This article first appeared in The Edge Malaysia Weekly on June 11, 2018 - June 17, 2018

PETROLIAM Nasional Bhd’s (Petronas) court challenge of Sarawak’s claim of regulatory authority over oil and gas activities in the state has sparked a barrage of political responses and an angry backlash.

There was an outcry over the perceived trampling of state rights over oil and gas wealth in Sarawak. Many also began to question Pakatan Harapan’s pre-election promise to increase oil royalty to 20%.

But court documents viewed by The Edge indicate that the national oil company is pursuing a more precise question: who is in charge of upstream oil and gas activities in Sarawak?

For Petronas, it is a question that needs an urgent answer because operational continuity and investor confidence, which are vital to attract future investments, are at stake.

And then, there is Sarawak’s political ambition to exert more authority on oil and gas activities in its territory, partly to increase revenue for the state by exploiting its hydrocarbon resources.

Broadly speaking, Sarawak has been pushing to increase its entitlement and rights to its oil and gas resources without amending the Petroleum Development Act 1974 (PDA), which would require a simple majority in parliament.

The PDA is the federal law that created Petronas as a national entity vested with Malaysia’s entire hydrocarbon wealth.

When asked to comment on the issue at a press conference last week, Prime Minister Tun Dr Mahathir Mohamad simply said: “I will leave it to Petronas whether they can succeed or not in the court action they have taken.”

In its affidavit, Petronas states that production sharing contractors are unsure as to who to approach for regulatory approvals in respect of upstream activities in Sarawak.

This uncertainty is harmful to its operations and, by extension, to public interests unless resolved, it adds.

Petronas also raises questions as to possible state interference in operations, which could include the revocation and non-renewal of work permits for non-Sarawakian employees.

Much of the uncertainty would come from Sarawak’s plan to implement a new regulatory framework for the upstream oil and gas sector from July 1.

In a nutshell, the framework requires every entity involved in the upstream sector to have the requisite licences, permits, leases and approvals under the Oil Mining Ordinance 1958, the Distribution of Gas Ordinance 2016 or the Sarawak Land Code.

Petronas’ application for leave to commence proceedings against the Sarawak government on the matter will be heard by the Federal Court on June 12.

The company had applied for an urgent hearing vis-à-vis the application.
 

Is Petronas the sole regulator?

In its application, Petronas is essentially seeking a declaration that the PDA is validly enacted. It also seeks a declaration that the PDA confers upon it the exclusive regulatory authority over upstream oil and gas activities nationwide.

Another declaration it seeks is that the Oil Mining Ordinance, a key state law that Sarawak is relying on for similar regulatory powers, is no longer effective.

Petronas also points out in its affidavit that it had been exclusively regulating upstream activities in Sarawak without objection or dispute from the state government since the PDA came into force in 1974.

The Oil Mining Ordinance is a key basis of Sarawak’s assertion of regulatory authority over upstream oil and gas activities, according to a handbook on the state’s proposed regulatory framework circulated last month.

Sarawak has taken the position that legislative powers to issue permits and licences for petroleum exploration and prospecting remain with the state government and not the federal government.

The state also argues in the handbook that while the PDA has vested the entire ownership of Malaysia’s petroleum resources in Petronas, it does not constitute a mining lease. Therefore, the state believes Petronas is not exempted from having to comply with relevant state laws, including the Oil Mining Ordinance, which regulates the issuance of licences and such, while conducting its operations.

Petronas disagrees with the state’s interpretation, according to the court documents it has submitted. According to its affidavit, the company submits that under the Petroleum Regulations 1974, any application for licences related to upstream activities must be made to Petronas, making it the sole regulatory authority.

Among others, the national oil company also argues that the Oil Mining Ordinance is not binding on Petronas because it had become a federal law when Malaysia was formed on Sept 16, 1963.

Petronas further argues that in any case, the Oil Mining Ordinance was also impliedly repealed when the Malaysian parliament enacted the PDA.

If this interpretation is upheld, it would mean that Sarawak no longer enjoys regulatory powers over petroleum resources under the Oil Mining Ordinance, as it claims to have.
 

A can of worms

Petronas’ court application has a narrow scope and does not touch any other hot potato oil and gas issue, such as Sarawak’s pursuit of 20% oil royalty.

But political observers and commentators are bringing such issues to the fore in response to the court application, clouding the discourse for the public.

The issues include the rightful ownership of oil and gas resources (notwithstanding the PDA) and the restoration of the state’s larger rights under the Malaysian Agreement 1963.

Prolonged contention over such matters could risk the revisiting of past allegations and theories that the federal government at the time had twisted the arm of the then Sarawak leaders to accept the PDA terms.

Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg had told The Edge that the state was essentially seeking higher revenue from its oil and gas resources to fund its development plans.

However, there is more than one way to skin a cat. For example, a friendly federal government could pass on its own 5% royalty to Sarawak, allowing the state to have 10% instead.

In any case, the recently changed political realities mean Sarawak may find it difficult to make further demands on the federal side in the next several years.

But there is still a big elephant in the room — the state only started talking about its oil and gas rights when the late Tan Sri Adenan Satem took office as chief minister in 2014.

So, why didn’t the Sarawak government raise the matter when Barisan Nasional was in power in the preceding four decades? 

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