Sarawak and Malaysia can’t afford escalating O&G disputes

Making Sarawak the sole aggregator of natural gas will be costly for the state and for Petronas, say experts.

(FMT) – Cool heads must prevail in negotiations between Petronas and Sarawak over demands by the state to take over the gas aggregator role, as both the state and the nation stand to lose significantly if an understanding cannot be reached.

In fact, Sarawak is likely to end up losing more than what it now hopes to gain from its fight for control over the distribution and sale of natural gas extracted within its boundaries, according to experts.

For a start the billions in investment in its oil and gas (O&G) infrastructure, currently underwritten by national oil corporation Petronas, is likely to dry up.

Secondly, even if Petroleum Sarawak Bhd (Petros) is appointed the oil and gas aggregator for the state, it is unlikely to be able to strike as fair a bargain as Petronas can in its dealings with the big players in the industry.

Sarawak has long held the view that it has been short-changed in the distribution of the nation’s oil wealth despite being the state that produces the largest portion of the commodity.

According to the federal government 60.87% of the nation’s total oil reserves is found in Sarawak. It also accounts for close to 90% of Malaysia’s natural gas exports.

Yet, it receives royalties of only 5% of the country’s total oil revenue. That amounted to RM2.8 billion last year.

What’s at stake

Industry players and experts have voiced concern that making Petros the sole gas aggregator for Sarawak could backfire.

In addition to regulating distribution, export allocation and fixing prices, aggregators are also responsible for maintaining and developing gas distribution infrastructure, a task now performed by Petronas.

While no official figures have been disclosed, it is undeniable that Petronas has spent billions in developing Sarawak’s O&G infrastructure and the sector as a whole over the decades.

Many have expressed fear that there will be a severe negative impact on Sarawak’s O&G sector if Petros cannot replace Petronas as the long-term investor.

“Whatever capital expenditure that is supposed to be spent by Petronas must then be borne by Petros,” an analyst told FMT on condition of anonymity.

Unless Petros has the capacity to spend the same amount or more, Sarawak’s O&G sector will be the end loser.

To get a fair idea of how much Petronas could have spent in capital expenditure on Sarawak, all one has to do is look at the national oil corporation’s overall investments.

In 2023 alone, it invested a total of RM26 billion in the O&G sector in Malaysia, including Sarawak.

Impact on earnings and investments

Petros will not be the only loser. Research houses agree that Petronas also stands to lose if it hands over control to Petros.

Analysts said Petronas’s bottom-line could take a hit if it gives way to Petros, specifically its RM20 billion annual profit just off the gas production in Sarawak.

This will reduce the national oil corporation’s future capital spending, particularly in the gas segment and upstream operations across the country.

A source close to the matter has expressed his concern that Petros may not have the means to fill the financing gap given how Sarawak wants Petronas out of just its downstream activities.

“They want to keep Petronas’s activities only at the upstream level,” the source told FMT.

In the O&G sector, upstream operations — otherwise known as exploration and production — are generally the most costly.

This is especially so in the South China Sea, partly due to weather conditions, depth of the sea and rising tension from China’s disputed claim over several islands.

“We are losing in a big way to Indonesia if (Sarawak and Petronas) can’t sort this out, because no one is spending enough or they are not spending in the right way,” added the analyst. “That is the saddest part. We Malaysians do not want to see that happen.”

International standing

Petronas founding chairman Tengku Razaleigh Hamzah was blunt in his assessment of Sarawak’s claims.

“Petros?” he said in response to a question at an exclusive interview with FMT. “You can have 10 of these like-minded bodies but it’s not going to be like Petronas.”

He pointed out that Petronas owns the oil “on behalf of Malaysians ”, and this was clear under the Petroleum Development Act 1974 which saw the O&G sector nationalised under one company controlled by the federal government.

Tengku Razaleigh said this was to ensure that Malaysia received a fairer deal when dealing with the “Seven Sisters”.

This was in reference to a group of powerful multinational corporations that dominated O&G production in the 1970s. The Seven Sisters included Shell and Exxon that are among the biggest players in the world.

Tengku Razaleigh said only a national oil company such as Petronas, which has the backing of the entire federation, will be able to avoid being strong-armed by global corporations.

He said that while Petronas and even himself can walk into a Shell or Exxon office and gain recognition and even “speak on equal terms”, Petros will not be able to do the same.

He said that appointing Petros in place of Petronas would only weaken Sarawak’s hand in negotiations with major oil companies.

Seeking justice

The Sarawak government bases its bid to make Petros the sole gas aggregator in the state on what it claims is in line with a deal to restore its autonomy over natural resources under the 1963 Malaysia Agreement.

This would give Sarawak higher compensation for the oil and gas extracted from its territory.

It wants its share of the natural gas allocation raised to 30% from 5% currently to meet domestic demand under the Sarawak Gas Roadmap 2030, a 10-year plan to leverage on gas to drive sustainable development.

However, Tengku Razaleigh pointed out that this perspective overlooks the benefits that Sarawak has gained by being a part of the Federation of Malaysia.

Notably, the federal government pays for a number of services such as defence, which Sarawak has consistently demanded to protect its O&G resources amid rising tensions in the South China Sea.

Tengku Razaleigh pointed out that the federal government has also raised development financing for Sarawak over the years to compensate for past grievances.

Under the 12th Malaysia Plan, a total of RM4.8 billion has already been allocated for Sarawak for year 2025. The state will receive yet another RM5.9 billion under next year’s budget.