Giving Sabah a fair share of oil money

Insight Sabah says a stake in Petronas is better than higher oil royalty

Sabah Chief Minister Musa Aman is right. After 36 years, it is certainly time to review the oil revenue- or profit-sharing agreement between Sabah, Sarawak, the federal government and Petronas, the national oil company. And it is opportune since Najib Razak, the prime minister, is reviewing cash payments, deemed as royalties, from petroleum revenue to oil-producing peninsular Malaysian states of Kelantan, Pahang and Terengganu. Sabah, like the others, has been receiving 5% oil royalty. And this has been a source of unhappiness of Sabahans who feel shortchanged. But it would be naïve to think that increasing it will placate Sabahans suffering from a sense of loss of what is theirs. They don’t see oil and gas as a national asset despite having been Malaysians for almost 50 years.

Sabah in fact has never been shortchanged by Kuala Lumpur of its oil and gas. It receives about four times more than its 5% oil royalty from the federal government for its social and infrastructure development under each succeeding five-year Malaysia plan. The state problem has been in spending the money quickly enough.

Sabah expects about 800m ($258m) ringgit in petroleum royalties this year. Federal grants are estimated at about 350m ringgit. The state has got slightly more than 10 billion ringgit to carry out 424 projects under the first phase of a rolling plan of the 10th Malaysia plan which started last year.

The Borneo island state contributes a little more than a quarter of Malaysia’s crude oil production of about 635,000 barrels a day. The bulk of it comes largely off the peninsular coast of Trengganu. Sarawak’s makes up the rest. Petronas last year paid 5.4 billion ringgit in “petroleum proceeds” to the federal and state governments. (Petronas has never referred to these cash payments as “royalties” in its financial statements.)

Najib speaks of a “fair” distribution of cash payments from petroleum revenue. And this is what the Petroleum Development Act of 1974 has set out to achieve after Petronas signed the first production sharing contracts with Shell, Exxon and other foreign oil companies in 1976. Under a complex mechanism, Petronas sets aside 10% of gross revenue from oil and gas production for cash payments to the federal government and oil-producing states. Out of this money, the federal takes half and the states keep the balance.

The only sore point is that the federal government is the sole shareholder of Petronas. It gets a flat annual dividend of 28 billion ringgit. Last year it got 30 billion ringgit out of a profit of 63 billion ringgit.

It would thus be pertinent then for Najib and Petronas to consider converting Sabah’s and other oil-producing states' share of oil and gas revenue into equity. This would certainly help to diminish Sabahans’ sense of loss of their natural resources. Surely, they will be proud to own a piece of Malaysia’s only Fortune 500 company that will heighten their sense of belonging to the 13-state federation where they are separated from the peninsula by the South China Sea.

Rather than “cash payments” or “royalties”, Sabah and the other oil-producing states would be receiving dividends as long as Petronas continues to be profitable. Whether dividends will pay more is a moot point even though Petronas is trying to plough back more profit into its operations and limit dividends to 30% against 61% now. So is the question of whether it would reduce federal funding of the country’s social and infrastructure development should payment of oil and gas dividends to the federal government fall. Sooner or later Kuala Lumpur will have to cut its dependence on oil and gas money which now accounts for 45% of the national budget.

Giving Sabahans and Sarawakians a stake in Petronas will surely help their integration in Malaysia. After almost 50 years, it is still not too late to start. – Insight Sabah

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