Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin says increasing the oil royalty paid to oil-and-gas producing states to 20 per cent is not possible, as production costs are high and low-profit margins. ― Picture by Choo Choy May

KUALA LUMPUR, Dec 7 — Increasing the oil royalty paid to oil-and-gas producing states to 20 per cent is not possible, as production costs are high and low-profit margins, Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin has said.

Wan Zulkiflee, who is also president of national oil giant Petronas, explained how the company only makes a profit margin of 3.7 per cent from oil production locally, after accounting for matters such as production costs, oil royalty, and tax.

“In the past, we have tried to explain why this 20 per cent royalty is a no-go,” he was quoted saying in an interview with financial weekly The Edge.

The Edge said about 70 per cent of oil revenue is actually spent on production costs, with Wan Zulkiflee saying that such cost becomes even higher when it involves ultra-deep water production.

“This cost has increased because all the early simple reservoirs - the low-hanging fruit back in the 80s, 90s and early 2000s ― did not require as much technology as is required today.

“Today, we've got to deal with higher contaminants, higher carbon dioxide (CO2), hydrogen sulphide...Today, there are fields that are 70 per cent CO2,” he was quoted saying.

Aside from the production costs, there is also oil royalty that has to be paid to the federal government at five per cent and to state governments at five per cent, and a petroleum income tax at 7.6 per cent, which would then leave Petronas and production-sharing contractors (PSCs) with 13.4 per cent to share.

From the 13.4 per cent left, 30 per cent goes to Petronas, while 70 per cent goes to the PSC, Wan Zulkiflee said.

“Out of every US$100 (RM415), in this scheme, Petronas gets US$3.70. Not many people realise that. The respective governments get US$5 risk-free,” he was quoted saying.

Wan Zulkiflee said that a hypothetical scenario where oil-producing states get 20 per cent oil royalty would immediately show that it is not a viable arrangement for oil production projects.

“So, nobody will invest in Malaysia, and you can't have projects and you can't have more exploration and development, and production,” he said.

Ruling coalition Pakatan Harapan had in its manifesto for the 2018 election promised to increase the royalty payment to Sabah, Sarawak and other oil-producing states to 20 per cent, to enable these states to take over and fund their own development activities.