5/4/2019 MALAYSIA'S OIL AND GAS INDUSTRY: A BRIEF LEGAL INTRODUCTION | Law/Legal Articles by HHQ | Law Firm in KL Malaysia
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MALAYSIA’S OIL AND GAS INDUSTRY: A BRIEF LEGAL INTRODUCTION
Publish Date: 05 Oct 2014, By Noorul Haq
A. A BRIEF HISTORY OF OIL & GAS IN MALAYSIA
The discovery of oil in Sarawak in 1910 had provided the basis for the development of Malaysia’s
oil and gas industry today and it has created opportunities for many oil majors companies to
invest in the upstream and downstream sectors of the industry and ultimately provides ample
employment opportunities and skills transfer to thousands of Malaysians which in return has
changed the economic landscape of the country.
B. A NEW OUTLOOK ON MALAYSIA’S OIL & GAS
INDUSTRY
The Government of Malaysia has contributed signi cantly towards policy and macro-economic
planning to secure a sustainable and long-term success of the oil and gas industry.
The Government’s main objective is to increase aggregate production capacity by ve percent
(5%) every year up to the year 2020 to meet domestic demand growth while sustaining crude oil
and LNG exports to overseas markets. In the Asia Paci c region, Malaysia aims to be the number
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one oil and gas hub by 2017, taking advantage of its strategic location at key shipping lanes as
well as strong economic fundamentals in China, India and within Southeast Asia.
In Malaysia, energy policy for the upstream sector is determined by the Economic Planning Unit
(“EPU”) and the Implementation and Coordination Unit (“ICU”). Both functions report directly to
the Prime Minister of Malaysia. The Government focuses on efforts to enhance output from the
existing oil and gas elds, the new marginal elds as well as exploration and development
opportunities in deep-water areas. To this end, new tax and investment incentives have been
introduced by the Malaysian Government particularly under Petroleum Income Tax Act 1967,
particularly with the aim to promote oil and gas exploration activities.
I. Economic Transformation Programme (“ETP”)
i. Launched on 25 September, 2010 by the Prime Minister of Malaysia, the Economic
Transformation Programme (“ETP”) was formulated as part of Malaysia’s National
Transformation Programme. Its goal is to elevate the country to developed-nation status
by 2020, targeting Gross Net (“GNI”) Income per capita of USD15, 000. This will be achieved
by attracting USD444 billion in investments which will, in turn, create 3.3 million new jobs.
ii. The ETP’s targets for 2020 will be achieved through the implementation of 12 National Key
Economic Areas (“NKEAs”), representing economic sectors which account for signi cant
contributions to GNI. The programme is also centred on raising Malaysia’s
competitiveness through the implementation of six (6) Strategic Reform Initiatives
(“SRIs”). The SRIs comprise policies which strengthen the country’s commercial
environment to ensure Malaysian companies are globally competitive.
iii. The oil, gas and energy industry plays a prominent role in the Malaysian economy,
contributing to one- fth of the national Gross Domestic Products (“GDP”) over the past
decade.
II. Performance Management and Delivery Unit (“PEMANDU”)
PEMANDU was established by the Government to oversee the implementation and assess
the progress of the Economic Transformation Programme (“ETP”) and the Government
Transformation Programme. Under the ETP, oil, gas and energy has been classi ed as one of
twelve growth areas to spearhead rapid economic development. Presently, revenue from the
oil and gas sector contributes to about forty percent (40%) Malaysia’s total revenue. The
Malaysian Government felt there is potential to get more revenue from this sector should
Malaysia move into the commercial downstream ventures.
III. Malaysia Petroleum Resources Corporation
Malaysia Petroleum Resources Corporation (“MPRC”) was formed in April 2011 and started
its operation in July 2011. MPRC is an Agency established under the Prime Minister’s of ce.
MRPC main objective is to provide direction and advice to domestic and global oil and gas
companies to maximize their investment and growth opportunity. As an agency reporting
to Prime Minister’s Department, MPRC’s role is to promote, catalyse and transform the oil
and gas services sector to become stronger entities in the industry. MPRC takes a
strategic long-term approach and is aimed to be the conduit to make Malaysia as the Asia
Paci c oil & gas hub by 2017. To address ad resolve industry issues MPRC has set up an
Industry Consultative Council (“ICC”).
One is to recommend appropriate policies relating to the oil and gas sector by reviewing
existing business regulations and tax incentives. This would ensure that the facilities are
competitive and attractive to international oil and gas companies to set up their regional
or operation headquarters in Malaysia. MPRC also collaborates and promotes partnerships
and joint ventures between local companies with global MNCs, research institutions and
academia. This will encourage greater involvement in research and development
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activities, technology transfer and talent training and development. Ultimately, Malaysian
companies will be able to contribute substantially to the oil and gas value chain.
C. STANDARD SECTORS IN THE OIL AND GAS
INDUSTRY IN MALAYSIA
Oil & Gas activities in Malaysia can be classi ed under three (3) main categories, namely
upstream, midstream and infrastructure and downstream. Below are some examples of what
are the scope of activities involved under each of the foregoing categories.
I. Upstream Oil & GasExploration and Production
Study and explore composition, structure and other physical aspects of rock formations
associated with oil or natural gas deposits through geophysical prospecting and/or
exploratory drilling. Construct wells if an economically feasible eld is located.
Execute drilling and servicing of oil and gas well. Activities include managing
manpower, rigs, material supply and stocks to ensure dif culties onsite are resolved to
avoid delay in drilling process.
Involves the operation of control system and equipment related to plant and facilities.
This includes setting up, taking down, servicing the equipment and general clean-up
of both onshore and offshore oil rig areas.
II. Midstream and Infrastructure
Transportation and Storage Manage the movement of crude oil from oil elds to re neries
and/or to storage areas, where the products are stored for distribution and for emergency
reserves. Crude oil is transported by two primary modes tanker and pipelines.
III. Downstream Oil & Gas
Re ning, Distribution Trading & Marketing
Skilled personnel are required to ensure that oil re neries maintain its production level
and simply keep the re nery running.
Distribution of utilities, oil products wholesalers, petrol service stations and petrochemical
companies are all part of this downstream sector. This sector of the industry is responsible
to deliver oil product and ensure product quality meets stringent speci cations.
Track industry market movements through monitoring and collecting data on oil asset in
the world markets. Coordinate buyers and conduct trade with relevant parties agreeing to
the product price.
D. THE MAJOR PLAYERS IN THE OIL AND GAS
INDUSTRY IN MALAYSIA
In 1974, under the ambit of the Petroleum Development Act 1974 (“PDA”), the Government
of Malaysia proposed the creation of a national oil company to safeguard the country’s oil
and gas resources. Petroliam Nasional Berhad. (PETRONAS) was formed on September 6,
1974 and all petroleum resources in the country came under the responsibility of
PETRONAS to develop according to commercial requirements while taking into
consideration the socio-economic needs of the country.
Besides PETRONAS, there is also a large pool of other oil and gas players in Malaysia,
comprising international oil companies, independents, services and manufacturing
companies. Having established themselves in Malaysia for many years, these companies
provide a whole range of services, technologies as well as investments to support the
continuing growth of the oil and gas industry in Malaysia, and the region.
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The presence of international oil companies as well as PETRONAS’ stewardship of
domestic oil and gas players have created a strong ecosystem of services and
manufacturing companies that are able to support the needs of the oil and gas value
chain both domestically and regionally.
I. The National Oil Company – Petroliam Nasional Berhad (PETRONAS)
Despite being a company incorporated under the Malaysian Companies Act 1965,
PETRONAS is wholly owned by the Government of Malaysia and acts as the regulator and
the licensing authority for the Malaysian upstream oil and gas industry. By virtue of the
PDA and the Petroleum Regulations 1974 (“Regulation”), PETRONAS has the exclusive right
of exploring, winning and producing petroleum in Malaysia (“Owner”).
As a result of the enactment of the Exclusive Economic Zone Act 1984, such rights and
ownership above are now extended to all petroleum resources found within the exclusive
economic zone of Malaysia, which is an area beyond and adjacent to the territorial sea of
Malaysia to a distance of two hundred nautical miles from the baselines from which the
breadth of the territorial sea is measured.
Any person who intends to carry out upstream operations (i.e. the exploration,
development and production of oil and gas) must conclude a production sharing contract
(“PSC”) with PETRONAS or farm-in to an existing PSC.
Furthermore, any person who wishes to supply any goods or service to operators for such
upstream operations must seek the issuance of speci c licences from (or register with)
PETRONAS and comply with licensing requirements of PETRONAS.
II. Oil & Gas Operators in Malaysia
There are a few local and international operators involved in the upstream exploration and
production activities in Malaysia. PETRONAS Carigali Sdn. Bhd. remains the main local
operator in Malaysia. The international oil and gas companies such as Exxon, Shell, Hess and
Talisman also play a signi cant role in the exploration and production of oil and gas in
Malaysia together with PETRONAS Carigali Sdn. Bhd.
III. Oil & Gas Contractors / Services Companies
The major oil and gas contractors/services companies in Malaysia for the supply of services in
the upstream operations engaged by the Operators includes Technip, Petrofac, Halliburton
Baker Hughes, Schlumberger and Aker Solutions.
IV. Oil & Gas Associations in Malaysia
Over the years a number of oil and gas associations has been established to provide a forum
for discussion on issues of common interests among the oil and gas players. Among the
associations established include the following:-
MOGSC – Malaysian Oil & Gas Service Counsel;
MOGEC – Malaysian Oil & Gas Engineering Consultants;
MOCA – Malaysian Offshore Contractors Association; and
MGA – Malaysia Gas Association.
E. LEGAL FRAMEWORK AND GOVERNANCE OF
MALAYSIA OIL AND GAS INDUSTRY
I. Legislations Applicable to the Oil and Gas Industry in Malaysia
The Petroleum Development Act, 1974 is the main legislation governing the Malaysian oil and
gas industry. Besides the Petroleum Development Act, 1976 there are a number of other
statutes, ordinances and regulations applicable to the industry including but not limited to
the following:
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Atomic Energy Licensing Act 1984;
Communications and Multimedia Act 1998;
Continental Shelf Act 1966;
Continental Shelf Act, 1966;
Customs Act, 1967;
Environmental Quality Act 1974;
Excise Act, 1976;
Exclusive Economic Zone Act 1984;
Factories and Machinery Act, 1967;
Federal Constitution of Malaysia 1957;
Gas Supply Act, 1993;
Merchant Shipping Ordinance 1952;
Occupational Safety and Health (Safety and Health Of cer) Regulations 1997;
Occupational Safety and Health Act 1994;
Petroleum (Income Tax) Act 1967;
Petroleum (Safety Measures) Act 1984; and
Protected Areas and Protected Places Act 1959
The above list is by no mean to be exhaustive.
II. Application of Malaysian Law to Oil & Gas Activities Located in the Offshore
Pursuant to Section 5 of the Continental Shelf Act 1966 Malaysian laws both Malaysian civil or
criminal shall be applicable on and within 500 meter radius of any structure erected or used
on and above the Malaysian continental shelf in connection with the exploitation of any
natural resources, including oil and gas.
III. Oil & Gas Industry contracts:-
Apart for the above listed legislations, typically there a number of contractual documents
involved in the Oil and Gas industry business. These documents includes the following:-
I. Contracts between the Owner and Operators
(a) Production Sharing Contract (“PSC”) / Risk Service Contract (“RSC”);
(b) Joint Operating Agreement (“JOA”) (and Financial Procedure);
(c) Joint Study Agreement;
(d) Data Exchange Agreement; and
(e) Farm in Agreement (and the Signature Bonus).
II. Contracts between the Operator and the Contractor/Sub-Contractors
Non- Disclosure / Con dentiality Agreement;
Agency Agreement;
Services Contracts various exploration and productions activities including the
Drilling Contracts, Work-overs and other Oil elds Services Contracts;
Front-End Engineering Design (“FEED”) Contracts;
Engineering, Procurement, Construction, Installation and Commissioning (“EPCIC”)
contracts;
Bareboat Charters Agreement;
Manpower Supply Agreements or Secondment of Manpower Agreement;
Project Development and Management Agreement; and
Operations and Maintenance Agreement.
The list above is by no mean exhaustive, and differ from project to project and the contracting
out of the above contracts by the PSC/RSC Operator to third party contractor will normally
require the prior approval of the Owner.
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F. CONCLUSION:
Finally, oil and gas have been the major contributors to Malaysia’s development and
continue to serve as one of the Government’s main source of income. In an industry where
innovation and technology development is moving rapidly, the legal fraternity should also be
ready to contribute towards providing an up to date legal services to support the objective of
positioning Malaysia as the number one oil and gas hub in the Asia Paci c region by 2017.
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