KUALA LUMPUR: The Terengganu government has dropped its long-standing legal battle with national oil corporation Petroliam Nasional Bhd (Petronas) and the federal government over unpaid oil royalty payments amounting to several billion ringgit.

In response to queries from The Edge Financial Daily, Petronas said the Terengganu government had withdrawn its law suit on March 21 in “respect of the payment of oil and gas royalties”.

The oil corporation, Malaysia’s only Fortune 500 listing, declined to provide details of the settlement.

“We are not in a position to explain the settlement terms as these are under the purview of the federal government and the Terengganu government,” Petronas said.

Terengganu government legal adviser Datuk Noorbahri Baharuddin declined to comment for this article. One senior Terengganu government official, who spoke on condition of anonymity, said several details of the settlement are being ironed out with the Attorney-General’s Chambers.

The out-of-court settlement will end more than 11 years of legal wrangling that has squeezed Terengganu’s finances. But there are other repercussions, especially for Petronas, which is locked in a separate legal battle with the neighbouring Kelantan state over unpaid royalties for oil and gas, corporate lawyers and oil industry executives said.

“There will be pressure on the (federal) government and the state to disclose the details of the settlement and how the payments due to the state under the royalty payments were spent,” said one senior Kuala Lumpur-based lawyer who has been closely tracking the Petronas-Terengganu dispute.

Petronas was incorporated in 1974 to own and manage the country’s oil and gas reserves. Shortly after, the corporation signed separate profit-sharing agreements with the 13 states that set out uniform terms requiring it to pay 5% in annual royalties for all oil and gas discovered in the respective territories and sold by Petronas. It also signed a separate agreement with the federal government for the payment of 5% in royalties and other revenue in the form of dividend payments and taxes.

Oil producing states such as Sarawak, Sabah and Terengganu have been chief beneficiaries.

Petronas’ troubles with Terengganu surfaced shortly after the state fell into Opposition control in the 1999 state election. A year later, then prime minister Tun Dr Mahathir Mohamad ordered Petronas to rescind oil royalty payments in September 2000 on the grounds that the federal government didn’t have confidence in the ability of the state government led by Parti Islam SeMalaysia (PAS) to manage the funds.

The state’s oil wealth was channelled back through so-called goodwill payments or wang ehsan, which the opposition leaders and several government politicians have argued were mismanaged and directed to prestige projects like the annual Monsoon Cup and the Crystal Mosque.

PAS filed suit in the High Court in March 2001 insisting that the federal government’s decree to stop the royalty payments was illegal because its share of the 5% was based on an exclusive agreement between the oil company and the state. The case never proceeded very far in the court and in early 2009, the federal government decided to reinstate the oil royalty payments to the state, which is now under the control of the Barisan Nasional coalition.

But the haggling didn’t end. Both parties have not been able to reconcile how much the northeastern state should have received during the nine years when the oil royalty payments were suspended. In the negotiations the state government demanded compensation amounting to RM2.8 billion and rejected the federal government’s offer to pay the state RM1.7 billion.

The state received a total of RM7.13 billion for the 22-year period ended March 2000 when the federal government ordered Petronas to halt the semi-annual royalty cheques.

During this period, global oil prices hovered just over US$20 (RM61) a barrel. Over the last six years alone, oil prices have averaged US$87 a barrel.

Political analysts said the state and the federal governments are likely to come under pressure to disclose a full account of the royalty payments and the nature of the settlement in coming weeks.

In August 2010, the PAS-led Kelantan government filed suit against Petronas for failing to make oil royalty payments for oil and gas extracted within its territory, including the overlapping areas in the seas of Kelantan-Thailand, Kelantan-Vietnam and Kelantan-Terengganu.

The state has been demanding RM800 million in royalties for each year since 2005.

This article appeared in The Edge Financial Daily, April 23, 2012.