Reclaiming the state’s oil and gas rights

DURING this week, Chief Minister Datuk Patinggi Abang Johari Tun Openg, when officially launching Petroleum Sarawak Berhad (Petros), announced that by July this year, the state will assume full regulatory control over the upstream and downstream aspects of the oil and gas industry in Sarawak.

This provoked response from at least three opposition party leaders, namely, Chong Chieng Jen (DAP), who claimed to be speaking also for Pakatan Harapan (PH); See Chee How (PKR); and Cobbold John (PBDSB). They cast doubt as to whether Sarawak can reclaim rights to oil and gas since the Petroleum Development Act, 1974 (PDA) and Territorial Sea Act, 2012 (TSA) have not been repealed or amended. Under these federal laws, according to them, the rights over petroleum and gas had been vested in Petronas and Sarawak’s rights to these resources are limited to merely three nautical miles from the coast.

PH reiterated that should it win GE14, it would increase the oil royalty for Sarawak to 20 per cent from the current 5 per cent.

Legal arguments

The Chief Minister’s keynote address at the launch of Petros clearly stated that the state is enforcing its rights through the Oil Mining Ordinance, 1958, which stipulates that prospecting, exploration and mining of petroleum both on land and in the Continental Shelf required a licence or lease issued by the Governor in Council (state cabinet) under that Ordinance. The state cabinet has approved a Bill to amend this Ordinance, to update its provisions and provide for better enforcement of this state law.

He pointed out rightly that the under Item 2(c) of the State List in the Ninth Schedule of the Federal Constitution only the State Legislature can legislate on the subjects of prospecting licences and permits or mining leases. Executive authority over the grant of such licences and leases rest with the state government by reason of Article 80.

The Chief Minister called upon all industry players operating in Sarawak to comply with the said Ordinance and other state laws such as the Gas Distribution Ordinance and the Land Code (where use and occupation of land – including in the Continental Shelf, is involved).

 

What is clear from the Chief Minister’s speech is that the state is asserting its mining rights over petroleum and gas within Sarawak, including in the Continental Shelf. The Boundaries of Sarawak as proclaimed by the Queen in Council in 1954 extends to the seabed and subsoils in the Continental Shelf without affecting the character of the high seas above it. The Chief Minister said that this boundary cannot be altered unless the State Legislative Assembly consents by enacting a law to this effect.

The Chief Minister’s legal contentions are absolutely spot on. Assuming only that Petronas has ownership of the petroleum resources, how is Petronas to mine them without a mining lease issued by the state? How could Petronas or its contractors use and occupy state land offshore or onshore to build their mining platforms without a lease or occupation licence and without committing an offence under the Land Code for unlawful occupation of State Land.

The statements from the opposition leaders show their concerns about the PDA and TSA, which they considered to be unconstitutional and therefore, as the Chief Minister said, void by reason of Article 4 of the Federal Constitution.  Why should the opposition be so concerned about federal laws which are unconstitutional in the context of enforcing our state’s constitutional rights to the mining of petroleum, distribution of gas and use and occupation of land, which are all within the constitutional authority of the state?

Control of mining and land rights v 20 pct oil royalty

PH, through Chong’s statement, said that the Chief Minister’s approach to reclaiming state rights would at best make Petros a contractor of Petronas. PH reaffirmed its commitment to give 20 per cent oil royalty to Sarawak.

This commitment to increase oil royalty must mean that PH is content with Petronas or the federal government continuing to have ownership of the oil and gas in Sarawak, onshore and offshore. This is no different from Petros being a contractor to Petronas if PH’s argument is correct. In both situations, the state does not own the petroleum resources.

So, let us analyse the economic benefits of the two models – the state government’s perceived model resulting in Petros being a contractor [like other Production Sharing Contracts (PSCs) of Petronas] but holding the mining rights to the petroleum; and the 20 per cent model marketed by PH.

Typically, Petronas does, by itself, not prospect for or produce petroleum. It dishes out PSCs to companies such as Shell, Nippon Oil, Murphy Oil, just to name a few. It is well known in the oil and gas industry that the monetary returns derived from the petroleum (and natural gas) found and mined are divided between the government (for royalty), Petronas and its PSC contractors as seen in Table 1.

The recent sharing formula introduced by Petronas is known as ‘revenue over costs’, which gives incentives to the PSC contractors calculated on the basis of the contractor’s cost and profit on oil or gas. Industry sources say this formula is commercially more advantageous to the contractors than the old division shown in the table.

So, if (according to PH), the model for regaining state rights over oil and gas announced by the Chief Minister would only result at best in Petros being a contractor of Petronas, the financial returns to Petros (which holds the mining rights granted by the state government under the Oil Mining Ordinance) would clearly be more than 20 per cent. Even the share of profits alone should be more than 20 per cent of the royalty.

Additionally, the state would gain financially through premium, rent or licence fees, which may be levied under the Land Code on Petronas and its contractors, for the use or occupation of land in Sarawak including the state land in the Continental Shelf, which is within the boundary of Sarawak. The control over the gas distribution system in the state will also yield added revenues to the State Treasury. By having Petros as a major player in the oil and gas industry in Sarawak, the state government would be able to ensure greater and more meaningful participation by Sarawak companies and Sarawakians in this strategic industry. The spin-off effects of the Chief Minister’s model will definitely benefit Sarawakians directly and boost the GDP of the state.

Moreover, the state, by asserting its rights to enforce the Oil Mining Ordinance, opens up opportunities for the state to regain control of the ‘brown fields’ [where Petronas has completed its exploration and mining activities] and the ‘marginal fields’ which Petronas does not intend to mine for economic or commercial reasons. Industry experts believe there are still significant oil and gas deposits in these brown and marginal fields.

In the light of this financial analysis, it would be difficult to see how the 20 per cent oil royalty from Petronas, who still retains ownership of the petroleum oil and gas resources of Sarawak, could be a better option that what was announced by the Chief Minister on March 6, 2018. At this time point in time, merely asking for 25 per cent royalty without anything else is not an attractive selling point.

More importantly, under Item 3 of Part V of Tenth Schedule of Federal Constitution, royalty from minerals (including mineral oil) of up to 10 per cent ad volerom is assigned to Sarawak as “additional sources of revenue”. If the state imposes 20 per cent royalty on Petronas for oil and gas produced in Sarawak, only 10 per cent of this royalty paid by Petronas is constitutionally assigned to the state and the federal government is legally entitled to claim and have the other 10 per cent. So, constitutionally, the maximum the state gets is only 10 per cent royalty.

PH must explain how, constitutionally, the state can ever get 20 per cent oil royalty from Petronas without first amending Part V of the Tenth Schedule of Federal Constitution. This is a burning question calling for immediate answer from the promoters of the 20 per cent oil royalty model.

Choice

My fellow Sarawakians, Quo Vadis (which direction to go): – PSC contractor with mining rights or 20 per cent oil royalty? The real choice is between a visionary model for reclaiming state rights for oil and gas promoted by the Chief Minister or the outmoded approach of merely fighting for 20 per cent oil royalty flouted by PH. Choose intelligently.

 

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