Malaysia's Petronas vs. Sarawak Court Case - Will It End Up In London Courts?

The court case between Petronas and Sarawak is heating up.  I've made dozens of comments and posts about this over on LinkedIn in the past few weeks.  (I have lots of Malaysian connections and followers on LinkedIn, but there are not many Malaysians yet here on the Oil Price forum.)

Let me try to summarize as best I can what is going on, at least from my point of view. 

A bit of background for those who don't know me... I'm a U.S. Citizen and a Permanent Resident of Malaysia, married to a Malaysian Citizen for many years.  Living and working in Malaysia for over 15 years, in local Malaysian Oil & Gas and in International Oil & Gas.  I worked in Sarawak, Malaysia for 3 years.  And I will eventually retire here in Malaysia.

I have a particular interest in Petronas.  Two years ago, as a moderator on the Oilpro forum, I interviewed Malaysia's former Petronas Advisor / former Prime Minister Dr. Mahathir Mohamad about Petronas.

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So here is what is currently going on.  Malaysia's National Oil Company Petronas (a Fortune 500 company) recently filed a court case seeking a declaration / clarification that it has exclusive ownership of all of Malaysia's oil & gas resources, as per Malaysia's Petroleum Development Act 1974.

This was in response to Sarawak's setting up of its own State Oil & Gas company called Petros.  Sarawak is claiming ownership of all natural resources within its boundaries.

A bit of history is necessary to help explain the dispute.

The country of Malaysia was formed by 4 separate entities joining together: Singapore, Malaya (currently Peninsular Malaysia) Sarawak and Sabah (both on the island of Borneo).

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Agreements were made in London in 1963 between all parties, and all parties in the agreement were considered equal.  Special rights and privileges were granted Sarawak and Sabah, in areas such as religion and local immigration.  This was agreed by all parties, to prevent an infringement of the sovereign rights of Sarawak and Sabah by Malaya (currently Peninsular Malaysia).

Singapore left Malaysia a few years after the country was formed.

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Sarawak and Sabah are not just another of the 13 states of the country of Malaysia.  Sarawak and Sabah are supposed to be equal partners with Peninsular Malaya.

Anyway, the Malaysia Agreement 1963 is an International Agreement, filed in London, and needs the agreement of all parties for the Act to be amended.  The Malaysia Agreement 1963 has never been amended since 1963 (to the best of my knowledge).

During Malaysia's Emergency rule in 1974, the Petroleum Development Act 1974 was rather hastily enacted, and formed Malaysia's National Oil Company called Petronas.  This Petroleum Development Act 1974 was enacted by the Federal Government (in Peninsular Malaysia) without being voted on by the Parliaments of Sarawak and Sabah.  The Chief Ministers of the states (similar to State Governors) agreed to the Petroleum Development Act 1974, without the consent of their constituents, and without being voted on in their local parliaments, which is contrary to the local Sarawak and Sabah constititions.

Last month, in May 2018, Federal elections were held, and for the first time ever, the ruling coalition was voted out after 50 years, and the Opposition coalition formed the new government.

Two of the election promises made were that the current 5% royalty payment from Petronas to the oil & gas producing states would be increased to 20% royalty, and also the rights of oil & gas producing states would be re-examined.  In other words, revisiting and updating the Petroleum Development Act 1974.

Sarawak had earlier declared that starting 1st July this year, all oil & gas contracts must be approved by Sarawak.  Effectively disputing Petronas' claim to all oil & gas resources in Malaysia.

My view is that in local Malaysian courts, Petronas will likely win, under the local Malaysian agreement of the Petroleum Development Act 1974.  Local Malaysian courts seem to side with Government Linked Companies.

On the other hand, my view is also that in International court (in London) Sarawak would likely win, under the International agreement of the Malaysia Agreement 1963.  (The Agreement was signed in London.)

My own preferred scenario would be for the Petroleum Development Act 1974 to be amicably amended.  Petronas and the oil producing states should probably sit down together and amicably work out a new agreement, that all parties can agree to.

For context, the Malaysia Constitution has been amended more than 50 times (with changes to over 700 Articles and Schedules) in 50 years (that's not a typo).

Seems to me it is long overdue for the Petroleum Development Act 1974 to be amicably ammended, with the agreement of all parties.

/ Side note: if I am factually incorrect on anything here, please let me know, and I'll correct it.

On to today's news:

Sarawak to use documents found in London last year in Petronas suit

Sarawak will use documents related to the 1963 Malaysia Agreement which were found in London last year as a reference in its fight for rights to oil and gas produced in its territory.

State Law, State-Federal Relations and Project Monitoring Assistant Minister Sharifah Hasidah Sayeed Aman Ghazali said the documents, discovered by a team of lawyers which she led, could serve as evidence on the state’s rights.

“We will definitely use the documents that we obtained in London; they are certified true copies not just photostated. These will be used to assist us as evidence later in court,” she said when asked about Sarawak’s preparations in facing Petronas’ attempt in the Federal Court to seek a declaration that the Petroleum Development Act 1974 was also valid for the petroleum industry in Malaysia.

The national oil company had applied for a declaration of its exclusive ownership of the country’s petroleum resources, and named the Sarawak government as respondent.

... In September last year, Sharifah had said that documents obtained by the team to London included those on the “Continental Shelf”, which confirmed the ownership rights of the state to the natural resources on the seabed and in the subsoil of the continental shelf within the boundaries of Sarawak.

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This is definitely an interesting development.  

Are you living in Sarawak?  I figured you were living in Kuala Lumpur or near the border of Singapore.  

I'm curious to know if this court case will impact your career or current employers in anyway.

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I'm currently living in a suburb of Kuala Lumpur; lived in Sarawak over a decade ago.

It shouldn't impact my career or employer.  That's because we are in international oil & gas, although I live and work in Malaysia.  Malaysia's Oil & Gas (and LNG) will continue to be produced and refined.

It might help to think of this Petronas / Sarawak spat as more of a contractual dispute, but there is no stop work order.  And the contractual dispute is heading for arbitration.

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From Petronas web site, here is the earlier press release, announcing its intention to clarify.  The entire text is copied verbatim below:

Media Releases - 2018

4/6/2018

PETRONAS FILES TO CLARIFY PDA 1974

PETRONAS today has filed an application before the Federal Court seeking for a declaration on the Petroleum Development Act 1974 (PDA) being the law applicable for the petroleum industry in Malaysia, and that PETRONAS is the exclusive owner of the petroleum resources as well as the regulator for the upstream industry throughout Malaysia, including in Sarawak.

PETRONAS believes that the determination by the Federal Court would help provide clarity on its rights and position under the PDA. PETRONAS remains committed to support Sarawak’s aspiration to participate in the oil and gas industry in the State, for as long as it is within the framework of the PDA.

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(edited)

Thanks for the article, I'll have to keep closer tabs on it. I must admit I did not even know about this issue, as I spend most of my time keeping on top of other oil related issues, like Venezuela.

Probably not too interesting to the average person, but as I used to live in Brunei it is of interest to me.

 

 

Edited by Refman
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So I'm getting some flack about this from a number of local Malaysians.  Had a lively, fiery discussion last night with a local businessman who insisted that Sawarak is just a state in Malaysia, and that the federal government owns all resources in the country that is below 6 feet deep underground.

We could not agree that Sarawak and Sabah and Singapore and Peninsular Malaya came together as equals to form the country of Malaysia, as per the Malaysia Agreement 1963.

His view is the Petroleum Development Act 1974 over-rules the Malaysia Agreement 1963 because it is later.  My view is the PDA 1974 was not voted on by Sarawak and Sabah legislatures, and is therefore invalid per Sarawak and Sabah state constitutions.

We ended up amicably agreeing to disagree.  We did end up agreeing that probably the best solution going forward is for the PDA 1974 to be amicably re-negotiated by all parties, and amended.  Will wait to see what the locals have to say.

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3 hours ago, Refman said:

Thanks for the article, I'll have to keep closer tabs on it. I must admit I did not even know about this issue, as I spend most of my time keeping on top of other oil related issues, like Venezuela.

Probably not too interesting to the average person, but as I used to live in Brunei it is of interest to me.

Refman, you might find this old thread from 2012 interesting.  Helps explain why Sarawak and Sabah are annoyed by Petronas actions:

Malaysia ceded 3 million acres of offshore oil Blocks L & M to Brunei in March 2009 without any credible explanation. The area is equivalent to the combined total area of Penang, Perak, Melaka & Selangor. Estimated total future loss for Malaysia? RM 300 billion!

 

Also, side note to forum Admins, when I wrote this article, it was meant to be an original content article, not just a forum thread.  Google News picked it up anyway; this morning this thread was #2 on Google News search for Petronas:

 

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