Oil claim and the Constitution
REFLECTING ON THE LAW
By Prof Shad Saleem
Farudishadsaleem@Yahoo.Co.Uk
The constitutional rights of states in the peninsula are confined to fees for permits and licences for extraction of petroleum from their land and territorial waters.
However, there are moral and political issues at play here.
DOES Kelantan have a constitutional right to the oil and gas being extracted off its shores?
This question raises engaging issues of constitutional law, of federal-state relations, and of the interpretation of the Petroleum Development Act 1974, the Petroleum Mining Act 1966 and the “Assignment Deed” between Kelantan and Petronas dated May 9, 1975. If one were to believe Tengku Razaleigh Hamzah, the highly respected Kelantan Prince and former Petronas chief and Finance Minister, the answer is clearly in the affirmative.
If one were to read the 1975 “Assignment Deed” signed respectively by the then Kelantan Mentri Besar Datuk Haji Mohamad Nasir and Tengku Razaleigh, then Petronas chairman, the answer then is in favour of Kelantan.
The Assignment Deed states that Kelantan grants in perpetuity to Petronas exclusive rights to “petroleum whether lying onshore or offshore of Malaysia”.
In return Petronas, in a separate agreement, promises a yearly sum amounting to “5% of the value of the petroleum won and saved in Kelantan and sold by Petronas”.
Unfortunately for Kelantan, the matter cannot end with these two agreements.
There is a supreme Constitution in Malaysia with a federal-state division of legislative and financial powers.
The constitutional allocation cannot be altered except by constitutionally permitted procedures and amendments.
Even mutual agreements cannot override the constitutional scheme of things because jurisdiction is a matter of law and not of consent or acquiescence.
Federal powers:
In Schedule 9,
List I of the Federal Constitution, the following topics are assigned to the Federal Government:
Para 1(a) and 1(b).
Peninsular Malaysian States:
When it comes to Peninsular Malaysian States, the following matters fall in State hands:
From the foregoing, it follows that the constitutional right of Peninsular Malaysian states is confined to fees for permits and licences for extraction of any petroleum that is derived from their land and territorial waters.
Anything beyond territorial waters, e.g. on the Continental Shelf, is entirely in federal hands.
All gas is in federal hands.
From what is known the present extra-territorial exploration of oil and gas is approximately 150km from Kota Baru. Sadly, Kelantan has no constitutional right to regulate it and to receive compensation for it.
Assignment Deed:
What about the explicit provisions in the Assignment Deed of May 9, 1975 between Kelantan and Petronas?
The Assignment Deed grants to Petronas all rights to petroleum “whether lying onshore or offshore of Malaysia”. With all due respect to the drafters of the 1975 Assignment Deed, it contains serious legal defects and must be interpreted under the “doctrine of severability” to sever or separate the legal from the illegal.
This doctrine is employed routinely whenever legislation is questioned as unconstitutional e.g. s. 298A was severed from the Penal Code in Mamat Daud v Government (1988). See also Murugesan v Krishnasamy (1958) on the severing of illegal promises in an agreement for sale and purchase of land. The Assignment
Deed contains the following defects.
First, it is unconstitutional.
The Assignment by Kelantan gives to Petronas the ownership of all petroleum “whether lying onshore or offshore of Malaysia”. Obviously this was an overstatement.
Kelantan has no rights to what lies off the shores of the whole of Malaysia.
Furthermore, under the Federal Constitution, extra territorial operations are clearly in federal hands.
States cannot transfer rights over something they do not own.
In the case of Kelantan and any other Peninsular Malaysian State, the Deed should have been worded to refer only to onshore petroleum.
Second, the Assignment Deed is ultra vires the agreement between Kelantan and Petronas dated May 9, 1976.
The Agreement is quite clear that Petronas shall pay “5% of the value of the petroleum won and saved in Kelantan”.
There is no mention of offshore petroleum as indeed there cannot be under the Federal Constitution’s division of powers between Federal and state governments To make legal sense of the Assignment, it must be interpreted in such a way as to make it fall in line with the Federal Constitution, with the Petroleum Development Act and with the Principal Agreement between Petronas and Kelantan.
All references to “onshore or offshore of Malaysia” should be interpreted to mean “onshore in Kelantan”.
Equitable estoppel:
In the light of explicit provisions in the Assignment Deed signed by both sides with the concurrence of the Federal Government, can Petronas be prevented from denying its promises to Kelantan?
In administrative law, it is generally understood that a public body with limited powers cannot bind itself to act outside its authorised powers.
If it has done so, it can repudiate its undertaking.
A public authority may not vary the scope of its statutory powers and duties as a result of its own errors or the conduct of others: Brooks & Burton Ltd v Secretary (1976).
If the matter is litigated, a court is unlikely to force a public authority to comply with any illegal parts of its agreement.
Fiscal federalism:
Having noted the constitutional provision, it nevertheless needs to be said that there is more to life than law.
Besides the constitutional dimension, there are moral and political issues at play in the Kelantan claim.
Our Constitution does not show adequate concern for “fiscal federalism” i.e. an equitable sharing of the sources of national revenue between the Federal and state governments.
It is estimated that for every ringgit the Federal Government collects in tax, the states collect only 10 sen.
All West Malaysian states, therefore, have legitimate cause to seek a review of federal-state division of revenue especially in matters of income earned from minerals and mineral oils.
Such a review will require amendments to our basic law.
Till then the constitutional position is that in respect of offshore petroleum and gas, there is no legal right.
However, the Constitution permits discretionary payments. Article 109(3) permits discretionary grants for specific purposes.
Article 109(6)(b) allows payments to the State Reserve Fund. Under Article 110[3A] export duty on “mineral oils” may be shared on such terms and conditions as fixed by federal law.
Therefore, there is no need to refer to such payments by the patronising term wang ihsan.
Shad Saleem Faruqi is Emeritus Professor of Law at UiTM and Visiting Professor at USM
REFLECTING ON THE LAW
By Prof Shad Saleem
Farudishadsaleem@Yahoo.Co.Uk
The constitutional rights of states in the peninsula are confined to fees for permits and licences for extraction of petroleum from their land and territorial waters.
However, there are moral and political issues at play here.
DOES Kelantan have a constitutional right to the oil and gas being extracted off its shores?
This question raises engaging issues of constitutional law, of federal-state relations, and of the interpretation of the Petroleum Development Act 1974, the Petroleum Mining Act 1966 and the “Assignment Deed” between Kelantan and Petronas dated May 9, 1975. If one were to believe Tengku Razaleigh Hamzah, the highly respected Kelantan Prince and former Petronas chief and Finance Minister, the answer is clearly in the affirmative.
If one were to read the 1975 “Assignment Deed” signed respectively by the then Kelantan Mentri Besar Datuk Haji Mohamad Nasir and Tengku Razaleigh, then Petronas chairman, the answer then is in favour of Kelantan.
The Assignment Deed states that Kelantan grants in perpetuity to Petronas exclusive rights to “petroleum whether lying onshore or offshore of Malaysia”.
In return Petronas, in a separate agreement, promises a yearly sum amounting to “5% of the value of the petroleum won and saved in Kelantan and sold by Petronas”.
Unfortunately for Kelantan, the matter cannot end with these two agreements.
There is a supreme Constitution in Malaysia with a federal-state division of legislative and financial powers.
The constitutional allocation cannot be altered except by constitutionally permitted procedures and amendments.
Even mutual agreements cannot override the constitutional scheme of things because jurisdiction is a matter of law and not of consent or acquiescence.
Federal powers:
In Schedule 9,
List I of the Federal Constitution, the following topics are assigned to the Federal Government:
- Except as to State rights over permits and licences, the Federal Government has rights over development of mineral resources, mines, mining, minerals and mineral ores, oils and oilfields, petroleum products, safety in mines and oilfields: Para 8(j).
- Gas and gasworks, production and distribution of power and energy: Para 11(c).
- Foreign and extra-territorial jurisdiction: Para 1 (g).
- Treaties, agreements and conventions with other countries and all matters which bring the Federation into relations with any other country:
Para 1(a) and 1(b).
Peninsular Malaysian States:
When it comes to Peninsular Malaysian States, the following matters fall in State hands:
- Land: Schedule 9 List II, Para 2(a). Under the Interpretation Acts, 1948 and 1967, Section 3, land includes “the surface of the earth … all substances therein… all vegetations and other natural products… whether on or below the surface… and land covered by water”. The territorial waters of Kelantan will come within the definition of “land covered by water”. Territorial waters are defined by Section 4(2) of the Emergency (Essential Powers) Ordinance No 7, 1969. Subject to some exceptions, they refer to three nautical miles.
- Revenue from lands: Schedule 10, Part III Para 2.
- In addition to the income from land, one notes that in Article 110[3A] there is provision for discretionary payment on such terms and conditions as maybe prescribed by or under federal law of the export duty on “mineral oils” produced in the state. Petroleum comes within the meaning of “mineral oils” under Section 10 of the Petroleum Development Act. Sabah & Sarawak: In addition to the rights of other states, Sabah and Sarawak enjoy some special sources of revenue.
- Schedule 10, Part V, Para 1 assigns import duty and excise duty on petroleum products to Sabah and Sarawak.
- Schedule 10, Part V, Para 3 assigns royalty and export duty on “mineral oils” totalling 10% to Sabah and Sarawak. “Petroleum”, as defined in the Petroleum Development Act, falls within the meaning of “mineral oils” and, therefore, 10% combined royalty and export duty on it constitutes part of the guaranteed revenue for Sabah and Sarawak.
From the foregoing, it follows that the constitutional right of Peninsular Malaysian states is confined to fees for permits and licences for extraction of any petroleum that is derived from their land and territorial waters.
Anything beyond territorial waters, e.g. on the Continental Shelf, is entirely in federal hands.
All gas is in federal hands.
From what is known the present extra-territorial exploration of oil and gas is approximately 150km from Kota Baru. Sadly, Kelantan has no constitutional right to regulate it and to receive compensation for it.
Assignment Deed:
What about the explicit provisions in the Assignment Deed of May 9, 1975 between Kelantan and Petronas?
The Assignment Deed grants to Petronas all rights to petroleum “whether lying onshore or offshore of Malaysia”. With all due respect to the drafters of the 1975 Assignment Deed, it contains serious legal defects and must be interpreted under the “doctrine of severability” to sever or separate the legal from the illegal.
This doctrine is employed routinely whenever legislation is questioned as unconstitutional e.g. s. 298A was severed from the Penal Code in Mamat Daud v Government (1988). See also Murugesan v Krishnasamy (1958) on the severing of illegal promises in an agreement for sale and purchase of land. The Assignment
Deed contains the following defects.
First, it is unconstitutional.
The Assignment by Kelantan gives to Petronas the ownership of all petroleum “whether lying onshore or offshore of Malaysia”. Obviously this was an overstatement.
Kelantan has no rights to what lies off the shores of the whole of Malaysia.
Furthermore, under the Federal Constitution, extra territorial operations are clearly in federal hands.
States cannot transfer rights over something they do not own.
In the case of Kelantan and any other Peninsular Malaysian State, the Deed should have been worded to refer only to onshore petroleum.
Second, the Assignment Deed is ultra vires the agreement between Kelantan and Petronas dated May 9, 1976.
The Agreement is quite clear that Petronas shall pay “5% of the value of the petroleum won and saved in Kelantan”.
There is no mention of offshore petroleum as indeed there cannot be under the Federal Constitution’s division of powers between Federal and state governments To make legal sense of the Assignment, it must be interpreted in such a way as to make it fall in line with the Federal Constitution, with the Petroleum Development Act and with the Principal Agreement between Petronas and Kelantan.
All references to “onshore or offshore of Malaysia” should be interpreted to mean “onshore in Kelantan”.
Equitable estoppel:
In the light of explicit provisions in the Assignment Deed signed by both sides with the concurrence of the Federal Government, can Petronas be prevented from denying its promises to Kelantan?
In administrative law, it is generally understood that a public body with limited powers cannot bind itself to act outside its authorised powers.
If it has done so, it can repudiate its undertaking.
A public authority may not vary the scope of its statutory powers and duties as a result of its own errors or the conduct of others: Brooks & Burton Ltd v Secretary (1976).
If the matter is litigated, a court is unlikely to force a public authority to comply with any illegal parts of its agreement.
Fiscal federalism:
Having noted the constitutional provision, it nevertheless needs to be said that there is more to life than law.
Besides the constitutional dimension, there are moral and political issues at play in the Kelantan claim.
Our Constitution does not show adequate concern for “fiscal federalism” i.e. an equitable sharing of the sources of national revenue between the Federal and state governments.
It is estimated that for every ringgit the Federal Government collects in tax, the states collect only 10 sen.
All West Malaysian states, therefore, have legitimate cause to seek a review of federal-state division of revenue especially in matters of income earned from minerals and mineral oils.
Such a review will require amendments to our basic law.
Till then the constitutional position is that in respect of offshore petroleum and gas, there is no legal right.
However, the Constitution permits discretionary payments. Article 109(3) permits discretionary grants for specific purposes.
Article 109(6)(b) allows payments to the State Reserve Fund. Under Article 110[3A] export duty on “mineral oils” may be shared on such terms and conditions as fixed by federal law.
Therefore, there is no need to refer to such payments by the patronising term wang ihsan.
Shad Saleem Faruqi is Emeritus Professor of Law at UiTM and Visiting Professor at USM
