Commenting on growing demands from states for a larger slice of oil and gas revenue, Johan highlighted Petronas’s “win-win” partnership with Sabah, signed in 2021, as a successful example of commercial collaboration.

“Petronas entered into this commercial collaboration agreement, ensuring that Sabah was able to get more equity participation in investments undertaken by Petronas in the state.

“In addition to that, there’s also greater focus towards ensuring that more work was then subcontracted to Sabah-based contractors. In 2024, we were able to disburse contracts worth over RM2 billion,” he said.

Johan said the arrangement ensures that all parties benefit from continued oil and gas investments.

Over the past year, several states have also pushed for a renegotiation of non-oil revenue-sharing arrangements.

In June 2025, Penang called for Putrajaya to implement a revenue-sharing mechanism involving sales and service tax collected from the state. The following month, Johor regent Tunku Ismail Sultan Ibrahim called for the federal government to allocate 25% of tax revenue collected in Johor to the state.

In November, Prime Minister Anwar Ibrahim pledged to honour Sabah’s constitutional entitlement to 40% of federal revenue generated in the state.

On the broader issue of revenue sharing, Johan stressed that the Federal Constitution already provides clear fiscal guardrails, defining federal and state revenue streams as well as expenditure responsibilities.

He said the constitution clearly demarcates responsibilities of federal and state governments, set out in separate lists, with shared obligations in the concurrent list.

“(The federal list) includes things like defence, education, health,” he said.

While acknowledging the states’ desire for development and a bigger share of revenue, Johan rejected the perception that Putrajaya has drained state coffers without reinvesting.

“It’s certainly not the case that the federal government has benefited from revenues collected in the state at the expense of the people of the state.”

According to Johan, the prime minister has made it clear the federal government consistently spends more in each state than it collects. Much of the federal expenditure earmarked for 2026 are priority projects requested by the states themselves, he added.

He cited several high-value federal investments in Sabah as examples of reinvestment.

“For example, in addressing MA63, the federal government has agreed to devolve regulatory control over electricity to Sabah, while continuing to provide subsidies for power,” he said, referring to the Malaysia Agreement 1963.

He also pointed to the sizeable increase in special grants paid to Sabah and Sarawak, as well as the Madani government’s revival of the Pan Borneo Highway Phase 1B — covering more than 706km of road construction at a cost of RM13 billion — as proof of Putrajaya’s commitment to reinvest in the states.

“(At the national level), development expenditure has consistently been increased for every single state, every year,” Johan said.

Financial pressure

For over five decades, Malaysia’s oil dividends have been central to the national budget.

But with global headwinds and mounting state demands for a larger share of revenue, Johan cautioned against leaning too heavily on Petronas to offset fiscal shortfalls.

“Petronas is a business. It will only be able to pay dividends out of profits. It needs to also be able to retain part of its profits to enable reinvestments,” he said.

Petronas dividends reached RM40 billion in 2022 and RM32 billion in 2023, when oil prices were higher, but that level appears no longer sustainable.

“Because oil prices have come down, we therefore have to accept a reduction in dividends going into next year,” he said.

“We’re confident that Petronas will continue to operate as a sustainable and viable business in the long term. But obviously, again, its profits are subject to the volatilities of global markets and demands from states.”

Johan said the government has already taken steps to broaden its revenue base to buffer the federal budget against such swings.

“It’s probably very fortuitous. The expansion of the SST and even the targeted subsidies will help ensure the resilience of our fiscal position,” he said.