Resolving the petroleum royalty dilemma

PRIME Minister Tun Dr Mahathir Mohamad’s comment on the petroleum royalty has brought the long-running dilemma back under the spotlight.

Dr Mahathir told Reuters that the government was mulling to sell shares in the national oil producer, Petronas, to the oil producing states in order to raise funds.

This move is also expected to address the demand for 20% royalty payment to the country’s four oil producing states – Sabah, Sarawak, Kelantan and Terengganu.

Pakatan Harapan, in its 150-page manifesto for the 14th general election, has pledged to quadruple the petroleum royalty paid to Sabah and Sarawak as well as other oil producing states, from only 5% currently to 20%.

However, upon taking over the government, Dr Mahathir has acknowledged that the 20% royalty is unfeasible.

An industry observer tells StarBizWeek that royalty payments from Petronas to Sabah, Sarawak, Kelantan and Terengganu would exceed RM30bil a year, if the rate is increased to 20%.

“A higher royalty payment would affect Petronas’ finances. You wouldn’t want to kill the goose that lays the golden eggs,” says the industry observer.

Quoting Reuters, he says that a 20% royalty would roughly mean a payment of US$7bil or nearly RM29bil a year to Sabah and Sarawak.

“As for Kelantan, based on what Pengkalan Chepa MP Ahmad Marzuk Shaary said earlier in October 2019, a royalty payment of 5% would translate into RM757.7mil in 2018. At 20%, this would mean RM3bil last year.

“The royalty paid to Terengganu is higher than what Kelantan received in 2018, so we are definitely looking at at a higher amount for the former at 20%. The total petroleum royalty will easily surpass RM30bil a year if we increase the royalty rate,” he says.

Information is scarce on the idea to sell Petronas shares, which leaves many to wonder about how much the four states have to fork out to acquire a stake in the oil giant.

StarBizWeek columnist Pankaj C. Kumar, in his write-up last month, has estimated Petronas’ average market value at about RM862bil.

This means that even a 10% stake would cost RM86bil.

The question is would the oil producing states have the financial muscle to pay such enormous amount?

Economist Prof Yeah Kim Leng says the oil producing states are unlikely to afford the purchase price for a stake in Petronas.

“However, an agreed equity stake can be allocated over a period of time that takes into consideration Petronas’ ability to distribute the dividend income and a reduction of revenue for the federal government.

“To be acceptable to the states, the agreed distribution should be stepped up gradually so as not to disrupt the finances of Petronas and the federal government. As long as there is a steady increase towards the promised 20% royalty or the equivalent equity stake over a specified period of five or 10 years, the states could be persuaded into accepting a winning formula for all sides.

“Petronas also needs to ensure a sustainable solution as excessive dividend distribution could impair the necessary capital investment in exploration, production and downstream processing,” says Yeah.

Institute for Democracy and Economic Affairs chief executive officer Ali Salman suggested that the government could also consider disposing of stakes in Petronas’ subsidiaries to the oil producing states.

He points out Dr Mahathir’s earlier comment in September this Pyear that the government may list Petronas’ subsidiaries, among which include Petronas Carigali.

“At least, the state governments would get something in return rather than nothing,” Ali says.

Meanwhile, an industry observer floated a more controversial suggestion, calling for the separation of Petronas’ local and international operations.

He tells StarBizWeek that Petronas’ local operations should be fully-owned and managed by the four oil producing states in the country.

The international operations, on the other hand, should be carved out into a separate entity and managed by the federal government.

“Even without Petronas’ local operations, the federal government can still make its revenue by taxing the petroleum production activities. With more money in the hands of the four state governments, we will see increased local economic activities and that would also enable the federal government to generate higher tax revenue.

“By having the control of the foreign operations, supported by Petronas’ new push towards renewable energy, the federal government can still go big in the global energy industry,” says the person.

Today, apart from Malaysia, Petronas has presence in over 50 countries, with business involvement spanning from exploration to marketing, logistics to technological infrastructures.

For perspective, in the financial year of 2018, nearly 32% of Petronas’ revenue was contributed by its international operations and 39.4% by exports.

Domestic operations contributed 28.5% in revenue.

For now, the state governments of Sabah, Sarawak and Terengganu has indicated openness on discussing about the idea of acquiring Petronas shares.

Sabah Chief Minister Datuk Seri Mohd Shafie Apdal told the press that he would be meeting Dr Mahathir and Sarawak Chief Minister Abang Johari Openg on Dec 16 to negotiate on the petroleum royalty issue.

Commenting on the matter, Abang Johari says that the Sarawak state government will only reveal its stand upon receiving further details from the federal government.

Meanwhile, Terengganu Menteri Besar Datuk Seri Dr Ahmad Samsuri Mokhtar indicated willingness to buy “reasonable amount of equity” in Petronas.

“If it’s in the form of equity, say five or 10%, then we can probably consider, (buying) a reasonable amount of equity.

“In Terengganu we have many oil wells. If one oil well comes to only RM10mil or RM20mil, then we can buy,” Bernama quoted him as saying.
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