Incentives needed for investors in Sarawak O&G

by RAHIMI YUNUS / graphic by MZUKRI MOHAMAD

THE newly sealed commercial agreement between Sarawak state government and Petroliam Nasional Bhd (Petronas) would need to provide investment incentives for it to remain attractive for investors.

An industry expert said an agreement like that would have to create investment incentives as any increase in royalty amounts would discourage new investment in exploration and production.

“To have a successful agreement, part of it needs to ensure the right incentives are in place for investments in the state. Such an agreement may lead to higher investment costs, particularly in a low oil price environment, and cause lower investment and production in the coming years,” the expert, who asked for anonymity, told The Malaysian Reserve.

The expert said oil and gas (O&G) companies would invest based on their global portfolio projects and thus, the rate of return by investing in Sarawak compared to other projects throughout the world would be considered.

As it is, details of the commercial settlement are still publicly unknown, including how Sarawak would utilise the bigger share of revenue to fund higher capital shares to develop the O&G industry in the state and the facilitation from the agreement.

The Sarawak state government and Petronas concluded negotiations of the commercial settlement yesterday after resolving differences over the imposition of state sales tax on petroleum products and other O&G matters.

The commercial settlement agreement provides Sarawak with a greater share of revenues from O&G found and produced in the state.

It also provides for more active involvement by the state in the O&G industry through the management of onshore O&G resources by Petroleum Sarawak Bhd and investment by the state-owned company in the upstream ventures in offshore areas.

“Both the Sarawak state government and Petronas, continuing its current role as Malaysia’s national oil company, remain committed to working together to create and maintain a stable, conducive business and investment environment for the sustainable growth of the O&G industry, both upstream and downstream, in Sarawak.

“Towards this objective, the agreement provides for a consultative framework, whereby both parties will be able to jointly discuss and deliberate on matters of importance to the O&G industry, including those which affect the interests of the state,” Sarawak state secretary Datuk Jaul Samion and Petronas president and group CEO Tengku Muhammad Taufik Tengku Aziz said in a joint statement yesterday.

The signing ceremony was witnessed by Prime Minister Tan Sri Muhyiddin Yassin and Sarawak Chief Minister Datuk Patinggi Abang Johari Openg, among others.

Muhyiddin said in a statement that the settlement agreement will be a new start to further invigorate the O&G industry in Sarawak and create new business opportunities.

“The resolution to issues related to O&G management, including the agreement on the introduction of petroleum sales tax in Sarawak achieved earlier, will enable the Sarawak state government to expand revenue collection to be channelled to various development programmes for the wellbeing of the people from all walks of life,” he said.

In September, Petronas paid RM2.95 billion in sales tax on petroleum products to Sarawak owed from 2019.

The sales tax payment by Petronas and its subsidiaries was the result of a settlement reached between Petronas, the federal government and the state government.

Earlier, both parties had reached an agreement to drop their legal suits over the sales tax dispute.

Former Petronas president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin stepped down and was succeeded by Tengku Muhammad Taufik from July 1.