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March 9, 2001
Malaysian State's Oil-Royalty Lawsuit Could Shed Light on Petronas's Doings By LESLIE LOPEZ Staff Reporter of THE WALL STREET JOURNAL KUALA LUMPUR, Malaysia -- A state controlled by an Islamic opposition party has sued the Malaysian government over disputed oil-royalty payments, a move that could provide a rare peek into the secretive affairs of state oil company Petroliam Nasional Bhd., or Petronas, the country's richest corporation. The Terengganu state government, which is controlled by the Parti Islam se-Malaysia, or PAS, filed a suit Thursday asking Malaysia's High Court to overturn a federal-government decree last year that stopped Petronas from making oil-royalty payments to the state. Before the PAS won control of Terengganu in 1999 state elections, Petronas remitted billions of ringgit in oil royalties to the resource-rich state over a 22-year period under an agreement signed between the company and the state government in 1975. In its suit, the PAS-led Terengganu government alleges that Prime
Minister Mahathir Mohamad's decision to stop oil-royalty payments unilaterally altered the terms of the 1975 agreement and was, therefore, illegal. It further contends that the federal government's decision was motivated by the PAS's defeat of Dr. Mahathir's ruling United Malays National Organization, or UMNO, in the 1999 state election. The suit names Petronas and Malaysia's federal government as defendants. The federal government has yet to respond to the Terengganu government's allegations. A Petronas spokesman declined to comment Thursday. Business, Political Fallout When Kuala Lumpur ordered Petronas to rescind its oil-royalty agreement with Terengganu in September, it said it didn't have confidence in the PAS's ability to manage the funds. Instead, Kuala Lumpur said it would disburse the oil royalties to fund Terengganu development projects through a committee appointed by the federal government. A Voter Uprising Leads to Stricter Laws, Less Oil Royalties, for Eastern Malaysia (Dec. 26, 2000) The PAS's decision to take its oil dispute to court is likely to raise some sticky issues for Dr. Mahathir's administration. Private economists say the case will be watched closely by local and foreign investors concerned over how Kuala Lumpur deals with contracts its state agencies have signed with business partners. Political analysts also note that the suit could escalate tensions between the PAS and UMNO at a time when deep divisions among Malaysia's ethnic Malay majority are clouding the country's political future. UMNO has proposed to begin negotiations with the PAS to discuss differences among ethnic Malays, many of whom abandoned UMNO after the sacking and imprisonment of popular former Deputy Premier Anwar Ibrahim in 1998. The PAS has set out conditions for the so-called unity talks, one of which is the full reinstatement of the oil-royalty payments to Terengganu. Some analysts see the PAS suit as a signal to UMNO that unless the oil-royalty issue is resolved quickly, the PAS won't participate in the talks. Financial Hints The looming court battle could also provide a glimpse into Petronas's secrecy-shrouded financial affairs. Malaysia's sole Fortune 500 company, Petronas incorporated was in 1974 to own and manage the country's oil and gas reserves, currently estimated at 18 billion barrels of oil equivalent. Under the company's charter, Petronas management reports directly to the prime minister. While the company began to provide some details of its yearly financial performance in the mid-1990s, a full version of its annual audited accounts has never been made public. Petronas declared record profit of 12.6 billion ringgit ($3.3 billion) for the year ended March 31, 2000, up 85% from the previous year, citing strong oil prices and large contributions from its overseas operations. But how much the government receives in the form of annual dividend payments, or the amount Petronas holds in cash reserves, has never been publicly disclosed. Investment analysts, who track Petronas because it is a large bond issuer in international markets, estimate dividend payments from the company amount to almost 13% of federal government revenues, while the oil company's cash reserves account for about 5% of all Malaysian bank deposits. The Terengganu suit against Petronas provides some clues to the oil
company's financial clout and the pivotal role it plays in the national economy. According to court documents filed Thursday, Terengganu state received a total of 7.13 billion ringgit in oil-royalty payments between 1978 and March 2000. Since the 1975 oil-royalty agreement with Petronas stipulated that Terengganu receive a 5% share of the proceeds of all oil and gas produced within state territory, Petronas would have earned about 142 billion ringgit during that 22-year period from Terengganu alone. (Malaysia's two other main oil-and-gas-producing states are Sabah and Sarawak, which are situated on the island of Borneo. The two states have been producing oil since the early 1970s, and have similar oil-royalty agreements with Petronas that remain in force.) Controversial Moves Analysts and bankers generally credit Petronas with being well-managed. Its chairman, Azizan Zainal Abidin, and president, Hassan Marican, are widely considered no-nonsense managers who place a strong emphasis on professionalism in the organization. Still, several analysts note that should the Terengganu state government's suit go to full trial, PAS lawyers could try to expose details behind some of Petronas's more controversial moves in the past. Since its inception -- and particularly during Dr. Mahathir's nearly 20 years in power -- Petronas has regularly been tapped to play the role of private banker for the federal government. Among other things, Kuala Lumpur has twice -- in 1984 and 1989 -- used the oil company's money to save scandal-ridden Bank Bumiputra Bhd. from collapse. In those two rescues, Petronas injected a total of 3.3 billion ringgit into the bank, after bad-loan provisions nearly wiped out the bank's capital. More recently, Petronas's role as financier for troubled businesses has become more pronounced. In August 1997, Petronas paid 1.8 billion ringgit to a state pension fund to purchase a controlling 29% interest in Malaysia's largest shipping concern, Malaysia International Shipping Corp. Bhd., or MISC. The shipper wasn't facing financial difficulties. But eight months after Petronas invested in it, MISC acquired a debt-burdened shipping concern controlled by Dr. Mahathir's eldest son, Mirzan, for 836 million ringgit and assumed 1.2 billion ringgit of the company's debt. Petronas's move into noncore activities didn't stop there. In March last year, the oil company ended more than a year of negotiations to complete the acquisition of a 27.2% interest in national car manufacturer Perusahaan Otomobil Nasional Bhd., or Proton, from Hicom Holdings Bhd. for 1.03 billion ringgit. Petronas's other interests include a controlling stake in a property concern that owns Kuala Lumpur's Twin Towers, the world's tallest buildings. Petronas is also funding the construction of Dr. Mahathir's multibillion-ringgit administrative capital of Putrajaya. 'They Are Strangling Us' Meanwhile, in Terengganu, the halt in oil-royalty payments is putting a squeeze on the state's finances. Despite the huge oil contributions over the past two decades, predominantly agricultural Terengganu, on the east coast of Peninsular Malaysia, remains one of the country's poorest states. According to the Terengganu government's suit, payments made by Petronas to previous state governments have typically represented "between 75% and 80% of the total revenue earned each year." Petronas's oil-royalty payments were made semiannually. According to the suit, the last payment, of 434 million ringgit, was received in
September.
March of last year. The suit claims Terengganu is owed about 850 million ringgit in royalties that should have been paid in Senara Muda, Terengganu's state secretary, said in Kuala Lumpur on Thursday that oil royalties aren't the only federal funds for the state that have been frozen by Dr. Mahathir's government. "We usually get federal loans for water-supply and housing [projects], and these are being frozen. They are strangling us from both ends." Write to Leslie Lopez at [e-mail]
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