Petronas-Petros Dispute: Finding a Way Out

Petronas’ dispute with the Sarawak government over control of the latter’s oil and gas resources is intensifying. Instead of an open confrontation between Putrajaya and Sarawak, a more reasonable approach could be to find new political and economic arrangements, including the sharing of revenues.

By seeking to appoint state-owned oil and gas (O&G) vehicle Petros as Sarawak’s sole gas aggregator, Kuching is challenging Petronas’ exclusive authority — including over exports— in Malaysia. It is also flexing its political muscle against Prime Minister Anwar Ibrahim’s federal administration, testing how much autonomy Putrajaya can give the state.

About 90 per cent of Petronas’ LNG cargoes come from or pass through Sarawak, with 95 per cent allocated for export. The knock-on effects on Malaysia’s O&G industry and federal finances are significant. Yet Putrajaya has been relatively silent, reportedly asking Petronas to handle the dispute alone.

Political-economic realities suggest that Putrajaya cannot delay addressing the dispute and broader federal-state tensions much longer. A more sustainable future for Petronas and Malaysia’s federation hinges on finding new political and economic arrangements.

While a business dispute on the surface, Kuching’s appointment of Petros — which gives control over buying, selling, price-fixing, supply and distribution of natural gas — is noteworthy because it is both symptomatic and a result of the shifting balance of power between the federal and Sarawak governments.

Going by the numbers, Anwar’s unity government is shaky. Gabungan Parti Sarawak (GPS) is crucial to Anwar’s parliamentary majority and keeping his coalition government in power.

Sarawak has historically traded seats for concessions. The Barisan Nasional (BN) coalition agreed to non-interference in Sarawakian affairs, including keeping the United Malays National Organisation (UMNO) out of Sarawak, provided that Sarawak’s Muslim-Melanau leadership ensured BN’s dominance.

However, the fragmentation of the Malay vote splintered the Malay Peninsular bloc and augmented Sarawak’s kingmaker status. No Malay party — and Peninsular coalition, by extension — can effectively counter greater demands from GPS.

Further, Sarawak’s internal political unity is strong because Peninsular parties, including UMNO, have not made extensive inroads. Disagreement within GPS is also generally dwarfed by anti-Peninsular sentiment. This makes Sarawak’s push for concessions, like O&G autonomy, more unified and coherent.

In short, Sarawak’s bid for gas aggregator rights is a move Putrajaya may have limited capability to counter. 

Political capital is essential for a win-win situation in this dispute. A true balance of power would mean neither Putrajaya nor states dominate O&G negotiations — or broader federal-state relations in general.

In the opposite camp, Petronas has a strong hand it may not want to play.

While outside the scope of this commentary, Petronas has a reasonable legal case against Sarawak based on, for instance, the defence of laches.

Sarawak claims that its O&G authority is founded upon a state law called the 1958 Oil Mining Ordinance. Consequently, Sarawak argues, the 1974 Petroleum Development Act (PDA) — the federal law vesting Petronas with control over upstream (e.g. exploration) and downstream (e.g. distribution) activities — does not apply to Sarawak. However, one counter-argument is that Sarawak did not challenge the PDA for decades. Hence it may have waived its rights through negligent inactivity, otherwise known as the defence of laches.

Yet even if Petronas wins in the case against Petros, a victory might prove Pyrrhic.

It is possible that Sarawak would honour a resolution in Petronas’ favour. But the opposite could also be true. Petronas may wish to avoid any potential business risks. For example, Sarawak could complicate Petronas operations in the state. Sarawak could leverage its control over domestic labour, such as by blocking work permits of staff from the peninsula. This would hamstring O&G operations.

From Petronas’ perspective, a stronger federal core is necessary to deter further pressure on the company and ensure long-term business continuity and growth in Sarawak — irrespective of Petronas’ ability to nip the Petros dispute in the bud.

Putrajaya should arguably be more actively involved in resolving this dispute, given the high stakes.

Petronas’ financial sustainability is tied to Malaysia’s socioeconomic future. Since its inception in 1974, Petronas has contributed RM 1.4 trillion (US$ 315 billion) to the public coffers via oil royalties, taxes, and dividends.

True, oil dividends increasingly comprise a smaller share of Malaysia’s revenue. But that still equals RM 32 billion in Budget 2025, or 8 per cent of revenue.

Aggregator rights allow control over LNG export allocations. Losing this role could reduce Petronas’ exports, valued at RM 136 billion last year, and cut Sarawak-based profits, estimated to be as high as RM 20 billion annually. This would impact future contracts, capital expenditures, and national contributions.

Petros acquiring these rights is unlikely to open the floodgates for O&G autonomy. Only Sabah has a similarly strong case, whereas oil-producing states like Terengganu and Kelantan lack East Malaysia’s special autonomy.

But states may still push for higher oil royalties, echoing previous demands for a 20 per cent share over the current 5 per cent.

Given these implications and a weaker political hand, the Anwar administration faces two Herculean tasks in resolving the Petronas-Petros dispute and broader federal-state tensions.

First, Anwar must strengthen its political capital by improving the federal-state balance of power.

The Malay vote is unlikely to consolidate in Anwar’s favour in the short term. Anwar could broker a deal with the opposition Perikatan Nasional (PN) to address this, but this depends on the palatability of PN’s demands.

One advantage, however, may be that whereas Anwar’s coalition can still partner with PN to some extent, GPS’ largely Christian support base constrains the party from becoming entangled with Parti Islam SeMalaysia (PAS). Thus, GPS cannot push Putrajaya too much and too fast despite its kingmaker status.

Political capital is essential for a win-win situation in this dispute. A true balance of power, for example, with a stronger federal bloc less acutely dependent on GPS, would mean neither Putrajaya nor states dominate O&G negotiations — or broader federal-state relations in general.

A more sustainable federation requires checks and balances on all sides, so East Malaysia can redress its grievances, and power imbalance-related injustice can be more likely avoided for all parties — be it Putrajaya, Kuching, or Kota Kinabalu. It also ensures Petronas’ business continuity across Malaysia.

Second, increase and share revenue with states.

Boosting revenue could strengthen political capital by enabling Putrajaya to better tackle state grievances. Anwar’s economic reforms should be accelerated.

But there is also a need to share the pie, as federal-state tensions — including with Sarawak — partly stem from Putrajaya’s constitutional chokehold over revenue sources.

Putrajaya currently enjoys ten times the revenue of Malaysia’s thirteen states. Sharing some consumption tax revenue with states in exchange for added responsibilities would offer states a more stable income than O&G, particularly as the world shifts toward net zero. This would simultaneously reduce political-economic pressure on Petronas and federal spending.

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