LEGALLY SPEAKING Overview of laws governing oil and gas sector in Malaysia

05 Jan 2015 / 05:38 H.

    The recent decline in global fuel prices has resulted in the Malaysian government scrapping fuel subsidies for petrol and diesel from Dec 1, 2014. In view of the recent developments, it is timely to have an insight into the oil and gas laws in Malaysia.
    The oil and gas industry is generally divided into upstream, midstream and downstream activities. Upstream activities consist of exploration, development and production of oil and gas resources. Midstream and downstream activities range from the transportation of oil and gas, to refining and processing through to marketing and trading of end products.
    Malaysia Oil & Gas Regulatory Framework
    The principal legislations which form the foundation of the development of the oil and gas industry in Malaysia are the Petroleum Development Act 1974 (PDA), the Petroleum Regulations 1974 (Petroleum Regulations) and the Gas Supply Act 1993 (GSA). The PDA applies to all activities in the value chain of the oil and gas industry in Malaysia, except for the supply of gas through the pipelines to consumers, which is regulated by the GSA.
    Under the PDA, Petroliam Nasional Bhd (Petronas) was formed on Sept 6, 1974 to safeguard the country's oil and gas resources. Petronas is vested with the entire ownership of, as well as rights, privileges and benefits in relation to exploring and producing oil and gas, offshore and onshore in Malaysia.
    Petronas is also the responsible authority for licensing any third party contractors wishing to participate in upstream petroleum activities and licensing goods and service providers operating in the upstream sector, including providers of rigs and drilling services and supply of general goods and services related to upstream operations.
    Exploration and Production Sharing Contracts
    A contractor wishing to participate in exploration and production activities must apply for and receive a licence from Petronas. The licence will normally take the form of a Production Sharing Contract (PSC) which will be entered into between the contractor and Petronas.
    In general, the PSC sets out the terms, conditions, responsibilities and participating interest of the PSC contractors. The PSC will also typically include phases of exploration, development and production, time periods for each phase and required work programmes and budgets.
    Each PSC obligates the PSC contractors to provide all the financing and bear all the risk of exploration, development and production activities in exchange for a share of the total production. As these obligations are imposed contractually in the PSC, rather than as a matter of law, it is possible that the obligations may vary, depending on the outcome of the PSC negotiations.
    Petronas' wholly-owned subsidiary, Petronas Carigali Sdn Bhd, is its exploration and production arm. Although not required by law, we understand that it is the policy of Petronas that Petronas Carigali is one of the contracting parties to each PSC.
    Supply of Services for Upstream Operations
    Pursuant to the Petroleum Regulations, companies that wish to supply goods and services to the upstream oil and gas sector must obtain a licence from Petronas. Foreign companies wishing to supply goods and services to the upstream oil and gas sector in Malaysia must either do so through an agency agreement with local companies licensed by Petronas or set up a local subsidiary to be licensed by Petronas pursuant to the PDA.
    The foreign company's subsidiary must be incorporated under the Companies Act 1965 with the Companies Commission of Malaysia as a private company and it must comply with the minimum local equity and/or paid-up share capital requirements, and the technical and registration requirements as stipulated under Petronas' licensing guidelines.

    Risk Services Contracts
    In addition to PSCs, Petronas has also executed Risk Service Contracts (RSC) in 2011 for the development and production of discovered marginal fields. Under the terms of the RSC, Petronas retains ownership of the oil and remains the project owner while the RSC contractors are the service provider.
    Oil and gas have been the major contributors to Malaysia's development and continue to serve as one of the government's main sources of income. Despite the many challenges that the oil and gas industry is currently facing, the focus on oil and gas projects arising from the Economic Transformation Programme will create a more dynamic and progressive oil and gas industry in Malaysia with various market opportunities and potential jobs.
    The Malaysian government is also taking steps to leverage the potential of oil and gas even further, by reviewing existing business regulations and tax incentives and also collaborates and promotes partnerships and joint ventures between local companies with global multinational corporations.
    Therefore, local companies should strive to collaborate with Petronas and blue-chip multinational companies to build up their capabilities and track records to support the oil and gas industry in Malaysia.

    Contributed by Loy Ee Lin of Christopher & Lee Ong (

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