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Examining Kelantan’s oil royalty woes

THE tussle over whether Kelantan should be paid oil royalty is yet another example of politicians’ partisan childishness in their public discussion of issues. Instead of laying out the facts and law objectively and comprehensively, our politicians seem more focused on outdoing each other, leaving the public in a haze of rhetoric and factional discourse.

There are the arguments against Kelantan, such as:

“Kelantan isn’t entitled to oil royalties because the oil is drilled ‘suprastate‘, outside state boundaries.”
“Kelantan is only entitled to oil found within three nautical miles from its shores.”
“Kelantan can’t claim for oil in the exclusive economic zone because it is not a country.”

And then there are the arguments for Kelantan:

“The offshore oil belongs to Kelantan because this was agreed in 1974 by Tun Abdul Razak Hussein, Malaysia’s second prime minister.”
Kelantan is entitled to royalties from all the oil drilled by Malaysia off its shores just as Terengganu, Sabah and Sarawak are.”

The arguments on both sides go on and on. But amid all the political bickering, pertinent questions remain unanswered. What exactly are Malaysia’s international maritime borders for oil exploration? Are states entitled to royalty for oil found up to the limits of those borders? What law provides for this? What are the maritime borders between each state? What law delineates those borders?

Maritime law 101

Malaysia’s territorial waters were clearly defined when it signed the United Nations Convention on the Law of the Sea (Unclos) in 1982. Territorial waters extend 12 miles from a nation’s shore, and the nation has full sovereignty in these waters over matters such as immigration and customs.

Beyond a nation’s territorial waters lies its exclusive economic zone (EEZ), which extends for 200 nautical miles. A country has exclusive rights to the resources found within this area, including oil.


Territorial waters (Pic by historicair / Wiki commons)

It appears that when Malaysia signed Unclos in 1982, no concurrent law was passed to determine each state’s maritime borders within the new treaty definition. There is also no statute laying out clearly whether the resources in the EEZ are federal or state.

Kelantan and all other Malaysian states surrendered their oil exploration rights onshore and offshore to Petronas in 1974 in exchange for royalty payments. The Petroleum Development Act (PDA) is clear on that point. However, the problem arises because the legal definition for what “offshore” means to Malaysia changed when Unclos came into force. This prompted the filing of Opposition Leader Datuk Seri Anwar Ibrahim’s 1 Dec 2009 private member’s bill to clarify what offshore means.

Spurious arguments

Before 1982, what constituted territorial waters differed from country to country. Some claimed three nautical miles, others 12, and a few 200. Since Unclos, this has been fixed at 12 nautical miles.


Nazri Aziz
It is therefore misleading for Prime Minister Datuk Seri Najib Razak and Minister in the Prime Minister’s Department Datuk Seri Nazri Aziz to apply a 1969 Emergency Ordinance on Kelantan’s situation today. The ordinance stated that territorial waters only applied to three nautical miles from the state’s shore. However, territorial waters were still a nebulous concept at that time. The ordinance also named specific acts to which the three-mile definition of territorial waters would apply. Obviously, none of those acts was the PDA, which did not exist at that time.

It is also spurious of Nazri to say that the EEZ only applies to countries, and therefore Kelantan cannot make any claims. Unclos only binds Malaysia in relation to other countries. This is why it signed a Joint Development Agreement with Thailand in relation to parts of Malaysia’s EEZ off Kelantan’s shores which overlap with Thailand’s EEZ.

Unclos, however, doesn’t deny a state’s internal claim for resources extracted from its land. The fact that Kelantan is not a country doesn’t stop Malaysia from legislating that the EEZ is within state land or otherwise. Other federal nations such as the United States, Canada and Australia have legislated or signed agreements to regulate these issues. The US federal government has in fact sued several of its states over the federal-state maritime border.

Fair distribution

To resolve the Kelantan oil royalty issue, the federal and state governments need to map out where the borders fall in relation to federal and state land offshore. This needs to be achieved through open discussion and an objective examination and consideration of history and the applicable law.

Unless there are legitimate explanations to justify any differential treatment, any agreement on the division of federal-state land offshore should be applied uniformly across all states.


(Pic by Dawn Allwyn / sxc.hu)
If the EEZ is not state land as claimed by some politicians, then Petronas should stop paying royalties to Terengganu, Sabah and Sarawak unnecessarily for oil drilled in this area. If this seems unfair, then the federal and state governments need to sit down together, hammer out an agreement and pass the relevant laws to clarify each state’s maritime borders.

Politicians cannot just spew out a few laws and figures to the public and expect them to be satisfied and go away. This is not a neighbourhood playground dispute between children. This involves billions of petro-ringgit and the fair distribution of the nation’s resources. There needs to be reasoned and sound arguments based on facts and law, explained objectively and tactfully for the public to understand. Is that too much to ask? At the moment, it seems that it is.


Ding Jo-Ann knows a lot more about maritime law now than she did in previous weeks.

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9 Responses to “Examining Kelantan’s oil royalty woes”

  1. Uzebek65 says:

    You left out a very important point. The federal government has agreed to give the 5% to Kelantan. Every ringgit will be spent in Kelantan. The issue here is not about the laws. It is about politics. The Kelantan governemnt wants full jurisdiction over how it is spent while the federal government has guaranteed that it will spend all the money in Kelantan and all the projects will only be approved if Kelantan government has endorsed it.

  2. Sam says:

    This article is like throwing pearls to swines. Barbarians do not care about the law and Umno is barbarian.

  3. scarecrow says:

    Could you please enlighten us on the position of Singapore with regard to its territorial waters given that Pulau Batu Putih now belongs to them.

    On another note, does Malaysia have a right to claim anything found in the EEZ since Nazri Aziz said EEZ is “not a country”. I believe Malaysia has a right to this EEZ by virtue of Kelantan’s territorial waters which would indeed look strange for Malaysia if it did not belong to Kelantan in the first place.

    Do we have to surrender our rights in the JDA now that the government has confirmed this area is not Kelantan’s. Perhaps it belongs to Thailand altogether.

    Lastly, since Petronas is a party to this agreement, could Petronas please clarify.

  4. PM says:

    The issue here is not about fairness, and keeping to contractual agreement between the state and federal government. It is really about the Umno-BN government using underhanded and unconstitutional tactics to undermine a democratically-elected state government, which happens to be a [federal] opposition party.

  5. siew eng says:

    Edifying.

    As for wasting pearls, Sam – the target are not the “swines” and “barbarians” (an insult to both to be compared to the unethical BN government) but the citizens, consumers, taxpayers, voters…who will now know who the devil in this deal is and act appropriately come the next general elections :)

  6. drill says:

    Why does the Kelantan state not start oil exploration, and then pass some royalties to the federal govt for its oil revenue, rather than waiting for something impossible and time wasting like bickering with the feds.

  7. Is there any similarity with oil drilled off the coasts of Sarawak?

  8. Fairisfair says:

    It is absurd to claim that the EEZ belongs to the federation and not the state on which this EEZ abuts. Can the federation exist without its constituent states? One should not forget that the federation is “created” by all the states agreeing to come together to form it. If all the states (which were sovereign before they agreed to form the federation) were to secede and revert back to their previous status as sovereign states, does the federation still exist?

    Having allowed the centre to manage their assets in the form of the EEZ, how can the centre now claim ownership of these assets? It is in recognition of this right of the constituent states that the PDA came about whereby the states agreed to transfer this right to the centre. If the centre can now arrogate these rights to itself why then was there the need to have the PDA in the first place. The centre’s action not only smacks of arrogance and disregard for the sanctity of contracts, it is outright thievery. The inconsistent manner in which the centre treats the different oil-producing states shows that to the BN govt politics override moral ethics. Any wonder why foreign investors are shunning Malaysia as a country?

  9. Ding Jo-Ann says:

    @scarecrow

    The ICJ judgment only determined that Pulau Batu Puteh belongs to Singapore. It specifically mentioned that it was not asked to draw the maritime borders of the two countries as a result of its determination. For this reason, the ownership of South Ledge, which lies in an area where Pulau Batu Puteh and Middle Rocks territorial waters overlap, was not determined by the ICJ. As far as I’m aware, negotiations were underway to delineate the maritime boundaries following the decision.

    @Fairisfair

    In several federal countries, the federal government does actually claim the resources in the EEZ, either by law or by agreement with the states.


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