This article first appeared in The Edge Malaysia Weekly on January 29, 2018 - February 4, 2018

FOR over four decades, the Petroleum Development Act 1974 (PDA) has been the bedrock of Malaysia’s oil and gas landscape.

In a nutshell, it is the law that created Petroliam Nasional Bhd (Petronas) — Malaysia’s only Fortune 500 company — which is vested with the nation’s oil and gas wealth.

Now, Sarawak is questioning whether the Act is still valid. Chief Minister Datuk Patinggi Abang Abdul Rahman Zohari Abang Openg says it is a critical matter Sarawak is actively pursuing.

The question hinges on the state of emergency under which the bill was passed in 1974, according to Abang Abdul Rahman Zohari, who is popularly known as Abang Johari.

To recap, days after the racial riots on May 13, 1969, the then Yang di-Pertuan Agong issued the Emergency Proclamation, applicable to the whole country. Parliament was suspended and the entire nation was placed under a caretaker government, led by the then deputy prime minister Tun Abdul Razak Hussein, until 1971.

While Parliament reconvened in 1970, the proclamation — along with two other emergency proclamations that applied to Sarawak and Kelantan — were never lifted until 2011.

That means the Petroleum Development Bill was passed while the nation was, technically, under a state of emergency. In end-2011, Parliament revoked the three proclamations as the conditions that precipitated them — security and public order coming under threat — no longer existed.

Some parties have argued that the lifting of the proclamations means certain legislation, including the PDA, which was enacted using emergency powers, will cease to have effect.

“So, the question is, when the emergency was lifted, is (the PDA) [still] relevant? We don’t know. That’s what we have to discuss (with the federal government),” says Abang Johari.

He adds that Sarawak has formed a “high-level committee to [look into it] because we feel that it (the PDA) is not relevant anymore”. However, he stresses that it is for the legal minds from both sides to determine and “not for me to decide”.

The Sarawak government’s position on the issue is relatively new. Abang Johari’s immediate predecessor, the late Tan Sri Adenan Satem, had started the ball rolling by asking for higher oil royalties than the present 5% after becoming chief minister in 2014.

That year, the Sarawak legislative assembly, led by Adenan, unanimously passed a motion to ask for 20% oil royalty, a move originally mooted by the opposition. This marked a departure for Sarawak, which had not raised the issue for decades since the PDA was enacted.

In a book on Tengku Razaleigh Hamzah, An Unending Quest, by Ranjit Gill, the first Petronas chairman and the architect of the PDA recalls that the idea of setting up a national oil company originated from his discussions with Tun Razak in 1972.

Two years later, Tengku Razaleigh was tasked with setting up such a company, which would run on a commercial basis. Sarawak, as the nation’s largest oil producer at the time, had concerns on whether such an arrangement would benefit it.

Recalling conversations with the then Sarawak chief minister Tun Abdul Rahman Ya’kub, Tengku Razaleigh says in the book that Abdul Rahman eventually agreed to a national oil company, which would distribute profits equally to the federal government and Sarawak.

At a meeting just before the bill was tabled in Parliament, Tun Abdul Rahman again agreed to an arrangement where oil proceeds would accrue to the company, but both Sarawak and the federal government would get 5%, he says.

Tun Abdul Rahman was later replaced as chief minister by his nephew, Tun Abdul Taib Mahmud, who would go on to govern for 33 years, from 1981 to 2014.

It was only after Tun Abdul Taib stepped down, with Adenan succeeding him, that the question of royalty quantum became a talking point for the Sarawak government, which has always been part of the ruling Barisan Nasional coalition.

Should Sarawak succeed in arguing its case on the PDA issue, it could result in significant complications.

Data from the Energy Commission shows that as at end-2015, Sarawak possessed 28.7% of known national oil reserves and accounted for 29.4% of national production. As for gas, Sarawak accounted for 52.7% of the country’s known reserves.

Today, Sarawak is said to hold much potential in terms of unexplored hydrocarbon deposits.

It is worth noting that a few months after Abang Johari took charge of Sarawak, he set up Petroleum Sarawak Bhd (Petros) to be Sarawak’s wholly owned oil and gas company.

He has said Petros should have equal standing with Petronas in terms of oil and gas activities in Sarawak.

Abang Johari tells The Edge that Petros will be an “active player” in the sector within two years, envisioning it to go into oil exploration, among other things.

It is important to note that some production sharing contracts in Sarawak are expiring around that time. Abang Johari declines to comment on whether that is a factor behind the two-year deadline.

Should discussions with the federal government result in upholding the Sarawak government’s interpretation, is there a possibility that Petros will be vested with Sarawak’s oil and gas reserves?

“Yes, something like that,” Abang Johari says, adding that the ideal outcome should be a “win-win [situation] for the Sarawak and federal governments”.

The PDA issue is part of Sarawak’s pursuit of rights under the Malaysia Agreement 1963, which it says “have been eroded”. According to Abang Johari, one example of such rights is Sarawak’s claim to its territorial waters.

The Malaysia Agreement is an international treaty that was signed by the then Federation of Malaya, Sabah (then North Borneo), Sarawak, Singapore and the UK.

In essence, it led to Singapore, Sabah, Sarawak and Singapore gaining independence from Britain to form Malaysia with Malaya. Two years later, Singapore was ejected from the federation.

“When we formed Malaysia, our boundary was 12 nautical miles, but now, it is only three nautical miles,” says Abang Johari. “Under Article 2 of the Federal Constitution, you cannot change our boundary [without Sarawak’s consent].”

The chief minister is referring to the Territorial Sea Act 2012 (TSA), which limits a state’s claim to fisheries, marine and other resources to three nautical miles from the coastline.

While the Federal Constitution allows Parliament to alter a state’s boundary, such changes require the consent of the affected state as well as that of the Conference of Rulers.

To date, the Sarawak legislative assembly has yet to enact any laws accepting the changes under the TSA. In end-2015, it unanimously passed a motion to reject the TSA, among other things.

The TSA question ties back to Sarawak’s eye on its oil and gas wealth as hydrocarbon deposits in Malaysian waters mostly occur beyond the three-nautical-mile line.

To strengthen its case, Sarawak sent a legal team to London last year to do further research on the Malaysia Agreement and gather additional documentation on its rights under the treaty.

“We have found documents that strengthen our argument on our rights,” says Abang Johari, whose father Tun Abang Openg Abang Sapiee — Sarawak’s first governor — was among the signatories to the Malaysia Agreement.

He confirms that the documents found include the Sarawak (Alteration of Boundaries) Order 1954 by the Queen in Council, which stipulates that Sarawak’s boundaries include the seabed and subsoil beneath its territorial waters.

It raises a critical question from Sarawak’s perspective as the Sarawak Oil Mining Ordinance 1958 regulates oil production, both onshore and offshore, within its territory.

“The PDA does not exclude application of other written laws, including the Oil Mining Ordinance. Under the Federal Constitution, only Sarawak can issue mining leases for oil production,” opines one legal expert favouring Sarawak’s interpretation.

In layman’s terms, if the seabed beyond three nautical miles does belong to Sarawak, as argued by its government, Petronas would be required to obtain a mining lease to extract the oil and gas resources found there.

That scenario would shift the leverage substantially in favour of Sarawak. Abang Johari declines to comment on where he hopes the discussions will lead to insofar as Sarawak’s oil and gas resources are concerned.

“Let them (the legal team) discuss the legal implications, [it is] not for me to decide,” he says.

While the issues raised by the Sarawak BN government are valid, political observers question its timing as the 14th general election is due anytime now. The PDA has been there since 1974 and Sarawak itself has benefited not only from the royalties but also from the spin-offs of the oil and gas industry there. Sarawak houses some of Petronas’ largest investments and in the MLNG plant in Bintulu, it has one of the largest liquefied natural gas facilities in the world.

Petronas is also well managed and its managers over the years have turned a company with a start-up capital of RM11 million into one with RM600 billion in assets, without the need for the shareholder — the federal government — to increase its investment in the company.

For there to be a change in Petronas’ role as the custodian of the country’s hydrocarbon resources, the PDA has to be amended. One peninsula-based political pundit believes that it will require a two-thirds majority in Parliament to effect it. Why didn’t Sarawak push for the change when BN had the numbers in Parliament between 1974 and 2004?

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