Sarawak questions law that gives Petronas power over oil production

petronas-sarawakKUALA LUMPUR: If Sarawak succeeds in its fight to get back its rights under the Malaysia Agreement 1963 from the federal government, there is likely to be a seismic change in the way Petronas operates there and the share of oil revenue that Sarawak gets.

If its territorial waters are extended back to 12 nautical miles, from three now, it may get the power to issue licences for mining leases for oil production. This would mean that Petronas, which now basically dictates oil and gas activities, may just have to apply for such licences to work in Sarawak waters.

According to a report in The Edge Weekly, for over four decades, the Petroleum Development Act 1974 (PDA) has been the bedrock of Malaysia’s oil and gas landscape. The PDA created Petroliam Nasional Bhd (Petronas).

Now, the Sarawak government is agitating for changes so that it enjoys the rights under the Malaysia Agreement 1963, including a better share of oil and gas revenue mined in Sarawak waters.

The late Adenan Satem, as Sarawak chief minister, had started the ball rolling by asking for higher oil royalties than the present 5%. In 2014, the Sarawak legislative assembly unanimously passed a motion to ask for 20% oil royalty.

Sarawak is now questioning whether the PDA is still valid. The PDA was passed in 1974, at a time when a state of emergency was in place, following the May 13, 1969, riots. The emergency was lifted in 2011.

The report said some parties were arguing that the lifting of the proclamations meant certain legislation, including the PDA, which was enacted using emergency powers, would cease to have effect.

“So, the question is, when the emergency was lifted, is (the PDA) [still] relevant? We don’t know. That’s what we have to discuss (with the federal government),” Sarawak Chief Minister Abang Johari Abang Openg was quoted as saying by The Edge.

The PDA issue is part of Sarawak’s pursuit of rights under the Malaysia Agreement 1963, which it says have been eroded.

Abang Johari was quoted as saying that one example of such rights was Sarawak’s claim to its territorial waters.

The Malaysia Agreement is an international treaty that was signed by the then Federation of Malaya, Sabah (then North Borneo), Sarawak, Singapore and the United Kindom, resulting in the formation of Malaysia.

“When we formed Malaysia, our boundary was 12 nautical miles, but now, it is only three nautical miles. Under Article 2 of the Federal Constitution, you cannot change our boundary [without Sarawak’s consent],” Abang Johari was quoted as saying, referring to the Territorial Sea Act 2012 (TSA), which limits a state’s claim to fisheries, marine and other resources to three nautical miles from the coastline.

The Federal Constitution allows Parliament to alter a state’s boundary but such changes require the consent of the affected state as well as that of the Conference of Rulers, and Sarawak has yet to enact any law accepting the changes under the TSA.

In fact, at the end of 2015, it unanimously passed a motion to reject the TSA. This is important for Sarawak because its oil and gas wealth as well as hydrocarbon deposits mostly occur beyond the three-nautical-mile line.

To strengthen its case, Sarawak sent a legal team to London last year to do further research on the Malaysia Agreement and gather additional documentation on its rights under the treaty.

The team found documents that strengthened its arguments, Abang Johari said. This includes the Sarawak (Alteration of Boundaries) Order 1954 by the Queen in Council, which stipulates that Sarawak’s boundaries include the seabed and subsoil beneath its territorial waters.

The report quoted an unnamed legal expert as saying: “The PDA does not exclude application of other written laws, including Sarawak’s Oil Mining Ordinance 1958. Under the Federal Constitution, only Sarawak can issue mining leases for oil production.”

What this means is that if the seabed beyond three nautical miles does belong to Sarawak, as argued by its government, Petronas would be required to obtain a mining lease to extract the oil and gas resources found there.

This, again, would mean the leverage over oil and gas resources would shift from Petronas to the Sarawak government.

The report said Abang Johari declined to comment on where he hoped the discussions would lead, except to say: “Let them (the legal team) discuss the legal implications, [it is] not for me to decide.”

According to the report, data from the Energy Commission shows that as at end 2015, Sarawak possessed 28.7% of known national oil reserves and accounted for 29.4% of national production. As for gas, Sarawak accounted for 52.7% of the country’s known reserves.

Also, Sarawak holds much potential in terms of unexplored hydrocarbon deposits.

The report noted that Abang Johari set up Petroleum Sarawak Bhd (Petros), to be Sarawak’s wholly owned oil and gas company, a few months after he came chief minister.

Abang Johari told The Edge, Petros would be an “active player” in the sector within two years, envisioning it to go into oil exploration, among other things.

The report said he, however, declined to say whether the fact that some production sharing contracts in Sarawak would end around that time had anything to do with his two-year deadline for Petros.

Asked if Petros would be vested with Sarawak’s oil and gas reserves if Sarawak succeeded in its negotiations, Abang Johari told The Edge:“Yes, something like that.” He added that the ideal would be a win-win situation for both Sarawak and the federal government.