Petronas confirms Sarawak’s legal filing

by MARK RAO/ pic by BLOOMBERG

SARAWAK’S legal demand against Petroliam National Bhd (Petronas) could have a one-off financial impact on the state-owned oil and gas (O&G) company, but worries have heightened over future relationship between both parties.

The Sarawak Comptroller of States Sales Tax and the Sarawak state government filed a writ of summons and statement of claim against Petronas at the High Court in Kuching last week.

Sarawak is demanding Petronas to pay the 5% sales tax imposed on petroleum products originating from the state, effective early this year.

Petronas has not observed the sales levy despite threats of legal actions by the Sarawak government.

Petronas yesterday confirmed the legal filing by the Comptroller of State Sales Tax of Sarawak and the Sarawak state government at the Kuching High Court on Nov 21, 2019, for non-payment of the Sarawak sales tax on petroleum products.

The oil company did not elaborate how it would address the legal demand.

Petronas under the Petroleum Development Act 1974 (PDA) is given the exclusive right for the exploration and exploitation of O&G resources in the country.

Some states where Petronas operates are already demanding for higher royalties from the oil exploration activities. Petronas has stated that the higher royalties would financially ruin the company’s financial.

It is believed that Sarawak had introduced the sales tax on petroleum products to circumvent the delays in getting higher royalties. The state also amended its Oil Mining Ordinance 1958 (OMO) to add clouds to its claims.

It is not known the legality of a state-imposed sales tax as levies are entrusted to the federal government.

The amount sought by Sarawak is not known but there are about 60 O&G producing fields in the state, based on reports in August 2017.

Petronas was given until the end of last month to pay the 5% petroleum sales tax. Sarawak could generate close to RM4 billion from the sales tax. It is not known if other O&G companies operating in

Sarawak had paid the same tax. But the larger concern would be Sarawak’s O&G sector future and Petronas’ role.

Petronas has invested billions in the development of the country’s O&G sector, including introducing production-sharing schemes with foreign investors.

Higher taxes, coupled with prospects of higher oil royalty paid to Sarawak and regulatory uncertainties, could deter investors from participating in Sarawak’s O&G sector.

Here is a brief chronology of all the events leading up to and related to Sarawak’s decision to sue Petronas for the unpaid sales tax.

• March 2018 (The Birth of Petros) — Sarawak said it intended to assume full regulatory authority over its O&G activities — both upstream and downstream — by July 2018. The state-owned Petroleum Sarawak Bhd (Petros) was launched to undertake this landmark venture.

• June 2018 (Federal Court hearing) — Petronas filed an application to the Federal Court, seeking a declaration that the PDA was the rule of the land. The act effectively vested Petronas with regulatory authority over Malaysia’s upstream industry.

The Federal Court, however, dismissed Petronas’ application, citing that the declaratory sought is within the jurisdiction of the High Court.

• July 2018 (OMO Implementation) — Sarawak’s OMO was implemented on the first of the month and was amended several days later to consolidate the state’s regulatory authority over its O&G activities. Under the OMO, all participants in Sarawak’s O&G industry will need to procure the necessary licences and leases from Petros.

The deadline to do so was set for year-end 2019, but the working arrangement to be implemented is expected to reflect the outcome of the ongoing Malaysia Agreement 1963 (MA63) discussions.

• December 2018 (First steering committee meeting) — Prime Minister Tun Dr Mahathir Mohamad chaired the first steering committee meeting to review the MA63, and Sabah and Sarawak’s rights. MA63 granted both states the control over its natural resources in exchange of joining Malaysia.

The PDA, however, then conferred regulatory authority to Petronas in exchange for oil royalties paid to Sabah and Sarawak. It was understood that the issues surrounding oil royalties and cash payments for petroleum and gas extracted from both states would be discussed separately next month.

• January 2019 (Petroleum Sales Tax) — The Sarawak government imposed a 5% sales tax on petroleum products, namely crude oil, natural gas, liquefied natural gas, chemical-based fertilisers and gas-to-liquid products, to generate additional revenue for the state’s development. Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg said the tax, effective at the start of the year, would not be withdrawn despite dissent from the federal level.

• October 2019 (Deadline lapses) — Petronas was given to the end of the month to pay the amount owed under the new sales tax. Sarawak issued a Notice of Assessment to the company, seeking payment and stating that failure to do so will be in breach of the State Sales Tax Ordinance 1998. The state government had filed legal action against the national O&G company to recover the money.