More than a century after it first struck oil, Sarawak remains a vital part of Malaysia’s O&G map. The state has received nearly RM96 billion in petroleum-derived revenue and over RM280 billion in upstream investment.

With Petronas anchoring operations in both Miri and Bintulu, Sarawak has transformed from an agriculture-based economy into one of the five Malaysian states to achieve high-income status, with a gross national income per capita of RM77,997.

Yet this wasn’t always the case. For decades, much of the wealth from Sarawak’s oil fields flowed out of the state, with foreign companies repatriating the lion’s share of the profits. It took the creation of Petronas and a national-level effort to ensure Malaysians — and Sarawakians — benefited more fully from their own resources.

Win-win partnership

Oil and gas have been pivotal in the growth and development of Sarawak for decades now, turning a state that used to depend largely on fishing and agriculture into a vibrant economy.

The fact is not lost on Sarawak’s leaders. At a Dewan Rakyat sitting in February, works minister Alexander Nanta Linggi expressed hope that, Petronas, the main driver of the oil and gas (O&G) sector, will continue to help uplift the state’s economy.

Linggi, who is secretary-general of the Gabungan Parti Sarawak (GPS) coalition as well as its lynchpin PBB, earlier acknowledged that the national oil corporation has contributed significantly to Sarawak.

For instance, he said in a social media post, Petronas has given more than RM600 million for human capital development in the state over the last 10 years.

In July last year, the World Bank named Sarawak as one of the five states in Malaysia that have achieved high income status, and Petronas has, in no small part, played a role in helping the state reach that level.

In its report, the World Bank noted that Sarawak’s gross national income of US$16,560 (RM77,997) per capita last year put it at number four among the top five states.

Sarawak’s treasure trove

The O&G sector is an important component of the Sarawak economy. Over the past 50 years, the state has received RM96 billion in financial benefits derived from petroleum products and liquefied natural gas (LNG), according to Prime Minister Anwar Ibrahim.

Anwar also told the Dewan Rakyat in February that more than RM280 billion has already been invested in upstream and infrastructure development in the O&G sector in Sarawak since the 1970s, underlining the importance of oil and gas in the state’s economy.

While Royal Dutch Shell was the first company to drill for oil in Sarawak, it is Petronas that has made petroleum products a major economic contributor.

But the impact of the O&G sector on Sarawak is more than just royalties, taxes and dividends. It has provided employment for thousands, as well as led in the growth and development of communities.

From the first drop to a gush

The O&G industry had its start in 1910 when the first oil well was drilled on Canada Hill, Miri. Shell was the first oil company to engage in exploration and production in Sarawak.

Through the many decades when it was the only player in the sector, Shell made huge contributions to the local economy through wages it paid to workers, purchases of supplies and services to meet the demands of its oil rigs, and as royalties to the government.

However, Sarawak’s share of the returns from its own oil resources was minimal. For instance, Shell paid the Brooke government a royalty of only five to 14 sen (in 1978 ringgit equivalent) for every ton of oil extracted. This was raised to 40 sen to 80 sen per ton after the Second World War.

In 1958, the government introduced a 40% income tax on oil revenue. Even so, Shell continued to retain most of the returns from the oil business. In fact, 90% of the profits was repatriated to its shareholders abroad.

This extremely low returns for Malaysia persisted for decades. It was only after the Petroleum Development Act (PDA) 1974 was enacted when the country began to reap the maximum benefits from its oil resources.

Nonetheless, Shell’s contributions in other areas are not insignificant. While only 5% to 10% of the oil profits went to Sarawak before 1974, mostly in wages to local workers and royalties to the government, Shell did provide employment and training for locals.

In the 1960s, many Sarawakians were hired as technicians and clerical staff in Miri, while others received scholarships to train as geologists and engineers. Many of them now work for local consulting firms and Petronas.

But Shell’s diminished role as a major player in the O&G sector in Malaysia was inevitable after the enactment of the PDA. Even so, it remains the second largest employer in Sarawak’s O&G sector, after Petronas.

A well-oiled machine

While Shell’s contribution to Sarawak is not small by any measure, it is dwarfed by the benefits that Petronas has brought to the state.

Under the PDA, Petronas has effective custody of Malaysia’s oil and gas resources, and with that comes the responsibility of developing the country’s O&G industry for the benefit of the people.

Foreign oil companies such as Shell continue to operate in Malaysia but as partners in production sharing arrangements.

For Sarawak, the immediate benefit from Petronas’s entry into the O&G sector is the substantial increase in royalties it receives from the national oil corporation.

Since 1976, the state has consistently been getting a 5% royalty on oil and gas annually. In recent years, that has amounted to about RM600 million a year.

As oil prices escalated around the world in the early 1970s, the O&G sector in oil producing countries also saw a growth in support services.

It was no different in Sarawak, which saw the emergence of services such as maintenance of facilities and pipelines, engineering and construction of platforms, fabrication of structures, offshore hook-up and commissioning work, underwater inspection and repair, equipment supply, logistics and technical consultancy.

Today, there are more than 70 oil and gas services and equipment (OGSE) vendors in Sarawak, serving Petronas mostly.

The number of local vendors is also growing rapidly, according to Petronas. In the first 10 months of 2023, a total of 49 Sarawak-based vendors won Petronas or Petronas-approved contracts, up from just 11 the year before.

Anwar told the Dewan Rakyat on Feb 17 that in the decade from 2014, registered vendors in Sarawak secured more than RM40 billion worth of contracts from Petronas.

Dozens of Sarawak-based vendors are already integrated into the Petronas supply chain and in the process, they also provide employment for the locals. For instance, Miri-based Transfame Sdn Bhd, which provides upstream engineering, procurement, construction, and commissioning services for offshore projects employs about 2,000 people, mostly Sarawakians.

Sarawak contractors will be given priority for 600 categories of work by 2030, up from 63 now, underlining the importance Petronas places on developing local capabilities.

Sarawakians are also given priority for employment in Petronas. Of its 4,631 employees based in the state today, a total of 4,173 or 90.11%, are Sarawakians.

At the executive level, there are 1,524 personnel with the rank of executive to manager, and at the management level are 70 personnel from the rank of senior manager to senior general manager. All of them are Sarawakians.

The towns that oil built

The most visible impact of Petronas’s presence in Sarawak is undoubtedly the growth of Miri, where Shell first struck oil,
and Bintulu, where one of the world’s largest liquefied natural gas (LNG) plants is located.

The industrial hub that is Bintulu today was just a sleepy fishing village back in the 1960s.

The first LNG plant began operations in 1978 and began exporting in 1983. It now has nine liquefaction trains with a
combined capacity of 25 million to 30 million tonnes per year, making Bintulu one of the world’s top LNG export centres.

Petronas is the majority shareholder of the plant, with the Sarawak government and a Japanese company as minority
partners.

Apart from LNG, Petronas also operates a gas-to-liquids facility and a urea fertiliser producing plant.

The decision back in the late 1970s to locate the LNG plant in Bintulu, alongside a new deepwater port, provided the main impetus for the town’s robust growth, according to Petronas.

The LNG project drew thousands to Bintulu. By 2020, the town already had 114,000 residents, up from just a few thousand in the 1970s.

The LNG plant also gave Bintulu in particular and Sarawak in general an economic boost. The oil-based industries in the town are projected to contribute RM14 billion to RM15 billion to gross domestic product (GDP) by 2030.

The impact on Miri is even more significant. Petronas located the headquarters of its Sarawak offshore petroleum operations in the town, which necessitated the provision of office space, supply bases and worker residences for the many exploration, drilling and production projects in the region.

From just over 20,000 in the pre-war days, the Miri population has swelled to more than 350,000 today, led entirely by oil and gas activities.

Miri, which achieved city status in 2005, now also serves as a commercial hub for the northern region of Sarawak as well as Brunei.

Conclusion

Without a doubt, oil and gas have played a major role in the development of Sarawak, and while Shell gave it a start, Petronas had made it a major revenue generator for the state.

Millions of Sarawakians have benefited, directly and indirectly, from Petronas’s efforts in harnessing the oil and gas resources for commercial purposes.

It has provided jobs and generated business opportunities, attracted skilled workers, spawned supporting industries and spurred public infrastructure development, all of which have helped to boost economic growth for Sarawak.