This article first appeared in The Edge Malaysia Weekly on December 30, 2024 - January 12, 2025

THE year 2024 was one of showdown between the Sarawak state government and the federal government over areas of autonomy.

While Sarawak enjoys self-governance in the state’s energy sector, it has also obtained autonomy on healthcare and education.

To speed up economic developments, which were lacking in the past, the Borneo state is making plans to build strategic infrastructure, for instance an international airport and deep sea port near the state capital of Kuching.

Additionally, it wants to own a bank and establish a regional airline.

Sarawak has become the single largest shareholder of Affin Bank Bhd (KL:AFFIN). The state bought a 31.25% stake in Affin Bank Bhd from Lembaga Tabung Angkatan Tentera (LTAT) and Boustead Holdings Bhd for about RM2 billion.

The transfer of control of Bintulu Port to Sarawak is expected to take place before the year ends. Meanwhile, the state is in the process of taking over MasWings from Malaysia Aviation Group Bhd. According to Transport Minister Anthony Loke, the state government is in talks to finalise the valuation of assets. Meanwhile, Loke reiterates that the federal government is committed to continue subsidising the rural air service.

However, the hot debate is over Sarawak making more efforts to regain control of its hydrocarbon resources. 

This is Sarawak Premier Tan Sri Abang Johari Tun Openg’s tough mission. Completing this mission will solidify his political footing in the state. 

Likewise, it is equally tough, if not more, for Prime Minister Datuk Seri Anwar Ibrahim as the implications of the issue are significant. Petroliam Nasional Bhd’s (Petronas) earnings will be under threat, and so will the country’s centralised system. This could set a precedent for other states as political analysts point out. For instance, Penang Chief Minister Chow Kon Yeow in May revealed the intention to demand the Federal Government to return 20% of taxes collected from the state. The expected sum is estimated to be about RM1 billion. But this isn’t the chief concern of Sarawak, obviously. 

In May, Abang Johari dropped a bombshell when he told the state assembly that Sarawak wants to be the sole gas aggregator, meaning all the natural gas produced in Sarawak will be given to state-owned Petroleum Sarawak Bhd (Petros), instead of Petronas as in the past since the implementation of the Petroleum Development Act (PDA) 1974 five decades ago.

Petros signed a gas sales agreement with Sarawak Petchem Sdn Bhd, which owns and operates a large-scale methanol complex in Tanjung Kidurong, Bintulu. The state has gone solo in setting up a RM3.75 billion methanol plant with an annual capacity of 1.75 million tonnes.

The signing was on Sarawak Day on July 22 — the day that celebrates the independence of the state in 1963 before the creation of the Malaysian federation on Sept 16 in the same year.

Under the agreement, Petros will supply natural gas to Sarawak Petchem as the state’s sole gas aggregator as announced in the state’s oil firm. Sarawak is flexing its muscles on reclaiming its rights on all natural gas produced within its borders.

From the state’s perspective, this is a natural move to reclaim its rights and oil wealth under the Malaysia Agreement 1963 (MA63) — something that should have happened a long while back.

However, the interpretation of laws is different in the peninsula. The ownership and rights over the hydrocarbon within Malaysia’s waters should be under the national oil firm, Petronas, as stated in the PDA 1974, which was agreed upon by Sarawak’s former chief minister Tun Abdul Rahman. In a nutshell, revenues generated from oil and gas (O&G) resources will be accrued to Petronas while the producing states, for instance Sarawak, are entitled to 5% oil royalty.

Petronas president Tan Sri Tengku Muhammad Taufik explained in a media briefing in September that under the current arrangement, Petronas is responsible for purchasing natural gas from upstream producers, and then selling it to eventual buyers, such as liquefied natural gas (LNG) plants and other industries including the power sector.

This duty, Taufik stressed, is prescribed by the law under the PDA 1974, which grants ownership and exclusive rights to Petronas to explore, develop and manage petroleum resources for Malaysia.

“This involves not only collecting, packaging and remitting [the hydrocarbon] but also involves investment [and] laying the foundations for an integrated value chain.

“It is critical in the analysis of what is unfolding before us today that this integrator or aggregator role involves the management of infrastructure — be it pipelines, receiving facilities, development of a workforce to support this duty, quality assurance or quality control — to ensure that gas is delivered on time reliably and safely without interruption,” says Taufik.

Sarawak, citing the MA63 and the Oil Mining Ordinance 1958 (OMO), has challenged the PDA 1974. Sarawak contends that the PDA, enacted during the 1969-1971 Emergency Proclamation, may have limited validity post-emergency.

The state has enforced its OMO, mandating that all O&G players in Sarawak comply with state laws. In 2019, Sarawak imposed a 5% sales tax on petroleum products, leading to a legal tussle when Petronas disagreed to pay the taxes.

Eventually, both parties agreed to end the dispute, resolving it with payments made by Petronas for the sales tax starting from 2019. In a statement, Petronas expressed its commitment to collaborating with the Sarawak state government to strengthen the O&G sector and ensure a stable investment environment.

Nonetheless, the demand for a 5% sales tax on petroleum products is just the beginning of more negotiations on the state’s hydrocarbon resources.

Petronas has been negotiating with Sarawak’s state government for months over who should play the role of gas aggregator.

Deputy Minister in the Sarawak Premier’s Department (Law, MA63 and State-federal relations) Datuk Sharifah Hasidah Sayeed Aman Ghazali says the PDA 1974 and OMO must “coexist” and “need to be integrated and implemented together”.

She reiterates that while Sarawak has absolute rights over all minerals and natural resources beneath its seabed and subsoil within its territorial waters, external entities are welcome to explore and develop the resources, provided they obtain Sarawak’s necessary permits and approval.

Some in Sarawak are concerned that the acceptance of the co-existence of the PDA 1974 and OMO is a big give-in and that will cause repercussions on the other non-O&G areas where the state is also seeking autonomy. For instance, there is market talk that Sarawak is seeking control over its telecommunications spectrum in space.

Likewise, Malaysians living in the peninsula are also concerned that the federal government has been giving up too many things.

Some quarters see that since the rights to the state’s hydrocarbon are bound by law, the matter should be settled in court. Winner gets all, and this will settle the issue once and for all. Petronas is seen to have the upper hand if the matter is brought to the court.

“If Petronas loses the court case, the national oil firm will just pack and leave the state and move on ... [it] will have to look for opportunities elsewhere.

“It does not make sense for Petronas to be treated as an international oil major in Sarawak, which is part of the country,” an industry observer comments, noting that Petronas has invested a hefty amount of capital expenditure to develop the O&G ecosystem in Sarawak.

However, there is a lot at stake for the federal government. More than 20% of federal revenue over the last five years came from Petronas dividends.

It is not fair, says the observer, to paint a picture of the federal government and Petronas having taken away abundant oil money from Sarawak and not investing enough in the state, says the observer.

On this, Taufik told the media: “We understand Sarawak’s aspirations. We’ve also got to put on record here, we have invested heavily in Sarawak. We have invested over the years, in support of Sarawak’s economic growth.”

Abang Johari in a past interview explained that Sarawak aims to develop its economy within its rights, as outlined in the MA63, to correct perceived diversions from its entitlements. Despite contributing to Malaysia since 1963, Sarawak remains underdeveloped, lacking basic infrastructure, while other regions enjoy advanced facilities, highlighting issues of fairness.

“ We have been there [building Malaysia] since 1963 and the spirit is there already as a nation. But along the way, we feel that some of our rights that we should get, have been diverted either with intention or without intention.

“You want to develop your state, within your parameters. We are asking within those parameters to develop our state. The strength is there to develop a new economy,” Abang Johari tells The Edge in an interview back in February 2023.

Abang Johari’s vocal advocacy for Sarawak’s rights underscores his commitment and this undeniably helps to garner support in the state. His public disagreements with the federal government have sparked debate about the balance of power within the unity government.

Political analysts see the fact that the Sarawak state government controls 23 parliamentary seats as empowering it and making it possible to claim greater autonomy.

These actions have elicited mixed reactions, particularly among critics from Peninsular Malaysia who may view them as disruptive. However, to Sarawakians, these are crucial steps towards rightful autonomy.

According to Anwar, the negotiation on the state’s rights over the gas produced have been concluded. At the moment, Petronas is finalising the details with Petros.

For now, the Malaysian public, importers of LNG, financial institutions, international oil majors and politicians are awaiting the announcement of the final outcome of the talks — one that will shape the future of Malaysia, in which Sarawak is part of.

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