KUCHING, Oct 31 — The Sarawak Chief Minister’s Office (CMO) today made it clear that the state government has not dropped its 20 per cent demand on oil royalties from the federal government as reported by local news portals.

"This office wishes to clarify that the state government has not dropped the demand and that current negotiations with the federal government are based on that demand,” the CMO said in a statement.

"The article is misleading and vexatious with intent,” it said referring to a Reuters report published by a local news portal earlier today.

The Star Online quoted Reuters as saying that Sarawak will drop its demand for quadrupling royalties paid by energy giant Petronas but was pushing for production-sharing and other agreements.

Sarawak and neighbouring Sabah have Malaysia’s most prolific oil and gas reserves in their waters in the South China Sea.

Their long-standing royalty demand would cost government-owned Petronas up to US$7 billion (RM29.25 billion) a year, according to a rough calculation by a person aware of the matter.

Prime Minister Tun Dr Mahathir Mohamad had said last month that his ruling coalition’s election manifesto of increasing royalties to the states to 20 per cent was not workable and could "kill” Petronas, the world’s third largest exporter of liquefied natural gas.

Dr Mahathir said at an event in New York last month that his government was trying to work out how to give Sarawak and Sabah "more money without undermining Petronas’ own strength”.

In 2015, the Sarawak State Assembly passed a resolution demanding that Petronas and the federal government increase the present 5 per cent oil royalty to 20 per cent.

The royalty payment has been a key demand in the on-going negotiation with the federal government in the special Cabinet committee on the review of the Malaysia Agreement 1963.