First published on the Fulcrum platform under ISEAS-Yusof Ishak Institute on 18 November 2024, here.
A potential legal tussle between Sarawak and Petronas has implications for Malaysia’s approach to development and for the country as a whole.
In early September, Sarawak issued an ultimatum to Petronas, Malaysia’s national oil company, to surrender all rights over the distribution and sale of liquefied natural gas (LNG) to its state-owned oil and gas company, Petros, by 1 October. Following this, reports confirmed that Petronas was mulling legal action to defend its monopoly over the country’s natural resources.
Since then, the deadline has passed with no news of legal action. Sarawak Premier Abang Johari’s office issued a statement on 24 September confirming that negotiations were ongoing between the Sarawak state government, Petronas and Petros. This would be concluded soon, the statement added, stating that all parties should abide by federal and state laws. Most recently, reports quoted the Sarawak premier as saying that Petronas has unofficially agreed in principle for Petros to be the sole gas aggregator in the state, with an official letter to follow. He also said that he is ready to go to court if any party disrespects Sarawak’s right to do so.
If true, this is a major development since ceding rights to Petros would impact Petronas’ access to LNG supply in the state. Sarawak contributes almost 90 per cent of Malaysia’s LNG exports. Moreover, Putrajaya is focused on fiscal consolidation, and petroleum-related revenue is declining. In 2009, petroleum-related revenue contributed as much as 41.3 per cent of the federal government’s total revenue. However, this has fallen to 19.6 per cent in 2024. This is projected to further decline to 18.3 per cent in 2025. Moreover, a federal concession to Sarawak may encourage other state governments to follow in Sarawak’s footsteps.
Disputes over oil and gas resources by individual states, however, are not new.
Both Peninsular Malaysia’s east coast states of Kelantan and Terengganu have a long history of this. Under the National Front (Barisan Nasional) administration in the 1990s, oil royalties contractually agreed upon as part of production-sharing contracts were denied to both state governments when they were under the rule of Parti Islam SeMalaysia (PAS). Under the Pact of Hope (Pakatan Harapan) administration in 2018, wang ehsan (goodwill grants in lieu of royalties) were transferred to both states but not in full.
The current Anwar Ibrahim administration has made similar transfers, but the Terengganu state chief minister has claimed that these amounts have only been partially received. Negotiations with the federal government are often required to obtain full transfers. This ought not to be the case since the producing states possess the right over oil royalties as enshrined in the original production-sharing contracts (PSCs).
While the Petroleum Development Act 1974 provides for Petronas’ monopoly on oil and gas exploration and extraction, it is the three-way PSCs signed by Petronas, oil companies and state governments that spell out the revenue-sharing formula. This is made up of oil royalties (5 per cent to the federal government and 5 per cent to the producing state government); cost of oil (between 50-70 per cent as cost recovery to oil companies); and profit of oil (the remaining 20-40 per cent is split among Petronas, oil companies and PITA, or profit-income tax allowance paid to the federal government). It is unclear how the revenue-sharing formula would change if Petronas cedes its LNG monopoly to Petros but this would be one key element of negotiation among all parties involved.
The demands over state natural resource autonomy come most aggressively from East Malaysia. In 2020, Sabah and Sarawak won a court case resulting in their ability to impose a 5 per cent sales tax on petroleum-related products, paid by Petronas. In 2021, regulatory power for gas supply was transferred to Sarawak and, in 2023, to Sabah. While Sarawak had the pre-existing Oil Mining Ordinance 1958, Sabah enacted the Sabah Oil and Gas Ordinance 2020 to assert its rights over oil and gas.
The verdict is still out on whether Sabah and Sarawak will eventually succeed in their bid to fully control oil and gas resources. These recent developments, however, are clear signals for stakeholders to be concerned.
Both states have rejected the Territorial Sea Act 2012, which limits their territorial waters to three nautical miles from the coast. Sabah and Sarawak dispute the 2012 Act and argue that their maritime boundary — and hence their claims to their respective resources as part of the continental shelf, vis-à-vis the Malaysian federal government — should be 200 nautical miles.
Sabah cites the colonial-era North Borneo (Alteration of Boundaries) Order in Council 1954, which details a “continental shelf… contiguous to the territorial waters of North Borneo”. The 1954 document does not state that the continental shelf spans 200 nautical miles but the Sabah government has “opined that its sea boundary should be more than 200 nautical miles”. Similarly, Sarawak says its Sarawak Land Code defines its territory as extending to the continental shelf, up to 200 nautical miles out to sea. Here, the key question is what constitutes the continental shelf. When a similar colonial-era document — the Sarawak (Alteration of Boundaries) Order in Council in 1954 — was issued, the concept of “continental shelf” was not resolved.
The Terengganu state legislative assembly has also recently rejected the Act. Its chief minister has stated that the Act infringes upon the state’s right to explore resources and generate revenue within its maritime borders. The federal government’s only response has been to issue a statement saying that “the Act is still valid and applicable” and that it is the federal government’s responsibility to ensure Malaysian waters are always protected.
Given the grave importance of natural resources and their contribution to the nation’s coffers, much more clarity and stronger communication are needed.
The verdict is still out on whether Sabah and Sarawak will eventually succeed in their bid to fully control oil and gas resources. These recent developments, however, are clear signals for stakeholders to be concerned. First, if this happens, Petronas will lose its monopoly control and access to the two states’ resources. This is important, given that they hold 70 per cent of Malaysia’s oil and gas reserves.
Second, international oil and gas players more accustomed to dealing with Petronas would have to cultivate relationships directly with Petros and the Sarawak and Sabah state governments.
Third, and most importantly, this would have implications for the approach towards development and, more broadly, for the nation as a whole. The central government has always aimed to address existing regional imbalances through financial and developmental means. If the federal government collects less revenue, this would lead to lower expenditure. If Sabah and Sarawak eventually take over policy and programmatic execution, this may be the solution to ensuring that the federal government does not assume responsibility — and therefore expenditure — of all policy matters. For example, the issue of education is being slowly devolved to Sarawak.
Malaysia is an asymmetric federation, with Sabah and Sarawak possessing significantly more state autonomy than Peninsular states. Although unlikely in the near future, given both states’ current lack of technological capacity in the sector, handing over oil and gas rights to them would be a major shift, both economically and politically. These developments should be watched closely as they may ultimately impact Malaysia’s future.
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Dr Tricia Yeoh is a Visiting Fellow at the ISEAS – Yusof Ishak Institute and Associate Professor of Practice at the University of Nottingham Malaysia’s School of Politics and International Relations.
