20% royalty: Not just yet
KUALA LUMPUR: The government will have to discuss the mechanism of the 20 per cent oil royalty payment to petroleum producing states with Petroliam Nasional Bhd (Petronas) as a consensus must be reached on the matter, the Dewan Rakyat was told yesterday.
Economic Affairs Minister Datuk Seri Mohamed Azmin Ali said the rationale behind this effort was fulfilling the principle of distributive justice and fairness in the distribution of wealth.
He said that from Pakatan Harapan (PH) understanding, the proposal to increase the petroleum royalty to 20 per cent was based on Petronas's profits after taxation and not from total gross production.
“PH has made the cost structure analysis of petroleum production by Petronas,” he said when responding to a question from Datuk Seri Panglima Madius Tangau (Upko-Tuaran) during the question-and-answer session.
Azmin said however, the proposal could not be implemented immediately as it ran contrary to the Petroleum Development Act (PDA) 1974 as the calculation was based on gross profit rather than net profit.
If the 20 per cent petroleum royalty is to be handed out, it would require an amendment on the PDA 1974 as the existing Act only allow the payment of 10 per cent royalty of oil and gas royalty from gross production in cash to the federal government and oil producer states, he said.
At this moment, five percent of this amount will be received by the federal government and the petroleum-producing states, he said, adding that Petronas would normally make the payment twice a year, namely in February and August.
He said if Petronas were required to add the petroleum royalty to 20 per cent of the total gross output of petroleum to oil producing states, it would have serious implications on the financial position of Petronas and the federal government.
Currently the 10 per cent cash payment is a gross value per barrel at the market price and is made without considering whether oil and gas production from the fields is profitable or not, Azmin said.
He said based on the current situation, out of per barrel value, 70 per cent of gross output of oil and gas was the cost of production recovery that needed to be financed.
The cost has significantly increased over the years due to complexity and increased risks in offshore oil and gas exploration, he said, adding that in the case of deepwater production, the cost could reach up to 80 per cent of total gross production.
“After deducting the 10 per cent royalty and the cost of production of about 70 per cent, the remaining 20 per cent is the profit that will be taxed,” he said, lamenting that Petronas and its productionsharing partners had to pay the Petroleum Income Tax of 38 per cent of gross profit.
“Based on the estimated 20 per cent profit, the amount of the Petroleum Income Tax payable is estimated at eight per cent of total gross output,” he said.
The remaining 12 per cent of the total oil and gas gross output is a profit that will be shared between Petronas and other operators based on the agreements entered into on production contracts involved, he said.
Azmin said the Ministry of Economic Affairs was reviewing the functions and authority of relevant agencies and Petronas to ensure fairness and transparency in the distribution of petroleum royalty with regard to monetary implications to the country, including its impacts government revenue, industry and people. Bernama