Petronas formation may be unconstitutional, says law professor

Thomas replies to a question from the floor. On the right is Shad. — Picture by Jack Ooi

By Adib Zalkapli - The Malaysian Insider

KUALA LUMPUR, March 20 — National oil firm Petronas could be unlawful as its founding law was approved before it signed agreements with all the states, law professor Datuk Dr Shad Saleem Faruqi said today.

He also explained that according to the constitution land belongs to the states, which complicates the provision in the agreement surrendering control of petroleum found onshore under the Petroleum Development Act 1974.

“I think there are some aspects of the Petronas Act that is unconstitutional,” Shad told a forum on oil rights.

Under the agreements signed in the mid-1970s all state governments were promised cash payment or royalty of five per cent for petroleum extracted onshore or offshore in return for surrendering their control of petroleum resources to the national oil company.

Shad also pointed out that the Act was passed before all the states had signed the agreement.

“The constitution says when you take somebody’s property you have to pay adequate compensation,” said Shad.

Lawyer Tommy Thomas, who represented the Terengganu government in its demand for oil royalty, however said it would be a disaster if the Petroleum Development Act is declared unconstitutional.

“The first problem with that argument is Petronas becomes illegal,” said Thomas, adding that no party has brought the question to court.

“If the court rules PDA to be unconstitutional, I think it will be a tragedy,” he said.

Tengku Razaleigh also spoke at the forum.

Thomas also pointed out that all 13 states have agreed to the agreement.

“To me the PDA is a wonderful example of federalism,” he added.

Thomas is also currently advising the Kelantan state government to demand for oil royalty from Petronas.

Today’s forum, “Oil Royalty: A Constitutional Right?” was organised by the Bar Council to discuss the constitutional aspect of the oil royalty payment to petroleum-producing states.

Gua Musang MP and Petronas founding chairman Tengku Razaleigh Hamzah and lawyer Datuk Cecil Abraham also spoke at the forum.

Kelantan is currently demanding the federal government pay the five per cent royalty for oil extracted off its shore.

But Putrajaya has maintained that the East Coast state is not entitled to the payment as the oil and gas are extracted from waters that are beyond the three-nautical mile limit prescribed as territorial waters under Malaysia’s Emergency Ordinance (Essential Powers) No. 7, 1969.

The federal government has instead promised to pay goodwill payment or “wang ehsan” through its agencies in the state.

Terengganu also suffered a similar fate in 2000 when the federal government ordered the oil royalty payment to the state to be stopped after PAS took over the government a year earlier.

But the royalty payment to Terengganu was reinstated early last year.