Restore Sarawak’s rights to its oil

The rights of both Sabah and Sarawak are safeguarded in the Malaysia Agreement 1963 which declares the states as equal partners in the Malaysian Federation.

Economic Affairs Minister Mohamed Azmin Ali has told Parliament that Pakatan Harapan’s (PH) election promise of giving a 20% “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 a special Cabinet committee had been formed to negotiate with the oil-producing states on how to increase the 15% payments to them, on top of the existing 5% of gross profit cash payment under the Petroleum Development Act (PDA).

Opposition lawmakers from Sarawak have since accused PH not only of reneging on its promise to give a 20% royalty on the gross production of oil, but also failing to uphold and restore the rights of Sarawak under the Malaysia Agreement 1963 (MA63).

Sarawak gained independence from the UK 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 self-government, Sarawakians owned their own oil resources. They agreed to join the Malaysian Federation based on MA63 executed by the UK and the Federation of Malaya, North Borneo, Sarawak and Singapore. There are safeguards in MA63 for the rights of Sarawak and Sabah.

Then, under the PDA, Chief Minister Abdul Rahman Yakub 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 riots in 1969. The emergency was only lifted in 2011. The PDA created Petroliam Nasional Bhd (Petronas). Nevertheless, as an international legal document, MA63 supersedes the PDA and the Malaysian Federal Constitution.

Since the 70s, the NEP has been largely funded by the exploitation of offshore oil which, by 1985, contributed 26% of all government revenue when oil registered a 29.6% share of major commodities export. Tengku Razaleigh Hamzah, popularly known as Ku Li, who was the founding chairman 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. He said from its inception in 1974 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 tenure as prime minister.

Ku Li, who was finance minister from 1976 to 1984, said Petronas had rescued Bank Bumiputera with a RM2.5 billion bailout in 1985, and again in 1991 when it coughed up another RM1 billion. He 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. Ku Li said the exorbitant amount of bailouts and the 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 Ku Li has said, that is why we failed to build a sizeable sovereign wealth fund like that of Norway (US$1 trillion in assets, it made an annual return of US$131 billion in 2017 alone!) And now, with the scrapping of the goods and services tax (GST), Petronas cannot afford to pay the promised 20% royalty to Sarawak. One could say the Sarawakians have been deprived of their oil royalties because of the tax holiday enjoyed by the rest of the country with the abolition of the GST!

Sarawak’s resources 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. Multi-billion mega projects such as the Bakun dam have been implemented with federal backing at the expense of the local indigenous people. Thus, after more than 50 years, Sarawakians and Sabahans are among the poorest Malaysians in the federation. The deplorable state of basic educational infrastructural provision in Sarawak was recently highlighted in the mainstream press.

The late Sarawak chief minister Adenan Satem initiated the call for higher oil royalties than the present 5% from the federal government. In 2014, the Sarawak legislative assembly unanimously passed a motion to ask for 20% oil royalty.

When Malaysia was formed, Sarawak’s marine boundary was 12 nautical miles, but after the passing of the Territorial Sea Act 2012 (TSA), it was reduced to 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.

Lessons 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 that of Sarawak, 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 to accommodate changes in oil prices.

North sea oil was discovered in the waters off Scotland and Norway in the late 1960s. Although Norway is smaller than Scotland and has worse maritime weather, the Norwegians were able to benefit from being in sole control of their oil revenues because they stayed out of the European Union. If Scotland had become independent shortly after the first devolution referendum of 1979, could it have accumulated a similar fund by now? It is often said that countries with “black gold” can go it alone in a way that 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 will get the oil in the event of Scottish independence? If you go by the geographical median line drawn across the North Sea from the border, 90% 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 would give Scotland 90% of revenue. This means drawing a dividing line along which all points are the same distance from the Scottish and rest of the UK coastline. This was the method used when the North Sea was originally divided up in the 1960s between the UK and other countries. It is based on the same principle as the United Nations Convention on the Law of the Sea.

Scotland’s geographical share of UK North Sea revenue is broken down by licence fees, corporation tax and petroleum revenue tax, and is higher than that of the UK. And Scotland’s share of petroleum revenue tax is actually lower than its share of corporation tax. So, does Sarawak enjoy a share of corporation tax on Petronas?

Restore Sarawak and Sabah’s status as equal partners in the federation

In their GE14 manifestoes, both Barisan Nasional (BN) and PH clearly stated 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 North Sea oil even while being part of the UK, Sarawak and Sabah should have exclusive rights over their resources. They should not have to wait for Putrajaya to dish out paltry “cash payments” or “profits” whether by BN or PH. And they certainly should not have to endure the outrage of political coalitions reneging on their election promises.