First and foremost, we need to understand and make it clear that the cash payment payable under Section 4 which is currently fixed at 5% is not a royalty but a payment payable by Petronas to the oil producing States in return for ownership rights of the oil and gas that were unlawfully assigned and vested in Petronas by the late Tun Razak pursuant to a Vesting Order dated 26 March 1975.
Section 4 of the PDA74 provides:-
Cash payment by the Corporation
4. In return for the ownership and the rights, powers, liberties and privileges vested in it by virtue of this Act, the Corporation shall make to the Government of the Federation and the Government of any relevant State such cash payment as may be agreed between the parties concerned.
This vesting of the oil and gas ownership rights to Petronas is in breach of the State List under the Ninth Schedule of Federal Constitution where oil and gas resources come under land rights which belongs to the governments of Sabah and Sarawak and Tun Razak had no legal right or business to give to Petronas. The Vesting Order signed by Tun Razak reads:-
SCHEDULE
[Subsection 2(2)]
GRANT OF RIGHTS, POWERS, LIBERTIES AND PRIVILEGES IN RESPECT OF PETROLEUM
I, TUN HAJI ABDUL RAZAK BIN DATUK HUSSEIN, Prime Minister of Malaysia, on behalf of the Government of Malaysia on this 26th day of March, 1976, hereby grant in perpetuity and convey to and vest in PETRONAS the ownership in and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether lying onshore or offshore of Malaysia. The grant, conveyance and vesting made hereunder shall be irrevocable and shall enure for the benefit of PETRONAS and its successor.
In witness whereof I on behalf of the Government of Malaysia hereunto set my hand the day and year first herein above written.
The cash payment under Section 4 is for ownership rights and is not royalty and should not be confused or treated as royalty although it is often erroneously referred to as “oil royalties” for convenience.
Royalty is actually a sum or charge imposed by the Sabah government for the oil and gas extracted from its territory. The Sabah government is entitled to charge Petronas royalty under Section 24 of the Land Ordinance for oil and gas extracted from Sabah. This royalty is similar to royalty or tribute imposed by any State government for example for the extraction of tin, gold, copper or whatever mineral extracted.
Under Section 24, the Sabah government is entitled to charge any rate as oil royalties and it is not limited to 10%. In fact, in the six (6) oil agreements signed by the Sabah government under Tun Mustapha before 1972, the Sabah government imposed a 12.5% oil royalty to be paid by the international oil companies and that the Land Ordinance was enacted way back in 1930 even before Harris Salleh was born.
It needs to be remembered that when Petronas was formed in 1974, before Sabah and Sarawak’s oil and gas were vested in Petronas in 1976, 4 of the 19 oilfields in Sabah and Sarawak were already producing about 99,000 barrels per day.
For 1976, Sabah received RM20 million for its 5% cash payment which means Petronas and the federal government received a massive RM380 million by just signing a piece of paper with Harris Salleh. In 2015, Petronas was targeted to receive about RM22 billion from Sabah’s oil and gas.
The problem for Sabah is that in the Oil Surrender Agreement or Oil Agreement signed by Harris Salleh and witnessed by Pairin on 14 June 1976, a mere 8 days after the tragic Double 6 air-crash, is that Harris on behalf of the Sabah government agreed to waive the imposition and collection of royalties on the oil extracted. It was certainly not a very wise decision compared to Tun Mustapha imposition of 12.5%.
However, item 3 under Part V of the 10th Schedule of the Federal Constitution provided a saving grace for Sabah to be reimbursed part or all of the export duty imposed on oil and gas so as to make up any “loss” of oil royalty up to a total aggregate of 10% so that Sabah will get a minimum of 10% ad valorem oil royalty. Item 3 states:-
3. 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.
It is clear that Item 3 does not restrict the imposition of oil royalty or limit its imposition to 10%.
What Item 3 serves is to provide Sabah with a minimum of 10% oil royalties through the reimbursement from export duties of oil and gas so that it makes up to 10%. For instance, if the State charges 3% as oil royalties, it is entitled to reimbursement of an additional 7% from the oil export duties to make up oil royalties as 10%. Of course, if Sabah charges 12.5% as imposed by Tun Mustapha then Sabah is not entitled to any reimbursement as it has exceeded 10%.
Since Sabah now does not charge any oil royalty under Section 24, presumably due to the Oil Surrender Agreement signed by Harris Salleh back in 1976, the Sabah government is entitled to be reimbursed a full 10% of the export duties on oil and gas under Item 3.
Sad to say, the federal government has failed to honour Item 3, Part V of the Tenth Schedule of the Federal Constitution since 1976 although PM Najib has promised to form a Special Committee to look into the return of the 40% net revenue derived from Sabah and the additional sources of revenue due to Sabah under the Tenth Schedule. It is certainly not provided for in Budget 2016 in breach and non-compliance of the Federal Constitution.
It is, therefore, wrong to state that Item 3 restricts Sabah and Sarawak to a 10% limit on oil royalties or that the cash payment under Section 4 of the PDA74 is also restricted to 10%.
Sabah and Sarawak should continue to demand for the return of their oil and gas resources unlawfully vested in Petronas by Tun Razak in 1975 and for the reimbursement of the 10% oil royalties from the oil export duties as provided for in Item 3, Part V of the Tenth Schedule of the Federal Constitution.
The Sabah government and its MPs and Assemblypersons must stand up for Sabah’s rights including defending the Federal Constitution which they was sworn to safeguard and ensure Sabah’s oil and gas are returned and the reimbursement of the 10% oil royalties. It is their legal and moral duty to Sabah and fellow Sabahans.
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