The Geopolitical Risks of Malaysia’s Oil and Gas Fracas

Oil and gas (O&G) issues have historically been a bargaining chip in Malaysia’s realpolitik. Yet the latest standoff between national oil company Petronas and Sarawak state-owned O&G vehicle Petroleum Sarawak Berhad (Petros) marks a sea change. It is not only higher royalties, but resource ownership and regulatory authority that are increasingly on the table as the balance of power tilts from a weaker federal government to Sarawak and Sabah. Yet the tilt towards East Malaysia is not without risk.

As of March 2025, Putrajaya and Sarawak have agreed that Petros, not Petronas, will serve as Sarawak’s gas aggregator. The dust, however, has not settled. According to Sarawak, the push for aggregator rights — the supply, distribution and pricing of natural gas — is part of a broader effort to reclaim full autonomy over its O&G sector. The state is asserting control not just over land-based resources but also extending claims to the continental shelf up to 200 nautical miles offshore. With the Anwar administration in need of Sabah and Sarawak’s political parties to shore up its parliamentary majority, it is likely that Putrajaya would give these demands serious consideration.

Given this wider context, it is worth analysing whether Sarawak’s claims to Malaysia’s continental shelf off the Sarawakian coast are legally possible and strategically beneficial to the state owing to potential geopolitical implications.

Sarawak’s assertions over maritime resources are not a recent invention. The state traces its ownership over the continental shelf, up to 200 nautical miles, to a colonial-era legislation called the Sarawak Alteration of Borders 1954 order (SAB).

Table 1: Summary of Resource Ownership Debate

Overview
In the 1970s, all states signed the PDA agreement vesting Petronas with ownership over Malaysia’s offshore and onshore petroleum resources in perpetuity. According to an archived Straits Times report, the federal government (on behalf of Peninsular states), Sarawak and Sabah were paid 80 million, 65 million, and 10 million Malaysian ringgit respectively by Petronas in exchange.
Sarawak’s Position	Counter-Position
State leaders argue that the PDA, which vests ownership of hydrocarbon resources in Petronas, was enacted during an Emergency period and is hence nullified once the Emergency was officially lifted in 2011.	Parliament sat during the Emergency and was fully functional, and there is no reported objection from Sarawakian MPs towards the PDA recorded in Parliamentary Hansards.
Sarawak contends that then-Chief Minister Abdul Rahman Yaakub signed the PDA’s vesting agreement on Sarawak’s behalf, but that the Sarawak state assembly did not approve the PDA’s passing.	In addition to Sarawak proposing the 5 per cent royalty as compensation, then-Solicitor General Salleh Abas was said to be involved to ensure legal and constitutional due diligence.
Sarawak’s view is that the PDA never repealed the Oil Mining Ordinance 1958, which grants Sarawak exclusive rights to issue licences for mining and prospecting (i.e. Sarawak has the authority to allow or deny access to resources found offshore and onshore).	Article 75 of the Federal Constitution stipulates that federal laws override state laws in cases of conflict. Hence, the PDA supersedes any state resource ownership and authority.

But while the State Legislative Assembly had gazetted Sarawak’s borders to include the continental shelf since 2005, Sarawak only became more vocal over these disputed internal borders since 2017. In fact, the Sarawak government had only obtained authenticated copies of the SAB after Sarawak Premier Abang Johari Openg dispatched a legal team to London in July 2017.

This intensified push for Sarawak’s rights, or “Sarawak for Sarawakians”, built on ex-chief minister Adenan Satem’s policies which championed Sarawak’s autonomy. Since his tenure, Sarawakians have increasingly rewarded political parties that challenge the federal government on this front. Sarawak’s territorial claims and maximalist demand for historic rights are hence grounded in grievances and regionalism, but also simultaneously pertain to struggles for political legitimacy.

Putting aside historical sensitivity and political currency, however, the legal soundness of these claims remains debatable. There are various counterarguments to these territorial claims. This article focuses on the United Nations Convention on the Law of the Sea (UNCLOS), however, as it is beyond the scope of this article to address all points in this debate (see Table 1 for a summary).

Continental shelves, along with the overarching exclusive economic zones (EEZs) regime, are governed by conventions in international law rather than domestic laws. Internal laws, such as Malaysia’s 1966 Continental Shelf Act, are shaped and amended to align with international rules and regulations.

Only sovereign states can be signatories of UNCLOS. Sarawak is a sub-national government, whereas Malaysia is the sovereign state. Hence, Putrajaya controls the continental shelf, as well as rights to resource exploitation in the seabed — which the federal and East Malaysian governments chose to vest in Petronas with the 1974 Petroleum Development Act (PDA).

The SAB was also passed before the 1958 Convention of the Law of the Sea and the most recent 1982 UNCLOS, which prevails over preceding maritime laws. SAB-based claims are hence inapplicable, given the conditionalities and evolution of modern legal frameworks.

This does not mean that Sarawak’s bids for greater autonomy in this area are impossible. UNCLOS contains provisions which enable sovereign states to transfer rights and delegate authority to other entities of their choosing

Yet the risks may outweigh the benefits in Putrajaya recognising and implementing Sarawak’s full 200-nautical mile claim. Sovereign states are recognised as the primary legitimate actor in international law, and exercise of ownership and authority by sub-national governments are more vulnerable to being challenged. Any sub-national government, including Sarawak, by default has a weaker locus standi in maritime disputes.

It is not clear how introducing more risk to continental shelf governance would benefit Sarawak or Malaysia at large, particularly in a region as contested as the South China Sea. Malaysia is currently locked in a dispute with China, for instance, over the Luconia Shoals off Sarawak’s coast.

It remains to be seen whether future discussions on the continental shelf — and Sarawak’s oil and gas autonomy more broadly — may similarly relegate legal and geopolitical complications to the backseat.

At first blush, the risk may seem overblown as Putrajaya can represent Sarawak’s interests in disputes and other international governance matters (for example,  maritime patrols or responses to oil spills in the South China Sea). But this view overlooks how extensive decentralisation could trigger diplomatic friction and lead to slower cross-border cooperation to Sarawak’s detriment. Other countries such as Indonesia may be unwilling to fully engage with Putrajaya as Sarawak’s agent, bearing in mind their own separatist histories and sensitivities over regional autonomy.

Malaysia’s federal system has undoubtedly concentrated much power — financial and otherwise — in Putrajaya’s hands. Addressing this asymmetry — for instance, through sustainable revenue-sharing arrangements and devolution of powers — is necessary.

But while Sarawak feels strongly that these maximalist demands for historic rights are essential redress for decades of grievances, this must be weighed against the practicalities of defending resource ownership and regulatory authority in international legal frameworks.

Might there be some narrative course correction though, given current political dynamics? A pivot away from the full-throated advocacy for Sarawak’s “non-negotiable” continental shelf rights is unlikely. This boils down to the narrative’s political salience and its ability to bestow significant political mileage, as well as absent pushback from Putrajaya.

The ongoing Petronas-Petros settlement over the gas aggregator role was primarily brokered through political mediation rather than legal adjudication. In March 2025, Putrajaya further announced that any overlapping legal jurisdictions and issues between the 1974 PDA and Sarawak’s Distribution of Gas Ordinance would be preferably settled through out-of-court negotiations by both companies.

It remains to be seen whether future discussions on the continental shelf — and Sarawak’s oil and gas autonomy more broadly — may similarly relegate legal and geopolitical complications to the backseat. This will be done in lieu of expediting long-needed but non-transparent decentralisation and maintaining political alliances in Malaysia’s tricky federal-state landscape.

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