PETROLEUM REVENUE FOR THE FEDERAL AND STATE GOVERNMENTS

The attached extract of an article on "Financial Provisions Of  The Malaysian Constitution" written by Tan Sri Dato' Abdullah Bin Ayub, the Secretary-General of  Ministry of Finance, Malaysia, in 1978, establishes beyond doubt, the obligation of Petronas to make cash payment to the Federal Government and the revelant State Governments under the Agreements executed by Petronas and those government pursuant to the Petroleum Development Act 1974. Tan Sri Abdullah Ayub is still alive and surely he will be happy to assist. He was the most senior civil servant who executed federal government Chief Secretary.

This article is in fact part of a book on The Constitution of Malaysia-Its Development : 1957-1977-Edited by Tun Mohamed Suffian, H.P Lee and F.A Trindale. The book is still used as a text book for law students in the unversities in the country.

They would want to raise under the new financial provisions. Furthermore, it is essential for the Federal Government to unsure that the State Government do not borrow more than what they can afford as this would affect their own viability and the credit standing of the Federation. Sabah and Sarawak have their own authority to borrow within the respective States, subject to approval of the Central Bank, and the new amended law will now also apply to them.

"PETROLEUM REVENUE FOR THE FEDERAL

AND STATE GOVERNMENT"

With the discovery of petroleum off the coast of Sabah and Sarawak in the early 1970s, the economic and revenue prospects for Malaysia as a whole, and especially the State Government concerned, have become much more promising. Although Malaysia is a small oil producer with about 200,000 barrels of equivalent petroleum per day to its credit, she is nevertheless a net exporter of petroleum. For this reason, the Malaysian economy was not as adversely affected as many other countries by the major increase in oil prices in 1973 and even by the current energy crisis.

Originally, Malaysia had oil agreements that were based on the concept of the Concession System but this was superseded in April 1975 by new agreements that were based on the concept of Production Sharing. Under the old Concession System, the State Government received a royalty of 12 ½ per cent of the value of the Petroleum produced off the shores of that particular State. Thus, the State Government of Sarawak received about $44 million in 1974 representing the oil royalty that was due from 1971 to 1974.

However, with the incorporation of Petronas, which is the National Petroleum Company and the introduction of the Petroleum Development Act in 1974, all the petroleum agreements made under the Concession System were terminated with effect from 1 April 1975. The new production sharing arrangements provide for the oil companies and Petronas to exploit the petroleum resources of the country on the following basic formula :

            Cash Payment  - 10 per cent of production;

            Cost Oil            - Maximum of 20 per cent of production;

            Profit Oil           - 70 per cent or more (depending on cost oil) shared in the ratio of  70 : 30 in favour of Petronas.

           

For example, if the production of oil the year in 100,000 barrels, the proceeds from the sale of 5 per cent of production or 5,000 barrels will go to the Federal Government. 20,000 barrels (or less, depending on the actual cost ) will go to the contractor or oil company to meet the cost of production. The balance of 70,000 barrels ( or more, depending on the cost of production ) will be shared in the proportion of 70 to Petronas and 30 to the oil company, i.e 49,000 barrels to Petronas and 21,000 barrels to the oil company.

           

Under the agreements therefore, Petronas pays the Federal Government 5 per cent of the gross sales proceeds as Cash Payment, in return for the petroleum resources vested with Petronas. Similarly, state Government opposite whose shore the petroleum is produced, is also entitled to 5 per cent of the gross sales proceeds as its Cash Payment.

The Federal Government, in addition, derives petroleum income tax from the private oil companies and Petronas at the rate of 45 per cent on the basis of their relative portions of their incomes earned from petroleum operation as related to the above production sharing formula.

Since the operation of this agreement, the Federal Government has received about $397 million in 1975 and $ 312 million in 1976, while the State Government of Sabah and Sarawak have earned $78 million in 1975 and $77 million in 1976.

With the discovery of oil in the East Coast States of Terengganu and Pahang of Peninsular Malaysia, these relatively poorer States will also stand to benefit considerably, not only in revenue terms but in their overall socio-economic development as well, when oil starts flowing in the near future.