Focus View
Evaluate Sarawak’s O&G independence
FocusM team | 09 Mar 2018 00:30
A seismic shift is underway in the country’s oil and gas (O&G) industry with the recent announcement that Sarawak will be asserting complete mining rights within the state.

Is this move in the best interest of the nation? Unfortunately, there has not been much public debate or rigorous financial analysis on the pros and cons of such a milestone decision.

The sensitive matter has been brewing for years, but this agreement will have significant economic ramifications for Malaysia.

Although there is a myriad of underlying technical, political and legal issues, the public should be particularly concerned whether this is a progressive move for the industry and, to a larger extent, if the government’s coffers would be significantly reduced.

Sarawak has long pressured the federal government to have complete control over its O&G revenue and with the agreement, the state will be the first to have its own O&G company called Petroleum Sarawak Bhd (Petros).

Previously, Sarawak and Sabah earned only 5% in royalty payments for O&G deposits, and has lobbied the federal government to increase that to as much as 20%.

Petros, which was founded last year, was part of the promise made by the federal government to return state rights stipulated in the Malaysia Agreement 1963 (MA63).

Sarawak, through Petros, will now have complete control of all O&G projects in the state, including regulatory authority of upstream and downstream developments.

Prior to the latest move, the legal ownership and rights over O&G fields in the country belonged to Petroliam Nasional Bhd (Petronas), which pays royalties and dividends to the federal and state governments.

On one hand, the formation of Petros could provide much needed competition to Petronas which has enjoyed a monopoly in awarding big O&G projects. Petronas has welcomed the move and will collaborate with Sarawak within the current framework of the Petroleum Development Act 1974.

However, there has been little discussion on the possible downsides of this agreement, primarily if it has any significant impact on federal revenue. Sarawak will of course still contribute to the federal government via taxes on its O&G development, but there needs to be more indepth financial evaluation on whether this would cause a significant impact on the federal budget.

This could have domino effects on the development budgets of other states. As it is, Petronas has reduced its dividends to the federal government in the last few years due to the slump in oil prices.

O&G revenue has been a prime driver of domestic economic growth in the past few decades, and hence it is critical for the government to make long-term plans to manage any shortfall caused by the agreement with Sarawak. 

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