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Tom Kirkman

Sales tax ups ante in Malaysian resources battle

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Sharing this because I was one of the sources of background information for the author of the article.  We had a nice chat for an hour about Sarawak oil & gas and LNG, Petronas, Malaysia's federal government reliance on oil revenues, and so on.

Paywall, so I am sharing most of this article.

Sales tax ups ante in Malaysian resources battle

The key issue: The Malaysian state of Sarawak, Home to the 29.3 mtpa Bintulu LNG export complex, Is threatening legal action against Petronas if the NOC does not pay a 5% sales tax imposed on the export of petroleum products.


The political battle for control of hydrocarbon resources in Sarawak is intensifying after the eastern Malaysian state threatened to file a lawsuit against Petronas over a sales tax.

New upstream projects waiting to take FID and already delayed by the struggle now look set to face further hold-ups. Significantly, further delays will limit the expansion in production needed to help maintain LNG exports.

The sales tax – which covers crude oil, gas and LNG – was introduced on 1 January 2019 despite attempts by Petronas to block it through legal channels. The tax is a straight deduction from revenue, effectively an additional 5% royalty on top of the actual royalty rate of 10%. Petronas, one of the top hydrocarbon producers in Sarawak, asked to defer the payment for H1 2019 while its negotiations between with the state and federal governments continued. Sarawak approved the deferment until June 2019 but is now demanding full payment of the tax by the end of October. Otherwise, the state will start legal proceedings against Petronas.

IOCs such as Shell and Murphy Oil have all reportedly paid the tax, with Petronas being the only operator unwilling to do so.

The tax – estimated to generate at least $930 million per year – has been designed as a new source of revenue to support Sarawak’s development agenda. But the levy has created uncertainty in the oil and gas sector, particularly as Sarawak claims there is no legal cap to the tax rate. This means the rate could be reviewed at any time and may rise above the current 5%.

Chart showing Malaysian gas production by area

Investor confidence

The uncertainty has led to a loss of investor confidence in Malaysia, which has traditionally been the most successful country in Southeast Asia in creating a stable and predictable environment for E&P players of all sizes. Many IOCs are now seeking to exit the country. In July, Murphy Oil completed the sale of its Malaysian assets to Thai NOC PTTEP.

There is widespread resentment in eastern Malaysia over how the region’s natural resource wealth has been managed and distributed. Although the area produces much of the nation’s petroleum wealth, Sarawak and the neighbouring state of Sabah remain much less economically developed than Peninsular Malaysia.

The Pakatan Harapan party, which stormed to power in federal elections in May 2018, campaigned to devolve more power to Sarawak’s government. It also promised the state a greater share of the petroleum royalties, but this has not been forthcoming. As a result, Sarawak is pushing hard to assert ownership of its onshore and offshore resources.

Sarawak raised the stakes earlier this year when it blocked Petronas’s Kasawari project just as the company was getting ready to take FID.

Talks are still ongoing between Petronas, Sarawak’s government and Malaysian Prime Minister Mahathir Mohamad about the state’s involvement in oil and gas ventures within its territory. Mahathir is keen to negotiate a deal that appeases Sarawak while not weakening the NOC so that planned upstream projects can move forward. This is no easy task.

So far, the parties are finding it hard to strike a compromise. Nevertheless, Sarawak wants all the outstanding issues regarding unpaid taxes, higher royalties and control of state resources resolved by the end of October. This seems unlikely. 

At the heart of the problem is money. The federal government does not want to undermine Petronas’s strength by cutting its revenues. Kuala Lumpur also relies heavily on dividends and royalties from Petronas to run the country. Nearly one-third of the federal government’s revenues will come from petroleum-related sources this year. Sarawak’s resource nationalism drive is directly threatening the federal government’s coffers. Given the opposing points of view, the dispute looks set to simmer for some time.


The Bintulu complex is already facing a short-term supply crunch, and this looks set to persist until at least 2025, although it will probably last longer if the political spat cannot be resolved soon.

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Yep, but it is reality Douglas.  I covered quite a few additional points that aren't mentioned in the article.  But you already know how much I can shoot my mouth off on the topic of local O&G.  Some of which dare not be published.


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Two thoughts. First, a 10% royalty sounds like a good deal to me. Does everyone get that rate, or only the NOC? Second, given that Petronas seems to be an arm of the federal government, is this a state versus fed beef? How do those usually work out in that neck of the woods? 


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Here is an oversimplification.  It is messy, complicated, and being legally disputed in federal courts.

Current oil & gas royalty is 5%.  In the federal elections held a couple years ago, a major election promise was to increase the oil & gas royalty to 20% to the oil & gas producing states. 

This turned out to be bullpoop.  Federal government has admitted it will not be able to pay 20% royalty.  The royalty remains at 5%.  Increasing the royalty to the oil & gas producing states from 5% to 20% was a promise made *in writing* by the opposition party, and the opposition party won the federal government for the first time ever, unseating the political party that had been in power uninterrupted for over 50 years.  The opposition party renegged when it won power.

Sarawak state is trying to take oil & gas royalty matters into its own hands, by adding its own 5% tax.  Petronas (i.e. the Federal government) is not playing ball.

Per the Petroleum Development Act 1974 (attached below) Petronas is owned by the Prime Minister's department of the Federal government.  Petronas reports directly and only to one person - whoever is the Malaysian Prime Minister, and must follow instructions given by the Prime Minister.  It might help to think of Petronas as the personal piggy bank of whoever is the PM.

Here are a few of my related old articles I wrote on LinkedIn:

Petronas Infographics Regarding Oil & Gas Dispute with Sarawak, which were Submitted to Bernama

Hey Petronas, Royalties are *not* the same as Profits

So About That Petronas Dividend From Its Cash Reserves

The Inaugural Sarawak Oil & Gas Seminar & Exhibition

It wouldn't surprise me if Petronas lawyers start lurking around here, they tend to get a bit nervous and annoyed when I shoot my mouth off in plain, blunt language what my opinion is on the dispute between Sarawak and Federal government regarding Oil & Gas.  Petronas reps got up and walked out in a huff when I was giving a speech on this topic at a Sarawak Oil & Gas Seminar in April.

Act 144 - Petroleum Development Act 1974.pdf


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