Borneo Challenge Looms as Anwar Marks Two Years as Malaysian PM

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(Bloomberg) — One of Malaysia’s richest states is trying to take control of the country’s largest gas reserves, complicating relations in the ruling coalition and threatening to hit federal revenues.

Sarawak, Malaysia’s largest and most resource-rich state, claims domestic gas distribution rights from Petroliam Nasional Bhd, or Petronas, which has had full control of the country for 50 years. Talks to reach an amicable solution have continued for nearly four months, well past the October 1 deadline.

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The dispute represents a major headache for Anwar Ibrahim, who celebrates his second anniversary as prime minister on Sunday, a feat reached by none of his three immediate predecessors. Sarawak Chief Minister Abang Johari Tun Openg, the prime mover behind the state’s quest for gas rights, was key in 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 tests the strong relationship between the two leaders,” said University of 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 in light of the pivotal role that Sarawakians play in his government.”

Anwar, who spent years in prison before becoming leader, is credited with calming Malaysia’s fractious politics and reviving investor interest. The ringgit is the best-performing currency in Asia this year, and growth is expected to exceed initial expectations of between 4% and 5%.

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 total revenue for the year.

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Sarawak, which holds 60% of Malaysia’s gas reserves, had previously regained some rights over the resource by winning court battles in 2018 and 2019 with the state oil company, and Abang Johari’s office confirmed recently reported statements that it was willing to… To return to court.

Sarawak and the neighboring state of Sabah are located on the island of Borneo, and enjoy a greater degree of autonomy than the states located on Peninsular Malaysia. Abang Johari used his last political capital under Anwar to impose further decentralization.

Sarawak is the first Malaysian state to control a bank and a port, and is about to get its own airline. Since taking office eight years ago, Abang Johari has claimed that the state’s laws, drafted before it joined Malaysia in 1963, give it rights to onshore and offshore hydrocarbon resources.

Sarawak’s chief minister told his state assembly on Wednesday that the state is not only claiming gas rights, but rights over its continental shelf – the sea floor and subsoil in its offshore waters. He said Sarawak would defend its rights to “protect its territorial sovereignty and control its resources.”

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Abang Johari’s office referred to these statements when contacted for comment. Petronas declined to comment after a statement issued on October 31 stating that the talks were still ongoing.

“Negotiations are still ongoing, and we hope to reach an amicable solution,” Anwar’s office said in a statement, adding that the agreement must preserve the interests of the federal government and Petronas, as well as the interests of Sarawak and the well-known state energy company. Like Petros, “for the common good of the nation.”

Sarawak’s maritime claims could also impact Malaysia’s goal of centrally legislating carbon capture, as the country’s largest carbon capture projects are located in waters off the coast of Borneo state.

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 was able to impose local licensing requirements and sales tax on petroleum products. This tax – largely made up of oil company payments – has become Sarawak’s largest single source of revenue, generating 18.6 billion ringgit since 2019.

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Giving up control of gas rights could have deeper repercussions for Petronas, especially for the Bintulu LNG terminal, the world’s third-largest and a major gas export hub. Petronas said its talks aim to “preserve the sanctity of current contractual arrangements and ensure continued fulfillment of obligations to investors and customers.”

Former Malaysian Law Minister Zaid Ibrahim said Sarawak’s previous victories certainly did not necessarily indicate how the current dispute would end in the courts. “There is no binding decision from the Federal Court on this issue, especially regarding territorial rights,” he said.

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

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

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Mahathir Mohamad, who was prime minister during previous legal disputes between Sarawak and Petronas, has allowed previous battles to be fought in court. But Abang Johari’s party was not part of his government at the time, meaning Anwar had to balance Petronas’ interests with those of Sarawak and his ally.

San Naing, senior oil and gas analyst at BMI, said in a webinar on Thursday that Petronas and Sarawak may eventually find a compromise, provided Sarawak is able to enjoy more benefits from its rich reserves.

Adeeb Zalkabli, an independent analyst who has been covering Malaysia for more than 15 years, said negotiations were “moving rather slowly,” which may be to Anwar’s advantage.

“He may be waiting for the general elections, hoping his coalition will win more seats outside Sarawak,” he added, weakening Borneo’s negotiating power. The next federal election is not scheduled to be held until early 2028.

– With the help of Anisa Shukri.

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