Abstract
This article examines the concept of federalism in the oil and gas industry in Malaysia. The petroleum industry is one of the 12 National Key Economic Areas (NKEAs) to enhance national growth under Malaysia’s Economic Transformation Programme (ETP). Due to its economic significance, the petroleum industry was given priority by the Government of Malaysia. The development of the oil and gas industry in Malaysia can be divided into two stages, ie the period before 1974 and after 1974. Prior to 1974, the ownership of hydrocarbon resources was placed under the jurisdiction of the respective 13 states forming part of Malaysia. In 1974, the Petroleum Development Act (PDA) was passed by the Parliament of Malaysia. Pursuant to the PDA, a national oil company has been established in the form of a public listed company which is called Petroliam Nasional Berhad (Petronas). The national oil company was granted the entire ownership and the exclusive rights, powers, liberties and privileges of exploring, winning and obtaining petroleum onshore and offshore Malaysia. Each state permanently conferred its ownership, rights, powers, liberties and privileges in the petroleum by executing the vesting instrument specified in the PDA. This article examines the rights of ownership of the Federation and the various states of Malaysia with regards to the hydrocarbon resources at the time of the formation of the Federation of Malaysia, and the gradual changes in the ownership of the hydrocarbon resources from the states to the absolute ownership of the Federal government in 1974. Furthermore, this article examines the legislation regulating petroleum resources and the role of the states and federation in the upstream oil and gas industry prior to 1974 and after the enactment of the PDA.
1. INTRODUCTION
Malaysia has the world’s 23rd largest crude oil reserves and 14th largest natural gas reserves.1 The petroleum industry is one of the 12 National Key Economic Areas (‘NKEAs’) to enhance national growth under Malaysia’s Economic Transformation Programme (ETP).2 Due to its economic significance, the petroleum industry was given priority by the Government of Malaysia.3 The development of the oil and gas industry in Malaysia can be divided into two stages, ie the period before 1974 and after 1974.4 Prior to 1974, the ownership of hydrocarbon resources was placed under the jurisdiction of the respective 13 states forming part of Malaysia. In 1974, the Petroleum Development Act (PDA) was passed by the Parliament of Malaysia.5 Pursuant to the PDA, a national oil company has been established in the form of a public listed company which is called Petroliam Nasional Berhad (Petronas).6 ‘In 1975, Malaysia’s 13 states signed agreements with Petronas and the Federal government entitling the states to a 5 percent royalty on revenue from local onshore and offshore oil and gas production paid in cash.’7 The five oil-producing states are Sabah and Sarawak in East Malaysia, and Kelantan, Terengganu and Pahang in Peninsular Malaysia. The petroleum was most recently discovered in Pahang in 2012.
The national oil company was granted the entire ownership and the exclusive rights, powers, liberties and privileges of exploring, winning and obtaining petroleum onshore and offshore Malaysia.8 Each state permanently conferred its ownership, rights, powers, liberties and privileges in the petroleum by executing the vesting instrument specified in the PDA.9 Nevertheless, the state government of Sarawak has recently claimed its constitutional rights in respect of oil and gas mining as well as gas distribution rights alleging that they belong to the state instead of the Federal government.10
‘Due to the strengthening of opposition parties at both the national and state levels from 2008 onwards, the issue of petroleum royalties has become the subject of intense political debate.’11 The states of Sabah and Sarawak have insisted on a greater portion of oil revenues. It was reported in a local newspaper sometimes in June 2018 that,
[s]ix days after former prime minister Datuk Seri Najib Tun Razak announced the dissolution of Parliament, Petroliam Nasional Bhd (Petronas) received a letter from the Attorney General (AG) of Sarawak, which it knew it had to act on. The letter effectively aimed to relieve Petronas as the undisputed guardian of oil and gas (O&G) resources in Malaysia and its powers to be shared with the state government-owned Petroleum Sarawak Bhd (Petros).12
The basis of its argument is founded on the Malaysia Agreement 1963 (‘MA63’) where it was argued that the agreement safeguards the rights of both Sarawak and Sabah and the MA63 also declares that these states are equal partners in the Malaysian Federation.13 Early this year, the cabinet has ‘agreed to amend Article 1 (2) of Federal Constitution to restore the status of Sabah and Sarawak as equal partners with Peninsular Malaysia’.14 A proposal was tabled in the Parliament to amend the relevant provision. Nevertheless, ‘the Federal government has failed to get the nod from the Dewan Rakyat for the Constitution (Amendment) Bill 2019, which sought to restore the status of Sabah and Sarawak as equal partners with Peninsular Malaysia as enshrined in the MA63’.15
In June 2018, the national oil company, Petronas had filed an application at the Federal Court for a declaration that the PDA 1974 is a law applicable to the oil and gas industry in Malaysia.16 Petronas also claimed that ‘it is l the exclusive owner of the petroleum resources, as well as the regulator for the upstream industry throughout Malaysia, including in Sarawak’.17 Nonetheless, such an application sought by Petronas to declare that the national oil company is the sole authority of all upstream oil and gas activities in the country has been dismissed by the Federal Court on 22 June 2018.18 That said, it is important to note that the Federal Court had only decided on a procedural matter in respect of the declaration sought by Petronas. However, it ‘had not ventured into the substantial issues of the legal dispute between Petronas and the Sarawak government’.19 In other words, the questions over petroleum rights and the dispute between Petronas (read the Federal government) and the state government of Sarawak still remain unresolved. On the other hand, the Sabah state government is not planning to file a lawsuit against Petronas. However, according to its Chief Minister, the company should pay what is owed to the state.20
Meanwhile, in 2010, Kelantan had filed a lawsuit against Petronas to demand the payment of outstanding petroleum royalties due since 1998 resulting from the refusal of the government to grant the petroleum royalties to the so-called ‘opposition-controlled states’ at that particular time.21 ‘As a response, the Federal government offered to make token “goodwill payments” to Kelantan, but still refuses to acknowledge the state’s royalty rights on the grounds that exploration takes place beyond three nautical miles from its shores.’22
This article examines the rights of ownership of the Federation and the states of Malaysia with regards to the hydrocarbon resources at the time of the formation of the Federation of Malaysia, and the gradual changes in the ownership of the hydrocarbon resources from the states to the absolute ownership of the Federal government in 1974. It also examines the legislation regulating petroleum resources and the role of the states and federation in the upstream oil and gas industry prior to 1974 and after the enactment of the PDA.
2. HISTORICAL DEVELOPMENT OF OIL AND GAS IN MALAYSIA
Petroleum exploration in Malaysia commenced at the beginning of the 20th century in Sarawak, where it was actually begun since the British colonial period. The colonizers exploited hydrocarbons and other mineral resources before independence in 1957. Petroleum exploration in Malaysia began in the early 20th century in Sarawak.23 Oil was first discovered in 1909 and first produced in 1910.24
Subsequently, by the 1950s, attention turned to the offshore. This was made achievable by new developments in offshore petroleum technology. In 1954, marine seismic surveys were carried out for the first time in Sarawak.25 The swing offshore started to show results in 1962 with the discovery of oil in two areas offshore Sarawak.26 In Peninsular Malaysia, petroleum exploration activities commenced in 1968 and the first oilfield was discovered in 1971.27
The offshore Malaysia oil and gas activity map to 2019 can be seen in Figure 1.28
Offshore Malaysia oil and gas activity map to 2019.
Previously, prior to 1974, oil companies in Malaysia had been operating under a concession system.29 Under this system, oil and gas operators are given absolute rights over certain areas, including potential reserves contained in the oil field.30 At this point, the entire operating expenditure area is borne by the operator. The operator has the absolute right to the contract, the right of acquisitions and the right to make decisions regarding technology.31 The state government does not have the absolute right to make decisions except for matters relating to the environment and safety regulations.32 In exchange for these rights, the operator is required to pay royalties and taxes.33 Oil companies operating under the concession system have been given full freedom in the management of resources and control of petroleum assets and crude assets as well as income gas.34 In return for oil and gas, companies will pay royalties to state governments which account for between 8 and 11 per cent of the production being sold and the company’s income tax at 50 per cent to the Federal government.35
3. PETROLEUM LEGAL FRAMEWORK PRIOR TO 1974
Prior to 1974, the petroleum in Malaysia was governed by the following statutes:
The Continental Shelf Act 1966.36
The Petroleum Mining Act 1966 (‘PMA66’) and its revision in 1972.37
The Petroleum Income Tax Act 1967 as amended by the Petroleum Income Tax Amendment Act 1977.38
Petroleum Mining Rules 1968.39
It is important to note that the above-mentioned legislations were only covered oil-producing states in Peninsular Malaysia, ie Kelantan and Terengganu. Nevertheless, the application of 1972 revised version of the PMA66 had been extended to Sarawak and Sabah by virtue of the Emergency (Essential Powers) Ordinance Number 10, 1969. The Ordinance specified that all rights and liabilities accruing to Sarawak and Sabah under offshore petroleum licenses issued prior to this Ordinance have been transferred to the Federal government. The Ordinance also spelt out that all applications for petroleum prospecting and mining licenses must be made to the respective State Ministers of Natural Resources for onshore areas and within 3 miles of territorial waters, or to the Federal Minister charged with the responsibility for petroleum resources development, for offshore areas beyond 3 miles of territorial waters.
4. PMA66
Concession relations between oil companies and state governments are governed by the PMA66 and the Petroleum Income Tax Act 1967. Both PMA66 and the Petroleum Income Tax Act 1967 stipulated a conventional concession-type relationship between oil companies (ie the concessionaires) and the host state. The concessionaires were granted entire freedom in the management of petroleum resources and control the ownership of all assets, and crude oil and gas produced. In return, the concessionaires paid royalty to the particular state amounting to between 8 and 11 per cent of output produced and sold after five years of production and corporate income taxes at the rate of 50 per cent to the Federal government. Posted price was used as the base for income tax payments.40
It is worth noting that by virtue of section 13 of the PMA66, it repealed most of the written laws pertaining to mining activities. Nevertheless, the same provision states that ‘any oil prospecting licence or oil mining lease issued under any of those [written laws] shall continue to subsist for the duration of time for which it is issued and shall not be affected’ by the PMA66.41 More importantly, it is essential to note that subsection (2)(a) of section 13 of the PMA66 also provides that,
[t]he Mining Ordinance of Sabah [Ord. No. 20 of 1960], the Oil Mining Ordinance of Sarawak [Cap.85] and any other State law in force in Sabah or Sarawak relating to mining shall continue in force except in relation to the exploration, prospecting or mining for petroleum in off-shore land and the provisions of the said Ordinances and any such law so far as they relate to the exploration, prospecting or mining for petroleum in off-shore land shall be deemed to have been repealed.42
Therefore, by reading on the face of the above provision, it may be understood that any power relating to activity pertaining to exploration, prospecting or mining for petroleum in offshore land was repealed by the PMA66 and is no longer under the power of the Oil Mining Ordinance of Sarawak 1958 (‘OMO’). Additionally, section 13(2) of the PMA66 provides the following:
(b) Any prospecting licence, mining lease or agreement issued or made under any written law in force in Sabah or Sarawak immediately before the 8th November 1969, for the exploration, prospecting or mining for petroleum on off-shore land shall continue to be in force subject to paragraphs (c), (d) and (e).
(c) All rights accrued or due to and all liabilities and obligations imposed on or borne by the Governments of Sabah and Sarawak under or by virtue of any prospecting licence, mining lease or agreement referred to in paragraph(b) shall accrue and be due to and shall be imposed on and borne by the Federal government.
(d) The provisions of the prospecting licence, mining lease or agreement referred to in (b) shall be construed subject to this Act
Thus, the state government of Sarawak must be cautious in claiming that the OMO still has the full force since its application has been limited by the PMA66. The OMO no longer confers power to the state to deal with any matter pertaining to exploration, prospecting or mining for petroleum in offshore land. This scenario becomes more complex when Sarawak State Legislative Assembly passed an amendment to the OMO in July 2018 ‘to grant exploration or prospecting licences and mining leases for exploration, prospecting and mining of petroleum (including natural gas)’.43
5. PDA 1974
It is important to note that after the occurrence of the oil embargo in 1973, oil-producing countries around the world are aware of the importance of monitoring their own petroleum resources.44 In Malaysia, the PDA was introduced in 1974, known as PDA, and a national oil company was set up to ensure that national petroleum resources could be developed in line with national requirements and interests.45 The company is known as the ‘Petroleum Nasional Berhad’ (National Petroleum Limited) or Petronas.46 The PDA which sanctioned the incorporation of Petronas received the Royal Assent on 30 July 1974.47
The oil and gas industry in Malaysia is under the control of a national oil company, Petronas which was incorporated under the Companies Act 1965 (Revised 1973)48 on 17 August 1974 as a public company limited by shares.49 Petronas is one of the prominent operators that have comprehensive power over the petroleum industry.50 ‘Petroleum’ is defined under section 10 of the PDA as ‘any mineral oil or relative hydrocarbon and natural gas existing in its natural condition and casinghead petroleum spirit including bituminous shales and other stratified deposits from which oil can be extracted’.51 Such meaning provided under section 10 of the PDA is also similar to the definition of petroleum under section 2 of PMA66.
As discussed previously, prior to 1974, the state government had given petroleum concessions to oil companies. They are granted exclusive rights to explore and exploit oil and gas sources. In return, these oil companies will then pay royalties and taxes to the government.52 It ended on 1 April 1975, when PDA provided the possession of crude oil and natural gas resources in Malaysia and offshore to Petronas together with exclusive rights to explore and exploit petroleum.53 Section 2 of the PDA provides that,
(1) The entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore of Malaysia shall be vested in a Corporation to be incorporated under the Companies Act 1965 or under the law relating to incorporation of companies.
(2) The vesting of the ownership, rights, powers, liberties and privileges referred to in subsection (1) shall take effect on the execution of an instrument in the form contained in the Schedule to this Act.
(3) The ownership and the exclusive rights, powers, liberties and privileges so vested shall be irrevocable and shall enure for the benefit of the Corporation and its successor.
The PDA also requires all applications to commence or continue any petroleum business or service to be addressed to Petronas.54 Although Petronas is subject to the control and direction of the Prime Minister with the advice of the National Petroleum Advisory Council (NPAC), there is criticism that a clear provision should be included within the PDA to determine how far Petronas has the privilege of conducting operations related to oil and gas resources.55 The establishment of NPAC is required by section 5 of the PDA which reads that,
(1) There shall be established a Council to be known as the National Petroleum Advisory Council consisting of such persons including those from the relevant States as the Prime Minister may appoint.
(2) It shall be the duty of the National Petroleum Advisory Council to advise the Prime Minister on national policy, interests and matters pertaining to petroleum, petroleum industries, energy resources and their utilization.
However, despite the mandatory provision, the establishment of NPAC is still questionable until today. In other words, to the best of the author’s knowledge, based on the Petronas official website56 and Petronas Annual Report 2018,57 the NPAC is not in existence in practice or was never formally established although provided so under the PDA. The special body such as the NPAC is important to ensure the smooth running of petroleum administration and to resolve any misunderstanding and confusion relating to petroleum matters including the issues relating to the jurisdictions, rights and royalties. While it is true that the Prime Minister has a wider power to make regulations for the purpose of carrying into effect the provisions of the PDA,58 his decision must be well guided and properly advised by the NPAC. In this regard, he must not act arbitrary but to exercise his power under the PDA in accordance with the advice of the NPAC where any decision is made purely to the best interest of the country.59
It may be argued that the absence of such a special body has weakened the governance of petroleum administration. While the Federal Court has recently in the case of JRI Resources Sdn Bhd v Kuwait Finance House recognized the importance of Shariah Advisory Council (SAC) of Central Bank of Malaysia to provide an expert opinion relating to Shariah issues on the Islamic financial matters,60 the NPAC should be treated as equally important to advise and provide expert opinion on matters where petroleum issues are concerned. Furthermore, the establishments of both advisory councils are provided and required under the respective statute.61
6. PRODUCTION SHARING CONTRACT
In the mid-1970s, Malaysia moved from the concession system to the PSC model. Such a move was made to offer great incentives to the foreign oil companies to maintain with the oil production and investment in oil and gas exploration without jeopardizing the national interest by foiling them an excessive level of rent capture.62 In fact, some countries have changed the approach of the concession system to Production Sharing Contracts (PSC) including neighbouring countries, Indonesia. As a result, concession agreements between Malaysia and foreign oil companies were transformed into production-sharing agreements that were mostly based on Indonesia’s production-sharing model.63
Under these agreements, Petronas was granted complete freedom to set the policy, form, terms and conditions of any new agreements, including those that were meant to replace the ones that were cancelled64 so as to reflect the changing conditions in the oil industry.65 Petronas is the regulator for all PSCs whom the parties are from several international oil and gas companies. In this case, any oil and gas companies that intend to implement hydrocarbon exploitation in Malaysia or other activities of oil exploration with Petronas must execute the PSC.
According to various sources,66 the PSCs would typically stipulate, among other things, (i) the contract duration in years, broken down into exploration, development and production periods; (ii) the commencement of production, the state participation, the management of operations; (iii) the cost recovery (cost oil) and cost recovery ceiling; (iv) the division of profits (profit oil); (v) the financial obligations such as royalties (10 per cent: 5 per cent to the state government and 5 per cent to the Federal government); (vi) taxes and export duties (10 per cent); (vii) the excess proceeds; (viii) the research cess (0.5 per cent); (ix) the abandonment cess; (x) the participation of Petronas Carigali Sdn Bhd; (xi) the obligations of parties; (xii) the liability; (xiii) the possibility of extension for recovery beyond the production period; (xiv) the oil sale rights; and finally, (xv) the supplementary payments by ratio.67
The concept and the relationship between PSC and PDA are explained in Figure 2.68
The concept and relationship between PDA and PSA.
The first PSC was signed with Shell in 1976 with revisions being made later in 1985. Subsequently, two sets of Deepwater PSCs were introduced in 1993 and onshore PSC terms were developed in 1995. ‘Under legislation enacted in 1985, Petronas is required to hold a 15% minimum equity in production sharing contracts (PSC) with all foreign and private companies.’69 There are two types of profit-sharing and cost recovery models for PSCs. The first one is based on production rate/volume (ie 1976, 1985 and Deepwater PSCs) where the resource owner’s take increases along with production rate/volume, and another one is the profitability-based (ie R/C PSC (Revenue over Cost PSC)) where the resource owner’s take increases as the economic health of the project improves (indicated by an R/C index).70 The production-sharing revenue for crude oil and non-associated gas, before and after 1981, is provided in Table 1.71
Production-sharing revenue for crude oil and non-associated gas before and after 1981
| Item | Crude oil (%) | Non-associated gas (%) | ||
|---|---|---|---|---|
| Before 1981 | After 1981 | Before 1981 | After 1981 | |
| Gross output | 100 | 100 | 100 | 100 |
| Royalty: | ||||
| Federal government | 5 | 5 | 5 | 5 |
| State government | 5 | 5 | 5 | 5 |
| Cost oil | 20 | 30 | 25 | 35 |
| Profit oil | 70 | 60 | 65 | 55 |
| Petronas | 49 (70%) | 48 (80%) | 45.5 70%) | 44 (80%) |
| Contractor | 21 (30%) | 12 (20%) | 19.5 (30%) | 11 (20%) |
| Item | Crude oil (%) | Non-associated gas (%) | ||
|---|---|---|---|---|
| Before 1981 | After 1981 | Before 1981 | After 1981 | |
| Gross output | 100 | 100 | 100 | 100 |
| Royalty: | ||||
| Federal government | 5 | 5 | 5 | 5 |
| State government | 5 | 5 | 5 | 5 |
| Cost oil | 20 | 30 | 25 | 35 |
| Profit oil | 70 | 60 | 65 | 55 |
| Petronas | 49 (70%) | 48 (80%) | 45.5 70%) | 44 (80%) |
| Contractor | 21 (30%) | 12 (20%) | 19.5 (30%) | 11 (20%) |
Production-sharing revenue for crude oil and non-associated gas before and after 1981
| Item | Crude oil (%) | Non-associated gas (%) | ||
|---|---|---|---|---|
| Before 1981 | After 1981 | Before 1981 | After 1981 | |
| Gross output | 100 | 100 | 100 | 100 |
| Royalty: | ||||
| Federal government | 5 | 5 | 5 | 5 |
| State government | 5 | 5 | 5 | 5 |
| Cost oil | 20 | 30 | 25 | 35 |
| Profit oil | 70 | 60 | 65 | 55 |
| Petronas | 49 (70%) | 48 (80%) | 45.5 70%) | 44 (80%) |
| Contractor | 21 (30%) | 12 (20%) | 19.5 (30%) | 11 (20%) |
| Item | Crude oil (%) | Non-associated gas (%) | ||
|---|---|---|---|---|
| Before 1981 | After 1981 | Before 1981 | After 1981 | |
| Gross output | 100 | 100 | 100 | 100 |
| Royalty: | ||||
| Federal government | 5 | 5 | 5 | 5 |
| State government | 5 | 5 | 5 | 5 |
| Cost oil | 20 | 30 | 25 | 35 |
| Profit oil | 70 | 60 | 65 | 55 |
| Petronas | 49 (70%) | 48 (80%) | 45.5 70%) | 44 (80%) |
| Contractor | 21 (30%) | 12 (20%) | 19.5 (30%) | 11 (20%) |
From the above discussion, it is clear that Petronas as a national oil company has exclusive control and ownership of oil and gas in Malaysia.72 Petronas shall not only act as a regulator for the petroleum industry but shall also be responsible for all management involving technical and commercial matters to ensure the success of hydrocarbon exploration and exploitation activities throughout Malaysia, including Sarawak. Therefore, it is quite doubtful—the reason is discussed below—to say that the Sarawak government has the right to make legislation in claiming its constitutional powers to regulate petroleum mining activities in the state.
7. ‘CASH-PAYMENT’ VERSUS ‘GOODWILL PAYMENT’
The issue of Kelantan’s oil royalties or better known as cash payment was raised by the Kelantan state government in 2009. ‘The Kelantan state government had written a letter dated 31 December 2009 to the President and CEO of Petronas requesting for cash payments to be paid to the Kelantan state government for petroleum won off-shore Kelantan.’73 However, in reply to the letter, the President and CEO of Petronas in their letter dated 2 February 2010 and 12 April 2010 affirming that the Kelantan state government was not entitled to receive any cash payments.74
Following that, the Kelantan state government initiated a lawsuit against Petronas in 2010. The Kelantan government accused Petronas had breached its obligations under the PDA 1974, the Kelantan Petroleum Agreement dated 9 May 1975 and the Kelantan Grant. In its lawsuit, the Kelantan state government sought a court order for specific performance of the 1975 Agreement.75 It had been contended that, under the said 1975 Agreement, Petronas was required ‘to make annual cash payments to the state government amounting to an equivalent of 5% of petroleum won and saved on-shore and off-shore Kelantan and sold by Petronas, its agents or contractors’.76
Moreover, according to the Kelantan state government, based on the PDA 1974, the Federal government was bound to pay 5 per cent ‘oil-royalties’ to the state government of Kelantan, payable twice a year in March and September. The Kelantan state government also contended that, it shall remain a fact that the oil royalties on offshore and onshore oil discovered in Kelantan create the rights of the state for which Petronas was obliged to pay for, ie 5 per cent. While the term ‘oil-royalties’ was frequently used by the state government of Kelantan, it is suggested that the correct term to be used is rather ‘cash payment’ as provided under the PDA.
The Federal government refused to acknowledge the state’s royalty rights on the grounds that exploration takes place beyond three nautical miles from its shores.77 In this regard, the Federal government offered to make token ‘goodwill payments’ to Kelantan instead of cash payment.78 However, according to the Kelantan state government’s argument, the state should be entitled to the cash payment over all 12 producing fields as they are located within its territory.79 Based on such premise, the Kelantan state government argued that the Federal government is bound to make the 5 per cent ‘oil-royalties’ to the state and not the ‘goodwill payment’.80
It is important to note that the delimitation of the states’ petroleum right over territorial sea boundaries for the cash payment is neither stated in the PDA nor the 1975 Agreement. However, section 3 of the Continental Shelf Act 1966 states that ‘all rights with respect to the exploration of the continental shelf and the exploitation of its natural resources are hereby vested in Malaysia and shall be exercisable by the Federal government’.81 On that basis, the Federal government maintained that Kelantan does not have the rights to claim the 5 per cent of cash payment for offshore oil mined beyond Kelantan’s territorial waters. Besides, the Federal government is relying on the Emergency (Essential Powers) Ordinance No 7 of 1969 to justify the three nautical mile requirement. In other words, ‘a state is not entitled to cash payments for oil discovered beyond three nautical miles of its coast’.82
Having said that, it is interesting to compare the case in Kelantan with Terengganu, where it was completely different as the Terengganu state government received the 5 per cent of cash payment from Petronas since offshore production began there in 1978 despite its petroleum reserves do not fall within the three nautical mile boundary.83 However, the dissatisfaction over oil royalty payments had also raised in Terengganu in 2000, when the Federal government decided to stop paying directly to the Terengganu state government after the state was taken over by the opposition party.84
Subsequently, in 2012, the Federal government passed the Territorial Sea Act 2012 (‘TSA’). The TSA provides that the Federal government is granted with the rights over a state’s continental shelf and territorial sea located three nautical miles from the state’s coastline.85 ‘The implication is that with the reduced breadth limits of its territorial waters, the state’s rights to fisheries, marine and mineral resources, tourism sites in marine areas and so forth are now confined to only 3 nautical miles (5.56 km) from its coastline.’86
8. CONSTITUTIONAL PERSPECTIVE
Malaysia subscribes to the principle of constitutional supremacy and the relation between the Federal and state government is governed by the Federal Constitution (FC) which is the supreme law of the federation.87 Article 4 of the FC provides that ‘any law passed after Merdeka Day which is inconsistent with this Constitution shall, to the extent of the inconsistency, be void’.88 Meanwhile, Article 75 of the FC provides that ‘if any State law is inconsistent with a federal law, the federal law shall prevail and the State law shall, to the extent of the inconsistency, be void’.89
However, it is important to note that even though the Sarawak’s state law of the Oil Mining Ordinance of Sarawak 1958 (‘OMO’) is inconsistent with the federal laws of the PDA 1974 and the PMA66, the OMO is not necessarily affected its validity under Article 75 of the FC. OMO was enacted in 1958, while Sarawak obtained its independence and joined the Federation of Malaya to create Malaysia in 1963. The first thing to consider is the status of OMO after Sarawak joining Malaysia.
For states that united together to form the Federation of Malaya in 1957, Article 162(1) of the FC reads together with Article 160, provides that the law in operation before the Merdeka Day continues in force after Merdeka Day.90 If there is an inconsistency between the existing law and the FC, the courts in applying the law may make necessary modifications under Article 162(6). In the process of Sabah and Sarawak (and Singapore) joining the Federation of Malaya to create Malaysia in 1963, section 73 of the Malaysia Act 1963 provides the same, namely the law in operation before the Malaysia Day (rather than Merdeka Day) continues in force after the Malaysia Day.91 Article 159A of the FC in turn provides that the relevant transitory provisions in the Malaysia Act 1963 are incorporated into the FC. Thus, the end effect is that the OMO continues in force after Sarawak joined the Federation of Malaya.
With Sarawak joining the Federation of Malaya to create Malaysia, Sarawak is subject to the FC. According to Article 74(1) of the FC federal and state, legislatures are competent over different subject matters as could found in the Federal List, State List, Concurrent List and a special list for Sabah and Sarawak under the Ninth Schedule.92 Accordingly, the Federal government can make law for matters enumerated under the Federal List, whereas the state government can make law for matters enumerated under the State List and the special list for Sabah and Sarawak.
Item 8(j) of the Federal List provides the Federal government the power to make law over the ‘development of mineral resources; mines, mining, minerals and mineral ores; oils and oilfields; purchase, sale, import and export of minerals and mineral ores; petroleum products; regulation of labour and safety in mines and oilfields’.93 Nevertheless, this power is to be read together with Item 2(c) in the State List. The said provision provides that the state only has the power to issue and grant ‘permits and licences for prospecting for mines; mining leases and certificates’.94
Thus, the state government has the right to issue permits and licences relating to oil mining and petroleum as enumerated under Item 2(c) of the State List. The power does not extend to the hydrocarbon exploitation and exploration works. This is because, such power of development of mineral resources, oils and oilfields; purchase, sale, import and export of petroleum products; regulation of labour and safety in mines and oilfields are vested to the Federal government as enumerated under Item 8(j) of the Federal List. The PDA is the relevant legislation passed by the Parliament to regulate matters pertaining to petroleum development and Petronas is the right body to exercise such power according to the PDA.
It was also argued by the government of Sarawak that ‘[u]nder the OMO, Sarawak will be the licensor for all [oil and gas] development works via its state vehicle, Petroleum Sarawak Bhd or Petros.’95 In other words, the amendments passed by the Sarawak state legislative assembly to the ‘OMO could be geared at expanding Sarawak’s reach to development work and downstream activities as opposed to just a licensing authority’.96 Nevertheless, such amendments must be harmoniously read within the context of the FC that vests the power of development rights to the Federal government.97 In this case, the Federal government conferred its power to the PDA, which also means indirectly to Petronas.
As discussed earlier, Kelantan and Terengganu rely on the ‘Assignment Deed’, for the payment of a royalty from petroleum produced offshore of the states, signed under the PDA 1974 whereby the states agree to grant in perpetuity to Petronas ownership in and the exclusive rights over petroleum ‘lying onshore or offshore’ of the states. In return, Petronas pays in cash 5 per cent of the ‘value of the petroleum won and saved from areas’ in the states. It was reportedly argued that the states do not own petroleum lying ‘offshore’, thus could not grant the same to Petronas. Since the states do not own petroleum lying ‘offshore’, which is interpreted to mean beyond the ‘territorial water’ of the state, there is no cause for Petronas to make any payment to the state.
According to the FC, the territory of the states in Malaysia is the territory existed ‘immediately before Malaysia Day’.98 Malaysia Day refers to the formation of Malaysia in 1963 with the inclusion of Sabah, Sarawak and Singapore into the federation. It is interesting that distinction is not made between the formation of the Federation of Malaya that was formed in 1957 and the formation of Malaysia for the territories of the states constituting the earlier Federation of Malaya. The current provision of the FC seems to incorporate any changes of boundaries, if any, of the states constituting the Federation of Malaysia post-1957 until immediately before Malaysia Day. Nevertheless, it could be seen that no relevant law was passed pre-Malaysia Day that alters the boundaries of the states.
The constitution also provides that Parliament may alter the boundaries of any state. However, such a law requires the consent of that state through the state legislature.99 Additionally, the consent of Conference of Rulers, which consist of the nine hereditary Rulers and four state Governors, is required for passing any law altering the boundaries of a state.100
There are views that the United Nations Convention on the Law of the Sea 1982 (UNCLOS) contains principles (except on Part XI on deed seabed mining) that are reflective of international customary law.101 If this view is adopted, the principles of UNCLOS could be considered to be applicable even before the UNCLOS came into effect. The UNCLOS provides that the sovereignty of a coastal state extends to the territorial sea up to 12 nautical miles.102 Additionally, the UNCLOS provides that a state has the rights and jurisdiction over the Exclusive Economic Zone up to 200 nautical miles within which the coastal state may explore and exploit the natural resources.103
Considering the above provisions of the UNCLOS which is considered as reflecting the international customary law, it could be argued that states of Kelantan, Terengganu (including Sabah and Sarawak) as distinct states before the formation of the Federation of Malaya and Malaysia, have the boundaries as spelt out under the UNCLOS. In the context of the federation, as stated by the FC, such boundaries could not be altered except with the consent of the legislature of that state and the Conference of Rulers.
The ‘Assignment Deed’ seems to be obvious in its intention. Royalty is due for petroleum ‘lying onshore and offshore’. Dictionary meaning of ‘offshore’ is ‘away from or at a distance from the coast’.104 If we adopt this definition, the meaning is not restricted to territorial sea or territorial water; it may refer to beyond the territorial waters including the continental shelf. ‘Offshore’ petroleum production literally is not subjected to a territorial sea, or even the continental shelf. Such an understanding could be appreciated if we considered the international customary law (as reflected in the UNCLOS) relating to state territories, rights and jurisdiction.105
Similarly, the phrase regarding the payment of 5 per cent due to the state for ‘the petroleum won and saved’ from ‘areas’ in the state is clear if we take the above understanding of territories of the state. The ‘areas’ refer to the territories of the state which include the least—onshore, territorial sea and the Exclusive Economic Zone.
What about the Emergency (Essential Powers) Ordinance No 7 1969 and the Territorial Sea Act 2012 that delimit the territorial sea for the purpose of PMA66, the Continental Shelf Act 1966 and the National Land Code to three nautical miles? The short answer is that if such laws alter the boundaries of the states, such laws need to be consented by that state legislature and the Conference of Rulers. There is no information about such consent. Thus, the boundaries of the states are as provided by the international customary law. Consequently, payment of 5 per cent is due for petroleum produced from onshore, territorial sea and the Exclusive Economic Zone of the state.
An alternative argument is to refer to the Ninth Schedule of the FC that provides the list of legislative and executive subject matters of the federation and the states.106 The Ninth Schedule provides the federation with legislative and executive powers over, inter alia, the development of mineral resources, oils, gas and foreign and extra-territorial jurisdiction.107 For state, the Ninth Schedule provides it with legislative and executive powers over land—which according to the Interpretation Act 1948 and 1967 refers to ‘the surface of the earth … and land covered by water’.108 According to this line of argument, the ‘land covered by water’ refers to the territorial sea which according to the Emergency (Essential Powers) Ordinance No 7 1969 and the Territorial Sea Act 2012 is limited to 3 nautical miles.
This line of argument fails to differentiate between the question of territories and the distribution of legislative and executive powers. Even if one to accept the line of argument that the legislative and executive powers of the states are limited as provided under the Ninth Schedule, it does not mean that the territories of the states are also limited. For instance, the Constitution may provide the federation have the executive powers on matters of defence over the state but it does not necessarily mean the territory of the state is similarly compromised. Consequently, in respect of payment of royalty, what constitutes the territory of the state should still be considered from the international customary law as illustrated in the above paragraphs.
9. CONCLUDING REMARKS
Despite the Federal government was granted the entire ownership, and privileges of exploring petroleum in Malaysia under the PDA, in which each state permanently conferred its ownership, rights, powers, liberties and privileges in the petroleum to the national oil company (ie Petronas), some states including Sarawak still claim its constitutional rights in respect of oil and gas mining by alleging that they belong to the state instead of the Federal government.
Based on the history, oil companies in Malaysia had been operating under a concession system where the oil and gas operators are given absolute rights over certain areas, including potential reserves contained in the oil field. In that context, the state government does not have the absolute right to make decisions except for certain matters concerning the environment and safety issues.
In 1974, the Parliament (ie the Federal government) passed the PDA which provides the ownership of crude oil and natural gas resources together with exclusive rights, powers, liberties and privileges of exploring petroleum in Malaysia to Petronas. The concession contracts between Malaysia and the oil companies were then transformed into PSC where Petronas was granted complete freedom to set the policy, form, terms and conditions. The PDA also requires all applications to commence or continue any petroleum business or service to be addressed to Petronas. In this case, Petronas is the regulator for the petroleum industry in Malaysia and responsible for all management involving technical and commercial matters to ensure the success of hydrocarbon exploration and exploitation activities throughout Malaysia, including Sarawak.
According to the FC, the state government has the right only to issue permits and licences relating to oil mining and petroleum as enumerated under Item 2(c) of the State List (List II) of the Ninth Schedule of the FC. However, there is a clear line drawn by the FC that any ‘development of mineral resources; mines, mining, minerals and mineral ores; oils and oilfields; purchase, sale, import and export of minerals and mineral ores; petroleum products; regulation of labour and safety in mines and oilfields’ are to be granted to the Federal government as enumerated under Item 8(j) of the Federal List (List I) of the Ninth Schedule of the FC.
Furthermore, even though prior to 1974, each state had its own law (ie ordinance) in respect of oil mining, their applications were restricted by the PMA66 to certain aspects. For example, the OMO is not able to confer power to the state to deal with any matters pertaining to exploration, prospecting or mining for petroleum in offshore land since such power was repealed by PMA66 and it falls under the jurisdiction of the Federal government.
Nevertheless, the PDA also requires the setting up of a special body, namely NPAC to give advice to the Prime Minister in exercising his power under the PDA. The NPAC is a significant platform to resolve disputes pertaining to petroleum issues including resolving conflicts between the federation and the states.
The consideration of competencies of the federation and the states to legislate and to administer on matters relating to oil and gas should be considered separately from the issue of payment of royalty due as provided under the PDA 1974 and the ensuing agreements between Petronas and the states. The distribution of the legislative and executive powers under the FC is not relevant in determining the boundaries of the state and the sovereignty of the states as independent units in the formation of the federation should be duly respected as mandated under federalism. The guarantee of the integrity of the boundaries of the states should be duly observed as provided by the first and second articles of the Constitution. This is the spirit that should be employed to ensure efficient, equitable, representative and sustainable relationship between the federation and the states.
Malaysia is a federation of 13 states. The drafters for the constitution of an independent Federation of Malaya was told to craft a federation with a strong central government; and this what could be found in the FC.109 At the same time—consistent to its character as a federation—the FC grants ‘a measure of autonomy’ as could be seen above in the distribution of legislative and executive powers between the federal and state governments.110
With regard to fiscal distribution, the Federal government has the larger chunk of the revenue from the corporate and personal taxation, apart from the revenue in the present context—oil and gas. The Federal government at the same time is responsible for most of the expenditure for instance for public service, health, education and defence. The federal and state revenues, together with federal transfer to state governments such as under general grants, special grants and tax-sharing grants, are found under the Tenth Schedule of the FC. The National Finance Council which makes the decision on such grants is the platform for states to discuss with the Federal government on financial matters.111 Since the states’ revenue is limited, for instance to land, forestry and import and excise duties on petroleum products, states rely on the above statutory grants from the Federal government.112
From the discussion on the petroleum legislation, it could be seen that the general formulae adopted are to transfer the control over oil and gas from states to the federation through Petronas. Such transfer may increase the efficiency and efficacy in exploiting the natural resources. States then are supposed to receive 5 per cent royalty from the petroleum production, apart from import and excise duties on petroleum products. However, in the implementation of the arrangement, issues such as whether offshore petroleum production falls under the arrangement for 5 per cent royalty payment produce conflicts. Some states asked for higher royalty such as Sarawak that asked for an increase to 20 per cent.
What is jarring in this episode is that the states of Sabah, Sarawak, Kelantan and Terengganu that asked for the royalty or increase in the royalty or revenue sharing are among the states with the highest poverty rates in Malaysia. At this juncture, it is important to consider the interdependence of the national and state governments. The sharing of powers and resources under cooperative federalism as could be seen in the FC should produce an efficient, equitable, representative and sustainable solution taking into account the diverse interests of the federal and state governments under the notion of unity in diversity. The Malaysian model—which could be considered to a lesser degree as a work in progress—has evolved from the distinct federalist journey for states in the Malay Peninsula and Borneo.113 The changes in the power dynamic of the national–state relations may open doors for further ‘bargaining’ of the revenue-sharing formulae.114 The interdependent federalism where simultaneous cooperation and rivalry between federation and state governments ensures dynamic relations between the two levels of governments.115
Footnotes
GOV.UK,‘Doing Business in Malaysia: Malaysia Trade and Export Guide ’ (2015) <https://www.gov.uk/government/publications/exporting-to-malaysia/exporting-to-malaysia> accessed 9 May 2019.
‘National Agenda: Economic Transformation Programme (ETP)’ (INTAN Portal) <http://www.intanbk.intan.my/iportal/en/etp> accessed 9 May 2019.
ibid.
S Arief and R Wells, A Report on the Malaysian Petroleum Industry (Southeast Asia Research and Development Institute 1985).
VK Moorthy, ‘Changes in the Federal-State Ownership and Exploitation of Petroleum Resources in Malaysia’ (1982) 24 Malaya L Rev 186.
ibid.
See T Yeoh and K Toroskainen, ‘Political Parties and Natural Resource Governance: A Practical Guide for Developing Resource Policy Positions’ <http://data.worldbank.org/indicator/TX.VAL.FUEL.ZS.UN> accessed 17 October 2020
VK Moorthy, ‘The Malaysian National Oil Corporation—Is It a Government Instrumentality?’ (1981) 30 Int Comp L Quart 638.
ibid.
Wan Mohd Zulhafiz Wan Zahari, ‘Kisah Hak Minyak, Gas Sarawak’ Utusan Online (13 June 2018) <http://www.utusan.com.my/rencana/utama/kisah-hak-minyak-gas-sarawak-1.690570>; Wan Mohd Zulhafiz Wan Zahari, ‘Minyak Dan Gas Di Sarawak: Menurut Kaca Mata Sejarah Dan Undang-Undang’ Malaysian Digest (2018); ‘Regulatory Adjustments Should Be Passed in DUN before It Can Be Enforceable’ The Borneo Post (17 May 2018) <https://www.theborneopost.com/2018/05/17/regulatory-adjustments-should-be-passed-in-dun-before-it-can-be-enforceable-see/> accessed 4 May 2019.
Yeoh and Toroskainen (n 7).
IF Zainul and M Shanmugam, ‘The Petronas-Sarawak Oil Intrigue’ Star Online - Business News (9 June 2018) <https://www.thestar.com.my/business/business-news/2018/06/09/the-petronassarawak-oil-intrigue/> accessed 3 May 2019.
Kua Kia Soong, ‘WikiSabah: Restore Sarawak’s Rights to Its Oil’ (6 August 2018) <http://wikisabah.blogspot.com/2018/08/restore-sarawaks-rights-to-its-oil.html> accessed 3 May 2019.
Suzianah Jiffar, ‘Sabah, Sarawak’s Equal Partner Status: Cabinet Agrees to Amend Constitution’ New Straits Times - Malaysia General Business (8 March 2018) <https://www.nst.com.my/news/nation/2019/03/467402/sabah-sarawaks-equal-partner-status-cabinet-agrees-amend-constitution> accessed 3 May 2019.
Adam Aziz, ‘No Two-Thirds Majority for Bill to Make Sabah, Sarawak Equal Partners’ The Edge Markets (9 April 2019) <https://www.theedgemarkets.com/article/no-twothirds-majority-bill-make-sabah-sarawak-equal-partners> accessed 3 May 2019.
Bernama, ‘Petronas Files Application to Clarify PDA 1974’ The Sun Daily (4 June 2018) <https://www.thesundaily.my/archive/petronas-files-application-clarify-pda-1974-LUARCH552479> accessed 3 May 2019; ‘Petronas in Bid to Claim All Malaysian Petroleum Resources’ The Sun Daily (4 June 2018) <https://www.thesundaily.my/archive/petronas-bid-claim-all-malaysian-petroleum-resources-BUARCH552576> accessed 4 May 2019.
ibid.
Intan Farhana Zainul, ‘Federal Court Turns Down Petronas Bid to Challenge Sarawak’ Business News, The Star Online (22 June 2018) <https://www.thestar.com.my/business/business-news/2018/06/22/federal-court-turns-down-petronas-bid-to-challenge-sarawak/> accessed 9 May 2019.
‘Questions Remain over Petroleum Laws in Sarawak, Says Petronas Lawyer’ The Borneo Post (22 June 2018) <https://www.theborneopost.com/2018/06/22/questions-remain-over-petroleum-laws-in-sarawak-says-petronas-lawyer/> accessed 9 May 2019.
Azreen Hani, ‘No Lawsuit, But Petronas Must Pay What Is Owed to Sabah’ The Malaysian Reserve (2020) <https://themalaysianreserve.com/2020/07/16/no-lawsuit-but-petronas-must-pay-what-is-owed-to-sabah/> accessed 20 October 2020.
See Q Tariq, ‘Kelantan Allowed to Appeal Court Ruling on Petronas Oil Royalties’ The Star (2012) <https://www.thestar.com.my/news/nation/2012/10/03/kelantan-allowed-to-appeal-court-ruling-on-petronas-oil-royalties> accessed 17 October 2020; Bernama, ‘Kelantan Oil Royalty Suit: Court Sets Jan 22 for Hearing’ The Borneo Post (2014) <https://www.theborneopost.com/2014/12/24/kelantan-oil-royalty-suit-court-sets-jan-22-for-hearing/> accessed 17 October 2020.
Yeoh and Toroskainen (n 7).
Razmahwata bin Mohamad Razalli, ‘The Malaysian Oil and Gas Industry : An Overview’ in Ridwin G Candiah (ed), Jurutera, vol 1 (IEM 2005).
ibid.
Nordin Ramli, ‘The History of Offshore Hydrocarbon Exploration in Malaysia’ (1985) 10 Energy 457.
H Doust, Geology and Exploration History of Offshore Central Sarawak (AAPG Special Volumes 1981).
Ahmad Said, ‘Overview Of Exploration for Petroleum in Malaysia under the Production-Sharing Contracts’ Offshore South East Asia Show (SPE 1982).
‘Offshore Malaysia Oil & Gas Activity Map to 2019’ (GeoConnexion, 2014) <https://www.geoconnexion.com/news/offshore-malaysia-oil-gas-activity-map-to-2019/> accessed 4 May 2019.
Wan Zulhafiz, ‘Unfair Contract Terms Act 1977: Does It Provide a Good Model in Regulating Risk Allocation Provisions in Oilfield Contracts in Malaysia?’ (2015) 8 International Journal of Trade & Global Market 3.
Wan Mohd Zulhafiz Wan Zahari, Unbalanced Indemnities: A Comparative Analysis of Risk Allocation in Oilfield Service Contracts in Malaysia, the UK and USA (University of Aberdeen 2016).
Wan M Zulhafiz, ‘Perception of Contractual Risk Allocation in the Oil and Gas Contracts in Malaysia’ (2018) 11 International Journal of Trade and Global Markets 127.
Wan Zahari, ‘Minyak Dan Gas Di Sarawak’ (n 10); Wan Zahari, ‘Kisah Hak Minyak’ (n 10).
ibid.
Eduardo G Pereira and Wan M Zulhafiz Wan Zahari (eds), Joint Operating Agreement: Applicability and Enforceability of Default Provisions (Rocky Mineral Mountain Law Foundation 2018).
Wan Zahari, ‘Minyak Dan Gas Di Sarawak’ (n 10); Wan Zahari, ‘Kisah Hak Minyak’ (n 10).
Under the Continental Shelf Act 1966, Malaysia proclaims ownership of the natural resources to be found upon or beneath the seabed of the continental shelf beyond its territorial limits up to a water depth of 200 metres or deeper where the super adjacent waters permit exploitation of the natural resources. Under s 4 of the Continental Shelf Act 1966, it provides that no person shall explore, prospect or bore for or carry on any operations for the getting of petroleum in the sea-bed or subsoil of the continental shelf except under and in accordance with the Petroleum Mining Act 1966.
The Act governs exploration and production of petroleum.
The Act governs taxation of petroleum profit.
The Act governs taxes and royalties on petroleum production.
Apart from that, the PMA66 has main features in terms of (i) duration for 10 years of exploration with possible five-year extension; 30-year development and production period; and extendable by agreement; (ii) relinquishment for 50% of original area after five years; additional 25%, or total 75%, after the next five years, unless the remaining 25% is too small to develop and (iii) work obligations with a changing range which rises to US$1 million per 1000 square metres after the 10th year of exploration.
s 13 of the Petroleum Mining Act 1966.
s 13(2)(a) of the Petroleum Mining Act 1966.
Sharifah Hasidah, ‘Amendment to OMO 1958 Addresses Ownership of O&G in Sarawak’ The Borneo Post (11 July 2018) <https://www.theborneopost.com/2018/07/11/amendment-to-omo-1958-addresses-ownership-of-og-in-sarawak-sharifah-hasidah/> accessed 4 May 2019.
Mohamad Kamal Hamdan and others, ‘Enhanced Oil Recovery in Malaysia: Making It a Reality’ SPE Asia Pacific Oil and Gas Conference and Exhibition (SPE 2005).
Moorthy (n 5).
Khalid Abdul Rahim and Audrey Liwan, ‘Oil and Gas Trends and Implications in Malaysia’ (2012) 50 Energy Pol’y 262. See s 3 of the Petroleum Development Act 1974.
‘Petroleum News Southeast Asia’ (March 1976) 9.
Act 125.
Jaginder Singh, ‘The Legal Structure and Attendant Problems of the National Petroleum Corporation of Malaysia’ (1976) 18 Malaya L Rev 125.
Silvana Tordo, National Oil Companies and Value Creation (World Bank Publications 2011); Moorthy (n 8).
s 10 of the Petroleum Development Act 1974.
Hamdan and others (n 44).
ibid
Bruce Gale, ‘Petronas: Malaysia’s National Oil Corporation’ [1981] Asian Survey 1129.
Superannuation Fund Investment Trust v Commissioner of Stamps (1979) 53 ALJR 614, 620.
‘PETRONAS - about Us’ (2020) <https://www.petronas.com/about-us> accessed 18 May 2020.
Petroliam Nasional Berhad (PETRONAS), ‘PETRONAS Annual Report 2018’ (2018) <https://www.petronas.com/sites/default/files/2020-07/petronas-annual-report-2018.pdf> accessed 25 October 2020.
s 7 of the Petroleum Development Act 1974 provides that: The Prime Minister may make regulations for the purpose of carrying into effect the provisions of this Act and, without prejudice to the generality of the foregoing, such regulations may, in particular, provide for–
(a) the conduct of or the carrying on of–
(i) any business or service relating to the exploration, exploitation, winning or obtaining of petroleum;
(ii) any business involving the manufacture and supply of equipment used in the petroleum industry;
(iii) downstream activities and development relating to petroleum;
(b) the marketing and distribution of petroleum and its products;
(c) penalties in the form of a fine not exceeding one hundred thousand ringgit or imprisonment not exceeding five years or both for breach of any of the regulations and for non-compliance with any term or condition of any licence, permission or approval issued or granted under the regulations;
(d) the forfeiture of anything used or intended to be used in the commission of any such breach or non-compliance.
Tun Dr Mahathir Mohamad, as the seventh Prime Minister (May 2018–February 2020), told Parliament that the current administration will fulfill its election promise to grant all oil-producing states in Malaysia a 20% royalty from the earnings of the petroleum extracted. See Mark Rao, ‘PDA Does Not Dictate Specific Percentage for Oil Royalties’ (2018) <https://themalaysianreserve.com/2018/07/23/pda-does-not-dictate-specific-percentage-for-oil-royalties/> accessed 4 May 2019.
JRI Resources Sdn Bhd v Kuwait Finance House [2019] 3 MLJ 561. See ‘Federal Court Rules Bank Negara SAC Findings Binding on Civil Courts’ Malay Mail (10 April 2019) <https://www.malaymail.com/news/malaysia/2019/04/10/federal-court-rules-bank-negara-sac-findings-binding-on-civil-courts/1741915> accessed 4 May 2019.
The establishment of SAC of Bank Negara Malaysia is provided under ss 56 and 57 of the Central Bank of Malaysia Act.
See Eduardo Guedes Pereira and others, ‘Host Granting Instrument Models: Why Do They Matter and for Whom’ (2020) 6 Oil and Gas, Natural Resources, and Energy Journal 23.
Arief and Wells (n 4).
Bernard Taverne, An Introduction to the Regulation of the Petroleum Industry: Laws, Contracts and Conventions (Graham & Trotman 1994) 456.
Michael Goldberg, ‘Risking Diversity: The Oil Opportunity in Malaysia’ (1980) 4 Fletcher F 247.
Eugene (n 6) 24.
Eugene Thean Hock Lee, ‘Scope For Improvement: Malaysia’s Oil And Gas Sector’ (Research For Social Advancement - REFSA, 2013) <http://refsa.org/wp/wp-content/uploads/2013/07/OG-Scoping-Report-Malaysia-final-20130701.pdf> accessed 28 September 2018.
‘Overview of Malaysian PSC’ (2003) <http://www.ccop.or.th/ppm/document/CAWS4/MalaysianPSC.pdf> accessed 28 September 2018.
‘EIA: Malaysia Oil Market Overview, Energy News, Energy, Bunker Ports News Worldwide’, (2014) <http://www.bunkerportsnews.com/News.aspx?ElementId=85647a3b-562d-4368-b835-d274e9ad6e7e> accessed 25 October 2020; Pereira and others (n 62).
Eugene (n 6) 24.
Arief and Wells (n 4) 10.
Wan M Zulhafiz and Nasarudin bin Abdul Rahman, ‘Unfair Risk Allocation in Oil and Gas Upstream Service Contracts in Malaysia: The Necessity for Oilfield Anti-indemnity Act’ (2020) 21 IJBS 177, 181.
The Editor, ‘Kelantan Sues Petronas for Oil Royalties’ (TheEdge Markets, 2010) <https://www.theedgemarkets.com/article/kelantan-sues-petronas-oil-royalties> accessed 20 October 2020.
ibid.
Hafiz Yatim, ‘Kelantan Govt Withdraws Suit Against Petronas But Maintains Legal Action Against Federal Govt’ (TheEdge Markets, 2019) <https://www.theedgemarkets.com/article/kelantan-govt-withdraws-suit-against-petronas-maintains-legal-action-against-federal-govt> accessed 20 October 2020.
The Editor (n 73).
Yeoh and Toroskainen (n 7).
‘Federal Government, Kelantan State Clash over Malaysian Oil Royalties’ (IHS Markit, 2009) <https://ihsmarkit.com/country-industry-forecasting.html?ID=106594864> accessed 20 October 2020.
Ida Lim, ‘Boundary Issue Holding Up Kelantan’s Oil Royalty Payment’ Malay Mail (2019) <https://www.malaymail.com/news/malaysia/2019/11/25/report-boundary-issue-holding-up-kelantans-oil-royalty-payment/1813026> accessed 20 October 2020.
Martin Carvalho and others, ‘Kelantan Demands RM1bil in Oil Royalties from Govt’ The Star (2019) <https://www.thestar.com.my/news/nation/2019/10/17/kelantan-demands-rm1bil-in-oil-royalties-from-govt> accessed 20 October 2020.
s 3 of the Continental Shelf Act 1966.
Madiha Fuad, ‘Why Isn’t Oil Royalty Distributed Equally?’ (TheEdge Markets, 2014) <https://www.theedgemarkets.com/article/why-isn’t-oil-royalty-distributed-equally> accessed 20 October 2020.
Fuad (n 82).
ibid
The main purpose of the TSA was to comply with the Law of the Sea Convention 1982. According to the preamble, the enactment of the TSA was based on the reason that the Emergency (Essential Powers) Ordinance No 7 of 1969 had ceased to have effect six months after the annulment of the Proclamation of Emergency 1969. Therefore, there was no law to govern the breadth of the territorial seas of Malaysia.
Phyllis Wong, ‘Territorial Sea Act Null and Void?’ The Borneo Post (2016) <https://www.theborneopost.com/2016/10/30/territorial-sea-act-null-and-void/> accessed 20 October 2020.
The full art 4 of the FC reads that:
Supreme law of the Federation
4. (1) This Constitution is the supreme law of the Federation and any law passed after Merdeka Day which is inconsistent with this Constitution shall, to the extent of the inconsistency, be void.
ibid.
art of 75 of the FC. See City Council of George Town v Government of the State of Penang [1967] 1 MLJ 160; Re Estate of Yong Wai Man [1994] 3 MLJ 514.
Merdeka Day as defined under art 160 is 31 August 1957.
Malaysia Day refers to 16 September 1963.
art 74(1) of the FC reads:
(i) Without prejudice to any power to make laws conferred on it by any other Article, Parliament may make laws with respect to any of the matters enumerated in the Federal List or the Concurrent List (that is to say, the First or Third List set out in the Ninth Schedule).
(ii) Without prejudice to any power to make laws conferred on it by any other Article, the Legislature of a State may make laws with respect to any of the matters enumerated in the State List (that is to say, the Second List set out in the Ninth Schedule) or the Concurrent List.
(iii) The power to make laws conferred by this Article is exercisable subject to any conditions or restrictions imposed with respect to any particular matter by this Constitution.
(iv) Where general as well as specific expressions are used in describing any of the matters enumerated in the Lists set out in the Ninth Schedule the generality of the former shall not be taken to be limited by the latter.
Item 8(g) under List I—Federal List of the Ninth Schedule of the FC.
Item 2(c) under List II—State List of the Ninth Schedule of the FC.
Mark Rao, ‘Uncertainties Continue to Cloud Sarawak’s O&G Industry’ (25 July 2018) <https://themalaysianreserve.com/2018/07/25/uncertainties-continue-to-cloud-sarawaks-og-industry/> accessed 8 May 2019.
Rao (n 95).
ibid. On harmonious construction, see for instance Bato Bagi & Ors v Kerajaan Negeri Sarawak and another appeal [2011] 6 MLJ 297.
art 1(3) of the FC.
Article 2 of the FC.
art 38(6) of the FC.
David L Larson, ‘Conventional, Customary, and Consensual Law in the United Nations Convention on the Law of the Sea’ (1994) 25 Ocean Development & International Law 75.
art 3.
arts 55–57.
Cambridge Dictionary.
See for instance ‘LAW OF THE SEA’, Law of the sea: hearings before the Subcommittee on Oceanography and the Committee on Merchant Marine and Fisheries, House of Representatives, Ninety-seventh Congress, on status of the law of the sea treaty negotiations, 22 October 1981, 23 February, 20 and 27 July 1982. (1982): I-478.
art 74 of the FC.
Items 8(j), 11(c), 1(g) of the List I of the Ninth Schedule.
Item 2(a) of the List II of the Ninth Schedule.
Reid Commission, ‘Report of the Federation of Malaya Constitutional Commission 1957’ [1957] London: Her Majesty’s Stationary Office.
Abdul Aziz Bari and Farid Sufian Shuaib, Constitution of Malaysia: Text and Commentary (3rd edn, Pearson Prentice Hall 2009).
art 108 of the FC.
Jomo KS and Wee Chong Hui, ‘The Political Economy of Malaysian Federalism: Economic Development, Public Policy and Conflict Containment’ (2003) 15 Journal of International Development: The Journal of the Development Studies Association 441. Discussion Paper No 2002/113. United Nations University, World Institute for Development Economics Research.
Joo Chung Fong, Constitutional Federalism in Malaysia (2nd edn, Thomson Reuters Malaysia Sdn Bhd 2016).
Mohamed Nawab Mohamed Osman and Rashaad Ali, ‘Sarawak State Elections 2016: Revisiting Federalism in Malaysia’ (2017) 36 Journal of Current Southeast Asian Affairs 29, 29.
Ronald L Watts, ‘Federalism, Federal Political Systems, and Federations’ (1998) 1 Annu Rev Polit Sci 117.
Author notes
Wan M. Zulhafiz Wan Zahari, Assistant Professor, Ahmad Ibrahim Kulliyyah of Laws; Deputy Legal Adviser, Office of the Legal Adviser, International Islamic University Malaysia, Kuala Lumpur, Malaysia.
Farid Sufian bin Shuaib, Professor and Dean, Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia, Kuala Lumpur, Malaysia. Email: [email protected]. This article is a revised and expanded version of a paper entitled ‘The dilemma of petroleum rights and ownership in Malaysia: Federal vs. State’ presented by W.M.Z.W.Z. at the ‘16th Asian Law Institute (ASLI) Conference 2019’, National University of Singapore (NUS), 11–12 June 2019. The authors wish to thank and acknowledge the Malaysian Ministry of Higher Education (MOHE) for the funding under the Fundamental Research Grant Scheme for Research Acculturations of Early Career Researchers (FRGS-RACER) - Project ID: RACER/1/2019/SSI10/UIAM//2. W.M.Z.W.Z. and F.S.B.S. hereby declare that they have NO affiliations with or involvement in any organisation or entity with any financial interest or non-financial interest in the subject matter or materials discussed in this article.
