Proper Basis for Computations on royalty

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AFFORDABLE 20 per cent Royalty if Federal’s Portion of 35 per cent to 53 per cent Split Barrels/Share Profits/Productions in Sarawak’s O&G Reinstated in Petronas’s Accounts

1. For proper computations on royalty (‘cash payment’) and State sales tax (‘SST’), the actual, total productions of Petronas including the assigned Federal’s portions of 35 to 53 per cent split barrels/share profits (‘SB/SP’)on oil and gas, sales, revenues and net profits by Petronas, particularly from Sarawak and other States would need to be reflected in the Petronas’s books and annual financial accounts in toto, filed with SSM.

The separate breakdowns of Petronas’s total productions records in various companies primarily, then revenues and net profits in Sarawak need to be submitted to the Sarawak’s Government for correct payments of royalty, as required under the Oil Mining Ordinance (‘OMO’) and Land Code 1958 (‘SLC’) for proper confirmations and payments, being the exclusive licensor and owner of O&G under the Rule of law. That is for the proper and true shared wealth equitably, reasonably balanced and fairly with the Borneo States by reinstating first that Federal’s undeclared35 per cent to 53 per centof SB/SP of Sarawak’s O&G and productions since 1976 in the Petronas’s accounts properly to pay that affordable 20 per cent.

Sarawak State is entitled to impose State sales tax as it has done at 10 per cent for palm oil, lottery tickets, and now on all sales of oil, gas and their downstream products under Article 95(b)(3) of the Federal Constitution (‘FCs’) and Item 7 of Part V 10th Schedule,avoiding under Item 3, as royalty is capped at 10 per cent ad valorem or cost of production at site, not on selling prices.

Cash payment, arose by another name, is the official 5 per cent royalty from Petronas, deliberately designed by Federal to skirt around that limitation of Item 3 on royalty under Section 4 of the Petroleum Development Act 1974 (‘PDA1974’) and Clause I of the Sarawak Oil Agreement dated 27th March 1975.In the Sarawak’s previous Oil Concession under OMO 1958, the royalty payment on oil was even higher at 12½ per cent ad valorem.

Indeed, the cash payment or royalty on O&G 10 per cent gross is paid by Petronas before recovery of costs to the Federal Government of every barrel which were held in trust for the 5 per cent official royalty and 5 per cent additional unofficial fund or royalty, not grant, assured orally by Tun Razak who refused to put that in writing for fear of being leaked to Sabah.

This oral but reconcilable assurance under the Federal payment system undertaken by Tun Razak for Sarawak only, was in consideration of Sarawak aborting the declaratory judgement in the Privy Council, London on the Petroleum Development Act 1974 (‘PDA1974’) to be unconstitutional and void, illegal and unenforceable under the enforceable Assurance stipulated under Article VIII of MA1963, “in so far…….. [it]is not implemented by express provision of the constitution of Malaysia”, Article 3(a) of the Vienna Convention on the Law of Treaties and customary international law.

(i) Tun Razak, a lawyer too, the Federal AG, Tan Sri Abdul Kadir, after studying the legal opinions of the London QC, the ex-federal AG and a retired judge accepted that the PDA1974 would be unconstitutional and void basically under the 7 entrenched Constitutional Provisions, ‘7FCs’ explained in the other 17writer’s articles, particularly under Articles 2(b) 95D, 95B(1)(a), 76(I)(b), (c) and (4) of the Federal Constitution (‘FC’) with Items 2 (a),(c) and (d)of the State list forbidding compulsory acquisition of O&G and on the illegal alterations of Sarawak’s boundaries, namely its territorial waters of 12 nautical miles,  350 nautical miles of the continental shelf, 200 nautical miles of Exclusive Economic Zone and the international boundary at sea since Malaysia Day. The Privy Council then, had an eminent and strong bench, namelyLordWilderforce, Lord Fraser and Chief Justice of Australia, Barwick.

(ii) That PDA 1974 would be illegal and invalid under the 7 Protective Municipal Laws of Sarawak (‘7PMs’), in particular under the unrepealed Sarawak Land Code 1958, the Oil Mining Ordinance 1958 and that Order in Council 1954 (‘OIC’), only for the Borneo States, 3 years before Merdeka of Malaya in 1957.

(iii) Lastly, since 1982, the PDA 1974, Act 354 and3 Federal Acts, including Territorial Sea Act 2012 (‘TSA’) were also void, illegal and unenforceable under the United Nation Convention on the Law of the Sea ‘UNCLOS 1982’, ratified by Malaysia with effect from 14th November 1996.

Now that international boundary at sea has been ‘overlapped’ illegally by a Third World Power, prohibiting even Petronas, to operate in one block, adjacent to Brunei, but inside Sarawak’s continental shelf with a foreign marine structure 44.5 nautical miles from Bintulu being installed and patrolled in Sarawak’s territories which will result in the Jenning’s ‘Acquisition of Territories’ and dispute of fishery’s rights. Diplomatic notes have to be consistently sent by our governments to that party including the United Nations to prevent acquiescence.“Good fences make good neighbors”.

2. Balance of 5 per cent unofficial royalty can pay first the 5 per cent SST

Luckily, the State sale tax of 15 per cent under Item 7 and Article 95(3)(b) have provided the entrenched constitutional and legal alternative rights to royalty by imposing 15 per cent State sale tax to make up the 20 per cent voted unanimously and unconditionally in the DUN including DAP and PKR, and critically assured before the last election.

Sarawak CM can negotiate to use the balance of about RM25 billion or more of the unofficial 5 per cent additional royalty cumulating or ongoing still in the Federal’s hand for every barrel produced to pay for the SST imposed.

How Sarawak receive 5 per cent against 80-85 per cent of Federal/Petronas?

Under the present shared wealth, for 43 years Sarawak has received a pittance of5 per cent official royalty with a paltry 5 per cent unofficial royalty while the Federal and Petronas have received 80-85 per cent consisting of (i) 22 per centfor 4 taxes with 3.58 per cent State equity cash flow and (ii) Federal revenues of the 35 to 53 per cent SB/SP of Sarawak’s productions of O&G, less some costs, sold by Petronas, a public company, owned by Federal, but not taken up in Petronas’s accounts filed with SSM and (iii) Petronas’s  profits sharing with the contractor of IRR of 15 per cent with 10 to 25 per cent carried interest in the older PSCS.

That 80 per cent to 85 per centfor Petronas and Federal planned since PDA1974 were beseeched on grounds of ‘national I nterest’ by Tun Razak because of the high security costs in Sabah due to Sulu’s incursions, reconfirmed in the DCM Tan Sri Stephen Yong’s book, “A Life Twice Lived“ of poor Sarawak bearing Sabah’s costly burden.

Unfortunately, it was one-way traffic through the political pressure exerted on political alignment by the Federal ruling Government and that would seem to persist for the future Federal Government in power unless the State in the opposition at the State level is prepared, as advised by State counsels, to take up the legal challenge with the iron cast laws and entrenched constitutional provisions for judicial remedies with unpleasant court’s discovery of 43 years of Petronas’s accounts with its auditors now on that undeclaredFederal 35 per cent to 53 per cent SB/SP productions less certain costs the right way, against Petronas, then the Federal Government, if fair negotiations were to fail at the highest level.

Equitable, reasonably balanced and fair legal and political settlement under the Rule of law would be the best way forward on walking the talking of “equal partners”, with agreed staggered payments to maintain their cordial relationship, otherwise, that would also be embarrassing and mere constitutional mirage of unfulfilled political lip services of ‘equal partners’.

So, we hope our Federal Government would fulfill the 20 per cent even postponing the 50 per cent rebate of Federal income received from Sarawak, similar to even the entrenched provision of Clause1.2(i), Part IV, 10th Schedule for Sabah with rebate of 40 per centwhen about 95 per cent amount is still outstanding now, amounting to over RM15 billion with one payment in 1974.

3. Petronas can pay 15 per cent SST if Federal’s 35 to 53 per cent SB/SP are reinstated

True, Petronas per se cannot afford to pay another 15 per centto Sarawak. But when the total productions and direct revenues of that Federal’s 35 to 53 per cent SB/SP that were assigned by Petronas with certain costs from the total productions in Sarawak are reinstated directly into Petronas’s books for the complete, true productions and net profits in the annual accounts filed with SSM and for Sarawak’s enforceable verifications, then Petronas will be able to foot that 15 per cent. That can be arranged in agreed stages say, 5 per cent from the unofficial 5 per cent royalty in 2019, 5 per cent in 2022 and 5 per cent in 2024 or directly from the Federal Treasury from that 10 per cent gross royalty paid for each barrel produced, to fund the unofficial 5 per cent royalty with the big balance still accumulating for payments of SST.

So, in net terms, the additional payment of royalty is only 10 per cent, by using the unofficial 5 per cent royalty to pay SST which is slightly more than royalty. It is the Federal’s choice.

4. Petronas Must File Complete Accounts with SSM for correct computations of royalty and State sale tax

Due to past legacy, that Federal’s 35 per cent to 53 per cent of SB/SP productions less certain costs, have not been included in the total productions and profits of all the States owning the O&G and reflected in the annual audited accounts of Petronas filed with SSM.

So, the Petronas audited account (20076-K) of 2017 filed with SSM reflected only a net profit of RM26,152,000,000 (about RM26 billion) against the net profit of RM45,400,000,000 (RM45.4 billion) declared in the newspaper publicly. There is a whooping discrepancy of RM19.298 billion even assuming the downstream products have increased the values and profits to a certain extent.

On the international level, Petronas’s success must be complimented as one of the new ‘Seven Sisters’ on the oil and gas business outside OECD which has produced revenues of US$46.06 billion or over RM184 billion in 2016 or US$55.68 billion or about RM220 billion in 2015. Petronas is rich.

Did the royalty paid to Sarawak include all that undeclared productions of Federal’s35 per cent to 53 per cent SB/SPof Sarawak’s O&Goverthe last 4 decades? No.

5. ‘20 per cent Royalty or SST is Quite Affordable’, was amplified in Part I dated November 11 2018 on Sunday Borneo Post on Petronas’s most complex fiscal and financial structures

“Based on the contractor companies’ estimates at US$100 per barrel with certain assumptions for easier calculation, the net federal government’s share profit of O&G as pure revenue excluding the faxes imposed on the contractor companies’ portion with Petronas investments and carried interest in the PSCS but including the existing 10  per cent (5 per cent+5 per cent) royalty for Sarawak as assured by Tun Razak, plus another 10 per cent royalty out of share profit on Sarawak’s O&G totalling 20 per cent for the Sarawak government, excluding the 4 taxes and Petronas taxable profits, would be even affordable at different prices.”

“The breakdowns would be approximately as follows: (i) At US$40 per bbl : 44 per cent share profit of oil with 10  per cent additional royalty (totalling 20 per cent), it still would leave behind 34 per cent share profit on oil as pure revenue; (ii) At US$60 per bbl: about 49 per cent of the share profit on oil less the 10 per cent additional royalty totalling 20  per cent royalty would still leave behind 39 per cent share profit (iii) At US$10/ MCF the estimated share profit on gas would

be around 40 per cent after less 10  per cent additional royalty totalling 20 per cent, and it would still leave behind 30 per cent share profit on gas (boe); (iv) At US 6/MCF The share profit would be about 35 per cent, after deducting 10 per cent royalty with total 20  per cent royalty similarly it would leave behind 25 per cent still; (v) At US$4/MCF the share profit would be about 30 per cent. After deducting 10 per cent out of the 20 per cent royalty (10 per cent+10 per cent) in total, it would leave behind 20 per cent still.

In addition, there is the 5 per cent still accumulating balance of 10 per cent cash payment in the federal government earmarked for the 5 per cent unofficial additional royalty/fund assured by Tun Razak in 1975 for payments of SST.

6. Hope Tun Mahathir will change that legacy under Rule of law for transparency, used perhaps as a reserve for contingencies

The Sarawak’s director in Petronas’s Board should be reinstated as equitable, reasonable and fair proof for showing ‘equal partners’ without domination and exclusion.

The undeclared Federal 35 per cent to 53 per cent SB/SP productions would unfortunately be similar to Singapore’s parliamentary practice for non-disclosure of the accounts of GIC―not a public company.

So, the present Sarawak Federal Minister of Works has urged Putrajaya to comply with the Rule of law, corporate governance, transparency and accountability in our constitutional parliamentary democracy.

Indeed, we should emulate the Supreme Court’s judicial independence, impartiality and courageous depth in the landmark decision on the unlawful proroguing (suspension) of the British parliament, epitomizing the Rule of law upheld even against the British Convention on prerogatives, different from the politically charged US Supreme Court.

By not declaring knowingly the actual and total productions of O&G and profits operated by Petronas in its audited accounts in Malaysia, all the Petronas’s directors and senior officers would be liable for offences and prosecutions under the Companies Act, and other laws. The writer hopes parliament would rectify and ratify these shortcomings to protect them.

Tun Mahathir inherited this legacy. In 1985, Tun passed the Petroleum Development (amendment) Act 1985 to authorize legally 11 years later for Petronas to operate legally and commercially to make deals retrospectively under the new Clauses 3 (a) and (b) due to the dying Prime Minister Tun Razak who passed hurriedly the PDA 1974 by replacing the civil servant  system with quite independent professionals to run Petronas successfully with full discretionary powers under Sections 6, 7 and 7A of PDA1974 entrusted to the premier, still to be within the Dicey’s Rule of law.

Later, that void and illegal amendment of Clause 4 trying to ‘cure’ even the court proceedings with a retrospective blanket was found to be a wrong advice, perhaps intended to protect that undeclared 35 to 53 per cent SB/SP as a reserve fund for contingencies.

After proper advice, the new Section 4 was replaced by the previous Section 4 on cash payment.

As our Prime Minister is a doctor, he has totally to rely on his legal advisers at all times to give him the good and proper legal and constitutional advices, hopefully beforehand, e.g. it is unconstitutional and void for Federal to appoint MPKK under Articles 95D, 95B(1)(a), 76(1)(b), 95E and Item 4 State list and illegal under Local Ordinances for Federal to pass laws even about Local Government and administration of Sarawak without DUN’s or Head of State’s approval respectively.

Almost all the unconstitutional Acts and amendments of the Federal Constitution were passed outside Tun’s watch.

7. Present Sarawak’s pittance of 5 per cent shared wealth is inequitable, unreasonable and unfair against 80 per cent plus of Federal/Petronas

This inequitable shared wealth is for looking after other States of Malaya and Federal Government with disproportionately slow development with many unfulfilled assured funds, grants and projects in the Borneo States for the last 56 years which still have to continue the national service for subsiding the Federal budgets under national interest.

Even sadly today, “7 out of the 10 poorest districts are in Sarawak”, reflecting ‘outwardly rich’, but inwardly ‘poor’, pined Professor Madeline Berma.

“Federalism has provided a biased development focus and allocations for the Borneo States, worsened by the political control of the Federal Government,” lamented unbiased Dr Fatimah Binti Kari.

Overdue equity and fair sharing of wealth are plagued by sad history of ‘equal partners’ assurances without fulfillments.

8. New Sarawak Shared Wealth Vision 2020 be 20 per cent royalty

Let our PM implement now the equitable,reasonably balanced and fair sharing of the new ‘shared wealth vision’ 2020,with 20 per cent royalty or 15 per cent SST with real financial benefits, not oral nor paper rights for Sarawak’s O&G, and the balance about 72 per cent,to be shared with the Federal, Petronas and other States of Malaya and Borneo States in terms of grants, obligations and rebates of Federal incomes received from them, to be paid later on when able, while implementing the Rule law stated above under MA1963 and Malaysia Act 1963, (ANNEX A), the mother of the Supreme Federal Constitution.

Corollary of sharing 20 per cent durians

Let Sarawak have 20 per cent ‘musang king durians’ from its different orchards, licensed to the contractor, the Federal/Petronas which would share first the 65 per cent out of the thorny fruits in appointing sub-contractors with 15 per cent fruits in which Petronas has 7 per cent more totalling about 72 per cent fruits.

In paying 20 per cent royaltywith 15 per cent SST from that Federal’s 35 per cent to 53 per cent SB/SP productions reinstated to the Borneo States in Petronas’s accounts, we hope Tun Mahathir now would start the shining legacy to fulfill all the grants and obligations under MA1963 and share the balance of ‘the shared wealth’ equitably, reasonably balanced and fairly with the other States of Malaya, the Borneo States, our Federal Government, our King and Country.