This article first appeared in Forum, The Edge Malaysia Weekly on December 23, 2024 - December 29, 2024

By asserting greater control over its oil and gas resources, Sarawak has forced Malaysia to confront a fundamental question: How much decentralisation is too much in a nation built on centralised governance? The recent announcement by Prime Minister Datuk Seri Anwar Ibrahim that negotiations between Sarawak’s state-owned Petroleum Sarawak Bhd (Petros) and Petroliam Nasional Bhd (Petronas) have concluded — barring a few “fine-tunings” — marks a seismic shift in the country’s fiscal federalism. These “fine-tunings” are not mere technical details; they represent the building blocks of a new framework that could reshape Malaysia’s approach to resource governance and federal-state relations.

At stake are revenue-sharing mechanisms that will decide how oil wealth is divided, operational structures that define the coexistence of Petros and Petronas, and legal harmonisation to align Sarawak’s Oil Mining Ordinance of 1958 with the federal Petroleum Development Act of 1974. These elements will not only determine Sarawak’s future but also set a precedent for how Malaysia manages its natural wealth. For decades, the federal government’s tight control over resource revenues has been central to national development and cohesion. Sarawak’s deal, however, signals a move towards decentralisation, testing the durability of the country’s centralised system.

This isn’t just about Sarawak or Petronas; it’s about Malaysia’s future as a united federation. Sarawak’s autonomy flags the frontier of decentralisation and whether this is a one-off concession or the start of a domino effect depends on how the federal government handles the fallout. If Sarawak has successfully negotiated greater control, what stops other resource-rich states like Sabah, Kelantan or Terengganu from making similar demands? Precedent in a federal system can spread like wildfire. Armed with Sarawak’s agreement as evidence, these states may push for their share of autonomy, challenging the very foundation of the country’s centralised resource management system.

At the same time, resource-poor states like Perlis or Kedah might demand additional federal aid to address emerging imbalances, risking regional and economic tensions. If managed poorly, these dynamics could deepen existing fault lines, threatening national unity. This raises larger questions: Will resource governance remain centralised, or are we witnessing the first steps towards a patchwork of state-dominated systems? More provocatively, does this deal plant the seeds for a Balkanised Malaysia — where states operate more like independent entities than members of a unified federation?

For Petronas, the country’s corporate crown jewel, this moment is pivotal. Sarawak’s larger share of oil revenues will inevitably dent Petronas’ bottom line and, by extension, the federal government’s coffers. Domestically, it risks being perceived as ceding ground, potentially eroding its image as a unifying national symbol. Internationally, questions may arise about its ability to navigate political complexities while maintaining operational control. Yet, this shift could also redefine Petronas as a modern, pragmatic institution capable of balancing national interests with regional demands. If managed well, this could enhance its reputation as a cooperative and forward-thinking player in an increasingly fragmented world.

The broader implications are seismic. Sarawak’s autonomy deal has planted a flag on the frontier of decentralisation, posing critical questions for Malaysia’s unity. The answers lie in how the country navigates this moment. A robust fiscal federalism framework, one that equitably shares resources and ensures legal harmony, is critical. The federal government must engage with states to foster trust while ensuring that decentralisation doesn’t spiral into fragmentation. Sarawak’s deal is not just a test of governance — it’s a test of unity. How Malaysia manages this crossroads will determine whether this is a moment of renewal or rupture in its national story.

The country now stands at a crossroads. Can Putrajaya strike a balance between granting states greater autonomy while maintaining national cohesion? Can it ensure that decentralisation is a tool for empowerment rather than a harbinger of fragmentation? The future of the federation depends on the answers to these pressing questions. Sarawak’s deal is not merely about oil; it represents the evolving dynamics of identity, power and governance. Whether this marks the beginning of a new, cooperative era or the unravelling of national cohesion remains to be seen.

Economist Samirul Ariff Othman is an adjunct lecturer at Universiti Teknologi Petronas, international relations analyst and a senior consultant with Global Asia Consulting

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