This article first appeared in The Edge Malaysia Weekly on February 10, 2025 - February 16, 2025

SHELL Malaysia, which has operated in Sarawak for 115 years, finds itself caught in the middle of negotiations between Petroliam Nasional Bhd (Petronas) and state-owned Petroleum Sarawak Bhd (Petros) on the gas supply mechanism in the Borneo state.

The British oil firm is concerned about the risk of disruption to the supply of gas to the gas-to-liquids (GTL) plant, which Shell MDS (Malaysia) Sdn Bhd manages, in Bintulu.

Shell MDS has then sought legal intervention to safeguard its interest. The company filed an injunction to temporarily suspend payments to both Petronas and Petros, while ensuring continued gas supply. The injunction is on the grounds of Shell MDS’ involvement in two separate gas supply agreements (GSAs), one with Petronas (July 17, 2020) and the other with Petros (Aug 16, 2024), which raises concerns about the risk of supply disruption.

In the affidavits, Shell MDS states that it signed a GSA with Petronas in 2020. However, it signed another GSA with Petros in 2024 following notification from the Sarawak government that Petros is now the sole gas aggregator.

Shell MDS claims that it has notified Petronas the GSA it signed with Petros, and the national oil firm took notes of it. Petronas, however, points out that the Shell-Petros GSA is related to the natural gas supplied under Shell-Petronas GSA, the affidavit reads.  

In an unexpected twist of event,  Shell MDS in September last year received invoices from both Petronas and Petros for August’s supply. Shell MDS observed that the conflict over gas distribution rights in Sarawak might lead to double payment for gas and operational disruptions in Bintulu.

On Jan 6, the High Court ruled that Shell MDS could continue its operations as usual. Meanwhile, Petronas has to continue the gas supply without receiving payment, according to the court documents.

After a court ruling in favour of Shell MDS, Petronas filed a notice of appeal on Jan 10 to challenge the decision made by Judicial Commissioner Arziah Mohamed Apandi.

Although both Petronas and Petros were named defendants in the originating summons filed by Shell MDS last November, it should be noted that Petros has not appealed against the court’s ruling. It had 30 days from the Jan 6 decision to file an appeal against the injunction.

Petronas and Petros did not reply to The Edge’s request for comment. Shell MDS parent Shell Malaysia said it is not in a position to comment on the matter.

Shell MDS manages the GTL plant in Bintulu, touted as the world’s first unique GTL plant, and employs more than 450 staff, nearly 90% of whom are Sarawakians. The Shell group has interests in several gas projects in Sarawak, including Rosmari-Marjoram, SK408, Jerun and Timi, which contribute to the Petronas-operated Bintulu LNG export facility.

In the grounds of judgment, Arziah noted that Shell MDS faces immediate risks and threats of disruption to its gas supply under two competing GSAs, with financial implications given the monthly payments in the region of RM70 million to RM100 million.

Shell MDS has attempted to mitigate the situation by offering to set aside payments in an interest-bearing account pending resolution. However, Petronas has proceeded to call on the bank guarantee, the judgment read.

During the proceedings, Shell MDS sought an order to maintain the status quo to prevent Petronas or Petros from taking any steps that would disrupt the continuous supply and delivery of natural gas to Shell MDS in Tanjung Kidurong, Bintulu. It also sought to restrain Petronas from making calls on its UOB Bank Guarantee, accepting or utilising its proceeds, and making requests for a refund of proceeds already received.

Shell MDS says the case was not merely about damages, but fundamental legal validity and compliance issues. It says while the dispute is between Petronas and Petros regarding the validity and precedence of the Petroleum Development Act 1974 (PDA) and Distribution of Gas Ordinance 2016 (DGO 2016), any payment to either party without court determination could expose Shell MDS to criminal liability under DGO 2016.

Shell MDS maintains it is caught in a federal-state jurisdiction dispute and is willing to pay as directed by the court, having already set aside funds for this purpose.

Nonetheless, Petronas claims that the damages are an adequate remedy and that Shell MDS created its predicament by signing a GSA with Petros while having an existing GSA with Petronas.

In its affidavit, Petronas contends that the balance of convenience favours the national oil firm as it continues to incur significant costs (about RM2 billion in unpaid supplies) while Shell MDS profits from the gas supply.

Petronas claims that it is the only party physically capable of supplying gas and has ongoing commitments to upstream producers that require substantial financial outlay. The national oil firm argues that Shell MDS cannot “have its cake and eat it too” by receiving gas while withholding payment. Petronas maintains that the status quo was to be considered before Shell MDS signed the Petros GSA.

The latest on the talks between the federal and Sarawak government is that Petronas recognises Petros as the state’s gas aggregator, excluding liquefied natural gas (LNG), said Minister in the Prime Minister’s Department (Law and Institutional Reform) Datuk Seri Azalina Othman in parliament last week.

Furthermore, Petronas and its subsidiaries are not required to obtain a licence or comply with any additional procedures to conduct petroleum operations in Sarawak beyond those outlined in Act 144. Azalina told parliament that these were the key agreements reached between Prime Minister Datuk Seri Anwar Ibrahim and Sarawak Premier Tan Sri Abang Johari Tun Openg during their meeting on Jan 7.

Under the PDA 1974, Petronas is tasked to develop the country’s hydrocarbon resources, including natural gas.

However, Sarawak cites the Malaysia Agreement 1963 and wants its Oil Mining Ordinance 1958 (OMO) to coexist with the PDA 1974. The state government contends that the OMO, as the state’s oil mining law, has never been repealed to make way for the PDA. 

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