Sarawak's oil for Sarawak

December 26, 2019

Suarah Petroleum Group (SPG) would like to refer to the various statements by the CEO of Petronas, Wan Dzulkiflee Wan Ariffin, and Prime Minister Dr Mahathir Mohamad, as reported recently.

SPG reiterates the bigger picture that our stance, and we believe that of the Sarawak government as well, is based on the inequitable distribution of wealth and continuing poor management of Sarawak’s oil and gas resources that is the genesis of the situation which now manifests in our current disagreement with the federal government and Petronas.

To say or imply in any way that Sarawak’s demands are driven by short-term objectives or simply wanting larger royalty now is an over-simplification and misinformation that certain parties have put forward to mask the genuine and legitimate concerns of Sarawak that underpin SPG’s and the Sarawak government’s position.

The Malaysian public needs to know the truth and facts behind Sarawak’s stance notwithstanding the current court cases or their outcome.

In reality both the federal government – which for more than 43 years has reaped the lion’s share of revenue from Sarawak’s resources; and Petronas, which will never be ready to give more dividends as it is a “high cost operator” – are the real obstacles to finding a common ground and solution to the current conundrum.

‘High-cost’ Petronas

Why do we consider Petronas a “high cost operator”?

Firstly, of course, is the fact that the federal government has been heavily reliant for decades on the dividends demanded by it from Petronas. This is self-evident and there should be no doubt about this fact.

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 PSC companies as well as dividends from Petronas’s profits.

It is a known estimate among oil and gas players that the federal government reaps, approximately 92% of the revenues collected from oil and gas in Malaysia as per the sources mentioned above.

‘Illegal legacy assets’

Secondly, there is doubt that Petronas over the years has really evolved into a truly competitive entity as it has basically generated huge revenues from the “free assets” bequeathed upon it under PDA74. These assets comprise offshore blocks in Sabah, Sarawak and Terengganu, already producing in 1974 and also those yet-to-be discovered domestically.

Collectively in the 2000s, these were termed as Petronas’s “Legacy Assets”.

The so-called Legacy Assets, arguably illegally and unconstitutionally obtained via PDA74, cannot be considered as competitively acquired as there were normatively NIL acquisition costs on the part of Petronas.

In fact, Petronas profited even more by demanding that during the exploration phase the contractors allocate a 15% ‘carried interest’ cost for free to Petronas Carigali.

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. Note: the states that own the oil and gas do not get a single sen of Petronas’s annual declared dividends.

In his recent comments, the Petronas CEO talks about the respective governments getting 5% risk-free.

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?

In fact what risks does Petronas itself take on its domestic upstream operations?

In Petronas’s own words “Through the use of the Production Sharing Contracts, Petronas is able to insulate itself from capital costs and risk of failure associated with exploration activities while maintaining a significant share in any discovery through its entitlements. Petronas further benefits from the Production Sharing Contract as it owns all exploration and production data and all other assets acquired and used by PSC contractors in the performance of Production Sharing Contracts”.

In other words, Petronas does not bear any risks or capital costs at all, not with regard to its illegally and unconstitutionally acquired assets from Sarawak and Sabah, nor in respect of its domestic upstream operations.

The opposite is true of its overseas ventures and forays, where Petronas has exposed itself to all kinds of risks and incurred capital and operational costs that in many cases have led to disastrous losses.

CEO’s misleading statements

Petronas CEO’s recent media interviews have put forth rather false and misleading information.

One of these is that Petronas only makes a profit margin of 3.7% from its local oil production, which would appear to be with regard to deep water operations, that at the moment only constitute a small part of Petronas’s local operations, while most are still in shallower waters.

This is therefore not a coherent justification and in fact a disingenuous argument for not being able to pay more to the petroleum-owning and producing states.

Petronas as an operator in other countries is in fact committed to pay more than it does to Sarawak. It is also in fact grossly misleading in the overall scheme of Petronas’ profits and the Malaysian petroleum regime.

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. 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.

As a result of the long years of abuse by the federal government, Petronas is now unable to meet the legitimate demands of the petroleum-owning and producing states like Sarawak. This is a legitimate and pressing concern for us, even as the federal government is asking us to “buy back” what we have vested in good faith over the years yet receiving a pittance and sacrificing our own socio-economic development, which continues to lag behind.

SPG believes that fair play and equitable treatment must be the order of the day. After all, the federal government has been taking the lion’s share of Petronas’s profits to cover its poor economic policies and mistakes, even to this very day.

Sarawak is not asking to take only the “honey” from Petronas’s profits. That has always been the prerogative of the federal government, namely that of the prime minister, the sole person to whom Petronas reports.

The stark truth is that Sarawak can no longer afford to continue paying for Peninsular Malaysia’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, we believe 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.

We strongly believe that Sarawakians can certainly do better at managing Sarawak’s own petroleum resources than Petronas.

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.

The present lop-sided development, inequality and uneven distribution of wealth must end, and SPG pledges to do its utmost to help the Sarawak Government to achieve this objective.

Suarah Petroleum Group is made up of professionals from Sarawak concerned about the imbalances in mineral resources sharing.