This article first appeared in The Edge Malaysia Weekly on July 29, 2024 - August 4, 2024

TO understand Sarawak’s journey to control its oil and gas (O&G) resources, previously fully overseen by Petroliam Nasional Bhd (Petronas), it is essential to recognise the legal frameworks that have shaped the state’s rights.

The devolution of power is central to discussions between the state government and Putrajaya under the Malaysia Agreement 1963, with the Oil Mining Ordinance (OMO) and the Distribution of Gas Ordinance 2016 (DGO) playing pivotal roles.

To the uninitiated, Petroleum Sarawak Bhd (Petros) was established in July 2017 to oversee O&G matters in the state. Last November, it was appointed as the sole gas aggregator under section 7A of the DGO, a role previously held by Petronas.

As the sole gas aggregator, Petros will procure, distribute and maintain the gas distribution network in Sarawak, handling all activities related to gas import, regasification, treatment, processing, transport, pipeline management, supply and retail, according to the DGO.

While there has not been any formal announcement of a definitive agreement on the transition from Petronas to Petros, Sarawak’s Minister of Utility and Telecommunication Datuk Seri Julaihi Narawi reportedly said that the parties have agreed to sign a definitive agreement by July 1. However, there still had not been any announcement on the signing at the time of writing.

Meanwhile, Petronas tells The Edge that it “understands the aspirations of Sarawak to participate actively and directly in the development of the O&G industry in the state”.

“Petronas is in discussions with the state and federal governments as well as Petros to achieve a mutual resolution on gas distribution in Sarawak. In achieving the resolution, all parties need to understand and acknowledge each other’s constraints. Petronas will continue to be a strategic partner to Sarawak to preserve a thriving and conducive investment climate in Malaysia,” it says.

In an interview, Sarawak Premier Tan Sri Abang Johari Tun Openg assures that Petros will honour existing liquefied natural gas (LNG) sale agreements between Petronas and its clients in Japan, South Korea and China — arguably its largest earnings contribution from the state, if not the country.

However, on gas sources from upcoming fields, Abang Johari stresses that Petros will set the terms, including fixing the price and volume of the gas distribution, much like “a regulator”. He describes the practice as similar to that of Petronas currently.

For these upcoming fields, Abang Johari labels the gas producers as partners. They include Petronas in the Kasawari field, Thailand-based PTTEP in Lang Lebah and Shell, whose ongoing developments include the Rosmari Marjoram field.

Recall that in May, Julaihi told the Sarawak state assembly that a definitive agreement would allow Petros to conclude gas purchase agreements with all upstream gas producers, solidifying its role as the sole gas aggregator in the state. For future LNG sales, Petronas would need to sign new contracts with Petros, especially for the LNG supply and delivery activities out of Sarawak, he added.

“With the appointment of Petros as the sole gas aggregator, Petronas shall cease all buying and selling activities of natural gas in Sarawak and transfer its natural gas distribution network and system to Petros,” he was reported as saying.

In showcasing its powers under the DGO, Petros signed its first-ever gas sale agreements (GSAs) with Sarawak Petchem Sdn Bhd and Sarawak Energy Bhd last Monday. The GSAs, signed on July 22 — the day Sarawak celebrated its 61st year of independence — provide Sarawak Petchem with gas for its methanol plant and Sarawak Energy with fuel for its power plants.

Petros says in a statement that the move aligned with its commitment to a fair allocation of Sarawak’s gas, which is currently mostly exported abroad. The “growth of Sarawak’s economy requires natural gas for power, commercial industries and industrial feedstock”, it adds.

In the statement, Petros group CEO Datuk Janin Girie says Petros expects to sign all related agreements by year end to comply with the DGO, involving 23 upstream and nine downstream players.

A source close to Petros explains: “Previously, 94% to 95% of gas was exported, with only 5% to 6% for the state’s use. Profits went to Petronas’ coffers with minimal dividends to Sarawak.

“Petros will now have to do a balancing act — to decide how much to supply to MLNG and how best to distribute the gas and diversify domestic industries. Gas will no longer be mainly for export, like in the past.”

The view is that Petronas’ gas exports will be reviewed upon expiry of existing contracts. Its LNG supply agreements with international buyers, mostly in East Asia, have varying tenures.

Its customers include South Korea Oil Refining Co (up to 700,000 tonnes per annum [tpa] until 2033), Tokyo Gas Co Ltd (up to 900,000 tpa up until 2031), Hokkaido Electric Power Co (up to 130,000 tpa until 2027) and Korea Midland Power Co Ltd (240,000 tpa until 2025).

“Despite some dissatisfaction [over Petros’ taking over], no one wants to take the issue to court and scare away investors,” says the industry veteran.

The source points to how parties have learnt from previous legal disputes between Petros and Petronas over the state’s sales tax. Such disagreements are detrimental to business, says the source.

Sarawak, which introduced a state sales tax on petroleum products in 2019, had collected RM14.7 billion under the mechanism as at October 2023.

Through Petros, Sarawak has taken the lead in the state’s onshore O&G resources, as part of a commercial settlement agreement signed between Petronas and the Sarawak government in 2020.

Petros’ first onshore field, the SK433, is the state’s first in 113 years. On top of that, the company wants more say in carbon capture projects in Sarawak.

On July 23, Petros called for bids to develop three sites for carbon capture, utilisation and storage under Sarawak Bid Round — separate from Petronas’ Malaysia Bid Round programme — with plans to close submissions by November and complete evaluation of the bids by January 2025. It aims to award contracts by April 20 next year.

Offshore O&G resources in the state are still facilitated by Petronas under the Petroleum Development Act 1974.

Petros, through its wholly-owned subsidiary Petroleum Sarawak Exploration and Production Sdn Bhd (PSEP), has acquired equity in various strategic producing assets and exploration acreages in the state. These include several production sharing contracts (PSCs) for offshore fields such as the Kumang Cluster, SK407, BDO EOR and SK307.

Additionally, PSEP holds exploration PSCs for offshore sites like SK427, SK439/SK440, SK437, SK325, SK328, SK418, DW 2A, DW 3B and DW 4E. It also has PSCs for Discovered Resource Opportunities offshore, including the Baram Junior Cluster and A Cluster.

Petros’ current responsibility includes developing and maintaining critical gas and energy infrastructure across the state, including a gas trunkline from Kidurong to the Samalaju Industrial Park. It is also developing four gas hubs in Kuching, Miri, Samalaju and Bintulu as part of the Sarawak Gas Roadmap. These hubs will centralise gas distribution, enhance access to affordable gas and create industrial investment opportunities.

According to Petros’ Janin, the roadmap and carbon capture infrastructure will drive growth, transforming Sarawak into an economic powerhouse. “These projects are expected to create over 100,000 high-quality jobs across the state,” he says. 

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