What the Kelantan oil royalty issue is all about

The row over oil royalty for Kelantan has been revived by those who claim the state has been unfairly deprived of what it deserves, and that it has affected the state’s development.

(FMT) – The Kelantan government and like-minded activists have been demanding the oil royalty for decades, only for it to be dismissed repeatedly by Putrajaya, on the ground that oil is extracted outside Kelantan’s territorial waters.

However, Putrajaya already pays “wang ehsan”, or “compassionate money”, to the state, which amounted to RM15.7 million in 2019. In addition, the federal government has paid RM400 million to the Kelantan state government for 2020 and 2021, based on a rate of 5% of petroleum revenue derived from the state.

Kelantan has since mounted a series of unsuccessful attempts at demanding royalty payments backdated from 2005, in accordance with a 5% royalty promised in an agreement in the 1970s.

FMT takes a deep dive into the issue.

Political favouritism

In essence, the Kelantan oil royalty squabble revolves around an argument over sea borders and political favouritism.

Under the 1969 Emergency Ordinance, all waters beyond three nautical miles from the shores of any Malaysian state are under federal control. Putrajaya says it will pay no royalty if oil is extracted in waters beyond three nautical miles.

This was in stark contrast to an agreement by national oil company Petronas with all 13 states in 1975 stating that it would pay a 5% royalty to the states if oil were to be found inland or offshore.

Tengku Razaleigh Hamzah.

The agreement does not specify how far offshore the oil extracted has to be to qualify for royalty.

Kelantan’s oil is found some 80 nautical miles (about 150km) from its coast, in an area which overlaps Terengganu waters in the south and Thai waters in the north.

Those demanding the Kelantan oil royalty are crying a double standard by pointing to its neighbour Terengganu which gets its 5% oil royalty despite having oil wells 220km away from its coast.

The payments to Terengganu were halted when PAS took over the state, and restored in 2009 when Barisan Nasional came back into power.

Terengganu received oil royalty amounting to over RM1 billion in 2018, but took a 25% cut to repay federal debts for infrastructure projects. According to a parliamentary reply, Terengganu received RM22.4 billion from 2008 to August 2020.

In 2010, Kelantan sued Petronas for oil royalty, but the state discontinued the case in 2019 after a nine-year legal battle. The courts have also ruled that Kelantan cannot sue Petronas or the federal government again.

Tengku Razaleigh Hamzah, the founding chairman of Petronas, said the current practice of giving Kelantan wang ehsan instead of royalty was never part of the deal with the states in the mid-1970s.

The wang ehsan payments began during Dr Mahathir Mohamad’s premiership, he said, and Petronas was duty-bound to pay 5% royalty to each state in exchange for oil and gas rights.

‘Lame excuse’

Politician and lawyer Zaid Ibrahim said Putrajaya’s excuse that Kelantan did not qualify for royalty because the oil wells were beyond its borders was “lame and without basis”.

He said another point bandied about by the federal government was that the oil wells were closer to Terengganu than Kelantan, which did not hold water.

Zaid Ibrahim.

Zaid said Putrajaya’s rejection of the 5% royalty to states deserving them were “without basis, politically motivated and untenable”.

He said Kelantan should be paid RM20 billion in back payments and its annual 5% royalty payment be made immediately.

“Sabah and Sarawak were treated as sovereign states before joining Malaysia.

“Similarly, Malay states such as Kelantan were also sovereign states before coming together to form the Federation of Malaya, which was the precursor to the Malaysian federation with the inclusion of Sabah, Sarawak and Singapore in 1963.

“As sovereign states, the component states of the federation are wholly entitled to all the minerals, timber, petroleum, and fisheries, found within their respective territories onshore or offshore.”

It is learnt that Zaid, along with like-minded Kelantanese, will be contesting the next general election to further their demand for oil royalties to be paid to the state.

Petronas only wished to say that it made relevant cash payments for the benefit of Kelantan as advised by the finance ministry, with full disclosure to Parliament.