Lack of clarity curbs investments in Sarawak’s O&G sector

All stakeholders given till end of 2019 to procure necessary licences and leases from Petros for all O&G development works

By MARK RAO / Graphic By TMR

Investments in Sarawak’s oil and gas (O&G) industry are expected to remain at a standstill until clarity on regulatory control over the state’s petroleum resources is restored, according to an analyst.

Asia School of Business assistant professor of management Renato Lima De Oliveira said issues pertaining to the Oil Mining Ordinance 1958 (OMO),which overlaps the Petroleum Development Act 1974 (PDA), may become critical if the situation is not resolved soon.

He said it would not be productive if Petroliam Nasional Bhd (Petronas) and Petroleum Sarawak Bhd (Petros) start to publicly disagree over the direction of the industry moving forward.

The OMO, which took effect since its July 1 implementation this year, was subsequently amended 10 days later to consolidate Sarawak’s regulatory authority over its upstream O&G activities. At the same time, the PDA remains an applicable law in the country and grants Petronas exclusive ownership over Malaysia’s hydrocarbon resources.

As it stands today, all industry stakeholders are given till the end of 2019 to procure the necessary licences and leases from Sarawak’s state- owned Petros for all O&G development works.

“Until this grace period is over, we have a wait-and-see attitude that may stall investments at the margin,” De Oliveira told The Malaysian Reserve (TMR).

Among the complications include the government’s take or total taxes collected from O&G activities, technical requirements, relationship with suppliers and environmental and safety standards.

“It will be important to legally decide who has the authority to regulate O&G activities, which can be achieved either by a final court decision or by negotiation between the parties,” De Oliveira said.

The Federal Court dismissed Petronas’ leave of application on June 22, 2018, which sought to try the matter at the federal level, citing the declaratory sought is within the jurisdiction of the High Court.

Petronas will now have to take to the High Court of Sarawak if it wishes to uphold the PDA as the applicable law in the state or come to an out-of-court agreement with the Sarawak state government.

De Oliveira said the grace period provided by Sarawak indicates the state’s willingness to come to an amicable solution to avoid deterring prospective investors.

“In the view of the Sarawak government, it looks like they also want to avoid uncertainty to investors by giving time to negotiate a solution that can be permanent.

“Therefore, there is not much change for current operations, at least during this grace period, but for prospective investors, this uncertainty may have already tainted the sector,” he added.

Galen Centre for Health and Social Policy CEO Azrul Mohd Khalib said two scenarios are likely if the situation arises where there are two regulators over the same industry.

“The federal government, together with the Sarawak state government, can make a determination as to which part of the individual laws govern which part of the industry in a so-called collaborative and harmonised approach.

“Or the situation could require the intervention of the Federal Court to make a determination as to which law will be applicable or take precedence over the other, as this is potentially a constitutional issue,” Azrul told TMR.

The developments in Sarawak are part of several changes taking place in Malaysia’s O&G industry, which include plans to grant all oil-producing states a 20% royalty from the net profit of a given O&G project.

TMR reported earlier this month that higher oil royalties could dissuade investors from high-cost O&G projects, such as marginal fields or complex reservoirs, due to the reduced profit margins. This adds further uncertainty over the future of the country’s O&G sector.

However, Azrul said the developments would be part of a period of adjustment, opportunity and possible expansion for the industry.

“It could actually invigorate the industry, especially if there is actual realisation of the planned increase in royalties and management autonomy of this sector in Sarawak,” he said.

The higher royalties are aimed at providing the affected states access to funds for their own O&G development works.

Currently, a 10% oil royalty of gross profit is divided equally between the federal and state governments (namely Sarawak and Sabah) for a respective O&G development project.

Kelantan and Terengganu are granted compassionate funds under the current arrangement.