Long-term solution needed in battle for oil and gas with Sarawak

 

From Wan Agyl Wan Hassan

Was Dr Mahathir Mohamad wrong in calling for Sarawak to contribute towards developing Peninsular Malaysia’s more backward states?

Sarawak premier Abang Johari Openg appeared to push back hard at the suggestion, calling the former prime minister’s proposal “unreasonable”, and saying that his state must first concern itself with the welfare of its own people.

Dr Mahathir’s contention has some merit.

The passing into law of the Petroleum Development Act 1974, which saw the creation of Petronas, was intended to bring development throughout the country without exception.

Poorer states, including Kedah, Perlis and Kelantan, should be entitled to rely on a fair share of funds from the national oil company for their development needs.

For his part, Abang Johari will surely not deny that Petronas has over the years contributed significantly to Sarawak’s own growth.

Its LNG plants in Sarawak have played a big part in creating jobs for the Sarawakian people. This is a great example of what can happen when federal and state resources work together, allowing Petronas to unlock more possibilities and contribute to the success of the O&G sector in Sarawak.

But the Sarawak premier is also not wrong to say that he is obliged to prioritise the welfare of the people of his state, although, with respect, this cannot be to the extent of depriving other states a fair share of funds generated.

Sarawak has clearly been laying the groundwork to launch its claim for all rights over the continental shelf off its coast for several years now. In fact, it made public its legal position five years ago.

On Oct 18, 2019, Sarawak state assembly speaker Asfia Awang Nassar claimed that the federal government’s acquisition of the continental shelf off the state’s coast was unconstitutional.

He said a 1954 Order in Council issued by the British colonial government extended Sarawak’s boundaries to cover the seabed and subsoil beneath the high seas off the state’s coast. He also claimed that Sarawak retained the extended boundaries when it joined Malaysia nine years later.

Sarawak cannot be faulted for seeking to enhance its rights. The maritime area off its shore is rich in resources and would grow state coffers exponentially.

But Sarawak already earns a tidy sum under the present arrangement. Last year, it was reported to have earned an estimated RM7.4 billion from O&G-related revenue alone, propelling it to the status of a high-income state.

That figure included a hefty sum of RM3.5 billion in sales tax imposed on petroleum products, which Petronas agreed to pay beginning in 2020.

Sarawak is also believed to have earned dividends estimated at RM1 billion last year through its stake in Malaysia LNG Group of Companies, a Petronas subsidiary.

Unlike Sarawak, the federal government has yet to publicly state its own legal position, let alone test it in court. That is not to say that Putrajaya does not have a sound position in law. The federal government may simply be holding its cards close to its chest.

Both governments may have merit in their respective legal positions, but court action should only be invoked as the very last resort, if all other options are no longer available.

In the meantime, the constant back-and-forth will only hurt both sides – both politically and financially.

Earlier this week industry expert Tengku Ngah Putra, the head of Majlis Tindakan Ekonomi Melayu Bersatu O&G, said the increasing demands being placed by several states, including Sarawak, over O&G resources may have an adverse impact on the states and nation in the longer term. He said all states must band together under a national economy to survive in the sector.

“In the natural resources game, the bigger your consolidated economy, the more leverage you hold against competitors, investors and customers,” Tengku Ngah wrote in The Edge.

There is no question that he is correct. By working as a unified O&G sector, Putrajaya and Sarawak can ensure Malaysia is more appealing to investors. Doing so will also help reduce costs and boost industries that support local economies like those in Sarawak. A collaborative approach is capable of unlocking more growth for everyone involved.

Managing sectors like upstream O&G or petrochemicals takes a lot of resources, and market fluctuations can make it challenging. Through collaboration, we will be able to manage risks better while supporting the long-term growth of Sarawak and Malaysia in the industry.

Tengku Ngah is also correct to say that states which seek exclusive control of O&G resources for themselves may not be able to take advantage of the economies of scale and would also have to assume greater risks. This could adversely impact their ability to attract large scale investment.

Having a coordinated approach across Malaysia’s O&G sector would also simplify things for investors. By creating a smooth and predictable environment, we would be able to attract more investment, helping Sarawak and the whole country benefit from stronger, sustainable growth.

Malaysia has been heavily reliant on oil money for the last five decades.

The time has come for the federal and Sarawak governments to put aside their differences, which if allowed to fester could potentially kill the country’s golden goose even before the fast depleting resources run out.

Both Putrajaya and Kuching must make national interest and long-term sustainability their priority and work towards a long-term formula that satisfies both and benefits the nation. - FMT

Wan Agyl Wan Hassan is a public policy consultant at Agyl & Partners.

He is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.