Malaysia's govt tussles with Kelantan over oil royalty payments, offshore boundary

A photo taken on June 4, 2018, shows Malaysian Prime Minister Mahathir Mohamad with president of Parti Islam SeMalaysia Abdul Hadi Awang at the Perdana Leadership Foundation building. PHOTO: TWITTER/MAHATHIR MOHAMAD

KUALA LUMPUR - Malaysia's Pakatan Harapan (PH) government and Kelantan state are in a tussle over some RM1 billion (S$330 million) a year demanded by the east coast state, in a tug of war over "oil royalties" that may well decide the political future of the east coast state.

Parti Islam SeMalaysia (PAS), a federal opposition party that has controlled Kelantan for 29 years wants the funds from Prime Minister Mahathir Mohamad's government, as promised in PH's election manifesto.

But Prime Minister Mahathir Mohamad, both in his first term as premier and now into his second, has shown deep reluctance to pay the state the 5 per cent royalty for digging up oil and gas deposits in the South China Sea off Kelantan.

The word from his then-party Umno during his first term as premier, between 1981 and 2003, was that he didn't want PAS to become financially stronger by getting so much cash that could be used to strengthen the Islamist party's political machinery. PAS has continuously ruled Kelantan from 1990.

The latest stance from the PH government is that prior to paying out any royalties to Kelantan, it needs to draw accurate offshore boundary lines to confirm that the petroleum fields being exploited by Petronas are indeed within the state's maritime boundaries, and not within the borders of neighbouring Terengganu or Pahang.

Economic Affairs Minister Azmin Ali said only two oil and gas fields were located within three nautical miles - or 5.6km - of Kelantan's shore, while 10 other fields are located outside.

"Let the law decide the boundaries, and we will pay," Datuk Seri Azmin told Parliament on Oct 30. "If all 10 fields are in Kelantan waters, I give a guarantee that Petronas will make cash payments directly to Kelantan. If they belong to Pahang, then I have a responsibility to see that payments are made to Pahang," he said during a debate on a Bill in the Lower House.

The issue isn't just an idle matter, as Pakatan Harapan in its electoral manifesto issued just before the May general election last year promised to pay "oil royalties" amounting to 20 per cent of petroleum found offshore Terengganu, Kelantan, Sabah and Sarawak should it come to power.

The manifesto issued then by PH read: "Oil and gas-producing states will be given royalty or its appropriate equivalent value. The cruelty of Umno and Barisan Nasional that have been denying these payments based on political leanings will be stopped immediately."

It also said: "The Pakatan Harapan Government will increase the royalty payment to Sabah and Sarawak, and other oil producing states, to 20 per cent or of its value equivalent, so that the respective states can take over and fund more of their own development activities."

PAS secretary-general and Kelantan lawmaker Takiyuddin Hassan told The Straits Times: "We have to settle the boundary issue first so that they will pay the royalty".

He added that the federal government has not paid Kelantan its oil royalties, only "wang ehsan", or a discretionary "goodwill fund", of RM15.75 million, which was deposited in September.

PAS in Kelantan is especially peeved as Tun Mahathir had started to pay next-door Terengganu RM1.277 billion as of October this year in royalties.

This followed a meeting involving PAS president Abdul Hadi Awang, Terengganu Menteri Besar Ahmad Samsuri Mokhtar and the party's adviser Mustafa Ali in June last year, a month after PH won the general election.

It emerged later that the PAS leaders had agreed that all 18 PAS lawmakers in Parliament would throw their support behind Dr Mahathir's leadership of PH.

Neither Mr Azmin or Mr Takiyuddin said which government agency would be drawing up the offshore boundaries, and if there is a deadline to do so.

According to an agreement inked in 1975 with the federal government, the four oil-and-gas producing states would be annually paid royalty payments equivalent to five per cent of the production from any petroleum found in its territory. But PH went one step further to promise 20 per cent in their manifesto last year.

Sabah and Sarawak have been receiving 5 per cent in oil royalties since 1976 under the Petroleum Development Act 1974.

But now Sabah is also insisting on the 20 per cent promised by PH, while Sarawak has said it wants to be included in Petronas' production-sharing contracts. Sarawak in March 2018 kicked off its own oil and gas exploration firm called Petroleum Sarawak Bhd or Petros.

An increase in royalty payments to 20 per cent would mean annual petroleum earnings for Sabah of around RM5 billion, Sabah Chief Minister Mohd Shafie Apdal said in August.

PAS president Datuk Seri Hadi told reporters recently, that that Mahathir agreed to resume paying oil royalties to Kelantan and Terengganu.

"When we met Tun Mahathir after the general election last year, he corrected the situation. The cancellation of the oil royalty payments was done by Umno and was illegal. Umno had no right to cancel the agreement."

Mr Amir Fareed Rahim, strategy director from political risk consultancy KRA Group said: "The oil royalty payment has always been a sticky issue between Kelantan and the federal government especially when Dr Mahathir is at the helm. Therefore the latest twist in the issue is not a surprise and it will drag on for as long as it could as it is always used by the federal government to keep Kelantan in check."

"It seems this will just be one of those promises that PH will likely not keep or at least try to delay for as long as it could, given the political dynamics and economic conditions of the country."

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