Easwaran Kanason

Co - founder of NrgEdge
Last Updated: December 26, 2019
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Business Trends

Soon, it will be two years from Malaysia’s historic general election, where the ruling Barisan Nasional coalition was swept out of power for the first time in over 60 years. Opinions are divided on how effective the new government, under an old Prime Minister has been, but there has certainly been progress on a number of issues. And one of those issues is the relationship between Peninsular Malaysia and the Bornean states of Sabah and Sarawak. This is where most of Malaysia’s oil and gas fields lie, and appeasing the states that became a backbone of the 2018 general election victory is important enough that the Malaysian government is considering selling stakes in its crown jewel Petronas to them.

To understand the situation, one has to understand Malaysia. Malaysia – in its modern incarnation is a federation within a federation. The Federation of Malaya was formed in 1948, comprising the nine states and two British Straits Settlements of Peninsular Malaysia, gaining independence in 1957. In 1963, Malaysia was formed through the Malaysia Agreement, become a federation of Malaya, North Borneo (now Sabah), Sarawak and Singapore. This is known as the MA63 agreement, and through that, Sabah and Sarawak retain a unique status within the federation and considerable autonomy.

Autonomy that has been eroded over the decades, as more power was progressively transferred to the federal government of Malaysia since the 1960s. The seeds of Sabah and Sarawak’s current discontent over their oil royalties date back to 1974, when the state oil firm Petronas was formed, with the mandate of developing the entirety of oil and gas resources in Malaysia. In the early years, oil reserves were exploited off the east coast of Peninsular Malaysia, with the fields in Terengganu yielding the once-benchmark Tapis blend. In charge of extracting, processing and selling the oil, Petronas paid an oil royalty back to the states where it was found. Set at 5%, that rate has been the subject of grouses, with the states complaining that the royalty was too low. These complaints ebbed and flowed depending on which party was in charge of the state government, but were largely contained. As crude production in Peninsular Malaysia abated and the focus shifted to the huge reserves and untapped potential in Sabah and Sarawak, however, the oil royalty issue has taken on a new dimension.

According to the MA63 agreement, Sabah and Sarawak were considered independent nations that voluntarily joined the Federation of Malaysia in 1963, enshrining their additional rights. Given that the Bornean states now hold over 60% of the country’s oil reserves, they have been demanding a higher oil royalty. This carries more weight than a complaint from Terengganu, which was part of the original Federation of Malaya. This has a political dimension as well, since Sabah and Sarawak are guaranteed 25% of federal parliamentary seats – effectively making the states kingmakers in national elections. It was a shift in political tides in Sabah in 2018 that swept the new government in, in part due to the fact that the now-ruling coalition promised to restore Sabah and Sarawak to their MA63 status.

In the 2018 campaign, a promise to increase the oil royalty from 5% to 20% for Sabah and Sarawak was floated. It proved to be an effective one, but one that the government says it is facing challenges in meeting due to the fiscal irresponsibility of previous governments and to prevent a negative impact on Petronas. This has ruffled a lot of feathers in Sabah and Sarawak, which could colour future general elections and impending by-elections. Which is why alternatives – including selling stakes in Petronas – have been proposed. That was immediately rejected by both states, and talks continue. At stake is not just several billion in oil royalties, but the political future of Malaysia.

Malaysian oil & condensate production by region, 2018

  • Peninsular Malaysia – 30%
  • Sarawak – 25%
  • Sabah - 45%

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Royal Dutch Shell Poised To Become Just Shell

On 10 December 2021, if all goes to plan Royal Dutch Shell will become just Shell. The energy supermajor will move its headquarters from The Hague in The Netherlands to London, UK. At least three-quarters of the company’s shareholders must vote in favour of the change at the upcoming general meeting, which has been sold by Shell as a means of simplifying its corporate structure and better return value to shareholders, as well as be ‘better positioned to seize opportunities and play a leading role in the energy transition’. In doing so, it will no longer meet Dutch conditions for ‘royal’ designation, dropping a moniker that has defined the company through decades of evolution since 1907.

But why this and why now?

There is a complex web of reasons why, some internal and some external but the ultimate reason boils down to improving growth sustainability. Royal Dutch Shell was born through the merger of Shell Transport and Trading Company (based in the UK) and Royal Dutch (based in The Netherlands) in 1907, with both companies engaging in exploration activities ranging from seashells to crude oil. Unified across international borders, Royal Dutch Shell emerged as Europe’s answer to John D Rockefeller’s Standard Oil empire, as the race to exploit oil (and later natural gas) reserves spilled out over the world. Along the way, Royal Dutch Shell chalked up a number of achievements including establishing the iconic Brent field in the North Sea to striking the first commercial oil in Nigeria. Unlike Standard Oil which was dissolved into 34 smaller companies in 1911, Royal Dutch Shell remained intact, operating as two entities until 2005, when they were finally combined in a dual-nationality structure: incorporated in the UK, but residing in the Netherlands. This managed to satisfy the national claims both countries make on the supermajor, second only to ExxonMobil in revenue and profits but proved to be costly to maintain. In 2020, fellow Anglo-Dutch conglomerate Unilever also ditched its dual structure, opting to be based fully out of the City of London. In that sense, Shell is following the direction of the wind, as forces in its (soon to be former) home country turn sour.

There is a specific grievance that Royal Dutch Shell has with the Dutch government, the 15% dividend tax collected for Dutch-domiciled companies. It is the reason why Unilever abandoned Rotterdam and is now the reason why Shell is abandoning The Hague. And this point is particularly existentialist for Shell, since its share prices has been battered in recent years following the industry downturn since 2015, the global pandemic and being in the crosshairs of climate change activists as an emblem of why the world’s average temperatures are going haywire. The latter has already caused the largest Dutch state pension fund ABP to stop investing in fossil fuels, thereby divesting itself of Royal Dutch Shell. This was largely a symbolic move, but as religious figures will know, symbols themselves carry much power. To combat this, Shell has done two things. First, it has positioned itself to be at the forefront of energy transition, announcing ambitious emissions reductions plans in line with its European counterparts to become carbon neutral by 2050. Second, it is looking to bump up its dividend payouts after slashing them through the depths of the Covid-19 pandemic and accelerating share buybacks to remain the bluest of blue-chip stocks. But then, earlier this year, a Dutch court ruled that Shell’s emissions targets were ‘not ambitious enough’, ordering a stricter aim within a tighter timeframe. And the 15% dividend tax remains – even though Prime Minister Mark Rutte’s coalition government has been attempting to scrap it, with (it is presumed) some lobbying from Royal Dutch Shell and Unilever.

As simplistic it is to think that Shell is leaving for London believes the citizens of the Netherlands has turned its back on the company, the ultimate reason was the dividend tax. Reportedly, CEO Ben van Buerden called up Mark Rutte on Sunday informing him of the planned move. Rutte’s reaction, it is said was of dismay. And he embarked on a last-ditch effort to persuade Royal Dutch Shell to change its mind, by immediately lobbying his government’s coalition partners to back an abolition of the dividend tax. The reaction was perhaps not what he expected, with left-wing and green parties calling Shell’s threat ‘blackmail’. With democracy drawing a line, Shell decided to walk; or at least present an exit plan endorsed by its Board to be voted by shareholders. Many in the Netherlands see Shell’s exit and the loss of the moniker Royal Dutch – as a blow to national pride, especially since the country has been basking in the glow of expanded reputation as a result of post-Brexit migration of financial activities to Amsterdam from London. The UK, on the other hand, sees Shell’s decision and Unilever’s – as an endorsement of the country’s post-Brexit potential.

The move, if passed and in its initial stages, will be mainly structural, transferring the tax residence of Shell to London. Just ten top executives including van Buerden and CFO Jessica Uhl will be making the move to London. Three major arms – Projects and Technology, Global Upstream and Integrated Gas and Renewable Energies – will remain in The Hague. As will Shell’s massive physical reach on Dutch soil: the huge integrated refinery in Pernis, the biofuels hub in Rotterdam, the country’s first offshore wind farm and the mammoth Porthos carbon capture project that will funnel emissions from Rotterdam to be stored in empty North Sea gas fields. And Shell’s troubles with activists will still continue. British climate change activists are as, if not more aggressive as their Dutch counterpart, this being the country where Extinction Rebellion was born. Perhaps more of a threat is activist investor Third Point, which recently acquired a chunk of Shell shares and has been advocating splitting the company into two – a legacy business for fossil fuels and a futures-focused business for renewables.

So Shell’s business remains, even though its address has changed. In the grand scheme of things, never mind the small matter of Dutch national pride – Royal Dutch Shell’s roadmap to remain an investment icon and a major driver of energy transition will continue in its current form. This is a quibble about money or rather, tax – that will have little to no impact on Shell’s operations or on its ambitions. Royal Dutch Shell is poised to become just Shell. Different name and a different house, but the same contents. Unless, of course, Queen Elizabeth II decides to provide royal assent, in which case, Shell might one day become Royal British Shell.

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