Written by: Averroes
(1.0) Introduction;
Recently, the Finance Minister, Tengku Zafrul said in Parliament that states in Peninsular Malaysia would receive 'wang ehsan' rather than the assigned revenue for petroleum or oil or the 5% royalty. This shocked many members of Parliament, especially from Kelantan, coming from Deputy Minister Besar Mohd Amar Nik Abdullah.
He reinforced this by stating that, despite that petroleum production was in close proximity with Kelantan, such production took place outside the State's territorial waters. He added that this 'wang ehsan' would assist in developing projects and programmes for the Kelantanese.
Kelantan has four oil wells, three of them are located in disputed areas, while one is actually within the State's territorial waters. This caused lower revenue yield for Kelantan. They revenue from petroleum is important as to further improve education, welfare, economic aid for the farmers and youths.
Actually, wang ehsan began all the way in the late 1990s, when Dr. Mahathir decided to discontinue the 5% royalty to Terengganu when PAS took over power in the State. UMNO made such move, as PAS may use the money for political purposes instead.
Due to this farce, Kelantan under the administration of PAS sued the federal government, but dropped the case after 10 years since, former Prime Minister, Tun Dr. Mahathir Mohamad allocated RM600 million to them. However, Prime Minister Datuk Seri Ismail Sabri Yaakob agreed with Kelantan for a request to discuss on three matters for the State which are on oil, development and water supply.
According to Menteri Besar Datuk Ahmad Yakob, the remarks made by Tengku Zafrul is inconsistent with the National Finance Council meeting to abolish the Wang Ehsan Program and that royalty should be channeled directly to the States. A written explanation would be sent to the Finance Minister in this regards.
(1.1) Historical Context
When Malaya was formed from the Straits Settlements, Federated Malay States and Unfederated Malay States, the issue of petroleum was not lingering in any persons' minds. However, it was agreed that jurisdiction or State territorial waters only extended to 3 nautical miles off the shores. The rest were in the hands of the Federation.
In 1973, there was a six-month oil embargo on Arab members of the Organisation of Petroleum Exporting Countries. This increased oil crude prices, which prompted Malaysia to establish the Petroliam Nasional Bhd or Petronas on 17th August, 1974. The oil made were then used to finance KLCC and Putrajaya projects. This is to safeguard's Malaysia's economy during such turbulent times.
However, the agreements between Petronas and the States did not define the term 'offshore', as well no definition is provided in the Constitution as to the extent of the nautical miles for the States' territorial waters. Oil was first founded in Terengganu in the year 1973. Many cities were built and the economy improved.
We mentioned that royalty payment was discontinued in Terengganu due to political climate change to PAS. However, in 2009 Terengganu received royalty again when BN returned to power and even received the oil royalty that such production or extraction exceeded the 3 nautical miles.
Kelantan ceased to have their oil royalties in the 1990s when PAS took over. As mentioned, there are four oil productions, coming from;
(1) PM2
(2) PM301
(3) Malaysia-Thailand Joint Development Agreement (MTJDA)
(4) PM3 CAA Malaysia-Vietnam
According to Kelantan Pakatan Harapan (PH) chairman, Senator Datuk Husam Musa, there is no such term as 'royalty' in the agreement between Petronas and the States. The correct term are only referred to as 'cash payments' but now, the term royalty has been used widely. Previously, the royalty money was channeled into the Kelantan Federal Development Department (JPP) and the Kelantan Islamic Religious and Malay Customs Council (Maik).
Also, Kelantan advocated that the 5% royalty should be respected, basing these claims on the PDA, the Assignment Deed and the Vesting Grant 1975/1976, as these documents refer to onshore and offshore and made no mention of the words nautical miles. If the oil royalty is not honoured, this signals a deep disrespect between the Federation and the States which had already been agreed upon.
(2.0) Legal Analysis
Terengganu attempted to challenge the Federal Government obligation as in the case of Petroleum Nasional Berhad v Kerajaan Negeri Terengganu [2004] 1 MLJ 8 and allowed appellants appeal, since despite the defendant (Petronas) discontinued payments for 22 years, it would not go against the interpretation of the principal and vesting agreement.
Also, the issues of sovereignty over territorial waters to petroleum was only a preliminary legal question and should be dealt with first, as the court is more concerned on liability of damages and assessment. This includes interpreting the Federal Constitution, Trengganu Constitution, statutes and conventions which is very complex and unnecessary to determine in this case.
In the Federal Court case of Kerajaan Negeri Kelantan v Petroliam Nasional Bhd and other appeals [2014] 6 MLJ 31, the court dismissed the appeal as to interpreting the Kelantan Agreement and Grant should be done outside the courts.
According to the Ninth Schedule, List I to the Federal List of the Federal Constitution (FC), Putrajaya has power to create laws in respect to item 8(j) which are related to development of mineral resources, including oil and petroleum products.
Therefore, the Petroleum Development Act 1974 (PDA) was enacted by Parliament and applied to the whole Federation, including the States of Kelantan, Terengganu, Sabah and Sarawak.
Under section 2(1) of the PDA 1974, the entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore of Malaysia shall be vested in a Corporation to be incorporated under the Companies Act 1965 or under the law relating to incorporation of companies.
Therefore, Petronas has full powers to regulate and have control over petroleum, gas and oil in our country, with some governmental control. They are a government-linked company.
According to article 110(1) of the FC, there would be assignment of taxes and fees to the States where States shall receive all proceeds from the taxes, fees and other sources of revenue specified in Part III of the Tenth Schedule.
Hence, when read with article 110(3B) of the FC, Parliament may by law provide each State shall receive... such proportion as may be so prescribed of the export duty on minerals (other than tin) produced in the State. Minerals are defined as mineral oils.
Here, Kelantan, Terengganu, Sabah and Sarawak, as well as other States, are to receive the revenue from the production of oil and minerals, but depending on the proportion, it was agreed by all Malaysian states that it would be 5% royalty.
(3.0) Application
According to Tengku Razaleigh Hamzah (Ku Li), who was the founding chairman of Petronas, he stated that there was no such thing as 'wang ehsan' or compassion money under the PDA. In reality, there is the agreement between Petronas and the State governments, including Kelantan where the Federation has to pay the 5% oil royalty.
The oil royalty is for Petronas to continue their rights in the hydrocarbon, oil and gas rights. The 5% were calculations devised by the former Sarawak Chief Minister, Abdul Rahman Ya'kub which was agreed by the States and Petronas, to receive it yearly.
Though, Ku Li did not mention whether the wang ehsan was inherently bad or good, but the 5% royalty as stipulated in the Vesting Deed Agreement should be respected as to comply with uniformity among the state governments. If not, it could potentially deter Foreign Investors to Malaysia.
Adding to this, former Minister Zaid Ibrahim also commented that the PDA does not extend to territorial waters. The 5% royalty is only dependent on the agreement between Petronas and the States. The royalty and the PDA did not mention anything about the distance of 12 nautical miles from Kelantan, Terengganu and so forth.
Even Sabah and Sarawak, despite the oil fields being outside their territorial waters by 3 nautical miles, they still received the revenue or oil royalty. Even when Kelantan received RM600 million, Zaid argued that it was not enough to accommodate the state civil service salaries and how the State could progress with such numbers.
(4.0) Conclusion
To conclude, there is a legal conundrum as to the term offshore as it is not explicitly defined in any legal document, therefore the States should receive the cash payment or royalty from Petronas or the Federal Government. Moreover, this issue is related to politicking, whereby States governed by certain political parties may have been disbarred from economic benefits, as to shatter down other political opponents. Courts also refuse to answer the question of offshore and territorial sovereignty of the States.
If this issue persists, then the States in Malaysia and the country as a whole would not continue to grow and Malaysia may remain in the middle-income trap, while our people or rakyat would not experience social and economic gains, thus remain poor. This would indeed create discrepancies and Malaysia would face some repercussions in terms of perspectives from the rest of the world. We will never know why the government withheld the oil royalty and insisted on wang ehsan, but it is open to speculation.
(5.0) References;
Chung, N. (November, 2021) 5% oil royalty is the agreement, not ‘wang ehsan’, says Ku Li. Retrieved from, https://www.freemalaysiatoday.com/category/nation/2021/11/29/5-oil-royalty-is-the-agreement-not-wang-ehsan-says-ku-li/
FMT Reporters (November, 2021) Oil royalty has nothing to do with territorial waters, Zaid tells finance minister. Retrieved from, https://www.freemalaysiatoday.com/category/nation/2021/11/29/oil-royalty-has-nothing-to-do-with-territorial-waters-zaid-tells-finance-minister/
FMT Reporters (November, 2021) Kelantan disappointed with ‘no oil royalty’ decision. Retrieved from, https://www.freemalaysiatoday.com/category/nation/2021/11/26/kelantan-disappointed-with-no-oil-royalty-decision/
Bernama (November, 2021) Petroleum royalty among three requests by Kelantan being considered by federal govt, says Mustapa. Retrieved from, https://www.theedgemarkets.com/article/petroleum-royalty-among-three-requests-kelantan-being-considered-federal-govt-says-mustapa
MalayMail. (October, 2019) No ‘royalty’ term included in 1975 Petronas agreement, says Kelantan Pakatan chairman. Retrieved from, https://www.malaymail.com/news/malaysia/2019/10/17/no-royalty-term-included-in-1975-petronas-agreement-says-kelantan-pakatan-c/1801270
TheEdge. (May, 2013) The oil royalty rumble. Retrieved from, https://www.theedgemarkets.com/article/oil-royalty-rumble
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