Malaysia’s oil future hinges on Petronas vs Sarawak
Petronas wants to settle once-and-for-all the issue of who has the rights over the oil and gas resources in the country. What prompted it to seek a declaration from the Federal Court?
SIX DAYS after former prime minister Datuk Seri Najib Tun Razak announced the dissolution of Parliament, Petroliam Nasional Bhd (Petronas) received a letter from the Attorney General (AG) of Sarawak, which it knew it had to act on.
The letter effectively aimed to relieve Petronas as the undisputed guardian of oil and gas (O&G) resources in Malaysia and its powers to be shared with the state government-owned Petroleum Sarawak Bhd (Petros).
Officials familiar with the matter say the biggest fear for Petronas was that its role as the authority for any O&G exploration works would be compromised not because of inadequate laws, but the weak political strength of the federal government.
“But the change in the political landscape after May 9, where the shift in power moved to Pakatan Harapan, gave fresh hope that Petronas has an even chance to allow the courts to determine who is the guardian of all O&G resources in the country.
“The state based its case around the Sarawak Oil Mining Ordinance (OMO), while Petronas is anchoring its case on the Petroleum Development Act 1974 (PDA). Under Pakatan, the mantra is to follow the rule of law, which is good for all parties,” says the official.
On April 13, the letter from the Sarawak AG stated that Petronas would deal with Petros on all matters pertaining to the extraction of O&G resources effective July 1.
It officially positioned Petros as the sole authority to issue licences and permits on all upstream O&G activities carried out in the state.
Hence, Petronas, its sub-contractors and partners in the production-sharing contract ventures are to work with Petros in the extraction of O&G resources in the state with the most amount of reserves in Malaysia.
“When the letter came, Petronas was expecting the worst because over the past five years, it had lost many battles to the Sarawak state government. This was largely because the federal government was weak and did not provide Petronas with ‘air cover’ when it came to matters dealing with Sarawak,” says an official close to the matter.
To the international O&G world, the letter from Sarawak effectively was a blow to the standing of Petronas as the sole authority of O&G resources in the country.
The national oil company faces the daunting prospects of explaining to oil majors such as Shell, Murphy Oil, Mubadala Oil & Gas, Total and Nippon Oil that they have to go through one more layer – Petros – for any type of work they are going to undertake in O&G ventures in Sarawak.
In the past few years, Petronas president and chief executive officer Tan Sri Wan Zulkiflee Wan Ariffin never hid the fact that the company was getting uncomfortable with the situation in Sarawak. He had the view that the practice in most countries was for a single body to be the sole authority for O&G resources.
In this respect, Petronas has always anchored on the PDA that came into effect in 1974, vesting it as the sole authority for all upstream O&G activities in the country. This involves exploration works and entering into contracts with international partners to mine O&G fields, whether onshore or offshore Malaysia.
In return, the states of Sarawak, Sabah and Terengganu, which have O&G resources, receive royalties amounting to 5% from Petronas.
The absolute amount received by these states depends on the quantum of O&G resources extracted from the state. For instance, between 1978 and March 2000, Terengganu received RM7.13bil in royalties. Global oil prices averaged US$20 per barrel then.
In a legal suit between Terengganu and the federal government, it was disclosed that the latter had offered to pay the state RM1.67bil for the period from March 2000 to 2009, while the state wanted RM2.79bil. The matter was settled out of court.
GE14 a turning point?
Petronas vice-president and group general counsel Maliki Kamal Mohd Yasin wrote back to the Sarawak AG stating that it disagreed with the assertion of the state requiring it to get licences and permission from Petros to embark on any work starting from July 1.
It is learnt that Maliki’s argument was anchored on the PDA that vested all rights to upstream O&G resource activities to Petronas.
Maliki’s letter was sent on May 22, just two weeks after Malaysia saw a turning point in its political landscape.
Sarawak, which was the king maker in the previous administration under the Barisan Nasional with 25 seats in Parliament led by Najib, no longer held that precious position. Sarawak’s Barisan won only 19 seats in the 14th general election (GE14) and is facing a different federal government in the form of Pakatan.
The new federal government does not need to depend on Sabah and Sarawak to control Parliament.
The Pakatan coalition, led by Prime Minister Tun Dr Mahathir Mohamad, has more than 112 Parliamentary seats in Peninsular Malaysia and does not have to depend on allies from Sabah and Sarawak to form the government.
The political shift is viewed as something that works in favour of Petronas.
Whether by sheer coincidence or design, in the first week of June, Petronas filed a suit seeking a declaration that it is the sole governing authority for upstream O&G activities in Malaysia for onshore and offshore fields.
Petronas also wants the courts to declare that the PDA supercedes the Sarawak OMO, the law that the state has used as its basis for setting up Petros as the sole authority for O&G activities in Sarawak.
It is not hard to fathom why Petronas wants a decision in determining who controls the O&G resources in Sarawak as soon as possible.
Starting from July 1, the function of Petros as the sole issuing authority for all licences and approvals for O&G activities in the state is to kick off. Petronas would be deemed illegal if it operates in Sarawak without getting the approval from Petros.
The suit, which is to be heard on July 12, will consequentially determine if the Sarawak state assembly has any standing to preside on matters regarding the upstream activities of the O&G industry.
However, when it comes to matters pertaining to Petros, the state Pakatan and Barisan parties seem to have a similar stance.
Towards this end, Sarawak Parti Keadilan Rakyat vice-chairman See Chee How has already stated that the state cannot afford to lose the case against Petronas.
However, the federal government has already stated that it would manage the country based on the rule of law. On this score, Dr Mahathir has already said that the Petronas case is something that the company has taken up and that it would abide by the decision of the court.
Landmark case
The case between Petronas and Sarawak will be an interesting landmark because it sets the stage for other states such as Sabah and Terengganu to set up their own version of “Petros”. In fact, Sabah already has a similar set-up but it is not active.
As for Terengganu, the state government will directly get oil royalties from Petronas after 18 years. And ironically, it is coming from the same Prime Minister who had stopped payments to the state after it fell into the hands of PAS in 1999.
After Barisan lost Terengganu to PAS in the November 1999 GE, Dr Mahathir channelled the payments to a federal government-owned entity. The payments stopped in March 2000.
Payments were made through a federal government entity and was known as Wang Ehsan. It continued until 2009 when Barisan regained the state.
The utilisation of funds between 2004 and 2008 was said to be one of the reasons that led to the ouster of Datuk Seri Idris Jusoh as Mentri Besar of Terengganu. He was replaced with Datuk Seri Ahmad Said after the 2008 GE.
During Ahmad Said’s tenure, one of the proposals for the utilisation of the funds in
a supposedly transparent manner led to the birth of 1Malaysia Development Bhd or 1MDB – the fund that is subject to a massive investigation at domestic and international levels.
Since 1974, when the PDA came into effect, Petronas has been managing the resources. It has a monopoly and is the sole authority to go to for any investor get a piece of the action. Unlike wanting to state-owned petroleum companies such as Pertamina of Indonesia, Petronas has been handling the contracts well
However after 44 years, the states, especially Sarawak and Terengganu, have established many companies and employed people with vast experience in managing O&G resources. It is only natural that they would want a bigger role to play
However under the Pakatan government, Sabah and Sarawak are to get 20% of the royalties instead of 5%. That itself is a lot of money to handle – running into billions. As we have seen in Terengganu, the handling of the royalty money from Petronas itself is a full-time job. Although the current case only involves Petronas and Sarawak, the implications are wide-ranging.
The courts will decide once and for all who controls the O&G resources. This decision will come in an environment where nobody has any room to cast doubts if there were hidden hands behind any court judgements
A decision either way will have a major impact on the O&G industry in the country.