Borneo Challenge Looms as Anwar Marks Two Years as Malaysian PM

(Bloomberg) -- One of Malaysia’s wealthiest states is trying to seize control of the nation’s biggest gas reserves, complicating relations in the ruling coalition and threatening a blow to federal revenues. 

Sarawak - Malaysia’s biggest and most resource-rich state - is demanding local gas distribution rights from the country’s Petroliam Nasional Bhd., or Petronas, which has had full control for 50 years. Talks to find an amicable resolution have dragged on for nearly four months, well past an Oct. 1 deadline.

The dispute is a major headache for Anwar Ibrahim, who celebrates his second anniversary as prime minister on Sunday, a milestone that none of his three immediate predecessors reached. Sarawak Premier Abang Johari Tun Openg, the key driver behind the state’s pursuit of gas rights, was key to helping Anwar secure power after inconclusive elections in 2022, and controls the third-largest party in Anwar’s government. 

“The issue between Petronas and Sarawak is testing the strong relationship between the two leaders,” said Universiti Malaya political analyst Awang Azman Awang Pawi, who is from Sarawak. “This situation tests Anwar’s ability to balance federal authority with state aspirations, especially given Sarawak’s pivotal role in his government.”

Anwar, who survived years in prison before becoming leader, is credited with calming Malaysia’s fractious politics and reviving investor interest. The ringgit is Asia’s best-performing currency this year, and growth is set to beat the initial 4%-5% forecast.

But Petronas is crucial to the state budget. The oil and gas giant is expected to pay 32 billion ringgit ($7.2 billion) to the government in 2024, roughly 10% of Malaysia’s overall revenue for the year.

Sarawak, which holds 60% of Malaysia’s gas reserves, has previously clawed back some resource-related rights by winning 2018 and 2019 court battles with the state oil firm, and Abang Johari’s office confirmed recently reported remarks that he’s willing to go back to court.

Sarawak and neighboring Sabah are both on the island of Borneo, and enjoy more autonomy than states on peninsular Malaysia. Abang Johari has used his recent political capital under Anwar to force more decentralization. 

Sarawak is the first Malaysian state to gain control of a bank and a port, and is on the verge of acquiring its own airline. Since coming into office eight years ago, Abang Johari has claimed that the state’s laws, drafted before it joined Malaysia in 1963, give it rights to both onshore and offshore hydrocarbon resources. 

The Sarawak premier on Wednesday told his state assembly that the state claims not only gas rights, but rights over its continental shelf — the seabed and subsoil in its offshore waters. Sarawak would defend its rights to “safeguard its territorial sovereignty and resource control,” he said.

Abang Johari’s office referred to those remarks when contacted for comment. Petronas declined to comment beyond an Oct. 31 statement that talks were still ongoing. 

“The negotiations are still proceeding, and we hope to conclude an amicable resolution,” Anwar’s office said in a statement, saying a deal should preserve the interests of the federal government and Petronas, as well as those of Sarawak and the state’s energy firm known as Petros, “for the greater benefit of the nation.” 

Sarawak’s offshore claims could also impact Malaysia’s aim to centrally legislate carbon capture, as the nation’s biggest carbon capture projects are in the waters off the Borneo state’s coast. 

The prime minister told Free Malaysia Today earlier this month that while he would empower states where necessary, he would “draw the line” when needed.  

After previous court battles with Petronas, Sarawak managed to impose local licensing requirements and a sales tax on petroleum products. That tax — largely made up of payments from the oil firm — has become Sarawak’s single largest source of revenue, delivering 18.6 billion ringgit since 2019.

Ceding control over gas rights could have deeper ramifications for Petronas, particularly for its Bintulu LNG terminal, the third-largest in the world and a major gas export hub. Petronas said its talks are aimed at “preserving the sanctity of existing contractual arrangements and ensuring that commitments to investors as well as customers can continue to be fulfilled.”

To be sure, Sarawak’s past victories don’t necessarily signal how the current dispute will pan out in the courts, former Malaysian law minister Zaid Ibrahim said. “There is no binding decision by the Federal Court on this matter, especially on territorial rights,” he said.

The Federal Court is Malaysia’s highest court and decides on constitutional matters. Petronas in 2018 sought a declaration from the court that it had absolute control of all of Malaysia’s oil and gas resources under federal laws. The court declined to rule on the matter for technical reasons, and the company has not made a repeat bid.

Sabah, which started collecting petroleum sales tax from Petronas after Sarawak’s court victory, will likely try to emulate any new successes. It is the only state outside Sarawak to also have its own oil company, and is also led by an Anwar ally, who is currently grappling with allegations of corruption involving state legislators. 

Mahathir Mohamad, who was prime minister during the previous Sarawak-Petronas legal tussles, let the earlier battles play out in court. But Abang Johari’s party was not part of his government at the time, meaning Anwar must balance the interests of Petronas with those of Sarawak’s and his ally. 

BMI’s senior oil and gas analyst San Naing told a webinar on Thursday that Petronas and Sarawak might eventually find some middle ground, provided Sarawak is able to enjoy more benefits from its rich reserves.

Adib Zalkapli, an independent analyst who has been covering Malaysia for more than 15 years, said negotiations have been “moving rather slowly,” which could be in Anwar’s interest.

“He is perhaps waiting for the general election, hoping his coalition will win more seats outside Sarawak,” and weakening the Borneo state’s bargaining power, he said. The next federal election is not due until early 2028.

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