KUALA LUMPUR – Could an ongoing legal battle between Petroleum Sarawak Bhd (Petros) and Petroliam Nasional Bhd (Petronas) reignite disputes over Sarawak’s gas distribution rights, despite assurances that the matter had been settled?
Court papers sighted by Scoop reveal that Petros, which is displeased with Petronas’ demand on an RM7.95 million Maybank bank guarantee, claims the Sarawak Gas Sales Agreement (SGSA) with Petronas is illegal as Petronas lacks a required licence under the Distribution of Gas Ordinance 2016 (DGO 2016).
The ordinance mandates a licence for gas distribution in Sarawak, a role reserved for Petros since amendments were passed in 2023 to overcome challenges presented by the previous “inequitable arrangement” with Petronas.
“It is for that reason (Petronas’ lack of licence) that the plaintiff (Petros) cannot perform the SGSA, for otherwise, the plaintiff would be endorsing and furthering an illegal agreement. That notwithstanding, the defendant (Petronas) made the (bank guarantee) demand on the basis of such an illegal agreement,” Petros stated in its originating summons filed at the Kuching High Court.
Petros initiated legal action on October 15, 2024, following Petronas’ demand for the bank guarantee the previous day due to alleged non-payment under the SGSA.
Petros argues that fulfilling the SGSA would mean endorsing an illegal agreement, as Petronas does not hold the necessary Section 8 licence. This, according to Petros, invalidates any claims under the agreement, including the bank guarantee.
In a supporting affidavit by Petros senior vice president (downstream) Victor Maiyor, he noted that as a company conducting business in Sarawak, Petronas is subject to the requirements of all laws and regulations in the state – including the DGO 2016.
Section 20 of the DGO 2016 criminalises the carrying out of any activities under Section 7 of the ordinance without a licence, with those convicted of the crime liable to a maximum fine of RM200,000, imprisonment for up to five years or both.
A further fine of not more than RM1,000 per day can be imposed if the offence continues after conviction. Any pipeline, installation or facility used or intended to be utilised in the commission of the offence shall also be liable to forfeiture.
“The objective of enacting the DGO 2016 is to establish the Sarawak government’s exclusive control over the distribution of natural gas in the state. The legislation requires companies, particularly Petronas, to obtain the necessary licence for gas distribution activities in the state.
“The lack of the Section 8 licence renders the SGSA illegal and unlawful…consequently, the SGSA is void. As a result, Petronas cannot enforce the SGSA, including any claims for the purported sum (of the bank guarantee),” Victor said in his affidavit.
He added that Petros’ solicitors have advised that any continued performance of the SGSA and Miri GSA to buy gas from an “unlicensed person or company” could be construed as “abetting” that person to commit an offence under Section 20(1)(a) of the DGO 2016.
“Therefore, I verily believe that allowing Petronas to call on the bank guarantee would be tantamount to perpetuating the illegality of the SGSA and the Miri GSA.”
The Miri Gas Sales Agreement (GSA) refers to a 2024 gas sales agreement part of a supply separation exercise.
Dispute over gas supply agreement terms
Victor claims that Petros and the Sarawak government have been negotiating with Petronas on the transition of gas aggregation authority. Despite prior assurances of amicable resolution, Petronas demanded the bank guarantee without notice, which Petros argues violates good-faith discussions.
“Petronas’ demand on the bank guarantee is tainted by unclean hands and is made in bad faith to circumvent its lack of the Section 8 licence and the illegality of the SGSA,” he added.
“Petronas is thus acting unconscionably and is seeking to enforce payment under the SGSA although it was not licenced to carry out the activities for which it now claims payment.”
In an October 8, 2024 meeting between Petronas and Petros, Victor said one of the topics discussed was the outstanding gas aggregator margin owed by Petronas to Petros and the payment mechanism for the amount in question.
Referencing an “understanding” that all outstanding amounts owed by both parties would be reconciled upon the finalisation of the gas aggregator transition to Petros, Victor asserted that Petronas’ demand on the bank guarantee has “prejudiced the ability to settle the matter amicably”.
“Ultimately, the ongoing dispute arising from Petronas’ lack of a Section 8 licence for gas aggregation in Sarawak is a matter of national and state interest (which was) being negotiated and addressed at a wider level, including between leaders of both state and federal governments.
“Petronas’ conduct in making a demand on the bank guarantee is clearly intended to harass Petros and is unconscionable,” Victor added.
In September and October 2024, Petronas also issued letters demanding RM45.55 million purportedly owed by Petros for gas supplied. Petros insists these demands lack proper legal grounds, making them invalid.
In seeking interim injunctive reliefs from the court, Victor said Petros will suffer “considerable detriment and irreparable damages” if payment is released from the bank guarantee without regard to Petros’ rights under the law.
Cautioning that Petros’ reputation as a prominent state-owned company and gas aggregator is at risk if payment is released following Petronas’ demand, he also expressed concern regarding Petros’ financial standing, credit rating and existing relationships with other parties.
The case, which could set significant legal precedents in Malaysia’s energy sector, is expected to be heard before judge Leonard David Shim on February 19. Petros is represented by Reddi & Co., while Petronas is represented by Alex, Jason & Co.
While specifics of the apparently finalised discussions between Petronas and Petros on gas distribution in Sarawak have yet to be made public, officials previously said key details, parameters and legal implications of the deal were being ironed out.
Prime Minister Datuk Seri Anwar Ibrahim recently stated that Sarawak’s DGO 2016 does not override the Petroleum Development Act 1974 or federal laws. He clarified that while Petros manages domestic gas distribution in Sarawak, Petronas maintains national authority.
Previously, Scoop reported that Petronas is expected to suffer an approximately 30% revenue loss once the agreed formula for the distribution of natural gas in Sarawak is implemented, with the company confirming ongoing productivity reviews aimed at “eliminating inefficiencies”. – January 21, 2025