Easwaran Kanason

Co - founder of NrgEdge
Last Updated: August 1, 2018
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Here is a brief background story of the growing debate about the allocation of oil royalties in select states in Malaysia. 

The election that swept the former ruling coalition out of power in Malaysia three months ago was historic. Implementing the new Pakatan Harapan’s election manifesto, however, has proven a bit more challenging as populist measures have been hampered by bureaucracy and inertia. And now, a new spat is brewing – Malaysian state rights over oil royalties.

At present, Malaysia’s upstream extraction is conducted by Petronas on behalf of the federal and state governments. This unifies oil extraction under one national oil company, and has allowed Petronas to forge domestic and international pacts under the PSC system that has made it one of the best run state oil firms in the world. At present, Petronas pays a 10% royalty (based on gross production), 5% to the federal government and 5% to each state government. Of the remainder, 20% goes to cost oil to recover the cost of production, while 70% is split between Petronas and operators like Shell, Murphy Oil and Sapura Energy.

Malaysian states have long requested for their 5% royalty – paid twice yearly by Petronas regardless of field profitability – to be raised. In the past, east coast peninsula states Terengganu and Kelantan were the most vocal, particularly because they were intermittently ruled by (then) opposition parties, but East Malaysian states Sabah and Sarawak have increased their tone as well. This is particularly important given that the bulk of new finds and operations are focused on East Malaysia deepwater. Sarawak itself has gone as far as to create a state oil firm to participate in PSCs to increase its share of oil revenue. There are grouses elsewhere: in 1999, when opposition party PAS took Terengganu state, the oil royalty payment to the state stopped. In the leadup to the 14th General Election, Pakatan Harapan had promised to restore payments and increase the royalty to 20%. And now that it is in actual power, it seems to be backtracking.

New Prime Minister Mahathir Mohamed announced that the royalty would indeed be raised to 20%, but it would now be based on net profit instead of gross profit. Uproar ensued. Royalties based on gross production had always been the norm, and the new government was accused of moving the goalposts. Economic Affairs minister Azmin Ali claims that raising the royalty to 20% of gross profits would ‘destroy Petronas’ and has not given a timeframe for the implementation of the new royalty rule, citing the need to federal-state discussions and a need to change the Petroleum Development Act 1974. The states are not happy – especially because they were instrumental in toppling the previous BN government – and this could play into the fragile balance currently holding the government together under Mahathir’s sheer force of will.  Opposition parties have already begun capitalising on the ‘controversy’. A state seat by-election is scheduled for August 4, and will be seen as a litmus test for the effectiveness of the new government. A new government may be in place, but issues of old are still rearing their head.

Malaysian Oil Production By Area: 

  • Peninsula Malaysia: 20%
  • Sabah (Borneo): 50%
  • Sarawak (Borneo): 30%

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EIA projects less than a quarter of the world’s electricity generated from coal by 2050

According to the U.S. Energy Information Administration’s (EIA) International Energy Outlook 2019 (IEO2019), global electric power generation from renewable sources will increase more than 20% throughout the projection period (2018–2050), providing almost half of the world’s electricity generation in 2050. In that same period, global coal-fired generation will decrease 13%, representing only 22% of the generation mix in 2050. EIA projects that worldwide electricity generation will grow by 1.8% per year through 2050.

EIA projects that total world electricity generation will reach nearly 45 trillion kilowatthours (kWh) by 2050, almost 20 trillion kWh more than the 2018 level. Although growth occurs in both OECD and non-OECD regions, the growth in electricity demand in non-OECD regions far outpaces those in OECD regions. Even though electricity demand growth contributes to a region’s fuel share of generation, the scale and scope of that region’s policies provide different incentives and play an important role as well.

Throughout the projection period, some regions have high electricity demand growth, some have aggressive emission reduction policies, and some have relatively little change in both. Varying demand growth and policies across regions lead to different distribution of fuel shares for electricity generation within each region. However, the power sector’s share of generation from renewables tends to increase and the share of coal tends to decrease.

High electricity demand growth

net electricity generation by fuel, India

Source: U.S. Energy Information Administration, International Energy Outlook 2019

India has the most rapid regional electricity demand growth (4.6% per year) in the IEO2019 Reference case. Although India has developed target levels for solar and wind capacity, it does not have an aggressive emissions reduction policy in place, so EIA projects coal-fired generation growth in addition to growth in solar and wind generation. Combined, solar, wind, and coal will account for 90% of India's electricity generation mix in 2050. Combined wind and solar generation increases from less than 10% of India's generation mix in 2018 to more than 50% of the generation mix in 2050. The level of coal-fired generation increases during that same time period, but coal’s share of India's electricity generation mix falls from about 75% of the mix in 2018 to less than 40% in 2050.

Aggressive emissions reductions policy

net electricity generation by fuel, OECD Europe

Source: U.S. Energy Information Administration, International Energy Outlook 2019
Note: OECD is the Organization for Economic Cooperation and Development. International Energy Outlook regional definitions.

New capacity additions for renewable technologies are economically competitive with fossil technologies worldwide. But without policy incentives, growth in generation from renewable sources is limited in regions with slow demand growth. OECD Europe electricity demand is projected to grow at about 1% per year through 2050; however, EIA expects that a regional carbon dioxide cap will contribute to a reduction in fossil-fired generation and an increase in renewables generation to meet demand. Throughout the projection period, EIA expects that the share of wind and solar generation in OECD Europe will increase from 20% to almost 50% by 2050. In that same period, EIA projects that fossil-fired generation will decrease from about 37% to 18% of the generation mix. By 2050, coal-fired generation comprises only 5% of the region’s generation mix.

Low electricity demand growth/No emissions reductions policies

net electricity generation by fuel, other non-OECD Europe and Eurasia

Source: U.S. Energy Information Administration, International Energy Outlook 2019
Note: International Energy Outlook regional definitions.

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EIA expects U.S. energy-related CO2 emissions to decrease annually through 2021

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Changes in the relative prices of coal and natural gas can cause fuel switching in the electric power sector. Small price changes can yield relatively large shifts in generation shares between coal and natural gas. EIA expects coal-related CO2 will decline by 10.8% in 2020 after declining by 12.7% in 2019 because of low natural gas prices. EIA expects the rate of coal-related CO2 to decline to be less in 2021 at 2.7%.

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As total generation declines during the forecast period, increases in renewable generation decrease the share of fossil-fueled generation. EIA estimates that coal and natural gas electric generation combined, which had a 63% share of generation in 2018, fell to 62% in 2019 and will drop to 59% in 2020 and 58% in 2021.

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U.S. annual carbon emissions by source

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020
Note: CO2 is carbon dioxide.

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You can download the PDF of GEO ExPro magazine for FREE and sign up to GEO ExPro’s weekly updates and online exclusives to receive the latest articles direct to your inbox.

Download GEO ExPro Vol. 16, No. 6

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