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Mahathir acted in bad faith in directing Petronas to violate its legal obligation to pay 5 per cent oil royalty to Terengganu State Government which he had himself acknowledged publicly two years ago

Speech at the Shah Alam PAS dinner dialogue on "Oil Royalty - Violation of People’s Rights"
by Lim Kit Siang

(Subang Jaya, Monday): The Prime Minister, Datuk Seri Dr. Mahathir Mohamad, said today that "the present trend among opposition parties is to deliberately breach the law and invite action against them".

Mahathir cannot be more wrong as his description best befits himself, as when he acted mala fide and directed Petronas to violate its solemn legal obligation to pay five per cent oil royalty to the Terengganu state government so that the Barisan Nasional Federal Government could hijack the PAS Terengganu State Government’s oil royalty as part of its political revenge against the people of Terengganu for voting in a PAS state government in the last general election.

In this instance, Mahathir deliberately broke the law and challenged the PAS Terengganu State Government to take action against him and the Federal Government. The question is who dare to go to the courts on this matter?

The legal position and rights of the Terengganu state government to five per cent oil royalty is crystal-clear and had in fact been acknowledged by the Federal Government and every Prime Minister and Finance Minister for the past two decades.

In 1974, Parliament passed the Petroleum Development Act 1974 to provide for the "exploration and exploitation of petroleum whether onshore or offshore" and vested in Petronas "the entire ownership in and the exclusive rights, powers, liberties and privileges in respect of the said petroleum, and to control the carrying on of downstream activities and development relating to petroleum and its products".

Section 4 of the Petroleum Development Act 1974 stipulates that "in return for the ownership and rights, powers, liberties and privileges vested in it" by the Act, Petronas "shall make to the government of the Federation and the government of any relevant State such cash payments as may be agreed between the parties concerned".

On 22nd March 1975, Petronas signed an agreement with all states including Terengganu spelling out the "cash payments" under section 4 of the Petroleum Development Act 1974.

In the agreement signed between Petronas and the Terengganu State Government in March 1975, "in return for the ownership and rights, powers, liberties and privileges in respect of the petroleum vested by the Government in Petronas", Petronas made the following commitments:

"1. Petronas shall make to the government CASH payments in the form of yearly sum amounting to the equivalence of 5% of the value of the petroleum won and saved in Terengganu and sold by Petronas or its agents or contractors.

2. The cash payable under this Agreement shall be paid semi-annually. Payment for the first half-yearly period shall be made on or before the First day of September and for the second half-yearly period shall be made on or before the First day of March of the following year."

Although the legal obligation of Petronas to pay 5% cash payments of petroleum earnings to Terengganu was not called "royalty" until a supplementary agreement in 1987, it was clearly a legal right of the Terengganu state and not a "compassionate" or "goodwill" payment. In fact, in the past two decades, every Prime Minister and Finance Minister had recognised it as an "oil royalty" which is legally binding on Petronas on behalf of the Federal Government.

Only two years ago, on 23rd October 1998, Mahathir himself publicly acknowledged that the payment to the Terengganu state government was "royalty" and not "compassionate" or "goodwill" payment when he tabled the following report in Parliament:

"Receipts from petroleum royalty by Sabah, Sarawak and Terengganu, the three beneficiary states, are estimated to decline by 10.9% to RM872 million due to lower crude petroleum prices. For Sabah, receipt from petroleum royalty is estimated to decline slightly by 4.8% to RM75.7 million, while for Sarawak, it is estimated to decline by 11.2% to RM342 million. For Terengganu, the contribution from petroleum royalty is estimated to decline by 11.9% to RM453.9 million. However, in terms of contribution to its own revenue source, it is still very significant, accounting for 65.4%."

This is from the Economic Report 1998/1999, which bears Mahathir’s signature and was tabled in Parliament during the 1999 Budget presentation on 23rd October 1998, as Mahathir was then the Finance Minister after he had arbitrarily and unjustly sacked Datuk Seri Anwar Ibrahim as Deputy Prime Minister and Finance Minister.

How can Mahathir now disown his own public admission in Parliament on October 1998 that the five per cent payment to Terengganu was "oil royalty"?

Even the two-time Finance Minister, Tun Daim Zainuddin, publicly acknowledged Terengganu state government’s right to oil royalty in his retabling of the 2000 Budget in the Dewan Rakyat on February 25, 2000, when the Economic Report 1999/2000 he retabled in Parliament said:

"Sebaliknya, hasil dari royalti petroleum yang merangkumi sebanyak 15.2% dari jumlah hasil sumber sendiri dianggarkan merosot 11.2% kepada RM979 juta (untuk 1999) berbanding dengan RM1,102 juta pada tahun 1998 dengan Terengganu dianggarkan menerima RM520 juta, Sarawak RM359 juta dan Sabah RM100 juta. Kutipan royalti petroleum yang rendah ini adalah berpunca dari penurunan harga petroleum mentah pada enam bulan pertama serta penurunan pengeluaran petroleum mentah."

The very fact that every Finance Minister in the past two decades had recognised Terengganu state government’s right to oil royalty is fully borne out by the Economic Report 1978/1979 presented by the Finance Minister Tengku Razaleigh Hamzah in Parliament in October 1978, which is most significant as it was Razaleigh who signed the 1975 Petronas agreement with the Terengganu State Government when he was the President and Chief Executive of the national oil corporation.

The 1978/1979 Economic Report said:

"Revenue from royalties derived from oil is expected to increase by 50% to reach about $90 million compared to $60 million in 1977. This large increase is due to the State of Trengganu receiving oil royalties of $30 million from its offshore oil production activities."

Petronas should be fully aware of its legal obligation to pay five per cent oil royalty to Terengganu state government, and this was why at the press conference on 29th June 2000 to announce the national oil company’s best-ever annual results with a 83 per cent surge in pre-tax profit to RM21.6 billion for the year to March 31, 2000, Petronas president and chief executive officer Tan Sri Mohamad Hassan Marican said Petronas would continue paying five per cent oil royalty to Terengganu on offshore oil and gas to Terengganu based on the agreement signed in 1975.

He said:

"For as long as oil is produced, royalty will be paid to the state and the royalty amount, accrued or due is RM810 million, which is 5% of the value of oil and gas produced".

Petronas probably now feels that its hands are tied from fulfilling its legal obligation to the Terengganu state government once the Prime Minister issues a directive to stop paying Terengganu state government the five per cent royalty.

This is because the Petroleum Development Act stipulates that Petronas "shall be subject to the control and direction of the Prime Minister who may, from time to time, issue such direction as he may deem fit" (section 2) and that the Prime Minister’s direction "shall be binding" on Petronas (section 3).

Although the Prime Minister has the powers to issue directives to Petronas which is binding on the national oil corporation, the Prime Minister has no powers to issue a directive which is mala fide and bad in law as requiring Petronas to act illegally to break its solemn legal commitments to Terengganu - especially as every Prime Minister and Finance Minister in the last two decades had recognised Terengganu state government’s legal right to five per cent oil royalty, including Mahathir’s October 1998 budget presentation in Parliament and Daim’s retabling of the 2000 Budget in Parliament in February 2000.

What Mahathir and the Barisan Nasional Federal Government had done in deliberately breaking the law with regard to Petronas’ legal obligation to pay five per cent oil royalty to the Terengganu state government is the latest and most serious blow to national and international investor confidence, as it has aggravated increasing concerns about the devastating erosion of the rule of law and the integrity of the government in Malaysia.

(6/11/2000)

*Lim Kit Siang - DAP National Chairman