Kelantan Oil Royalty Lawsuit

Kelantan oil suit claims Petronas in constitutional breach

August 30, 2010

The Kelantan oil royalty tussle is expected to weigh on Najib in the coming general election. — file pic

KUALA LUMPUR, Aug 30 — By not making any cash payments for oil obtained offshore Kelantan, global oil giant Petronas is not only in breach of a slew of laws but also the Federal Constitution, the Kelantan state government charged today. The state also upped the ante in its continuing battle for oil royalties, alleging in court documents that Petronas is unfairly discriminating against the east coast state because it is controlled by Parti Islam SeMalaysia (PAS), a political party in opposition to the ruling Barisan Nasional (BN) coalition.
By throwing the discrimination charge into the mix, the state government is sending a signal that the battle in the court of public opinion will be as important in this case as the fight in the High Court.
Kelantan’s demand for cash payment for petroleum found off its shores has gained significant traction in the state and is likely to be one of the top issues when Prime Minister Datuk Seri Najib Razak seeks a mandate.
Petronas and the BN federal government have argued that Kelantan is not entitled to royalties for oil obtained offshore, preferring instead to offer the state a token goodwill payment. But the state government today said that it is owed oil royalties from at least four offshore areas from which oil has been extracted from. These are Kelantan, Kelantan-Thailand, Kelantan-Vietnam and Kelantan-Terengganu.
In court papers filed today, Tommy Thomas, the lawyer for the Kelantan state government, sketched the background of the Petroleum Development Bill. He noted that petroleum had been commercially exploited off the waters of Sarawak and Sabah before the formation of Malaysia in 1963.
In 1973-1974, a dispute 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 the state, 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 then-Solicitor-General Datuk (now Tun) Salleh Abas drafted the Petroleum Development Bill on the basis of economic development, equitable rights of states, and the pooling and sharing of resources.
The Bill’s fundamental provision was that ownership of petroleum, whether onshore or offshore, should not be property of either federal or state governments but be vested in a limited liability company. In return for vesting of ownership in the company, the company would pay cash payments to the federal government and state governments where petroleum was found. The Bill was not only confined to Sarawak and Sabah but all states because of the equality provision under the Federal Constitution. The Petroleum Development Act (PDA) was passed on October 1 1974.
By virtue of PDA, Petronas became the sole owner of petroleum offshore and onshore for 13 states.
Further, on May 9, 1975, Petronas entered into an agreement with Kelantan where it agreed to make cash payments yearly amounting to the equivalent of five per cent of the value of 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.
“Such relinquishing of ownership of petroleum resources belonging to and vested in the state of Kelantan from time immemorial was done in good faith and for valuable consideration, namely, the half yearly cash payments. It was not a gift to Petronas,” said the state government.
As such, the Kelantan state government contends that 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.
In addition to failing to make an account of all oil obtained offshore Kelantan to date, the national oil company has also informed the state government that it was not entitled to any cash payments.
In contrast, Petronas made cash payments to BN-controlled Sarawak, Sabah and Terengganu (stopping only in 2000 when the PAS controlled the state).
“Such conduct on the part of Petronas constitutes unfair discrimination which has resulted in severe financial loss to the Kelantan state government and will continue to do so,” said the state government in its writ of summons.
By not treating Kelantan equally with Sarawak, Sabah and Terengganu, Petronas is in breach of Article 8 of the Federal Constitution, the state government charged.
Kelantan is seeking the following relief against Petronas:
* specific performance of the Kelantan Petroleum Agreement;
* an account or an inquiry to make a full and frank disclosure of all the relevant facts relating to cash payments payable to Kelantan, including the period from which petroleum has been produced, won or obtained offshore Kelantan;
* an order that an arrears of all cash payments be paid to Kelantan within one month of an order of the court;
* general damages.
MI