Sarawak sees oil settlement agreement as progress

Agreement shall create higher value-added opportunities in Sarawak and develop skilled technical talent


THE commercial settlement between Petroliam Nasional Bhd (Petronas) and the Sarawak state government will clear the way for both parties to develop the state’s oil and gas (O&G) industry.

Before the agreement, the two parties were at odds, with Sarawak demanding autonomy to develop oil resources within the state borders, resulting in litigation by both sides.

That is now settled, with the agreement signed by the two parties on Monday seen as a compromise but an essential milestone for Sarawak and Petronas to benefit from the state’s oil reserves.

Under the commercial settlement agreement, Sarawak through its state-owned company Petroleum Sarawak Bhd (Petros) will be able to manage, control and undertake all petroleum operations relating to exploration, exploitation, winning and obtaining petroleum onshore Sarawak (on land), according to Sarawak state government.

Williams Business Consultancy Sdn Bhd founder and director Dr Geoffrey Williams said the agreement shall create higher value-added opportunities in Sarawak and develop skilled technical talent.

“The agreement tries to create a win-win solution where local business can benefit from heavy investment by Petronas, and the state government can also benefit more from the presence of Petronas in the state.

“So, it should stimulate local supply industries and small and medium enterprises as partners with Petronas, as well as stimulate local employment,” Williams told The Malaysian Reserve (TMR).

He said greater O&G investments in Sarawak would have a multiplier effect for wider development in higher-quality economic activities.

According to Assistant Minister in the Chief Minister’s Department (Law, State-Federal Relations and Project Monitoring) Datuk Sharifah Hasidah Sayeed Aman Ghazali, the agreement provides equity participation in Petronas offshore upstream exploration and production (E&P) for petroleum arrangement.

It also provides additional equity investments in Malaysia LNG Sdn Bhd and Malaysia LNG Dua Sdn Bhd on a commercially acceptable, arm’s-length basis, and the terms and conditions are to be mutually agreed by both parties.

Petros would also be able to formulate and implement its own gas masterplan following the agreement, while still benefitting from Petronas’ vendor development programmes which would stimulate Sarawak’s petroleum industry.

TMR previously reported that the newly sealed commercial agreement would need to provide investment incentives for it to remain attractive to 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 E&P.

“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 TMR.

The expert said 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.

Not everyone is happy with the settlement agreement. One critic said the commercial agreement skirted autonomy to develop Sarawak oil resources, a major demand from state activists.

Sarawak MP See Chee How said the agreement fell short and disappointing. In a statement, he said the state government gave ground on the constitutionality and legality of the provisions of the Petroleum Development Act 1974.

However, the federal government sees the agreement as a step forward. Prime Minister Tan Sri Muhyiddin Yassin said the settlement will be a new start to invigorate the O&G industry in Sarawak and create new business opportunities.

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.

Read our earlier report

Incentives needed for investors in Sarawak O&G