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.
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 employment opportunities and skills transfer to thousands of Malaysians which in return has changed the economic landscape of the country.
NEW OUTLOOK ON MALAYSIA’S OIL & GAS INDUSTRY
The Government of Malaysia has contributed significantly 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 five 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 Pacific region, Malaysia aims to be the number 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 fields, the new marginal fields 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”)
- 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.
- 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 significant 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.
- The oil, gas and energy industry plays a prominent role in the Malaysian economy, contributing to one-fifth 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 classified 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 office. 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 Pacific 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 activities, technology transfer and talent training and development. Ultimately, Malaysian companies will be able to contribute substantially to the oil and gas value chain.
STANDARD SECTORS IN THE OIL AND GAS INDUSTRY IN MALAYSIA
Oil & Gas activities in Malaysia can be classified 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 & Gas
Exploration 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 field is located.
- Execute drilling and servicing of oil and gas well. Activities include managing manpower, rigs, material supply and stocks to ensure difficulties 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 fields to refineries 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
Refining, Distribution Trading & Marketing
- Skilled personnel asre required to ensure that oil refineries maintain its production level and simply keep the refinery 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 specifications.
- 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.
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.
- 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 specific 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 significant 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.
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:
- 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 Officer)
- 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 / Confidentiality Agreement;
- Agency Agreement;
- Services Contracts various exploration and productions activities including the Drilling Contracts, Work-overs and other Oilfields 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.
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:-
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 Pacific region by 2017.
