Fallacious Arguments To Maintain Federal Control of State Petroleum Resources

An increase in oil royalty and KL Takes All: A Slue to Fallacy

by YB Dato Abdul Rahman Dahlan 

With comments by Sarawak Headhunter in red.

Time and again, we have listened to the opposition's over the top vitriol on two very emotive issues to Sabahans; the promise of 15% increase in oil royalty to Sabah and the allegation of federal government taking away all Sabah resources and in return, giving almost nothing back to Sabah. These issues must be answered factually and timely to prevent anyone from being deceived into emotional shadow boxing by the opposition. 

Let's start with the 15% increase in oil royalty issue. While on the surface it sounds quite appealing, there are serious concerns over the mechanics needed to bring the notion to fruition. Making promises is one thing; executing them is another thing all together.

Since the mechanics of bringing about the formation of PETRONAS and the very validity of the Petroleum Development Act vesting all the States' petroleum resources in PETRONAS may itself be questioned, it is high time to look seriously at this usurpation of state resources by the Federal government under the pretext of bringing about the economic development of the poorer States. 

Where there is a will there is a way. 

There is certainly no excuse for not redressing the balance in favour of the poorer States of Malaysia whose rich petroleum resources have been literally stolen by an avaricious Federal government. 

AN OVERVIEW 

The petroleum business is not a business arrangement for the Average Joe. The capital outlay, technical challenges and financial risks are so great and prohibitive that only the companies which have specialized expertise and bottomless bank accounts normally dare enough to go into it.

While certainly the petroleum business is not for the Average Joe, the risks are not as great as the companies and the government would like us to imagine. The reason that such companies have bottomless bank accounts is the fact that they are making enormous PROFITS from the petroleum business.

7 of the top 15 most profitable companies in the world for 2011 (including PETRONAS by the way) are oil companies. See the full list here. No. 1 was Gazprom, which made US44.5 billion in 2011 and No. 2 was Exxon Mobil, which made US41 billion.

The fact that PETRONAS has been able to contribute huge revenues to the Federal government, even amounting to 40% of the national budget, much of it extravagantly misspent, wasted and unaccounted for, also shows the fallacy of this statement.

WHAT risks?   

Imagine trying to lower drilling pipes, 4.5km from the sea level, in an intensely-pressurized environment to search for the elusive black gold. It requires special and extremely expensive equipment and expertise which only the world’s oil major players (the likes of Shell, Murphy Oil, ExxonMobil, etc) possess. The cost of exploration drilling could run into hundreds of millions of dollars which would go to absolute waste should no oil be found in vicinity of choice.

There is actually no need to let your imagination run wild and the black gold is not as elusive as the writer would have us believe. No oil company would spend hundreds of millions on exploration drilling without a high probability of finding oil and/or gas. There are preliminary geological, seismic and other surveys that are done first to maximise the probability of finding oil when the exploration drilling phase starts. Expenses are also usually capped to avoid waste.

The fact is that even if hundreds of millions are spent on exploration drilling in any particular area, which is not normally the case, any oil strike would be potentially worth billions and render these expenses immaterial.    

The nation’s oil company, Petronas, like her counterparts in other  developing countries (Indonesia, Venezuela and Nigeria etc), does not have the capacity to absorb the financial risk mentioned above.

This is simply not true. PETRONAS's deposits in Malaysian banks alone keep the Malaysian financial system afloat. PETRONAS is ranked 12 68 (up from 68 86 in 2010 2009) of the top one hundred most profitable companies in the world and made US21 billion in profit in 2011. To say that it doesn't have the capacity to absorb such financial risk is incredulous to say the least.                                                                                 

It is not financially equipped to spend billions on research and development and take on the financial risks in the exploration and production phases when the same billions are very much needed to be spent on the country’s development.

This is another blatant lie that PETRONAS itself would probably refute. The fact is that the UMNO regime has even used PETRONAS illegally as a lender of last resort (which is supposed to be the Central Bank's role) in bailing out entities such as Bank Bumiputra and MAS and to bankroll the construction of Putrajaya, thereby putting it at even greater financial risk.

In addition, unlike Petronas - which primarily operates within Malaysia’s waters - the oil majors  enjoy economies of scale. They operate all over the world which helps to defray the costs of R&D, the exploration and production phases.

Another lie. PETRONAS is a multinational and operates in many other countries around the world very profitably. This is what PETRONAS says on its website:

"PETRONAS has come a long way from managing the work of foreign production sharing contractors. We have evolved our own upstream capabilities and ventured into the entire spectrum of downstream activities to add value to our petroleum resources.

With our strategy of integration, adding value and globalisation, PETRONAS continues to deliver excellence towards realising our vision of becoming a leading oil and gas multinational of choice."

Also from its website:

• "Malaysia’s hydrocarbon reserves stand at 20.56 billion barrels of oil equivalent (boe) with an average production of 1.63 million boe per day.
• PETRONAS’ total hydrocarbon reserves stand at 27.12 billion boe with an average production of 1.1 million boe per day.
• International reserves in Africa, Southeast Asia, the Middle East and Central Asia stand at 6.56 billion boe, comprising nearly a quarter of PETRONAS’ total reserves.
• PETRONAS achieved a Reserves Replacement Ratio of 1.1 times in Malaysia and 4.1 times internationally, comparable with the industry average.
• Malaysia's first deepwater field, Kikeh, employing the first Truss Spar floating production unit outside the Gulf of Mexico came onstream in August 2007. The project achieved world-class performance with only five years elapsing between discovery and production."

 
Who is the writer trying to kid, and why is he downplaying PETRONAS's capabilities?

In the event that oil is actually discovered, the capital that needs to be spent in the subsequent phases is even more substantial. It is reportedly said that the cost of the oil production phase could reach as much as RM2 billion. Sometimes even more.
 
Rubbish! This is a gross over-exaggeration. See the following source: 

 "The International Energy Agency (IEA) -- in its latest November 2008 world energy outlook -- gave the following estimates for the all-in costs of producing oil from various types of hydrocarbons in different parts of the world:

 
 Oilfields                   Estimated Production
 /source                        Costs ($ 2008)
 Mideast/N.Africa oilfields         6 -  28
 Other conventional oilfields       6 -  39
 CO2 enhanced oil recovery         30 -  80
 Deep/ultra-deep-water oilfields   32 -  65
 Enhanced oil recovery             32 -  82
 Arctic oilfields                  32 - 100
 Heavy oil/bitumen                 32 -  68
 Oil shales                        52 - 113
 Gas to liquids                    38 - 113
 Coal to liquids                   60 - 113
 
 Source: International Energy Agency World Energy Outlook 2008"(emphasis added).

 

To cushion such uncertainties and spread the financial risk, Petronas enters into a joint-venture agreement (known in the industry as Production Sharing Contract or PSC and later, a variant called RSCs or Risk Sharing Contracts) with multinational oil companies like Shell, Murphy Oil or ExxonMobil and others.

These giant oil companies are given a percentage of the oil revenue generated in return of them bearing the financial risk and sharing technologies worth billions in Research & Development.
 
The FACT is that PETRONAS's own subsidiary, CARIGALI, does exploration and oil production for PETRONAS, not just in Malaysia but in other countries around the world such as Vietnam and Sudan. As its own website says:

"Globally, PETRONAS has exploration and production presence in over 22 countries in Southeast Asia, the Middle East, Central Asia, Latin America and Africa. These overseas ventures account for almost a quarter of our total oil and gas reserves." 

PETRONAS TAKES ALL?

The opposition always paint the perception that Petronas has been unfairly profiting from Sabah’s oil revenue, so according to them, it is only right for Petronas to give 15% extra oil royalty to Sabah.

Can it be done? Is it even doable? Let’s explore the realities.

While the following example will not be able to capture every essence of all the JV partnerships Petronas entered into, none the less, it is suffice to give a fair view of what the realities are on the ground.

The illustrations below explain how much Petronas makes from Sabah oil.

For every RM100 revenue derived from Sabah oil, 5% goes to the state’s coffer while another 5% to the Federal coffer. Approximately 45% goes into recovery cost, and the remaining 45% goes to the joint venture’s gross profit.

In the end, it is clear that Petronas’ profit, after splitting revenue with others and after paying taxes, is only around 16.74%. If Petronas is asked to pay up the extra 15% from its profit margin, this will effectively render them unable to pay their overheads, financial commitments and re-investment for future income. The end result is financial blow which may lead to bankruptcy!

Again, this is highly misleading and only focusses on one part of PETRONAS's revenue, that is the selling of crude oil (for which it actually gets a premium on the international market). PETRONAS's actual revenues also include that from the refining of crude oil, gas processing and sale and the retail sale of petrol and other petrochemicals, for which there is a large value-added from the purchase of cheaper crude.  

If Petronas is unable to pay without jeopardizing its very existence, where would the additional 15% come from then? Obviously there are two other choices left; the PSC partner or the federal government.

It is very unlikely for the PSC partner to give up what was already agreed in the contract between them and Petronas. Furthermore, lower profit percentage would make oil exploration in Malaysia unattractive to them.

Has any real analysis been done on the recovery cost of 45%? This appears to be very much on the high side. The oil companies would of course be more than happy to get away with it, if they were allowed to incorporate elements of profit into cost that is then more than fully recovered.

If the joint venture partners refuse jobs in Malaysia, we will not be able to extract our oil in an economically viable manner. This may lead to a serious energy security problem for Malaysia: with no one extracting oil, we may end up importing all of our energy requirement!

Mere scare-mongering. If PETRONAS can operate by itself profitably in other countries, it can also operate by itself profitably in Malaysia without the necessity for expensive high-cost joint venture partners who have already by themselves made tens if not hundreds of billions from Malaysia.

With Petronas and its joint venture partners unable to commit the extra 15% (or about RM12.5 billion) to the oil producing states of Sabah, Sarawak and Trengganu, the other option is of course to take it from the federal government which receives dividend around RM30 billion annually from Petronas.

As the oil-producing states only get their 5% based on the crude oil price, there should be no difficulty in giving them a fair share of the downstream processing and sale of refined products, which can easily come up to an extra 15% or more.

This 15% increase would actually mean RM3.2 billion for Sabah, Sarawak RM8.3 billion & Terengganu RM9.3 billion, or a total of RM20.8 billion which is approximately 30% of Petronas's profit for 2011.

This option is not without its own ramifications.

With reduced dividend from Petronas, the federal government will have less money for its development budget. This means there will be less public spending on subsidies, schools, hospitals, police stations, roads and other infrastructures. Obviously, the most impacted would be the non-oil producing states.

  

There is obviously something wrong with the present system where the oil-producing states still remain among the poorest in the country.

Anwar Ibrahim must have the moral courage to inform the non-oil producing states that as a Prime Minister, he will cut their federal allocated budgets by RM12.5 billion. Unfortunately this is not happening. 

The last option available to Anwar Ibrahim is to increase Sabah’s oil royalty by 15% but in order to ensure he has enough funds available for the rest of the country, he will have to cut Sabah’s federal allocation. Remember, cutting Sabah’s federal allocation is within his prerogative as a Prime Minister. This option is plausible given the fact he has never given any assurances publically that he would not cut Sabah’s federal allocation which, at the moment, is one of the highest among all the states in Malaysia.

It is actually funny how Anwar hardly shares the specifics of his promise of 15% increase in oil royalty with the rest of the country. Perhaps he knows very well that he won't be able to provide explanation for them. Apparently, keeping Malaysians in the dark makes the illusion easier to perform. In fact, I remember asking opposition members, including Anwar Ibrahim himself, in Parliament of the specifics but instead of an answer, I got a blank response followed by sharp stares!

FEDERAL GOVERNMENT COLLECTS MORE THAN IT SPENDS IN SABAH

This is yet another irresponsible claim by the opposition to gain sympathy votes in Sabah. It is a very powerful lie which if not countered factually, could result in deep division and hatred towards the Barisan Nasional federal government.

Let's address this issue objectively and see if it is true that the federal government has been taking so much of Sabah's resources (including oil money) but giving back so little in return.

The following two illustrations show what federal government collected in Sabah in 2011 and how much it had spent in Sabah in the same year. 

Contrary to lies spawned by the opposition, the federal government actually spent more (by a whopping RM4.736 billion) in Sabah in 2011 compared to what it collected in the same year!

Isn't it amazing therefore that poverty is still so high in Sabah compared to other states that don't have the oil resources but live off oil revenues of the oil-producing states?

The statistics, which were made available to me by Bahagian Analisa Cukai dan Bahagian Pengurusan Belanjawan, Kementerian Kewangan Malaysia, went as far back as 2007 and had breakdowns for each federal ministry.

It showed the same consistent trend of federal government spending more in Sabah than what it collected in each year. Nothing is more revealing than the truth and fact! Statistics, in the end, don't lie.

There are only lies, damn lies and then there are statistics.

For the year 2012 onwards, there is no reason to believe the trend will reverse itself especially when Dato Sri Najib Tun Razak has made it very clear that special emphasis will be placed on Sabah's development under his economic transformation program.

Towards this, Barisan Nasional Sabah is happy to note that to date, the Prime Minister has not disappointed Sabahans.

Tell that to all those poor Sabahans (and Sarawakians).

Thank you.