Why Sarawak really can ask for 20pc royalties

OCT 31 — On Thursday, Sabahan author Zainnal Ajamain made an interesting proclamation — he claims that limitations contained by the Federal Constitution preclude Sarawak and Sabah from asking for more than 10 per cent in oil royalties.

Zainnal’s statement would have raised concerns. In a landmark ruling the Sarawak state legislative assembly had previously unanimously voted to demand 20 per cent of its oil and gas royalties. If an entire state legislative assembly had missed this particular restriction then you can imagine the blushes that would follow.

However, is the cap really there? In Zainnal’s argument, he cites Schedule 10, Part V, Item 3 of the Federal Constitution which deals with “Additional Source of Revenue Assigned To States of Sabah and Sarawak”. Here’s what it says:

“So long as the royalty levied by the State on any mineral chargeable with export duty other than tin (but including mineral oils) does not amount to 10 per cent ad valorem calculated as for export duty, export duty on that mineral or such part of the export duty as makes the total of royalty and duty on exported mineral up to 10 per cent ad valorem so calculated.”

From a layman’s perspective, here’s a translation: As long as the royalty you charge on the mineral in question (except tin but including oil and gas) doesn’t come up to 10 per cent of the total value, you can impose export duty on it so as to make the total of royalty plus export duty be up to 10 per cent of the total value.

So this item deals with how Sarawak and Sabah can derive additional sources of revenue. Specifically, this item allows the states to impose export duty on mineral exports but only if the royalty charged has not come up to 10 per cent  of the total value.

If you follow so far, you would have also noticed that the only limitation contained in the item is on how much export duty you can impose --- whatever the amount of difference between current royalty imposed and the 10 per cent threshold of the total value of exports.

In other words, it is not a limitation on how much royalties the states can get. If Sabah and Sarawak gets 10 per cent or more in royalties on oil and gas, the item simply limits them from charging further export duty.

So it would seem that Zainnal had misinterpreted the item in question and that Sarawak had not overlooked a potentially embarrassing obstacle. Sarawak and Sabah are not barred from asking for more than 10 per cent.

That said, being able to ask is not necessarily the same as realistically being able to get what you asked for.

Here’s how the current system works. In oil production, 10 per cent goes to the government --- that is, 5 per cent to federal and 5 per cent  to the state. Another 20 per cent is usually claimed as the cost of oil production. The balance of 70 per cent is split between Petronas and the operator.

If Sabah and Sarawak gets 20 per cent, the extra 15 per cent must come from somewhere. Either Petronas concedes part of its own portion or everyone else takes less than their current entitlements to enable the states to get more. It’s a zero-sum game.

But that’s a problematic proposition because it directly hits the profitability and perhaps even the viability of oil and gas production for Petronas and other players. 

This is before we consider the Petroleum Development Act 1974, which created Petronas and under which all of the oil and resources throughout the country are vested in Petronas in exchange for 5 per cent royalty to the states in which these resources are located. 

So how? Sarawak can ask, but it’ll take more than a state legislative ruling — unusually unanimous as it may be — to make this happen.

*This is the personal opinion of the columnist.