What next for Sarawak, Petros & Petronas?



SPG congratulates the Sarawak Government and YAB Chief Minister Datuk Patinggi Abang Johari for taking this bold and brave step to exert Sarawak’s ownership and its rights over its own petroleum resources.

All Sarawakians must support this revolutionary move, as it immediately gives tangible hope for the equitable redressing of economic imbalances faced by Sarawak from the uneven distribution of economic value-creation and being subjected to unfair exploitation policies/practices of its rich oil and gas natural resources.

With the official launch of Petros on 6 March 2018 by the CM, followed by his unequivocal assertion that the ownership of Sarawak’s oil and gas resources still belong to Sarawak, all parties involved in the industry in Malaysia, especially Petronas, must accept this new reality.

For avoidance of any doubt, it is no longer ‘business as usual’. The Sarawak Government officially no longer recognizes the Petroleum Development Act 1974 (“PDA74”) that had unconstitutionally vested Sarawak’s petroleum resources with Petronas.

So, what must come after this watershed moment for Sarawak?

New Licensing and Regulatory Regime

Following the Chief Minister’s announcement, a new licensing and regulatory regime will be imposed by the Sarawak Government on 1st July, 2018. It will detail out the applicable rules and regulations applicable to bona fide players in the upstream, midstream and downstream sectors of Sarawak’s oil and gas industry.  Even Petronas will have to apply for a licence to operate in Sarawak and will no longer be able to claim ownership of Sarawak’s petroleum resources.

Petronas’ statement that it welcomes the formation of Petros within the current framework of PDA74 (reported in The Borneo Post, 8 March 2018) appears in denial of the new reality. There is broad expectation amongst Sarawakians from all walks of life that Petronas will accept the new rules of the game after more than 40 years of having things their way. The sooner the better for all and it will be a reflection of the maturity and professionalism of Petronas’ current leadership team.

Sarawak Petroleum Authority

To ensure that proper management and governance is in place to safeguard the state’s resources and its environment, the Sarawak Government should without delay set up the Sarawak Petroleum Authority, reporting directly to the Chief Minister or perhaps to a newly created Ministry of Energy, with full powers and authority to control and regulate ALL aspects of the petroleum industry in Sarawak.

This is to avoid further massive depletion of its resources with poor value-creation. For example, Petronas’ National Gas Utilisation policy designated that the gas resources in Sarawak and Sabah are mainly for export whereas for Peninsular it was for domestic energy and industrial consumption, and to make matters worse, even subsidised, at the expense of re-investment for economic multiplier projects in Sabah and Sarawak.

As can be surmised, the so called massive profits from Bintulu LNG operations and offshore Sarawak have been at the ultimate expense of better value-creation of its economy. This is a sacrifice which had been forced upon Sarawak to fuel the economic boom in Malaya from Petronas’ Peninsular Gas Utilisation (PGU) project. Therefore such a policy must be changed for better value-creation covering Sabah and Sarawak as well in the interests of a truly national and balanced development within Malaysia.

Sarawak Oil and Gas Fiscal and Planning Framework

The Sarawak Government will need to decide what fiscal framework to impose on Petronas and all other operators within Sarawak’s boundaries. It is suggested that the Production Sharing Contract (PSC) regime adopted by Petronas itself would be an appropriate model to follow, given its success in bringing Petronas to where it is today.

Most importantly, Sarawak must be able to craft its own strategic policy and values of having control and ownership of its oil and gas resources aimed to promote the best utilisation and value creation from the Sarawak’s resources. These policies and values will underpin the terms and conditions of, amongst others, the fiscal regime, procurement policies and giving priority to Sarawak companies.

Sarawak Petroleum Development Master-Plan

It is also timely for the the Sarawak Government to formulate its own Petroleum Development Masterplan (something that has not been done holistically) covering key areas of upstream, midstream and downstream development, to ensure an orderly and sustainable development of the industry, which at best only has another 15 to 20-year window of opportunity before being overtaken and replaced by renewable energy.

Handing Over of Sarawak’s Oil & Gas Assets by Petronas

Petronas’ role in all new and existing PSCs must be relinquished and together with all of Sarawak’s Oil and Gas Assets handed over to the Sarawak Petroleum Authority. Petronas (and its current operators) could continue operating the PSCs but only as a contractor to the Sarawak Government on terms and conditions for the continued operations to be negotiated and agreed.

Data Acquisition

In order to adequately exercise its ownership rights, the Sarawak Government must require Petronas to hand over all existing exploration and production data to the Sarawak Petroleum Authority who should be equipped and resourced to store, examine and complement such data. After all, these data were taken over by Petronas from Shell which had operated in Sarawak’s territory and waters since the 1900’s.

New PSCs

We note with concern that Petronas is still signing new PSCs with its contractors. There must be a moratorium on all new PSCs and all other related dealings in the interim period.

Under the new rules, all PSCs for existing operating blocks in Sarawak must be regularised with the real owner (Sarawak) and signed by Petronas and all other operators with the Sarawak Government represented by the Sarawak Petroleum Authority.

The current 70:30 split between Petronas and its contractors after taking into account Cost Oil or Cost Gas should be reviewed since Petronas no longer functions as owner/regulator.

PETROS’ Carried Interest

The Sarawak Government must insist that Petros takes up a stake (“carried interest”) in all new PSCs, similar to that given to Petronas Carigali. This is extremely important if it wants to build up Petros as its operating Oil and Gas arm.

All of this will constitute immediate revenue generation for the Sarawak Government to replace the 5% cash payment currently made by Petronas (which may continue as partial credit towards the new revenue model). The 5% now paid by Petronas to the Federal Government under PDA74 must stop insofar as Sarawak is concerned. This can no longer be sustained with the repudiation of PDA74.

Other than upstream in exploration and production, Petros should also look into active participation in the midstream and downstream sectors to take advantage of the full value chain of the petroleum business, especially when Sarawak will have access to its own production under the new PSCs.

At the same time, the Sarawak Government must look into tax-exempt status for Petros, which would otherwise be subject to corporate tax on its earnings as a company operating under the Companies Act. This would defeat the purpose of having Petros as a cash-generating vehicle for the Sarawak Government.

Audit of Cash Payments made by Petronas to the Sarawak Government

Sarawak is said to owe the Federal Government RM2.5 billion currently. SPG believes there are grounds to question the amount of revenues from the cash payments made by Petronas to Sarawak which it would appear have never been audited and SPG also questions whether the excise and export duties for crude oil and petroleum products collected by the Federal Government been remitted to Sarawak as required under the Federal Constitution.

Restitution and reparation

Furthermore, in settlement and compensation for all its activities over the years under PDA74, all shares in companies and associated facilities based on Sarawak’s Oil and Gas resources operated by Petronas in Sarawak, such as MLNG and ABF, must be handed over to the Sarawak Government.

Some have said that it takes longer to develop a state as big as Sarawak. This ignores the fact that with proper allocation of its own Oil and Gas resources, Sarawak would definitely have been in a much better position economically and in terms of physical development than it is today.

The PDA74 may have created a ‘Tuan Tanah’ or ‘Landlord’ mentality in Petronas and it has failed to give due consideration to producing states’ interests in the development of their petroleum resources. Sarawak and Sabah could have been developed as twin ‘Hubs’ for Gas/Petrochemicals and Oil respectively as they have the biggest reserves respectively of these two resources.

One only has to look at the current state of the facilities in Lutong, Miri to have a sense that Petronas only wants to maintain a ‘minimal presence’ whilst exploiting to the fullest the Miri Light Crude that now trades in place of Tapis Crude from Malaya which has depleted. Instead, new multi-billion ringgit investments are going to places where no indigenous oil and gas resources exist.

Redressing of Economic Imbalance

The Sarawak Government must therefore stand firm and resolute in strategically addressing the situation and properly managing Sarawak’s petroleum resources for the benefit of present and future generations of Sarawakians. Sarawakians, irrespective of their political beliefs, must therefore stand with the Government in this regard.

The economic imbalance between Malaya and Sarawak needs to be redressed and Petronas needs to adjust to this economic reality. It is ultimately in the national interest that both sides make sacrifices for each other, and not one way only.

History will show that Sarawak has contributed far more than its fair share to the nation’s economic growth, at the expense of its own needs. Sarawak and its people cannot remain deprived of the real fruits of the management and development of their own petroleum resources. Petronas and the Federal Government’s take from Sarawak’s petroleum has been around 91%, with Sarawak only getting 1-2%. This has to change.

In all federal systems throughout the developed world, states are never deprived of the benefit of their God-given resources, as federal coffers can be filled through many other avenues.

Sarawak and Sarawakians deserve to be in the mainstream of development of Malaysia. Now.

Suarah Petroleum Group