Over the past year, Sarawak has pressed hard for Petronas to ink a deal that would make Petroleum Sarawak Berhad (Petros) the sole gas aggregator in the state.

Last week, Sarawak premier Abang Johari Openg refuted suggestions that his state was acting greedily, saying it was merely exercising a “constitutional right” to distribute gas which belongs to the state.

He had previously said Sarawak was prepared to battle any party that “disrespects” its “rights” in a court of law.

Thankfully, there is also some evidence to suggest a willingness on both sides to come to a compromise.

Last month, Prime Minister Anwar Ibrahim expressed his openness to negotiations premised on trust, understanding and mutual respect.

Speaking of federal-state relations, Anwar told FMT: “(Malaysia has) a federal system. We navigate, we negotiate, but we draw the line (if the need arises).”

His deputy, Fadillah Yusof, a Sarawakian, expressed hope that a mutually beneficial outcome will be reached: one that would be advantageous to both the state and nation.

“What we want to achieve is a ‘win-win’ arrangement for both the state and the federal government,” he told FMT.

Tengku Razaleigh said a win-win federal-state partnership, built on integrity and a commitment to the fair distribution of wealth among all Malaysians, was already present when Malaysia’s oil and gas industry was first established in 1974.

Since then, every state has benefited from the availability of public goods such as healthcare, education, and national defence. The challenge for today’s leaders, he said, was to recapture this spirit and reaffirm their commitment to these principles.

Sarawak’s claim to O&G

The Petroleum Development Act 1974 (PDA) vests in Petronas the exclusive right to all onshore and offshore petroleum resources throughout the country, including in Sarawak. It is a right that the national oil company has exercised unchallenged for the last 50 years.

However, Sarawak has in recent years taken various steps to stake its own claim to these precious resources. It passed the Distribution of Gas Ordinance (DGO) in 2016 and incorporated Petros the following year.

Sarawak traces its entitlement to two other pieces of legislation. It claims the Sarawak (Alteration of Boundaries) Order in Council 1954, issued during colonial rule, extended the state boundaries to include the continental shelf off its shores.

It also says another state law, the Oil and Mining Ordinance 1958 (OMO), which pre-dates the PDA, grants it rights over all O&G resources within those boundaries.

Legal experts, however, have challenged those assertions, but that does not appear to have deterred Sarawak from insisting on Petros taking complete control of the buying, selling, price-fixing, supply and distribution of natural gas in the state.

Sarawak’s motiviations are clear. It is seeking to generate greater revenues for its coffers. It also wants to ensure that 30% of gas is made available for domestic use, in line with the Sarawak Gas Roadmap 2030, up from 5% presently.

Sarawak also claims the state has not received its fair share of the spoils, accusing the federal government of a bias towards Peninsular Malaysia over the years.

Visionary leadership

Speaking to FMT, Tengku Razaleigh called for both federal and state leaders to rise above the dispute and emulate the foresight of their visionary leaders of the early 1970s who put the current structure in place.

He said the federal government, led by then prime minister Abdul Razak Hussein, negotiated with its constituent states for the nationalisation of all O&G resources and the creation of Petronas.

Sarawak’s then chief minister, Rahman Ya’kub, was instrumental in those negotiations, which were carried out in good faith and with a common desire to put national interests first, Tengku Razaleigh said.

“(Rahman) wanted a body to be created. Having taken into consideration the laws that had been enacted in the states, Petronas was born.”

Tengku Razaleigh added that the nationalisation of all O&G resources gave Malaysia a fresh start.

“We could (now) make use of the oil wealth to build up the country, let it grow together, and let the people benefit.

“Tun Razak’s noble thinking was that oil money should go back to the people, and I agreed with him,” he said, adding that the then prime minister had everyone’s complete trust to be custodian of the nation’s wealth.

A step too far

In recent years the national oil company has developed a working relationship with Petros, including by playing a leading role in the state’s carbon capture and storage efforts.

However, Petronas has stopped short of surrendering the gas aggregator role, which may be a step too far and would have severe financial consequences for the entire country.

Tengku Razaleigh recognises that Sarawak may feel entitled to more than it is getting, but cautions the state against taking steps that could hurt Petronas.

“If Sarawak feels that they’ve been victimised, why not bring up the issues (to Putrajaya)? Talk with the central government or the prime minister, who is in charge of Petronas.

“See where things have gone wrong and where they have been shortchanged and I’m sure they can put it right. But for heaven’s sake, don’t kill the goose that lays the golden egg,” he warned.

Former prime minister Muhyiddin Yassin concurred, warning that hurting Petronas may backfire on Sarawak.

“You cannot go as far as to kill the goose that lays the golden egg. Because if Petronas makes losses, so will Sarawak,” he told FMT.

Indeed, any divestment by Petronas of its role as the sole gas aggregator in Sarawak will have a significant impact on the company’s finances.

Since Petronas’s inception, the company has contributed roughly RM1.4 trillion in oil dividends, taxes and cash payments to Malaysia’s socioeconomic development and nation-building.

But with 90% of its gas cargoes said to come from Sarawak, Petronas expects to see its annual gas profits of between RM10-20 billion shrink substantially. It also projects that its yearly export takings, estimated at RM136 billion last year, will be substantially slashed.

That may spell trouble for federal finances, meaning substantially lower contributions by Putrajaya towards development expenditure across all states, including Sarawak.

Petros, meanwhile, would likely have to operate on a much smaller scale.

Given the gargantuan investments required to operate in the industry, and without the benefit of Petronas’s stature, the economies of scale the national oil company enjoys and its readily available expertise, Petros may struggle to have the desired impact on Sarawak’s finances.

“Sarawakians are intelligent people. I know Abang Johari well. He surely knows that there are limits to the demands he can make,” Muhyiddin said.

“Sarawak does not undertake upstream exploration and production. They get those yields from Petronas’ activities.

“Petronas needs Sarawak, and Sarawak needs Petronas.”

Chasing a ‘win-win’ solution

Fadillah’s “win-win” solution would require both parties to put aside their respective legal positions to avoid a bruising “all-or-nothing” court battle.

“(If Sarawak wants) autonomy in the production of petrol, that can be studied,” former prime minister Dr Mahathir Mohamad told FMT.

His successor, Muhyiddin, called for the federal and state governments to be fair and reasonable in their negotiations, especially towards Petronas.

“Petronas is investing billions in Sarawak to drill in the high seas (for) petroleum. You (Sarawak) need Petronas.

“Even if they have large revenues, I know that Petronas has to reinvest larger amounts. What’s more, Petronas doesn’t just operate in Malaysia. Petronas operates in many countries to make up for any shortfall here.

“There must be a way of finding some fair and equitable solution to the problem,” he said.

Ultimately, Petronas does not belong to the government, Tengku Razaleigh explained. “It belongs to all the rakyat of Malaysia.”