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KUALA LUMPUR, July 26 – Former Petronas chairman Tengku Razaleigh Hamzah has rubbished reasons given by the federal government over its dismissal of the Kelantan state government’s claim on oil royalties and says that the national oil company is obligated by law to pay up.

The Kelantan state government has claimed that is is owed RM1 billion in royalties from oil that has been extracted in an offshore area bordering Thailand.

In response, Information Communication and Culture Minister, Datuk Seri Rais Yatim had said that the Kelantan demand for oil royalty had no legal basis and was made to earn political mileage.

According to Tengku Razaleigh however, the vesting deed agreement, which he signed on behalf of Petronas as founding chairman and CEO, entitles the state to five per cent of any revenue derived from hydrocarbon deposits found on or offshore of the state.

“If I am chairman still of Petronas, I will pay without all the fuss,” he told The Malaysian Insider in an interview earlier this week. “And I feel all the more it should be paid because I signed the agreement! There is no two ways about it. It must be paid.”

The former finance minister declined to comment on whether political considerations played a part in the decision not to pay Kelantan oil royalties but noted that Terengganu oil royalty payments were suspended when it was under the opposition but was reinstated when it returned to Barisan Nasional rule last year.

“I don’t know what kind of politics they are playing,” he said.

He also agreed with the view that the government is currently overdependent on Petronas oil revenue and that it needs to scale down expenditure.

The following is the conversation between The Malaysian Insider (TMI) and Tengku Razaleigh, who is also known as Ku Li:

TMI: The Kelantan state government has requested that the Federal government pay them RM1 billion worth of oil royalties due to them since 2004. Do you agree with this request?

Ku Li: I think it is a very straightforward issue. It shouldn’t be an issue because we signed the vesting deed agreement with all the state governments, including Sabah and Sarawak. And it’s very straightforward and very simple piece of legislation. Anybody who reads it will understand it without having to consult a lawyer.

Simply put, we agreed to pay any state in the federation if oil is found onshore or offshore. In this instance, oil is found offshore, which is a joint development area with Thailand. And it became like that because we did not file with the Law of the Sea Convention in Geneva to reiterate that that was our offshore area. So the Thais decided to move ahead and as a result, through negotiation, we adopted the same area as a joint development area. Now that is just off the state of Kelantan..

Under the vesting deed agreement, if oil is found there and Petronas make profit from the joint development and of course it is 50:50 share (with Thailand), Petronas will earn 50 per cent of profit. If they earn that much money, then 5 per cent must be paid to the state in cash.

TMI: So the question of the fact that it is a disputed area does not arise at all?

Ku Li: No, no. Because Petronas is operating in what is an offshore area of Kelantan. It is very straightforward. Otherwise Petronas cannot have a joint venture with Thailand.

TMI: Is there any legal redress available to the state?

Ku Li: I don’t think there is a legal redress, I think it is obligatory on the part of Petronas to pay. You see, the whole thing behind this issue was, I went to Tun Razak, who was prime minister then. I said: let’s do this vesting deed agreement because Selangor and Perak were difficult with us at that time, to sign the vesting deed agreement. So I told Tun Razak that on the east coast, there is potential for oil and gas. And why not we also do the same to bring in uniformity and we pay 5 per cent even if oil is found offshore in the area that is under the federal jurisdiction. So it was agreed and since we signed with the mentri besar of Kelantan, or I signed with the mentri besar of Kelantan the vesting deed agreement, if oil is found in the offshore area, although it is under the federal jurisdiction, even though it is in joint venture with the Thais today, 5 per cent must be paid to the state. As simple as all that.

TMI: So with that agreement, the state can take Petronas to court?

Ku Li: I don’t think there is a need to take Petronas to court. Petronas has to pay, that’s all. If I am chairman still of Petronas, I will pay without all the fuss. Because, look, we have this money and we want to help states like Kelantan, Terengganu, Kedah because those states are poor states, undeveloped states, like Sabah, Sarawak, they are also undeveloped states. Why grudge the pay? Those people are tax payers all the same. They may have supported PAS in the last election. But it does not mean they are not citizens of this country. They have same rights as the others.

TMI: Do you feel that’s the reason why they are not getting paid?

Ku Li: I am not making any guess. But I think they should be paid because the law says so. And I feel all the more it should be paid because I signed the agreement! There is no two ways about it. It must be paid. Previously they suspended payment to the state of Terengganu, when it was previously receiving this cash payment from Petronas. I don’t know why they did that. Maybe for political reasons. Now it has been restored because under the law, you have to pay the state. You cannot pay to the federal government departments here. Because they’re not entitled to it. It’s the state concerned that it entitled to the payment. Similarly with Kelantan. There is no escape. I don’t know what kind of politics they are playing.

TMI: Do you think the federal government is overdependent on Petronas for revenue? As of last year, 45 per cent of their revenue came from Petronas. According to the Malaysian Institute of Economic Research, the government operating expenditure is going to exceed revenue.

Ku Li: It would, because of the pension bill and all the extraneous expenses incurred. Naturally, it will. And the interest, the cost of money, that the government bears is large. Unless they scale this down. I am sure the expenditure is going to be more than revenue and because of that, I think they are quite dependent on Petronas revenue now. But the Petronas revenue is falling, because of the fall in the price of crude oil. The world price has fallen.

TMI: I get a sense from the people I speak to at Petronas that they are not happy about the pressure being applied on them.

Ku Li: Well, the government has no money (chuckles). Basic. I’m told that some of the contracts awarded prior to this, are being delayed because payment has not been made, because the government has to reschedule the repayment of the contract work.