Oil Royalty – A Right?

Question One: what oil is being produced in Kelantan waters?

Answer: None.

No, I am not sorry for my answer because the truth is just that: there is no oil produced within Kelantan waters.

Firstly, let us revisit the Petroleum Mining Act, 1966.  Section 4(3) of that Act states the following:

(3) The Petroleum Authority shall –

(a) in relation to an application in respect of an area of on-shore land, be the Ruler or the Yang DiPertua Negeri of the State in which the area of on-shore land is situated;

and

(b) in relation to an application in respect of an area of off-shore land, be the Yang DiPertuan Agong.

Bear with me, this can be technical.

The section above clearly defines that any matters pertaining to on-shore land comes under the jurisdiction of the respective State, while anything to do with off-shore land, comes under Federal purview.  But what are on-shore and off-shore lands?  In the Interpretation section (Section 2), the following is said:

“off-shore land” means the area of the continental shelf; “on-shore land” includes foreshores and submarine areas beneath the territorial waters of the States. “Land”, in relation to the States of Peninsular Malaysia, means any area of on-shore land and includes off-shore land adjacent to and contiguous with on-shore land and, in relation to the States of Sabah and Sarawak, means area of off-shore land only.

What does the above mean?  It means that the States of Sabah and Sarawak has an autonomous say about the development of on-shore oil fields, independent of the Petroleum Authority.  This is because Sabah and Sarawak were given the rights via the Colonial Government Orders in Council, 1954, that honoured the agreements signed between Sabah and Sarawak with SHELL way before the Independence and the formation of Malaysia.  What is then the off-shore land?  Isn’t that included in the territorial waters of Kelantan?

The Section 2 of the Continental Shelf Act of 1966 states:

“continental shelf” means the sea-bed and subsoil of submarine areas adjacent to the coast of Malaysia but beyond the limits of the territorial waters of the States…”

Now, we have something new here.  The term “territorial waters of the States” does not equal “territorial waters of Malaysia” as prescribed by the United Nations Convention on the Laws of the Sea (UNCLOS).  UNCLOS states that “every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention” (Article 3, UNCLOS).

The Emergency Ordinance (Essential Powers) No. 7, 1969 also mentions this in Section 3(1) and (2) with some remedies pertaining to the Strait of Malacca and the Sulu and Celebes seas.  But it also goes on to say that “For the purpose of the Continental Shelf Act 1966, Petroleum Mining Act 1966, the National Land Code, and any written law relating to land in force in Sabah and Sarawak, any reference to territorial waters therein in relation to any territory be construed as a reference to such part of the sea adjacent to the coast thereof not exceeding three nautical miles measured from the low water mark.” (Section 4(2) of the Emergency Ordinance (Essential Powers) No. 7, 1969).

Therefore, any State forming the Peninsular of Malaysia, that has any drilling platform at sea not exceeding three nautical miles (5.46km) has the right to claim oil royalty from the Federal Government.  Look at the map below and tell me which field is within three nautical miles of any land in Kelantan?

But UNCLOS mentioned the word “State”, some may cry.  In Article 1, para 2 (1) of the UNCLOS, “State Parties” means States that have consented to be bound by this Convention and for which this Convention is in force.  Historically, Kelantan was a vassal state belonging to the Kingdom of Siam until the Anglo-Siamese treaty of 1909, that saw Kelantan becoming part of the Unfederated Malay States under a British adviser for a while until the Japanese invasion in December 1941.  By 1st February of 1948, Kelantan became part of the Federation of Malaya and together with the other Peninsular states, attained independence on 31st August 1957.

The first of the United Nations Conferences on the Law of the Sea was held only in 1958 in Geneva (Geneva Convention of Continental Shelf, 1958), and no way could have Kelantan, as an independent and sovereign state, consented to the UNCLOS.  Therefore, UNCLOS applies collectively to Malaysia as a recognised State.  Of course, the Petroleum Development Act, 1974 never mentions anything on territorial waters; but in Section 2(1) of the Act, it is stated that “the entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning, and obtaining petroleum whether onshore and 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.” Refer to the definition of onshore and offshore in Section 2 of the Petroleum Mining Act, 1966.

The Act defines the Corporation in Section 3(1): “Notwithstanding Section 22 of the Companies Act 1965, relating to the names of companies, the Corporation shall be styled as the Petroleum Nasional Berhad or in short form PETRONAS.”  Therefore, PETRONAS has the right to all the activities described in Section 2(1) of the Petroleum Development Act.

As a government-owned Corporation, it is only right that PETRONAS pays the Federal Government and the Government of any relevant State as may be agreed between the Corporation and the relevant State’s Government in return for the ownership and rights, powers, liberties and privileges vested in it by the Act.  This is stated in Section 4 of the same Act.

Terengganu and Kelantan are not the only Peninsular states that are gifted with petroleum blocks.  As a matter of fact, all states are, including those on the West coast.  Terengganu entered an agreement with PETRONAS on the 22nd March, 1975.  In fact, oil was first discovered offshore Terengganu by Esso Exploration Inc in 1973.  Had PETRONAS not entered an agreement with Terengganu, the latter would still be backwards in economic nature, as Esso had only entered a production-sharing contract (PSC) with PETRONAS for winning oil beyond Terengganu’s territorial waters.  This agreement, said the then-Terengganu’s PAS Government Exco member, Mustafa Ali in November 2000, “did not specifically refer to the payments as oil royalty.”  However, the then-PAS-led State Government claimed that a letter in 1987 confirmed the agreement of a “royalty” of some sort.  This is the same basis that the PAS-led Kelantan state government is claiming the “royalty” payment based on an agreement the State also signed with PETRONAS in 1975.  The only difference between Kelantan and Terengganu is that, PETRONAS uses the latter as its production and storage base, while there isn’t a single refinery built in the former. The 1975 agreement between PETRONAS and Terengganu states:

Petronas shall make to the government cash payment in the form of yearly sum amounting to the equivalent of five percent of the value of the petroleum won and saved in Terengganu and sold by Petronas or its agents or contractors during the period provided in Clause 2.

Therefore, Terengganu has a better locus standi than Kelantan does in asking for some form of payment.

The act of PETRONAS giving payment to any state for oil won beyond the state’s territorial waters can therefore be seen as a token rather than a royalty, bearing in mind that anything beyond the three-nautical mile limit belongs to the Federal Government.  Logically, if the oil belongs to the Federal Government, then the state has no right to ask for the payment for transferring to PETRONAS something that does not belong to it.  Not unless the state is either Sabah or Sarawak.

There is also no guiding principle anywhere within the Petroleum Development Act that the number must be five percent of the value of petroleum won and SAVED IN ANY STATE as mentioned in the agreement between PETRONAS and Terengganu and Kelantan.  The oil won beyond the territorial waters of these states were never, and will never be the States’ God-given oil and gas as claimed by some.