Whether Kelantan has the right to claim oil royalties from Federal Government as enumerated in the Assignment Deed.

IN1975, an agreement was signed between the Kelantan Chief Minister of the time Datuk Mohammad Nasir, and the Chairman of Petronas, Tengku Razaleigh Hamzah. According to the terms of the agreement, Kelantan was to receive oil royalties of 5 percent a year biannially, for any oil found in Kelantan or her coastal areas. In return, Kelantan grants Petronas to exclusive rights to "petroleum whether lying onshore or offshore of Malaysia".


As to the issue arises here is whether Kelantan has the right to claim oil royalties from Federal Government as enumerated in the Assignment Deed. The question arises put so much legal complication and it is trans-border many relevant statues namely Petroleum Development Act 1974, Petroleum Mining Act 1966 and requires legal interpretation on some provisions in Federal Constitution. Being the Supreme Law of the Land, any law or any agreements enacted inconsistent with Federal Constitution shall be void. Since, Malaysia is a federation of 13 states, the division of powers between two level of governments (Central government and State government) are the most important feature in Federal Constitution.




Relevant with the issue, Article 76 gives powers to two level of governments accordingly set out in Schedule Ninth. 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
• Gas and gasworks, production and distribution of power and energy
• Foreign and extra-territorial jurisdiction
• Treaties, agreements and conventions with other countries and all matters which bring the Federation into relations with any other country

As for the State Government:

• 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.

It is clear, from the Schedule, Peninsular Malaysia states has the constitutional right 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. However, owing to the fact, exploration of oil and gas is approximately 150 km from Kota Bharu and beyond the territorial water of Kelantan. Relying to this, Emeritus Professor Dr Shad Saleem Faruqi concludes Kelantan has no constitutional right to regulate it and to receive compensation for it.

He further argued given the Agreement Deed to support Kelantan rights over royalties will render as unconstitutional and void under the doctrine of severability (the bad parts of the law being severed leaving the good parts intact) as the Assignment by Kelantan gives to Petronas the ownership of all petroleum “whether lying onshore or offshore of Malaysia” was an overstatement and Kelantan has no rights to what lies off the shores of the whole of Malaysia. Indeed, it is the rights of Federal Government guaranteed by Federal Constitution that extra territorial operations are in their 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. 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.

Current action

Kelantan state government is owed between RM850 million and RM1 billion from oil revenue royalties from the central government according to the Petroleum Act 1974. In 2009, the central government offered 'compensation' or Wang Ehsan, a fraction of the sum actually owed. Discrimination of Kelantan on this matter has lead the state government considering action in the International Court of Justice (ICJ).

Support for Kelantan and the local government in defiance of the central government includes the group Kelantan Peoples' Movement Demanding Petroleum Royalties or Gerakan Menuntut Royalti Petroleum Rakyat Kelantan (GMR).