The fiercely independent Sarawak state government is pressing national oil corporation Petronas for full control over its oil and gas reserves. The move could embolden other states to demand for more autonomy.
KUALA LUMPUR: The Sarawak state government has thrown down the gauntlet to Prime Minister Anwar Ibrahim’s administration in a determined campaign for greater autonomy.
In a sharp escalation of the state’s long-standing petition for greater self-rule, Sarawak has set an Oct 1 deadline for state-owned oil corporation Petroleum Nasional Bhd (Petronas) to finalise an agreement that would give the state complete rights over the supervision and the trading of gas extracted from the state.
Mr Abang Johari Openg, Sarawak’s chief minister, said his state administration would consider other options should Petronas fail to meet the new deadline and surrender all rights over the distribution and sale of liquified natural gas (LNG) to its wholly owned Petroleum Sarawak Bhd (Petros).
“Other parties have signed the agreement (to deal directly with Petros), including Shell … Now, ExxonMobil is expected to come to Sarawak,” he told the Malaysian media over the weekend, referring to the oil giants that already have an extensive and established presence in Malaysia. He did not elaborate on the options the state was considering.
POTENTIAL TROUBLE FOR PETRONAS
Whatever Mr Abang Johari’s state administration may have in mind, Sarawak’s next moves could spell serious trouble for both Petronas and the federal government on several fronts, and present Mr Anwar with his most complex political and economic conundrum since he assumed office after the inconclusive November 2022 general election, noted analysts and oil industry executives.
A takeover by Petros as the sole so-called aggregator of Sarawak’s oil and gas reserves would be viewed as a direct challenge to the decades-old monopoly Petronas has held over the national oil and gas reserves since its incorporation in 1974.
Sarawak accounts for close to 90 per cent of Malaysia’s national LNG exports, and Petronas has held sole rights over the buying and selling of the resource with a heavy reliance on long-term supply agreements with international buyers, particularly from Japan.
These arrangements draw billions of ringgit in annual revenue for the national oil giant that is Malaysia’s sole listing in the Fortune Global 500 list of the world’s largest corporations.
Petronas currently operates huge LNG installations in Sarawak and the mechanics of how Petros will take over the national oil corporation’s role, and what impact it would have on current long-term LNG supply arrangements, remain confidential.
But there is wide consensus among industry watchers that the impact on Petronas, which currently ranks as the world’s third-largest supplier of LNG, will be significant.
According to a report by Malaysian financial institution RHB issued on July 22, Petronas is set to lose a significant portion of its revenue should the new arrangement proceed.
There would be a major impact on how much the oil corporation will be able to spend on capital expenditure, significantly undercutting its ability to fund exploration activities – which represent the lifeblood of oil companies – and limiting the amounts it can surrender to the government’s national coffers in the form of dividends.
“The earnings impact to Petronas remains uncertain but may affect its ability to spend notwithstanding that it has committed to pay a sizeable dividend to the Federal Government,” the RHB report stated, adding that the gas segment of the corporation’s activities contributed about RM101 billion (US$22 billion) in revenue and roughly 38 per cent, or RM30 billion, of total profits for the 2023 financial year.
Petronas paid RM40 billion in dividends to the government in 2023, down from RM50 billion the previous year, according to the national oil corporation, and dividend payments this year are expected to amount to about RM32 billion.
Petronas is treading carefully.
In its official responses to the media, including CNA, the national oil corporation said that it is in close talks with both the Sarawak government and Mr Anwar’s administration to achieve a “mutual resolution” to the state gas distribution situation.
It stressed that “all parties need to understand and acknowledge each other’s constraints”.
POLITICAL CHUTZPAH, BUT “BE CAREFUL NOT TO OVERREACH”
The political chutzpah displayed by Mr Abang Johari, Sarawak’s chief minister or premier as he is referred to in the state, spotlights how the balance of power in Malaysia has been upended following the May 2018 general election that has since led to four changes in government.
The fractured political landscape in Peninsular Malaysia has turned Sarawak and neighbouring Sabah, which is collectively referred to as the Borneo bloc, into serious crutches for Mr Anwar’s unity government.
That, in turn, has emboldened the ruling political entities in the two states to impose demands on Kuala Lumpur to meet provisions established in a charter when both states joined then-Malaya to create the Federation of Malaysia in 1963, which at the time included Singapore. The island state became independent in 1965.
Of the two Borneo bloc states, Sarawak has been more aggressive in its dealings with Kuala Lumpur because of the political cohesiveness of the state government led by Mr Abang Johari.
The demands by Petros join a list of other demands by Sarawak.
Last month, Sarawak signed a memorandum of understanding with the Armed Forces Fund Board (LTAT), which manages the pension fund for certain members of the armed forces, to explore potential cooperation and sharing of information. Mr Abang Johari said it is securing necessary approvals to take a bigger stake in domestic financial institution Affin Bank, of which LTAT is the largest shareholder.
Two weeks ago, Sarawak also retook control of Bintulu Port, a previously federal government-controlled port in the state.
But it is the control over the oil and gas resources that is drawing close scrutiny.
According to the federal government, Sarawak’s probable and proven reserves of petroleum represent 60.87 per cent of Malaysia’s total, while Sabah’s make up around 18.8 per cent.
Sarawak is insisting that oil and gas resources in its territory must be regulated under a colonial-era Oil Mining Ordinance 1958, which stipulates that oil and gas resources found within 200 nautical miles of its waters belong to the state.
The state government wants the six new oil and gas fields discovered in the Balingian province of the continental shelf and the West Luconia area to be developed jointly with Petronas to ensure that the state receives more than the annual 5 per cent royalties that it currently enjoys.
Senior government officials and political operatives in Mr Anwar’s inner circle acknowledge that the demands by Sarawak and Petros could trigger a snowball effect and prompt other states to make greater demands on the federal government, which is already struggling with serious budgetary constraints because of a national debt burden of about RM1.22 trillion.
Several political and economic watchers in Malaysia say the stakes are also high for Mr Abang Johari, a seasoned politician who is regarded as a strong and able administrator.
“Abang Johari is in a strong position but he needs to be careful not to overreach (when dealing with the federal government),” said Mr Manu Bhaskaran, chief strategist at Centennial Asia Advisors.
“The gas distribution issue needs to be settled where it is a win for both sides, and I hope that the demand for full control by Sarawak is just an opening gambit in the ongoing negotiation.”
Source: CNA
