(Bloomberg) -- Malaysia’s biggest state, Sarawak, is set to take control of its natural gas assets from federal government-run companies, as its campaign for economic autonomy bears fruit in the Southeast Asian country’s fragile political landscape.
The Borneo island state’s oil firm, Petroleum Sarawak Bhd., last week signed its first gas sale agreements. It is effectively starting a take-over of the gas distribution network in Sarawak that’s controlled by Malaysian oil giant Petroliam Nasional Bhd.
Petronas, which answers only to the prime minister, is asking for more time before it cedes full control. It wants to finalize gas supply agreements with Sarawak first to keep its liquefied natural gas complex running in the state — one of the biggest in the world at 30 million metric tons a year.
“We said we respect their concern because we have equity in the LNG plants,” Sarawak Premier Abang Johari Openg was cited as saying by the News Straits Times newspaper this week. “The discussions must be finalized by October 1, otherwise, we will go ahead with the arrangement.”
The state has long demanded for higher oil and gas royalties from Petronas, the custodian of Malaysia’s energy reserves, only to be rebuffed or given small increments at best. The renewed push for autonomy began after the November 2022 elections since Prime Minister Anwar Ibrahim now depends on the backing of Abang Johari and the Sarawak-based parties he leads to keep a government coalition intact.
The Sarawak Premier’s Office declined to comment, while the Prime Minister’s Office didn’t respond to Bloomberg’s request for one.
Petronas, whose sole shareholder is the federal government, now has to make concessions. It will soon cede control of the gas distribution network in Sarawak for the first time in its history, and analysts say it could lead to more negotiations with the state over revenue sharing, operational control and regulatory oversight.
“The relationship with Petronas might become more complex,” said Awang Azman Awang Pawi, an associate professor at Universiti of Malaya, who is from Sarawak. “It might create tension, but both parties might seek a cooperative framework to avoid disrupting the industry.”
The impact on earnings for Petronas, a major source of revenue to the Malaysian government, is uncertain. RHB Research said in a July 22 note that the oil firm could lose some earning power given the gas segment accounts for about 38% of Petronas’ headline profit last year.
Petronas said it was in discussions to achieve a mutual resolution on the gas distribution in Sarawak. The firm told Bloomberg in a statement that it “will continue to be a strategic partner to Sarawak to preserve a thriving and conducive investment climate in Malaysia.”
Full Circle
A lot is at stake for Sarawak, which is almost as big as mainland Malaysia and has oil and gas fields in the disputed South China Sea. Abang Johari had forecast the value of Sarawak’s energy sector will surpass 60 billion ringgit ($13 billion) by the end of the decade, up from the 10 billion ringgit it currently collects just in royalties from Petronas, according to a report.
By next year, Sarawak will become the owner-operator of the port where the Petronas LNG complex sits, once the Malaysian parliament passes legislation to dissolve the federal government-owned Bintulu Port Authority. The state is not just betting on oil and gas, it is also going to build two hydrogen plants at the same port.
If the takeover goes through, Sarawak will have come full circle. It joined Malaysia in 1963 under an agreement that allowed it to self-govern and manage its resources. However this wasn’t the case until the 2022 elections gave an opening to Abang Johari, a politician who had a role in every Sarawak administration since 1982.
While Abang Johari is an influential voice in national politics, he is flexing his influence when it comes to balance of power at the federal level. Sarawak and Sabah are now pushing to increase the allocation of 222 national parliament seats for Borneo states to 35% from 25% currently. Malaysia has 13 states.
In the meantime, Sarawak is on a buying spree. The state is set to finalize an agreement to increase its stake in Affin Bank Bhd next month, making it the first Malaysian state with direct control of a national bank. It is also in the midst of purchasing a regional airline from national flag carrier Malaysia Airlines in another first.
(Adds Sarawak Premier’s Office declines to comment in sixth paragraph.)
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