KUALA LUMPUR (Dec 26): The real reason that Petroliam Nasional Bhd (Petronas) cannot pay 20% royalty to oil-producing states is because Putrajaya wants to keep its share, said Sarawak-based oil and gas advisory Suarah Petroleum Group (SPG).

The Pakatan Harapan government had promised to raise the royalty in its election manifesto.

In a statement today in response to recent interviews by Prime Minister Tun Dr Mahathir Mohamad, and Petronas chief Tan Sri Wan Dzulkiflee Wan Ariffin, SPG said both the Federal Government and Petronas "are the real obstacles" to finding a solution to the conundrum.

SPG argued that "it is a known estimate among oil and gas players" that the Federal Government gets approximately 92% of revenues collected from oil and gas in Malaysia.

"Contributing to the 'lion's share' that the Federal Government gets is also the fact that while it owns Petronas, it also gets 5% oil royalty (similar to the oil-producing states, yet it does not own any oil or gas).

At the same time, it also collects petroleum income tax from both Petronas and other production sharing contractors (PSCs) as well as dividends from Petronas' profits, said SPG.

"The real reason is that the Federal Government does not want to reduce its 92% take from petroleum revenues.

"As a matter of fact it is the Federal Government's demands on Petronas that have weakened Petronas," it said.

SPG also pointed to Petronas being a "high-cost operator" due to how the Federal Government has demanded the dividends from Petronas, but the oil-producing states received none of that.

"Combined with weak leadership, it's a recipe for disaster. This trend continues as last year Petronas was forced to pay 'special dividends' of RM30 billion to the Federal Government," it said.

The Sarawak State Government has requested Putrajaya to fulfil its election pledge to provide a 20% oil royalty to the state, from 5% currently. Dr Mahathir and Petronas have both been reported by the media as saying that the request is impossible, and would hurt Petronas' ability to operate.

Meanwhile, SGP slammed the statement by Wan Zulkiflee that oil-producing states get 5% royalty risk free, because the states are not involved in the development and operations of the hydrocarbon assets.

It questioned Petronas' competitiveness as its hydrocarbon assets were acquired without any acquisition costs.

On Petronas' claim that it makes an average profit margin of 3.7% from its local oil production, SGP said the estimate relates to deep-sea operations. Most of Petronas' operations here are still in shallower waters, it argued.

SGP further pointed to a 15% carried interest cost allocated by PSCs for free to Petronas' exploration unit Petronas Carigali Sdn Bhd.

"These 'carried interests' arrangements amounting to billions of dollars have no doubt artificially kept Petronas costs down and thereby artificially boosted its own profits to the same extent to enable it to meet the voracious appetite of the Federal Government for ever-increasing dividend allocation," it said.

Because of the PSCs, Petronas does not bear any risk or capital costs at all — as opposed to its overseas ventures, in which it incurred capital and operational costs that have led to losses previously, SGP added.

"What risks does Petronas Carigali take for its 15% free carried interest in most if not all of the PSCs? Why can't this 15% free carried interest be given to the petroleum-owning and producing states?" it questioned.

"The stark truth is that Sarawak can no longer afford to continue paying for Malaya's economic development and covering of its losses through gas subsidies and Petronas's profits on Sarawak's oil and gas production and the failures of and losses on its overseas adventures written off, while sacrificing Sarawak's own development and economic parity and equity for future generations of Sarawakians.

"Therefore, SPG believes that it is only proper for the Sarawak Government to offer to relieve Petronas of this burden by the amicable return of Sarawak's petroleum resources and assets to Sarawak, its rightful owner. SPG strongly believes that Sarawakians can certainly do better at managing Sarawak's own petroleum resources than Petronas," it said.

"SPG further wishes to point out that seeking redress through the courts is not the only legal option left to the Sarawak Government and that it should relentlessly pursue all options, legal and political, until resolution to Sarawak's full satisfaction," it added.