Standing firm on O&G rights and beyond

IN a world where the issues of energy security, economic security, and climate change are inextricably linked, advocating for the rights of oil and gas (O&G) is not a backward-looking exercise in nostalgia.

It is a forward-thinking strategy for a prosperous future.

The rights of O&G are the foundation upon which secure and clean energy supplies, jobs, and essential funding for vital services and new clean energy projects depend.

But responsibility is not only about responsibility. It is also about a comprehensive plan that meets the highest standards of environmental responsibility, community responsibility, and regulation.

Sarawak supplies more than 60 per cent of Malaysia’s proven natural-gas reserves.

These reserves are the foundation of the country’s long-term energy plans and power a significant percentage of the country’s electricity production, petrochemicals industry, and export earnings.

60 per cent O&G reserves in Sarawak

While Sarawak holds over 60 per cent of Malaysia’s O&G reserves, these are overwhelmingly located offshore, not onshore.

These offshore fields fuel pipelines in Borneo (like the Sabah-Sarawak gas pipeline) and support liquefied natural gas (LNG) operations.

The federal petroleum giant Petronas derives a significant percentage of its earnings from the state’s reserves.

Its dividend and tax payments to the federal government are one of the pillars of the federal budget that funds everything, from infrastructure to social programmes in the country.

Control over natural resources

However, beneath the surface of this economic interdependence lies a political struggle that has been ongoing since the signing of Malaysia Agreement 1963 (MA63).

This agreement was meant to provide the newly formed federation of Malaysia – then comprising Malaya, Sabah, Sarawak, and briefly, Singapore – with a set of guarantees.

This included a measure of fiscal autonomy, control over their natural resources, and a ‘special position’ to safeguard the interests of the Borneo states.

Over the years, the government has had different views on the implementation of these guarantees.

Many Sarawakians today claim that the spirit of MA63 has been breached.

This is evidenced by the fact that despite providing the lion’s share of gas reserves to the country, Sarawak receives only a small portion of the revenue from the associated funds.

Petronas, which is a federal government-owned corporation, owns the upstream assets and distributes the majority of the profits to the federal government.

Sovereignty, balance of power

As a result, the conflict involves more than just money; it also involves sovereignty and the balance of power outlined in Malaysia’s Constitution.

The Petroleum Development Act (Amendment) 2019, the creation of the Sarawak Shell Petroleum Development Company (SSPDC) to collaborate with foreign majors, and the demand for a larger share of royalty and profit-oil are just a few of the aggressive actions that the Sarawak government has taken in recent years.

Legal challenges, legislative discussions, and a wider public discussion over the necessity of renegotiating the federal-state budgetary structure to reflect the original MA63 pledges have all been triggered by these moves.

Proponents of a fairer revenue split contend that this would not only be a just and fair way of honouring the past commitments made to Sarawak, but would also spur development in the region, provide employment, and narrow the gap between the states.

Pragmatic economics, constitutionalism

However, opponents of this proposition have expressed concerns that this might undermine Petronas’ capacity to finance national schemes, damage Malaysia’s creditworthiness, and establish a pattern for other states to follow.

This, therefore, appears to be an issue of pragmatic economics and constitutionalism.

In practice, the way forward may well involve a combination of legislative change, inter-governmental negotiation, and perhaps a reinvigorated ‘Malaysia Agreement’ debate to rethink the original deal in light of today’s realities.

As Sarawak continues to export its gas to countries in Far East Asia, the energy policy of the state continues to shift towards decarbonisation and the development of renewable energy and hydrogen.

However, Sarawak has to balance the lucrative trade of natural gas with addressing the need to reduce carbon emissions and develop clean tech infrastructure.

Based on the recent developments in the energy policy of the state, such as the ‘Carbon-Neutral Sarawak Roadmap’ and the development of incentives for the development of offshore wind and solar farms, natural gas is likely to remain a bridge energy source of the state to meet the energy demand of the people while the state develops alternative energy sources.

Although the natural gas reserves of the state are likely to remain relevant in the future, they are likely to change from a primary energy source to a bridge energy source to finance the development of a sustainable energy future in Malaysia.

Economics of O&G business

On the economic side, the gas industry continues to provide the bulk of revenues to fund state-level infrastructure, education, and health initiatives.

Federal subsidies from these state revenues also help balance the national budget, enabling the federal government to subsidise cheaper fuel prices for Peninsular Malaysians.

Any premature termination of the O&G industry could, therefore, threaten state and federal finances, exacerbating fiscal imbalances that have long put a strain on centre-state relations.

On the other hand, any strategic shift in the gas industry’s purpose – perhaps using the established pipeline network to transport hydrogen or using the established gas extraction infrastructure to produce ‘blue’ hydrogen with carbon capture – could ensure revenue continuity while meeting the push for decarbonisation.

Environmental impact

The environmental impact of the continued use of natural gas is a double-edged sword.

Though it is a cleaner fuel than coal, it still releases 50 per cent of the carbon dioxide (CO2) per megawatt hour of coal, and also adds methane to the atmosphere during its entire lifecycle.

International investors are increasingly reviewing projects that lock in fossil fuel infrastructure for the long term because they believe they will be stranded assets.

If Malaysia wants to use the O&G reserves of Sarawak as a bridge fuel, they need to ensure that they also adopt stringent methane-reducing technologies and a carbon pricing structure with a commitment to a phasing-out plan or a change to low-carbon fuels.

Otherwise, they risk locking the country into a carbon-intensive pathway that undermines its 2050 net-zero commitments and its international climate leadership.

Politically, the issue of Sarawak’s O&G cannot be discussed without mentioning the overall politics of federalism. In fact, the MA63 on the formation of the Federation promised a ‘shared destiny’ whereby any wealth extracted from any state in the Federation would be equally distributed.

Issues of inequity

However, the current model of revenue sharing has been accused of being biased towards the peninsula; hence, the call for greater autonomy for the state of Sarawak.

If the O&G reserves continue to dictate the overall policy on energy, then issues of inequity might force the formation of separatist movements that might threaten the overall cohesion of the nation.

A win-win situation for all parties would therefore be one whereby the federal government takes a strategic role in the transition to clean energy resources, while the state of Sarawak enjoys greater royalty rates on the resources and takes a seat at the table for the transition to clean energy resources.

Energy transition

Therefore, it is argued that Sarawak’s O&G deposits hold the key to Malaysia’s energy transition, which can only happen if the stakes are altered.

Foremost, with the help of a more just system that upholds the initial sharing of sovereignty, the resource must be turned from a static supply of fossil fuels into a dynamic source of clean energy technologies.

The next 10 years or so will determine whether the gas fields will remain historical artefacts, or serve as the impetus for a more democratic federation.

Sarawak’s O&G reserves may not be seen as an anachronistic relic, but as the catalyst for the Malaysian energy revolution, provided the stakes are rebalanced to ensure the original allocation of sovereignty is maintained, with the focus shifting from O&G-based innovation to clean energy innovation.

* Toman Mamora is ‘Tokoh Media Sarawak 2022’, recipient of Shell Journalism Gold Award (1996) and AZAM Best Writer Gold Award (1998). A holder of PhD in Social Anthropology (Nottingham UK), this communication and research consultant remains true to his decades-long passion for critical writing as he seeks to gain insight into some untold stories of societal value.