Time and again, we have listened to the opposition's over the top vitriol on two very emotive issues to Sabahans; the promise of 15% increase in oil royalty to Sabah and the allegation of federal government taking away all Sabah resources and in return, giving almost nothing back to Sabah. These issues must be answered factually and timely to prevent anyone from being deceived into emotional shadow boxing by the opposition.
Let's start with the 15% increase in oil royalty issue. While on the surface it sounds quite appealing, there are serious concerns over the mechanics needed to bring the notion to fruition. Making promises is one thing; executing them is another thing all together.
The petroleum business is not a business arrangement for the Average Joe. The capital outlay, technical challenges and financial risks are so great and prohibitive that only the companies which have specialized expertise and bottomless bank accounts normally dare enough to go into it.
Imagine trying to lower drilling pipes, 4.5km from the sea level, in an intensely-pressurized environment to search for the elusive black gold. It requires special and extremely expensive equipment and expertise which only the world’s oil major players (the likes of Shell, Murphy Oil, ExxonMobil, etc) possess. The cost of exploration drilling could run into hundreds of millions of dollars which would go to absolute waste should no oil be found in vicinity of choice.
The nation’s oil company, Petronas, like her counterparts in other developing countries (Indonesia, Venezuela and Nigeria etc), does not have the capacity to absorb the financial risk mentioned above.
It is not financially equipped to spend billions on research and development and take on the financial risks in the exploration and production phases when the same billions are very much needed to be spent on the country’s development.
In addition, unlike Petronas - which primarily operates within Malaysia’s waters - the oil majors enjoy economies of scale. They operate all over the world which helps to defray the costs of R&D, the exploration and production phases.
In the event that oil is actually discovered, the capital that needs to be spent in the subsequent phases is even more substantial. It is reportedly said that the cost of the oil production phase could reach as much as RM2 billion. Sometimes even more.
To cushion such uncertainties and spread the financial risk, Petronas enters into a joint-venture agreement (known in the industry as Production Sharing Contract or PSC and later, a variant called RSCs or Risk Sharing Contracts) with multinational oil companies like Shell, Murphy Oil or ExxonMobil and others.
These giant oil companies are given a percentage of the oil revenue generated in return of them bearing the financial risk and sharing technologies worth billions in Research & Development.
PETRONAS TAKES ALL?
The opposition always paint the perception that Petronas has been unfairly profiting from Sabah’s oil revenue, so according to them, it is only right for Petronas to give 15% extra oil royalty to Sabah.
Can it be done? Is it even doable? Let’s explore the realities.
While the following example will not be able to capture every essence of all the JV partnerships Petronas entered into, none the less, it is suffice to give a fair view of what the realities are on the ground.
The illustrations below explain how much Petronas makes from Sabah oil.
For every RM100 revenue derived from Sabah oil, 5% goes to the state’s coffer while another 5% to the Federal coffer. Approximately 45% goes into recovery cost, and the remaining 45% goes to the joint venture’s gross profit.
Contrary to lies spawned by the opposition, the federal government actually spent more (by a whopping RM4.736 billion) in Sabah in 2011 compared to what it collected in the same year!