This article first appeared in The Edge Malaysia Weekly on March 20, 2023 - March 26, 2023

THE devolution of power over Sarawak’s oil and gas (O&G) resources has always been a matter of paramount importance when it comes to the state’s discussions with Putrajaya in pursuit of its rights under the Malaysia Agreement 1963 (MA63). With these rights, Sarawak — which has more than 60% of Malaysia’s gas reserves and close to 30% of its crude oil reserves — can reap optimum benefits from its natural resources to accelerate its planned development in the new economy.

Premier Tan Sri Abang Johari Tun Openg, popularly known as Abang Johari, said it was his duty to continue the efforts of the late chief minister Tan Sri Adenan Satem to reclaim Sarawak’s rights under MA63 that had “eroded” over the years. While Adenan was the first Sarawak leader to bring the federal government to the negotiating table on MA63, it will go down in the annals of history that Abang Johari is the first to bring national oil company Petroliam Nasional Bhd (Petronas) to court.

The legal tussle between the Sarawak government and Petronas arose from differences over whether the latter needed to pay when the State Sales Tax (SST) was implemented in the Land of the Hornbills (Bumi Kenyalang).

To recap, the Sarawak government made it mandatory for all O&G industry players operating in the state to be licensed under its Oil Mining Ordinance 1958 (OMO) and Gas Distribution Ordinance 2016 (GDO) from July 1, 2018. The state then challenged the Petroleum Development Act 1974 (PDA) — the main legislation governing the Malaysian O&G industry, which also established Petronas — calling the PDA irrelevant in the state as it had not been endorsed by the state legislative assembly.

Sarawak began imposing an additional 5% tax on all petroleum products in the state starting January 2019, but Petronas did not pay the amount. In response, Sarawak filed a RM1.3 billion civil suit against the national oil firm.

According to Petronas’ plea in its defence, the company need not pay any other taxes, such as SST, to the Sarawak government because the PDA states that Petronas is the regulator of all oil and gas assets in the country, petroleum income taxes are already paid to Putrajaya, and Sarawak’s oil and gas assets had been vested in Petronas along with cash payments made to the state since 1976.

In 2020, Petronas withdrew its appeal over its failed judicial review application against the Sarawak government and the state’s Comptroller of SST pertaining to the sales tax at the Court of Appeal. Sarawak also withdrew its cross-appeal.

With the SST, even without additional oil royalty, Sarawak saw a sharp rise in oil and gas revenue collection to RM4.82 billion in 2020, from just RM138 million in 2019. Surpluses for the state ballooned from RM300 million in 2020 to RM1 billion in 2022 on the back of rising oil prices.

To understand how Sarawak came this far, it is pertinent to note certain legalities that have been instrumental in determining the state’s rights and power over O&G resources in the past and future.

Sarawak has a long history in O&G, from the first oil mining in 1910 under the Brooke regime’s Shell Concession Order to the Oil Mining Ordinance 1958 (OMO) and the 1969 Emergency Oil Mining Ordinance (see infographic).

Currently, in the regulation of O&G production, all players — including Petronas — must deal with only state-owned Petroleum Sarawak Bhd (Petros) to produce or extract O&G from beneath land within the state boundaries.

Under the state’s direction, Petros will then enter into mining and production sharing agreements with Petronas and other major players. Petros works alongside Petronas, with certain statutory powers conferred by the OMO to the State Minerals Management Authority (SMMA) delegated via statutory instrument to Petros.

Another milestone was the regulation of gas distribution under the Gas Distribution Ordinance 2016 (GDO), passed pursuant to legislative powers conferred to the Borneo state by the Yang di-Pertuan Agong under Article 95C of the Federal Constitution.

Noting that the PDA was passed under the 1969 Emergency Proclamation (put in place following the May 13 racial riots that year) — which was then lifted in 2011 (even though parliament had reconvened in 1970) — the Sarawak government raised the question as to whether the PDA remained valid after 2011. Further, the PDA does not overrule the OMO, which states that only Sarawak has the right to issue mining licences for oil production.

Section 2, read with sections 6 and 8 of the PDA, confirms that all industry players must comply with the OMO and other state laws, including the Land Code for Sarawak, regarding land use and occupation of the state. Under section 8 of the PDA, only the Petroleum Mining Act 1966 (except section 14 thereof) is not applicable to Petronas. Section 14 of the Petroleum Mining Act 1966 (which is no longer applicable to Sarawak) requires Petronas to seek permission to use and occupy land needed for its activities.

Thus, the state’s defence is that Petronas, not being exempt (by the PDA) from compliance with the Land Code of Sarawak, must have licences or leases to use and occupy land, including land on the continental shelf, to produce O&G, in accordance with the land code. Under Item 2(c) of the State List (List II) in the Ninth Schedule of the Federal Constitution, Sarawak has the constitutional authority to issue exploration and prospecting licences and mining leases for petroleum (including natural gas), onshore and offshore.

As such, the Sarawak government issued the mining leases to Petros, thus vesting the mining rights in the state-owned company, which would then work with Petronas and other players on the drilling of O&G in the areas covered by the mining leases.

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