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11 October 2009

Scrapping the Royalty-In-Kind Programme

First off, this particular post has nothing to do with Malaysia. It has everything to do with events in a foreign land. Having said that, the question becomes, what is the "Royalty In Kind" programme? Why does it attract any attention at all? The country in question is the United States of America, and we pay attention because it involves scandals with regards to petrol companies.

On 18th September 2009, The New Republic, an online news portal, blogged about the "Royalty In Kind" programme. Here is an excerpt:

On Wednesday, the Interior Department finally terminated a program few people had ever heard of: the royalty-in-kind (RIK) system, which allowed oil and gas companies to drill in public lands and pay the government in oil, rather than cash. Over the past decade, the program, run out of an office in suburban Denver, had allowed companies to underpay the government by $10 million. But that's not why it was shut down--the tale goes well beyond ordinary waste and abuse and into the delightfully tawdry realm of sex, drugs, and graft.

Onlookers knew that the RIK system was a bad idea from the start. In the mid-1990s, oil companies saw that the royalties they owed the government were rising alongside the price of oil, and proposed that they should just be allowed to pay the government in oil to "simplify" the process--even though the proposed system would require a new, multimillion-dollar office within the Minerals of Management Services (MMS). But Alaskan Senators Frank Murskowski and Don Young, themselves the recipients of oil industry largesse, liked the idea and pushed it through.

Just like that, the government had entered the oil and gas business, collecting commodities and selling them on the open market. Even though early trial runs showed that the Treasury was making less money this way than through the old way of simply taxing mining companies--in part because the government now had assumed the responsibility of managing and marketing a natural resource--the program kept growing, while whistleblower warnings and government reports were brushed aside. Eventually, 40 percent of all royalties for drilling rights were collected in-kind, with such weak auditing that investigators called it an "honor system."
Source: The New Republic, 18th September 2009. No More Sex and Drugs in the Interior Department.

It certainly makes for interesting reading. Of note is also the link to New York Times on the issue: The New York Times, 16th September 2009. Interior to Eliminate Royalty-In-Kind Program.

As for Malaysia, I believe that petrol companies here pay in Ringgit, the common language of Malaysian banks and the favourite currency of many in the region. Of note is this extract from Malaysian site Infernal Ramblings:

According to the 2006 budget — the relevant figures can be found at the Treasury website — RM20,106 million of government revenue alone came from direct and indirect taxes on petroleum. That's no small sum, considering that the total government revenue was about RM115,561 million.

That is far from all, however. The government attributes RM35,136 million of revenue to non-tax sources, but does not itemise these sources. It states in a footnote, however, that this income includes "government commercial undertakings" and "petroleum royalties/gas cash payments".

I have no sure way to estimate the amount of petroleum royalties, but according to Wikipedia, in 2004 Petronas contributed RM25,000 million in "dividends and other revenues" to the treasury. Conservatively estimating that RM30,000 million was contributed by Petronas in 2006 (the price of oil has gone up, after all), we arrive at a figure of at least RM50,106 million worth of revenue derived directly or indirectly from petroleum — and this does not even include royalties on petroleum!
Source: Infernal Ramblings, 24th March 2007. Bleeding Petrol: Malaysia On Life Support.

In the Malaysian Treasury's 2008 4th Quarter Quarterly Updates, it was reported that:

Non-tax revenue rose to RM46.9 billion (2007: RM44.7 billion), the bulk of which was attributed to higher dividend from Petroliam Nasional Berhad (PETRONAS) and petroleum royalties.

Source: Malaysia Treasury, Quarterly Update on the Malaysian Economy – 4th Quarter 2008. Accessed: 12th October 2009.

It seems that our Malaysian government gains its royalties from oil companies in cash terms.