Upon the demise of Allahyarham Tun Pehin Seri Taib Mahmud in February 2024, open and frank conversation over Sarawak rights on its oil and gas under Chief Ministership of the late Adnan Satem escalated beyond the usual grumbling and dissatisfaction into a conflict between Sarawak and Federal Government.
Earlier during Dato Najib’s administration, the Malaysia Agreement 1963 (MA63) was acknowledged with a cabinet joint committee established and chaired by former Foreign Minister Anifah Aman and Dato Nancy Shukri during Najib’s administration.
The passing of Taib, political undercurrent during Premier Abang Johari Openg, and demand to accelerate state economic development put greater pressure on the fulfillment of the terms of MA63 including the oil and gas rights.
A misconduct by Petronas towards the East Malaysians angered the once cooperative state government. Instead of seeking a reasonable resolution, Petronas taken to their customary arrogant self and conflagrated the situation by being too cocksure the Production Development Act 1974 (PDA) will come to their favour.
Dispute
Sarawak's claim over its oil and gas rights is rooted in MA63 and the pre-Malaysia Oil Mining Ordinance (OMO) 1958. The state that OMO remains valid and applicable, thus the state retains control over its oil and gas resources.
PDA, which granted Petronas full control over Malaysia’s oil and gas resources, was imposed during a period when the Emergency Ordinance (EO) 1969 was in effect. Since the EO was repealed in 2011, the argument from the eastern side of the South China Sea is that PDA is no longer applicable in Sarawak.
Petronas argued that PDA grants it exclusive authority over Malaysia's petroleum resources, including those in Sarawak. Experts and stakeholders maintain that Federal Laws, including the PDA and the Territorial Sea Act 2012, supersede state ordinances when it comes to national resource management.
This was the position of the Federal government, which has historically maintained that all oil and gas resources in Malaysia fall under Petronas' jurisdiction as a national entity.
The dispute between Sarawak and Petronas started in 2016 when Petronas was unable to fulfill Sarawak request for more local participation in the Sarawak oil and gas operation since applicants could not meet the minimal educational qualification.
Sarawak government retaliated to deny entry and work permit to Petronas management and staff. Subsequently Sarawak imposed 5% sales tax on oil and gas since 2019, amounting to nearly RM10 billion. The dispute escalated till Petronas had to cease operations in Sarawak and Petros lawsuit against Petronas. .
The legal uncertainties surrounding the dispute raised concerns among investors, particularly in new energy sectors such as carbon capture. Sarawak continue to push for greater autonomy over its resources, while Petronas and the federal government maintain their stance based on the PDA 1974.
The outcome of this dispute could set a precedent for other Malaysian states seeking greater control over their natural resources.
Malaysia Agreement 1963
MA63 was negotiated when Sabah, Sarawak joined Malaya to form Malaysia. It contained provisions intended to safeguard the rights of these states over their natural resources. Although it was not spelt out exhaustively the details of every aspect of resource management, several key points of MA63 are commonly cited by Sabah and Sarawak to support their claim:
1. Retention of Natural Resource Rights:
States’ lands and natural resources—including oil and gas—remain under their control. These provisions were intended to ensure that Sabah and Sarawak benefit directly from the exploitation of their resources, rather than having all revenues centralized at the federal level.
2. Consent for Transfer of Rights:
Any transfer of control or rights over natural resources from the state to the federal government must be with the states’ consent. The Federal government cannot unilaterally appropriate these resources without the agreement of Sabah and Sarawak.
3. Revenue Sharing and Autonomy:
Provision for a more favorable sharing of revenues derived from oil and gas production in these regions. The expectation was that Sabah and Sarawak would have the authority to negotiate terms and receive a greater share of the proceeds from their own resources.
The counter argument by Petronas are as follows:
1. Superseding Federal Legislation:
Subsequent legislation—notably PDA —was enacted under the authority of the federal government and grants Petronas the exclusive right to manage and develop Malaysia’s petroleum resources, including those in Sabah and Sarawak.
It has effectively centralised control over the oil and gas sector at the national level, regardless of the earlier assurances made in MA63. The argument by Tengku Razaleigh is that Sarawak was a party to the agreement and the state assembly endorsed it.
The Federal Constitution is amendable by Parliament according to the procedures set out in its amendment provisions. For many parts of the Constitution, a two-thirds majority in Parliament is required. Thus, technically, Parliament can amend even those provisions that originated from MA63.
Many in Sabah and Sarawak, as well as some legal scholars and politicians, argue that certain terms of MA63—being part of the original agreement for the formation of Malaysia—should be considered “entrenched” or sacrosanct. The counter argument claimed the Constitution does not provide an explicit entrenchment clause that would categorically prevent Parliament from amending these provisions.
Even if Parliament has the legal authority, any move to amend provisions that affect the rights and autonomy of Sabah and Sarawak is highly contentious. Such amendments is viewed to undermine the original spirit of MA63 and the fair distribution of resources promised to these states.
2. National Cohesion and Investment:
A unified, centralised management system is necessary for maintaining investor confidence, ensuring operational efficiency, and preserving Malaysia’s competitive edge in the global energy market. Decentralising resource control will lead to fragmented policies and inefficiencies that ultimately harm national interest.
Sabah and Sarawak point to MA63 in establishing their rights over natural resources and allow them greater autonomy in managing oil and gas, including direct control over exploration, production, and revenue sharing.
In contrast, the federal government assert that later federal laws, particularly the PDA have overridden those provisions, granting them exclusive authority over the entire country’s petroleum resources. This divergence in interpretation remains at the heart of the ongoing dispute between the states and Petronas.
UNCLOS and Territorial Waters Act 2012
The Territorial Waters Act 2012 and the United Nations Convention on the Law of the Sea (UNCLOS) had key roles in shaping the legal framework for coastal resource rights, which directly affects Sabah and Sarawak’s claims over their oil and gas reserves.
The Territorial Waters Act 2012 was enacted to clearly delineate Malaysia’s territorial waters and, by extension, its Exclusive Economic Zone (EEZ). The EEZ extends up to 200 nautical miles from the baseline, and is the area over which Malaysia can exercise sovereign rights for exploring, exploiting, conserving, and managing natural resources.
For Sabah and Sarawak, if the maritime boundaries set out in the Act are recognised, the states assert that the oil and gas resources located within their EEZ are under their control. This is the autonomy accorded under MA63.
A maritime lawyer argued that Sarawak’s interpretation of the continental shelf’s extent under the 1954 Order in Council is problematic. The 200-nautical-mile length is not specifically stated in the Order and the 'continental shelf' was only defined in the 1982 UNCLOS, in which Malaysia ratified in 1986.
Under UNCLOS, international law benchmark for maritime claims, a coastal state is granted exclusive rights to explore and exploit natural resources within its EEZ and on its continental shelf. This means that any oil and gas reserves located in these areas belong to the state, provided that the boundaries are properly delineated.
Sabah and Sarawak had their maritime boundaries demarkated under British rule and before formation of Malaysia, thus could invoke UNCLOS to claim their offshore resources are theirs to manage, based on the boundaries defined domestically by the Territorial Waters Act 2012.
Based on the MA63, and the Territorial Waters Act 2012 (supported by UNCLOS), they have a legitimate claim over the oil and gas reserves in their offshore areas.
UNCLOS and its subsequent incorporation into Malaysian law through the Territorial Sea Act 2012 following the annulment of the 1969 Proclamation of Emergency in December 2011.
It is argued that UNCLOS affirm Federal rights to the continental shelf for the benefit of the entire nation. The PDA and Territorial Sea Act 2012 are valid and enforceable unless declared otherwise by the courts.
For states other than Sabah and Sarawak, oil and gas rights in the EEZ and onshore are managed and regulated by the federal government. These states do not have separate legal claims to these resources under these laws.
The law serves to establish Malaysia’s overall maritime jurisdiction, but do not provide for individual Malaysian states (apart from the special arrangements in Sabah and Sarawak) with separate rights to claim oil and gas findings in their territory.
Is it resolved?
Sarawak had long sought for greater autonomy over its oil and gas reserve. The dispute over Petronas royalty figure became the basis to challenge Petronas' long-standing national control under the PDA.
It was timely to enable Sarawak state-owned Petros to gain control over gas distribution in Sarawak and seek bigger role in any decision-making and revenue collection from hydrocarbon resources extracted within their territory. Anwar Ibrahim claimed to media that the dispute is resolved.
In the Settlement Agreement facilitated by Anwar and Abang Johari, Petros was granted authority as a gas aggregator in Sarawak, meaning it controls gas distribution for domestic use. Petronas retains national authority and continue to be involved in major projects. The liquefied natural gas (LNG) remains under Petronas' control, given that Sarawak accounts for about 90% of Malaysia's LNG exports.
Supposedly the settlement is collaborative; ensuring both companies work together on exploration, hydrogen projects, and other energy ventures. It serves to avoid potential disruptions to foreign investments and international energy contracts, if Sarawak taken complete control.
The settlement strengthened Sarawak’s autonomy, while maintaining Petronas’ dominance in Malaysia’s oil and gas sector. It allows Sarawak to benefit economically from its natural resources and serves their green energy plan, while ensuring Malaysia's LNG exports remain stable.
Supposedly, investors remain to have confidence in Malaysia’s oil and gas regulatory framework, reducing risks of legal uncertainties. However, an MNC was awarded court injunction against Petronas and Petros.
The multi-billion dollar Malaysia-Thai Lang Lebah gas field development project off Sarawak shores had to be called off. It is touted as the largest gas discovery in Malaysia’s history.
Challenges awaits
Familiar with the Sabah 20-point agreement debacle and MA63 for more than 10 years, in which the effort of a group of West Malaysians culminated into the 2015 forum at Universiti Malaysia Sabah, Kota Kinabalu, any claim of resolution to MA63 only scratched the surface.
As much as Anwar like to believe a resolution between Peronas and Petros was reached, there are issues still being slugged out in court. Cynical Sarawakian view the said settlement does not favour the state and risk being exploited by Petronas.
Meanwhile, an estimated 16,000 management and staff will likely be “right sized”. Petronas official said, the way forward is still unclear. Further negotiations are expected for upcoming projects with Sarawak.
Petronas Chemical recorded Loss After Tax of RM762 million for its third quarter ending 31 December 2024. On full-year performance, net profit for FY 2024 fell 30.7% while revenue rose 7% due to Penegerang forex revaluation.
Petronas registered net profit of RM55.1 billion for 2024, a drop by 32%. Challenging 2025 lies ahead for Anwar economically as he tries to do fiscal consolidation, cut fuel subsidy and face Trump tariff. With the inflationary pressure, perhaps the challenge is political too.
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