Are Malaysian GLC contracts worth the paper they are signed on?

petronassime darby

(TMI) ANALYSIS, Sept 3 — One mega suit filed against Petronas and another potential billion ringgit legal wrangle against Sime Darby Berhad will address an issue which could have far-reaching consequences for Malaysia: just what value do government-owned companies place on contracts and legal agreements.

The outcome of both cases will be watched closely by foreign investors at a time when the flow of foreign direct investment is slowing and investors are becoming more queasy about putting money into a country which seems trapped in a quagmire of racial politics. The last thing an investor will want to deal with is a system where legal agreements are treated in a wanton fashion.

The sanctity of a contract is the foundation of the Kelantan state government’s petroleum royalty case against Petronas. It is notable that the state government did not sue the federal government or other oil majors involved in extracting oil from its offshore.

It only named Petronas as the defendant. The reason: Petronas is the signatory of all oil contracts with the Kelantan state government, as it is with other states in obtaining exclusive rights to exploit oil resources onshore and offshore in all states in Malaysia.

It is these agreements which formed the basis for Petronas paying Sarawak, Sabah and Terengganu oil royalties. These agreements with the states and the Petroleum Development Act 1975 are based on two simple facts: the ownership of all petroleum onshore and offshore is owned by Petronas and in consideration, the national oil company will pay the states 5 per cent royalties.

The background to this give-and-take approach is the dispute that arose between the federal government and the Sarawak government over the question of oil royalties.

Sarawak claimed that oil obtained offshore belonged to Sarawak and royalty should be paid to Sarawak, exclusively. Sabah adopted the position of Sarawak. To break the impasse, the federal government appointed the late Tun Dr Ismail Ali and Tengku Razaleigh Hamzah to come up with a new national petroleum policy.

Against this backdrop, the Petroleum Development Act was drafted and passed.

On May 9 1975, Petronas entered into agreement with Kelantan where it agreed to make cash payments yearly amounting to the equivalent of 5 per cent of the petroleum obtained onshore and offshore Kelantan. In consideration of Petronas agreeing to make cash payments, it was granted exclusive rights and privileges of obtaining petroleum in the state under the Kelantan Grant.

As such, under the PDA, Kelantan Petroleum Agreement and Kelantan Grant, Petronas is obliged to make cash payments twice a year for all oil obtained offshore Kelantan.

But the national oil company has refused to make any cash payments. Its lawyers and the Attorney-General are likely to rely on the same argument they put forward when refusing to pay the Terengganu state government its share of oil royalties in 2000 — that the state is only entitled to petroleum extracted three miles from the shore.

This is a curious position to take given that there is no mention of three miles or any offshore boundary in any of the agreements. It is also a curious position given that oilfields in both Sarawak and Sarawak are hundreds of miles offshore, and both states enjoy a steady flow of oil royalties. And to compound this curious position, Petronas paid oil royalties to the BN-controlled government for about two decades for oil exploited many many miles off Terengganu and only ceased when the state fell into the hands of PAS.

In fact if there is one pattern of consistent behaviour involving Petronas, it is this: that states under the opposition have had a tough time getting the national oil company to honour legally-binding and clear agreements it signed with them.

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