state-owned oil and gas company called Petroleum Sarawak Bhd (Petros).

The message from Chief Minister Datuk Patinggi Abang Abdul Rahman Zohari Abang Openg, commonly known as Abang Johari, is that the state is regaining its rights that had been eroded over the decades.

The question that arises is how this reconciles with the Petroleum Development Act 1974 (PDA), which vests all oil and gas resources nationwide with Petroliam Nasional Bhd (Petronas).

For over four decades, Petronas has acted as the regulator and custodian of the nation’s oil wealth. Can Sarawak regain its rights vis-à-vis the oil wealth in its territory without having the PDA amended?

It is an important question with serious implications for the oil and gas industry and its players. And the answer is both yes and no — it boils down to what “rights” mean.

Contrary to public perception, the state’s restored “rights” in this case does not mean it is retaking ownership of the oil wealth.

The chief minister did not broach the subject of the ownership of the oil reserves itself during the launch of Petros, according to a transcript of the speech seen by The Edge.

Rather, “rights” refer to the state’s prerogative under its Oil Mining Ordinance 1958 to grant mining leases for the extraction of resources from its territory, which in this case would be oil and gas.

Over the years, oil players operating in the state had not been required to obtain the requisite mining licences and other permits under the state law.

That is set to change come July and will add a layer of cost to operations. It is unclear how that added cost would impact the industry at this juncture.

“They are required to regularise their operations and activities to comply with all state laws, including those relating to the use and occupation of land,” said the chief minister, according to the transcript.

In a nutshell, Sarawak’s regulatory authority over production permits and related matters that take effect from July simply adds another layer of bureaucracy.

So, within that specific definition, the state has accomplished its objective of gaining federal recognition that oil production there must submit to the Oil Mining Ordinance.

That is where the state-owned oil firm, Petroleum Sarawak Bhd (Petros), comes in. It was set up to spearhead the state’s participation in the oil and gas sector.

“Petros will be granted rights to mine oil and natural gas in the state and be an important player in the upstream oil and gas industry,” Abang Johari said during the launch, adding that Petros had already been granted a mining licence for oil production.

 

Ownership rights remain with Petronas

But the actual ownership rights to Sarawak’s oil reserves remain vested with Petronas until such time that the PDA is amended. Therefore, the existing PDA framework will remain in place for the industry. This is implied in the Petronas statement issued following the launch.

“Petronas welcomes the participation of Petros in the sector and looks forward to continue collaborating with the state for mutual benefit,” it said.

“Petronas is committed to supporting the Sarawak state’s aspirations to actively participate in the state’s oil and gas industry in line with the current framework of the Petroleum Development Act,” it added.

It is noticeable that the statement highlights the PDA framework. It governs how Petronas operates and it cannot deviate from its provisions.

To put the PDA’s importance into perspective, since its incorporation until 2013, Petronas had said that it had contributed a total of RM806 billion to the nation’s coffers in taxes, dividends and other forms.

Since then, it had paid an additional RM71 billion in dividends up to 2016. Petronas’ total contribution — royalty, dividends, petroleum income tax (PITA is charged against upstream/exploration companies), corporate income tax plus export duties — to the federal government to date since the PDA came into force should have exceeded RM1 trillion. The federal government gets additional revenues, notably in the form of PITA and corporate taxes from other local companies and multinationals in the oil and gas sector.

To recap, in an exclusive interview with The Edge in January, Abang Johari said the state’s push to re-examine the dynamics underlying its oil reserves is aimed at gaining additional income for the state’s development.

“The crux is to get additional revenue. But it could be through (additional) royalty, or it could be active participation by Petros in other forms,” he told The Edge.

For perspective, under Abang Johari’s predecessor, the late Pehin Sri Adenan Satem, the state has asked for 20% royalty from oil production

However, that requires an amendment to the PDA, which currently stipulates that the federal and state government get 5% each.

Insofar as Petronas is concerned, it can only adhere to the PDA’s provisions to guide its operations.

Therefore, the looming enforcement of Sarawak’s Oil Mining Ordinance seems to be a step around the PDA that will open up new income streams for the state, both via regulatory approvals related to oil production as well as the participation of Petros in the industry.

But insiders and observers have pointed out that if revenue is the sole consideration — and that the federal government has received more than RM1 trillion from oil and gas resources since 1974 — it would be easier for Sarawak, for example, to ask the federal government to just give its 5% share to Sarawak. This means Sarawak will get 10% royalty directly instead.

Another possibility is allowing states with oil reserves to become shareholders in Petronas directly, and thereby take a cut of its annual dividends.

Both are easier paths for Sarawak’s ruling politicians, who, by the way, are important partners in the Barisan Nasional coalition.

Additionally, either option does not entail taking the business risk of setting up new operations, acquiring talent and building up new expertise at a time when question marks still linger over the recovery in oil prices.

That said, later last week, the chief minister seemed to broach the subject of ownership over the state’s oil reserves indirectly.

Speaking to reporters in Sarawak, Abang Johari said the PDA, among others, is not relevant in the state as the state legislative assembly had not formally endorsed it.

When asked if the PDA should be amended or repealed, he told reporters to direct the question to the federal government.

It is an interesting viewpoint considering that before the PDA came into force, all states — including Sarawak — had signed away oil ownership rights to Petronas.

So, can the state go back on the arrangement decades later?

This statement could pave the way for further talks on the PDA itself — an interesting issue as general election fever rises.

 

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