This article first appeared in The Edge Financial Daily on June 5, 2018

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) is challenging the Sarawak government’s claim to regulatory authority in the upstream oil and gas (O&G) sector. The national oil company is taking the question to the Federal Court via an application filed yesterday.

At the heart of the matter is whether the extraction of petroleum resources requires mining leases from the state government.

While the state had repeatedly said it has regulatory authority over such activities, Petronas is now asserting it does not need such approvals from the state to undertake upstream O&G activities in Sarawak.

In a statement yesterday, Petronas said it is seeking a declaration from the apex court that the Petroleum Development Act 1974 (PDA) is the law applicable for the nation’s petroleum industry. The company is also seeking a declaration that it is the exclusive owner of petroleum resources in the country as well as the only regulator of upstream activities nationwide, including in Sarawak.

“The court filing is done to seek and clarify Petronas’ role as the custodian of the nation’s oil and gas resources and not an act of suing the Sarawak state government,” said Petronas. “We remain committed to support Sarawak’s aspiration to participate in the oil and gas industry in the state, for as long as it is within the framework of the PDA.”

The application names the Sarawak government as the respondent. The state’s Attorney-General’s Chambers confirmed that it has been served with a notice from the Federal Court Registry.

“At the moment, the state has yet to receive the motion filed by Petronas related to the application,” State Assistant Minister in the Chief Minister’s Department for Law, State-Federal Relations and Project Monitoring Sharifah Hasidah Sayeed Aman Ghazali said in a statement.

“The state government will do everything within its powers, in accordance with the rule of law, to defend our rights in this matter,” she added.

In April, Sarawak Chief Minister Datuk Patinggi Abang Johari Abang Openg said companies operating in the upstream O&G sector in Sarawak must obtain the necessary licences and leases from the state beginning July 1.

Abang Johari said the requirement extends to contractors, subcontractors and vendors. In a previous interview with The Edge Malaysia weekly, he indicated the state’s position rests primarily with the Oil Mining Ordinance 1958.

The Sarawak attorney-general officially wrote to Petronas on April 13 to communicate the state’s intention to enforce the requirements. The attorney-general also stated that continuing such operations in the state without the necessary licences and approvals would be “illegal” after July 1.

The letter, sighted by The Edge Financial Daily, stated the exploration and mining leases would be issued to Sarawak state-owned Petroleum Sarawak Bhd (Petros). It also advised Petronas to liaise with Petros to discuss the future exploration and mining of petroleum, including natural gas, in Sarawak.

However, in a response dated May 22, Petronas rejected the state’s interpretation that upstream O&G activities fall under the Sarawak state’s regulatory authority. The company takes the position that it is not required to apply for any such licences or leases from the state.

In supporting its argument, Petronas highlighted the Sarawak government, in March 1975, vested in Petronas the ownership of the state’s petroleum resources irrevocably.

Among others, the May 22 letter argues that the PDA had vested in Petronas exclusive regulatory authority of the upstream O&G sector throughout Malaysia and that no other body has such powers.

Petronas also cites the Malaysia Act 1963 in arguing that the Oil Mining Ordinance should be treated as a federal law since the ordinance pre-dates the formation of Malaysia. That interpretation would mean the Sarawak state government could no longer consider itself the authority under the ordinance, Petronas wrote.

Petronas asserted that the PDA had, in any case, superseded the ordinance. Petronas’ application to the Federal Court includes a declaration that the Oil Mining Ordinance was impliedly repealed by the PDA.

Petronas in its application also expressed concerns that the state government may interfere with the operations of its subsidiaries and contractors. The concerns include its worry that production sharing contractors may face uncertainty as to whom to deal with in respect of regulatory approval.

Additionally, Petronas raised the worry that the state government may revoke work permits of non-Sarawakian workers in upstream activities or refuse to renew the permits upon expiry.

Petros was incorporated in July 2017. In August 2017, Abang Johari reportedly said Petros will enable Sarawak to actively participate in O&G extraction activities in the state while actively pursuing its quest for a 20% royalty from Petronas.

At present, the federal and state governments are entitled to a 5% royalty each as stipulated in the PDA. Increasing the rate to 20% would entail amending the PDA via Parliament.

The state’s quest for a higher royalty began with Abang Johari’s predecessor Tan Sri Adenan Satem back in 2014. Adenan had taken over as chief minister in 2014 and oversaw a landmark motion to ask for a 20% oil royalty passed in the state assembly later that year.

The motion had been mooted by state opposition. Adenan passed away in January 2017.