Malaysia's Sarawak to drop demand for Petronas royalty hike

By Krishna N. Das and Liz Lee
KUALA LUMPUR, Oct 30 (Reuters) - Malaysia's energy-rich
state of Sarawak will drop a demand for quadrupling royalties
paid by energy giant Petronas but is pushing for
production-sharing and other agreements, a key negotiator told
Reuters on Wednesday.
Sarawak and neighbouring Sabah possess Malaysia's most
prolific oil and gas reserves in their waters in the South China
Sea.
Their longstanding royalty demand would cost
government-owned Petronas up to $7 billion a year, according to
a rough calculation by a person aware of the matter.
Prime Minister Mahathir Mohamad said last month that his
ruling coalition's election manifesto of increasing royalties to
the states to 20% was not workable and could "kill" Petronas,
the world's third largest exporter of liquefied natural gas.
But J.C. Fong, legal adviser to the Sarawak government, said
the state accounted for two-thirds of Malaysia's total gas
production and almost a third of the oil produced, and therefore
deserves a bigger share of the Petronas pie.
"They now say they can't afford it, it will bankrupt
Petronas and all that, so of course we have to find the
alternative solutions for them to get out of this failure to
fulfil the electoral promise," Fong, a former attorney-general
for Sarawak, told Reuters.
"The alternative is a commercial solution. That does not
hurt them too much in terms of their cash flow, but allows us to
have a fairer share of the revenue and more participation and so
on and so forth."
Petronas, formally known as Petroliam Nasional Bhd
PETR.UL , is the biggest cash cow of the debt-laden federal
government and raising the royalty could have crippled its
expansion programme.
This year, Petronas has promised to invest billions of
dollars in oilfields in Brazil. Petronas, which manages Malaysia's oil and gas reserves, did
not immediately respond to questions from Reuters.
Sabah's chief minister's office also did not respond to a
request for comment on any similar discussions with the
government.
Fong said negotiations on the issue had been going on for
more than a year and a settlement could include
production-sharing and better availability of oil and gas for
industry in Sarawak.
Currently Petronas converts all the gas produced there to
liquefied natural gas and exports, Fong said.
Mahathir said at an event in New York last month that his
government was trying to work out how to give Sarawak and Sabah
"more money without undermining Petronas' own strength".
"We have agreed on many things with the Petronas management
but they can't implement because they say that they need the
clearance from the shareholder," Fong said.
"They know that if the situation is not sorted out soon
there will be some impact on foreign investments in the
industry."
The prime minister's spokesman had no immediate comment.
($1 = 4.1790 ringgit)