20 pct roy­alty on O&G is quite af­ford­able Part I

Bor­neo states’ sole right to im­pose roy­alty

The Borneo Post - - HOME - By Alex Ling

“ROY­ALTY means share of the prod­ucts of pro­ceeds from the oil and gas pro­duced and re­served to the owner of land for per­mit­ting an­other [Petronas] to use the prop­erty:” MCcul­loh v Al­mach (OKA 1941).

It is very dif­fer­ent from the his­tor­i­cal sub­servient usufruct, namely where the fed­eral gov­ern­ment and Petronas would only have a lim­ited le­gal usufruc­tu­ary right, if law­fully given by the owner for a spe­cific time pe­riod akin to shorter than life es­tate or by op­er­a­tion of the law in en­joy­ing the prof­its from a prop­erty or leases that be­long to the owner with no right of alien­ation but servi­tude un­der the Ro­man Law or a lim­ited in rem right un­der the Civil Law.

But it is very dif­fer­ent in the case here on the Sarawak’s do­min­ion of its O&G with the ex­clu­sive right to is­sue O&G li­censes and im­pose roy­al­ties or lo­cal sales tax for the time be­ing as the al­ter­na­tive and on the oil by-prod­ucts per se.

Nev­er­the­less, roy­alty like a rose is still a roy­alty by other names for the fed­eral gov­ern­ment and Sarawak, such as cash pay­ments of 10% for win­ning the O&G of Sarawak un­der Sec­tion 4 of the PDA 1974, be­cause of the ad­di­tional and un­of­fi­cial (oral) 5% roy­alty as an ad­di­tional de­vel­op­ment fund given to Sarawak, as as­sured by Tun Razak on be­half of the fed­eral gov­ern­ment in con­sid­er­a­tion of abort­ing the declara­tory judg­ment in the Privy Coun­cil on the PDA 1974 by Tun Rah­man Ya­cob, the third Chief Min­is­ter of Sarawak, on be­half of the Sarawak gov­ern­ment un­der the As­sur­ance in Ar­ti­cle VIII of the MA1963.

There­fore, the coastal state of Sarawak has the do­min­ion of its oil and gas (O&G), namely the sole en­trenched le­gal own­er­ship, sole eco­nomic right and con­sti­tu­tional rights un­der the four-tiers en­trenched pro­vi­sions of Item 2(c) of the State List Ninth Sched­ule, a part of the 7 Ar­ti­cles of the fed­eral con­sti­tu­tion (“7FCs”) and 7 pro­tec­tive mu­nic­i­pal laws of Sarawak (“7PMs”) to ex­clu­sively is­sue profit shar­ing con­tracts (“PSCs”) on its land un­der its en­trenched Item 2(a) with the pro­pri­etary and prop­erty rights of its O&G stretch­ing from on­shore to 350 nau­ti­cal miles in its con­ti­nen­tal shelf un­der Sec­tion 76 of the United Na­tions Con­ven­tion on the Laws of Seas (“UNCLOS”) 1982.

Un­der the con­sti­tu­tional en­trenched Item 2(d) and Ar­ti­cle 95D of the Fed­eral Con­sti­tu­tion (“FC”), the fed­eral gov­ern­ment is pro­hib­ited to com­pul­so­rily ac­quire Sarawak’s O&G with rea­son­able com­pen­sa­tion un­der Ar­ti­cle 13 of the FC which is ap­pli­ca­ble only to the var­i­ous states of Malaya and Fed­eral Ter­ri­to­ries.

Con­se­quently, Sarawak, not the fed­eral gov­ern­ment, has the sole con­sti­tu­tional right to is­sue PSCs and im­pose roy­alty.

Fixed roy­alty which is paid based on the sale price of O&G be­fore the re­cov­ery of costs and taxes to the do­min­ion of Sarawak on its O&G, but not to the fed­eral gov­ern­ment, is very dif­fer­ent from the net net profit af­ter all the costs, de­duc­tions, al­lowances, amor­ti­za­tions, R/C in­dex, thresh­old vol­ume, de­pre­ci­a­tion, aban­doned costs, taxes, past losses, if any, and oth­ers de­pend­ing on how trim and ef­fi­cient in man­ag­ing the costs and prof­its aim­ing at mar­gin of prof­its, but not on gross turnovers, as in large cor­po­ra­tions.

So, Sarawak with its do­min­ion has the sole con­sti­tu­tional and le­gal right to im­pose roy­alty on its O&G un­der the 7 PMs and 7FCs specif­i­cally ac­cepted by the fed­eral gov­ern­ment un­der item 3 of the Part V of the Tenth Sched­ule of the FC and oth­ers.

How­ever, the fed­eral gov­ern­ment has only im­perium, namely po­lit­i­cal rights and sovereignty only in the con­text of ju­ris­dic­tion be­tween sovereign na­tions and ad­min­is­tra­tive con­trol over and duty to safe­guard Sarawak’s O&G, but no do­min­ions on the O&G of the Bor­neo Ter­ri­to­ries nor any right to im­pose roy­alty nor right to is­sue PSCs un­der the en­trenched pro­vi­sions of Item (c) and other items of the Ninth Sched­ule and the fed­eral con­sti­tu­tion (“FC”).

Taxes and share profit of O&G for fed­eral is around 75% to 80% now

The roy­alty is paid by way of 10% cash pay­ment or “roy­alty” un­der a dif­fer­ent name by Petronas to the fed­eral gov­ern­ment and 5% of­fi­cial roy­alty to the Bor­neo Ter­ri­to­ries with var­ied in­ter­nal ar­range­ment.

Of­fi­cially it is 5% for Sarawak ev­ery six months di­rectly from Petronas, un­of­fi­cially an­other 5% ad­di­tional un­of­fi­cial roy­alty men­tioned above, to­talling 10% be­fore re­cov­ery cost and taxes, as and when the state would re­quest for it.

In the con­trac­tor com­pany’s 15% (net 11%) Petronas has 15% to 20% with no man­age­ment/ work­ing in­ter­est with car­ried in­ter­est (free) and some di­rect in­vest­ments in the older PSCs but more di­rect in­vest­ments from 40% to 60% with con­trol­ling work­ing in­ter­est in the new PSCs.

Based on US $100 bbl on oil for eas­ier cal­cu­la­tion (with cer­tain as­sump­tions), the profit cen­tres, taxes and share profit on Sarawak’s O&G for the fed­eral gov­ern­ment ex­clud­ing Petronas’s tax­able profit are shown ap­prox­i­mately as fol­lows: (1) The taxes/im­po­si­tions would be pe­tro­leum in­come tax (PITA) 38% (10% net with de­duc­tions), (2) 10% ex­port tax (4% net with de­duc­tions), (3) Sup­ple­men­tary tax (ex­cess profit tax with de­duc­tions) (4% net) based on US $ 50 bbl, (4) Cess re­search 0.5% (0.15% net) im­posed on the con­trac­tor com­pany only, (5) 3.85% State Eq­uity Cash Flow (un­der fed­eral’s con­trol) to­talling 22% rev­enue for the fed­eral gov­ern­ment.

Mi­nus the stan­dard 10% roy­alty be­fore re­cov­ery costs and taxes as cash pay­ments, there is still a bal­ance of about 53% share profit on O&G of pure rev­enue or gravy for the fed­eral gov­ern­ment to­talling 75% with the share profit O&G in­clud­ing the 22% taxes with the State Eq­uity Cash Flow now with cer­tain vari­a­tions due to the dif­fer­ent O&G fields and fluc­tu­at­ing prices of O&G daily.

But still there is an­other 5% bal­ance cash pay­ment left with the fed­eral gov­ern­ment af­ter mi­nus the un­of­fi­cial 5% roy­alty.

So out of the 53% pure share profit of Sarawak’s O&G 10% roy­alty can be used to pay half of the 20% af­ford­able roy­alty ap­proved unan­i­mously by the Sarawak Coun­cil Negeri in­clud­ing the hon­ourable YBs from DAP and PKR Sarawak rep­re­sent­ing Sarawak’s in­ter­est.

Ab­sorb­ing that cost still makes gas com­pet­i­tive.

The other 10% roy­alty comes from the ex­ist­ing of­fi­cial pay­ment of 5% by Petronas un­der the 2page Sarawak Oil Agree­ment and an­other as­sured 5% un­of­fi­cial and oral ad­di­tional roy­alty men­tioned above.

In brief, the fed­eral gov­ern­ment af­ter pay­ing 10% ad­di­tional roy­alty still has pure rev­enue of 43% (53%-10%) of the share profit of O&G and 22% tax in­clu­sive of the State Eq­uity Cash Flow un­der its con­trol, to­talling 65% plus 5% bal­ance of cash pay­ment as roy­alty, apart from Petronas own profit cen­tres with div­i­dends for tak­ing care a part of the na­tional fi­nan­cial res­cue pack­ages to plug the Rm 1 tril­lion fi­nan­cial hole.

There is no fed­eral sale tax nor any tax on the 53% pure rev­enue un­less Pet­ros takes over the li­cens­ing of PSC.

Of course, Sarawak also will im­pose state sales tax on that 53% or 43% on the share profit of O&G un­der Item 7 of Part V 10th Sched­ule, in­clud­ing down­stream, dis­til­lates,LNG, fer­til­iz­ers and petro­chem­i­cal prod­ucts and CNG in fu­ture which Pet­ros and Petronas should set up an­other one in the state, if fea­si­ble.

Chi­nese com­pa­nies would be keen for the mar­ket shares. Bin­tulu will do well for fu­ture CNG’s hub like Sin­ga­pore.

Con­trac­tor com­pa­nies on 15% IRR

The con­trac­tors’ com­pa­nies are sub­ject to vari­able R/C In­dex, de­pre­ci­a­tions, de­duc­tions, aban­doned costs, tax, cap­i­tal al­lowances THV (thresh­old vol­ume) at dif­fer­ent level and changes of per­cent­age of share­hold­ings ra­tio.

There­fore on shal­low wa­ters, 20% roy­alty poses no prob­lem even if the oil price is at US$40 bbl or at US $4/MCF for gas.

For deep wa­ters, the con­trac­tor has spe­cial cost re­cov­ery with their EEA costs, CAPEX and OPEX al­lo­cated about 15% for its IRR.

RSC is in the back burner af­ter ter­mi­na­tion of Balai Clus­ter and BERANTI due to poor re­cov­ery and price.

How­ever, the hith­erto 75% to 80% plus for the fed­eral share profit and Petronas’s profit on O&G over the last 40 years com­pared to the of­fi­cial 5% and 5% un­of­fi­cial roy­alty for Sarawak and 5% for Sabah would be quite dis­pro­por­tion­ate and in­equitable based on net loss not net gain to Sarawak re­spec­tively with only a par­tial pay­ment of that un­of­fi­cial 5% roy­alty be­ing made spo­rad­i­cally in the past.

A rec­on­cil­i­a­tion state­ment would not be out of or­der.

The bal­ance due to Sarawak could be used to off­set agreed ac­qui­si­tions of the as­sets of Petronas, if agreed by the fed­eral gov­ern­ment.

20% roy­alty is quite af­ford­able even oil at US $40 bbl Based on con­trac­tor com­pa­nies’ es­ti­mates, the net fed­eral gov­ern­ment’s share profit of O&G as pure rev­enue ex­clud­ing the taxes im­posed on the con­trac­tor com­pa­nies’ por­tion with Petronas in­vest­ments and car­ried in­ter­est in the PSCs but in­clud­ing the ex­ist­ing 10% (5%+5%) roy­alty for Sarawak as as­sured by Tun Razak, plus an­other 10% roy­alty out of share profit on Sarawak’s O&G to­talling 20% for the Sarawak gov­ern­ment, ex­clud­ing the 4 taxes and Petronas tax­able prof­its, would be even af­ford­able at dif­fer­ent prices, ap­prox­i­mately as fol­lows : (i) At US $40 per bbl : 44% share profit of oil with 10% ad­di­tional roy­alty (to­talling 20%), it still would leave be­hind 34% share profit on oil as pure rev­enue; (ii) At US $60 per bbl : about 49% of the share profit on oil less the 10% ad­di­tional roy­alty to­talling 20% roy­alty would still leave be­hind 39% share profit; (iii) At US $10/ MCF - the es­ti­mated share profit on gas would be around 40% af­ter less 10% ad­di­tional roy­alty to­talling 20%, and it would still leave be­hind 30% share profit on gas (boe); (iv) At US 6/MCF - The share profit would be about 35%, af­ter de­duct­ing 10% roy­alty with to­tal 20% roy­alty sim­i­larly it would leave be­hind 25% still; (v) At US $4/MCF the share profit would be about 30%.

Af­ter de­duct­ing 10% out of the 20% roy­alty (10%+10%) in to­tal, it would leave be­hind 20% still.

In ad­di­tion, there is the 5% bal­ance of 10% cash pay­ment in the fed­eral gov­ern­ment.

Only rev­enue of RM204,908 filed by Petronas in SSM

For the profit of Petronas from Sarawak’s op­er­a­tion in­clud­ing per­haps the O&G, the down­stream LNG and oth­ers, the petrol kiosks and oth­ers as re­ported, if ac­cu­rate, though strangely was not re­flected in the au­dited fi­nan­cial ac­count of Petronas, as a pub­lic com­pany filed with SSM (20076-K) which showed only a rev­enue of Rm204,908 against the re­port of Rm45.4 bil­lion profit in 2017 (net?).

So 20% roy­alty for pay­ment is quite af­ford­able, but would be very in­equitable and un­jus­ti­fi­able on the net net profit for­mula, as do­min­ion of its O&G.

Sarawak has sev­eral pro­duc­tion plat­forms for pay­ment of the 20% (10%+10%) roy­alty with the crit­i­cal and trans­par­ent sums and parts, share prof­its of O&G de­tails from the Data Room of Petronas in­clud­ing the de­tailed au­dited ac­counts of the sales in real times to re­flect dif­fer­ent mar­ket prices fluc­tu­at­ing daily which ought fairly be made avail­able to ver­ify this quite af­ford­able 20% roy­alty at all times.

Coun­cil Negeri has the con­sti­tu­tional and le­gal right to have those de­tails to an­swer on 20% roy­alty for mean­ing­ful de­bates and dis­cus­sions, un­der the Rule of Law and ad­min­is­tra­tive gov­er­nance re­cently pro­claimed by the fed­eral gov­ern­ment.

Let our far­sighted Prime Min­is­ter be the right per­son, in the right time and in the right place of the Bor­neo Ter­ri­to­ries to do the right thing to ful­fil the vi­sions, as­pi­ra­tions and dreams of the founders of the Bor­neo Ter­ri­to­ries un­der MA 1963.

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