20 per cent royalty on O&G is quite affordable
Royalty based on sale price needs amendment of Federal Constitution
(PART II) THE complex provision of Article 112( c) Clause ( 4) is subject to Clause ( 5) of Article 112( d) in relation to the States of Sabah and Sarawak, Clauses ( 3)( b) and (4)( b) of Articles 110 of the FC and Item 3 Part V Tenth Schedule on imposition of royalty by Sarawak, as an additional source of revenue. After being challenged, Sarawak must establish its dominion on its O& G in court or under the legal and political settlement including the 20per cent royalty at least for the moment by amending the same Item 3 of Part V on royalty to be based on the sale prices of O& G, not on the existing 10per cent ad valorem ( production cost at site) nor on any fixed percentage.
However, royalty and O& G are outside the purview of grants under Articles 112(c) and 112(d) of the FC.
In fact, under that entrenched Item 3, the royalty of 10per cent ad valorem was 2½per cent less than the previous Concession System with 12½per cent ad valorem which was still enforced up till 1976 under the overriding unamended and unrepealed Oil Mining Ordinance 1958 (‘ OMO 1958’), Sarawak Land Code 1958 (‘SLC 1958’) and Order in Council 1954 (OIC 1954) not superceded by PDA1974. Thereafter only the new royalty system based on the sale price of O& G has been replaced under the void and il legal , PDA1974. That Item 3 has been waived in practice by the official 5 per cent plus 5 per cent unofficial royalty, based on sales prices by the federal government.
The most exceptional 4 fervid dying pleas of Tun Razak to Tun Rahman, amplified later, were made under their private arrangements due to the political pressure exerted on political alignment with and under the Federal BN, when the PDA1974, Oil Agreement and the purported Tun Rahman’s letter (‘TR’s letter’) of grant in perpetuity, not made known to the Council Negeri, were per se ultra vires, void and illegal, so therefore unenforceable against Sarawak. The Sarawak’s dominion of its O& G was never challenged until one day, recently, as envisaged by the shrewd Tun Razak in 1975, when Petronas would by then decades later be strong enough with financial reserves to be the national saviour of Malaysia with expansions in overseas and under MA1963 Agreement ready to make a substantial increase of royalty later when clamoured by the more educated and enlightened leaders of the Borneo States, based on the rising price of oil due to Opec’s cartel and on sale price for the Borneo Territories since 1973, but sadly at the expense of the Borneo Territories. That was a smart but unfair chess move against the good natured Borneons, though the premier believed that that was done on grounds of ‘national interest.’
In the grundnorm jurisprudence or the ultimate process of validation from the 18 or 20 points on the Memoranda of Appeal, Cobbold Commission, IGC Report 1962, MA 63 to the FCs on the royalty imposed by Sarawak’s and Sabah’s respective dominions of their O& G to issue oil prospecting licenses and O& G leases, were unequivocally accepted by all these parties and the federal government before and after Malaysia Day. Besides, before MA1963, Tun Razak steadfastly assured the Executive Council of the Sarawak Alliance under Article VIII of MA 1963 when oil was raised by its Executive Chairman, Tan Sri B S Ling, that the Sarawak’s oil royalty would be increased tremendously under a different royalty system which eventually was 2½ per cent less than the previous concession system of 12½ per cent ad valorem (production cost at site) under Item 3 of Part V 10th Schedule. Then that was varied to the 5 per cent official and 5 per cent unofficial royalty based on sales O& G by the federal government. But never was there any intended change of the Sarawak’s dominion or legal ownership of the O& G or exclusive right of Sarawak government to issue its leases including prospecting licenses. However, Tun Razak exhorted them “to go and win the election [ 3-tiers] first against PANAS-SUPP united front.”
Local sale tax used for royalty payment till amendment achieved
However, the safest alternative fiscal mechanism to prevent the constitutional impasse in Parliament with the Steering Committee as well for amending that Item 3 Part V on royalty is to impose directly the state sale tax about 98 per cent or more for the time being based on the export sale prices of O& G instead of royalty for achieving in addition to that 10 per cent ad valorem royalty until amended, under Item 7 of the same Part V to reach the 20 per cent royalty based on sale prices in total, instead of facing the maximum constitutional restriction up to 10 per cent ad valorem pro tanto to 10 per cent ad valorem export tax. This fiscal mechanism is only to be replaced when the 20 per cent or higher royalty based on sales prices have been implemented by the amended federal legislation on this Item 3 Part V. Petronas does not charge area rental nor fees nor signature bonus in recent times of Rm100,000.
What a difference between Ad valorem and sales price!
At petroleum production cost at site, say at US$ 10 per barrel ( bbl) ( US$ 6 to US$ 13) oil, even at the shallow waters on the high side, royalty of 10per cent ad valorem production cost at site would be US$ 1.00 bbl while with the WTI/NYMEX/Platt’s average price today around US$ 75 bbl, the royalty will be US$ 7.50 bb. There is a big difference of US$ 6.50 ( bbl) per barrel. 20per cent royalty would mean US$13 around RM55 bbl. Recovery of oil is only 29 per cent and gas 40 per cent (boe) from about 70 per cent to 80 per cent of its O& G reserves already extracted. Luckily more discoveries were being made recently on our premium light oil and more gas. But for political reasons and “mining” of stock markets, oil companies would often tend to report or project oil reserves higher than actual while for OPEC producers quotas are based on “pumped up” reserves from P3, P2 to P1. Shell international and other Seven Sisters have to revise down their reserves decades ago after independent audits.
With geopolitical cartel and uncertainty in Iran, Iraq, Libya and Venezuela, oil is unlikely to dip below US$ 50 bbl most of the times because of the OPEC’s cartel. The break- even point of shale oil is above that benchmark with environmental costs would not make any serious impact. Oil now is around US$ 75 bbl even with production of 33 million bbd ( barrel) per day under Opec. Plastic will increase oil consumptions at least to 28 million bbd and gas feed- stock to 21 per cent by 2050, according to IEA [ International Energy Agency], apart from increased consumption of fuel on roads. China has a few weeks of oil stock as usual, hungry for more oil from Spratly Islands touching Sarawak’s 350 nautical miles of Continental shelf with an innocuous foreign marine structure within Sarawak continental shelf with foreseeable future complications on Sarawak’s and Sabah’s O& G, fishing rights and ‘acquisition of territories’ under international law decades later.
Good fences make good n e i ghbour s t o p r event ‘acquisition’.
Early good fences making good neighbours would be the best policy for our foreign office and our state government to reach agreement with the foreign government preempting such looming ‘acquisition’ by laches, based on Singapore and Malaysia ICJ’s judgment on the islands in between. That agreement must be registered with the UN. Power politics and enforcement of ICJ judgements are two different things, as seen in the Spratly Islands’ case. The prices of crown jewels and freedom are not realized until they are lost; once lost we may not get them back again.
Oral agreement enforceable under international law
The additional oral 5per cent unof f icial and oral royalty verifiable in Sarawak by partial receipts is enforceable under Article VIII of MA 1963, customary international law and Article 3(a) Article 31(1) ( Interpretation in good faith) and Article 27 on Pacta sunt Servanda (no self-induced frustration or due to non-fulfilment) of the Vienna Convention on the Law of Treaties (‘ VCLT’) and also sanctioned under Paragraph 24( 2)( a) of the IGC Report 1962 “consists of the revenue levied in the States [of Sarawak and Sabah” as well as Items 3 and 7 of Part V Tenth Schedule.
Hopeful ly at the highest level of negotiation with equal representations on restoration, revision and reformation with autonomy, the 20 per cent royalty will be the first successful agreed item to be paid out in the real time from the share profit or split barrel on O& G around 30 per cent to 53 per cent of pure revenue at different batch and different sales prices, though payment should not be every six months in a new fullbodied standard international oil agreements, not a two- page agreement, with a revision clause on agreed percentage increases in decades later on the royalty on its O& G, after the national service to fill partly the one trillion financial hole. The payment should be revised to now quarterly or bimonthly instead of six months in real time for calculations on payments with fluctuating O& G price daily based, say on PLATT with the differentials, for each shipment within the respective month and the prices fixed or hedged forward smartly and conservatively.
Court’s battle royale still needs legal-political settlement
The total net amount of royalty received would be the name of the end game. Natural ly, Sarawak will fight all the way for the promised and rightful imposition of the quite affordable 20 per cent royalty at least based on the share profit or split barrel of oil or gas ( boe) for its dominion of its O& G in the front yard more than its backyard. Following the cyclic history of the legal and political settlements similar to the battles of the coastal state’s dominion against the imperium of the federal governments of USA, Canada and Australia would be expected even with the entrenched constitutional protections of 7 FCs and 7 PM laws of Sarawak likely to be neutralized by the federal taxes and inbuilt financial machineries, reduction, repeal and delay of financial obligations or grants of the federal government, if the legal and political settlement fails. Then, it will be a political battle royale between Sarawak’s and Sabah’s dominions and the federal imperium hopefully not beyond the court arena and beyond the pale of the constitution, law and MA 1963, as “history without politics bears no fruits” in this epic tussle to redress this disproportionate imbalance of share profit of O& G. However, the politics of oil has no prospect of an immediate ending due to super-vening events.
However, Sarawak and Putrajaya have always treaded on the path of mutual respect and cordiality with a gentle touch of quiet diplomacy and trust, now working on the equitable and overdue restoration, revision and reformation of Sarawak’s right on its O& G and imposition of 20 per cent royalty or ‘equivalent’ at least and other rights swept away by the federal waters and undercurrents.
Now, the Sarawak government has moved on to impose local sale taxes on O& G and by-products by January 2019 and later perhaps as the alternative fiscal mechanism for royalty.
Let our dream, faith and trust not to be misplaced under the new broom of the PH government under the first pillar on the Rule of Law and the constitutional parliamentary democracy to be the Third pillar of AV Dicey, if you will, to his second pillar of parliamentary sovereignty, except for Malaysia, unlike Westminster, is fettered with the four- tiers of entrenched constitutional provisions amplified later, to be included in his classic work Introduction to the study of Law of the Constitution (1885).