[COLUMNIST] Making federalism work: Lessons from the PETRONAS-PETROS agreement one year on

Two self-imposed deadlines - mid-July, then 1 October - came and went without agreement, and on 30 April 2025 Sarawak served notice that PETRONAS Carigali was operating its Miri Crude Oil Terminal without a state licence under the Distribution of Gas Ordinance (DGO), giving it 21 days to comply or face penalties.

Prime Minister Datuk Seri Anwar Ibrahim swiftly reached out to Premier Tan Seri Abang Johari Tun Openg from Penang on 4 May, urging calm and predicting a swift settlement.

The crisis did its job: on 21 May - the very day the notice lapsed - Anwar and Abang Johari signed a Joint Declaration that reaffirmed PETRONAS’ nationwide custodial mandate under the Petroleum Development Act 1974 (PDA) and recognised PETROS, effective 1 March 2025, as Sarawak’s sole buyer and distributor of domestic gas.

This political bargain rests on a clear trade-off. Sarawak is legally entitled to up to 1.2 billion cubic feet per day of gas under the amended DGO, starting 1 March 2025.

This allocation supports its own hydrogen, power, and downstream aspirations, while the federal government retains centralised control over exploration permits, production sharing contracts (PSC), and LNG export transactions under the PDA 1974. Kuching finally gained operational control of its own feedstock; Putrajaya retains the fiscal clarity that has underpinned Malaysia’s petroleum industry for the last five decades.

PETROS is now negotiating fresh gas‑sale agreements and has begun construction of the Samalaju Pipeline, with onshore works underway and commercial operations expected by the fourth quarter of 2025.

For investors, the PDA still delivers predictable recovery of capital costs and an unambiguous royalty chain. For Sarawak, the aggregator model offers something rarer: access to gas without shouldering exploration risk or upfront CAPEX.

That risk-free upside, coupled with manufacturing spillovers and human capital development, explains why state officials call the deal “transformational.”

Yet the settlement is still not airtight. The 30 April licence notice issued by Sarawak to PETRONAS Carigali has not been formally withdrawn.

Although the Joint Declaration signed on 21 May 2025 defused tensions politically, it did not legally nullify the notice.

The underlying ambiguity remains unresolved. In principle, PETRONAS and its subsidiaries still require downstream licences under Sarawak’s Distribution of Gas Ordinance, though Premier Abang Johari has indicated that exemptions may be granted upon request.

Until a joint licensing circular is published - clarifying how the PDA and Sarawak’s DGO interlock and how exemptions are handled - companies must still navigate overlapping federal and state laws - an ambiguity that needlessly clouds investor confidence.

The ongoing legal dispute between Shell, PETRONAS, and PETROS illustrates how regulatory uncertainty can escalate into commercial risk.

According to Upstream (29 July 2025), Shell’s Middle Distillate Synthesis (SMDS) plant in Bintulu placed its gas payments in escrow after receiving dual invoices - one under a 2020 supply agreement with PETRONAS, and another under a 2024 deal with PETROS.

A High Court injunction secured by Shell in January compels PETRONAS to continue gas deliveries despite non-payment.

PETRONAS claims the arrangement is costing it more than RM 80 million per month and has filed an appeal, with hearings tentatively scheduled for August and September. Separately, a broader aggregator-related suit filed by PETROS remains pending before the Kuching High Court.

None of this means the federal government’s PDA has outlived its usefulness; if anything, it remains the legal and institutional anchor holding Malaysia’s hydrocarbon regime together.

In an industry grappling with price volatility, surging capital costs, and the climate-policy pressures of a global energy transition, the country’s single-regulator model continues to offer clarity and cohesion.

Production-sharing contractors still deal with one sovereign counterparty - PETRONAS - within a framework that sets predictable ceilings on cost recovery and a well-defined royalty structure.

These features remain central to Malaysia’s investment appeal, as affirmed by credit rating agencies and fiscal analysts alike.

At the same time, Sarawak’s gas aggregator model provides a pragmatic route to deeper local participation in the downstream economy - without requiring the state to bankroll upstream exploration risks or disrupt long-term LNG export contracts.

For now, this division of roles - federal custodianship for upstream and exports, state stewardship over domestic distribution - offers a workable, if evolving, compromise.

The broader regional picture underscores the value of regulatory coherence. A recent FMT report highlights that exploration activities in Blocks SB409 and SB310, as well as the redevelopment of the Kota Belud field, are drawing renewed upstream investment into Sabah in the second half of 2025 - partly because Malaysia is now viewed as more predictable than rival hydrocarbon basins.

Investors increasingly see Sarawak’s gas aggregator model as a workable template for balancing national control with local participation.

In Sabah, political and civil society groups have begun calling for comparable downstream arrangements under the Malaysia Agreement 1963 (MA63). Prime Minister Anwar has publicly stated that there is “no objection” should Sabah seek a similar compact, provided it remains within the federal constitutional framework.

What, then, should year two of the compact deliver? First, clarify licensing arrangements - in the absence of a formal circular, PETRONAS and its subsidiaries continue to operate under exemptions granted by Sarawak’s Ministry of Utility and Telecommunication (MUT), while the DGO technically still requires licences.

Second, resolve the ongoing aggregator dispute, particularly the Shell gas-payment impasse in Bintulu, where dual invoices, a High Court injunction, and estimated losses of RM 80 million per month have exposed the commercial stakes.

Third, deliver visible infrastructure progress: Sarawakians will expect gas to flow into Samalaju’s industrial facilities and heavy manufacturing zones before the next state elections.

If these benchmarks are met, the Joint Declaration could stand as a rare Southeast Asian example of resource federalism done right - where state ambition is realised without undermining the PDA’s central leadership, and where investor confidence is buoyed by operational clarity.

Anything less risks turning a promising compact into a stalled arrangement - symbolic on paper, but problematic in practice.

* Jamil A Ghani is a PhD candidate at the S Rajaratnam School of International Studies, Nanyang Technological University, Singapore and a founding fellow of Futures Office. ** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.