System of Oil and Gas Ownership

Pursuant to Section 2(1) of the Petroleum Development Act 1974 (PDA), Petroliam Nasional Berhad (“Petronas”), a company wholly owned by the federal government of Malaysia, is the corporation vested with the entire ownership in petroleum and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum both onshore and offshore in Malaysia.

Petroleum is defined in Section 10 of the PDA as any mineral oil or relative hydrocarbon and natural gas existing in its natural condition, and casing head petroleum spirit including bituminous shales and other stratified deposits, from which oil can be extracted.

Such ownership and exclusive rights conferred on Petronas under the PDA extend to include Malaysia’s exclusive economic zone and its continental shelf.

Differences Between Federal, State and Private Ownership of Mineral Interests

As stated above, Petronas enjoys exclusive ownership of petroleum in Malaysia. Therefore, the federal government’s and state governments’ interests in petroleum would only lie in the “cash payments” to be paid by Petronas, under cash payment agreements between:

• Petronas and the federal government; or
• Petronas and the relevant state government.

Cash Payment Agreements

Section 4 of the PDA provides that, in return for the ownership, rights, powers, liberties and privileges granted to it, Petronas must provide “oil royalties” (otherwise known as “cash payments”) to the federal government and the relevant state governments. The rates of these cash payments are set out in the cash payment agreements. Some cash payment agreements provide for 5% of the value of the petroleum won, saved and sold to be paid to the respective federal and state governments. The bulk of the remaining value (50–70%) is repaid to oil companies to cover the costs of extracting the oil.

Regulators of Hydrocarbon Activity

Upstream operations

Pursuant to Regulation 3 of the Petroleum Regulations 1974 (the “Petroleum Regulations”), enacted pursuant to Section 7 of the PDA, Petronas is the responsible authority for:

• the licensing of any contractors who wish to participate in activities relating to the exploration, exploitation, winning and obtaining of petroleum; and
• the licensing of goods and service providers operating in the upstream sector, including providers of rigs and drilling services and suppliers of general goods and services related to upstream operations.

The activities relating to the exploration, exploitation, winning and obtaining of petroleum is regulated by Petronas through the granting of licences, typically in the form of a Production Sharing Contract (PSC) or a Risk Service Contract (RSC). PSCs and RSCs are similar in that the rights to title in the petroleum produced remain vested in Petronas, but generally differ in respect of how the oil companies’ revenue is calculated:

• for PSCs, revenue is usually calculated on the same basis as the oil companies’ share of production under the PSC; and
• for RSCs, the oil companies are entitled to remuneration fees for services provided upon commercial production.

For the licensing of goods and service providers operating in the upstream sector, the PETRONAS Licence and Registration General Guidelines (the “Petronas General Guidelines”) (see https://www.petronas.com/themes/custom/petronas/pdf/General-Guideline-PETRONAS-License-and-Registration-v13.pdf) sets out the general requirements and procedures for the application of Petronas licences to provide goods or services to the upstream sector.

Midstream/downstream operations

Transportation of petroleum

The Petroleum (Safety Measures) Act 1984 (PSMA) was enacted to consolidate laws relating to safety in the transportation, storage and utilisation of petroleum, and to provide for situations relating to such matters. The PSMA and the regulations enacted pursuant to it – namely, the Petroleum (Safety Measures) (Transportation of Petroleum by Pipelines) Regulations 1985 (the “PSM Pipelines Regulations”) and the Petroleum (Safety Measures) (Transportation of Petroleum by Water) Regulations 1985 (the “PSM Water Regulations”) – regulate, among others, transportation of petroleum by road, railway, water and pipelines.

As with the PDA, the PSMA and the regulations enacted thereunder define “petroleum” as any mineral oil or relative hydrocarbon and natural gas existing in its natural condition, and casing head petroleum spirit including bituminous shales and other stratified deposits, from which oil can be extracted, including petroleum products.

The PSMA and the PSM Pipelines Regulations govern the transportation of petroleum in pipelines to places including production facilities, tank farms, natural gas processing plants and other delivery and receiving points. The PSMA does not apply to:

• pipelines within petroleum refineries and gas processing plants;
• pipelines within industrial plants, bulk plants and service stations; and
• piping systems from the point of delivery to the connections with each gas utilisation device.

Under the PSM Pipelines Regulations, the installation and operation of covered pipelines require separate licences issued by the Department of Occupational Safety and Health (DOSH) (https://www.dosh.gov.my/index.php).

Regulation 10 of the PSM Water Regulations provides, among others, for the requirement for all vessels carrying certain classes of petroleum to be certified and licensed upon examination by a Surveyor General of Ships and a Surveyor of Ships, respectively.

Section 65KA of the Merchant Shipping Ordinance 1952 (MSO) provides that domestic shipping must be conducted by Malaysian registered ships. The Marine Department of the Ministry of Transport (https://www.marine.gov.my/) regulates the registration of Malaysian ships, while the Domestic Shipping Licensing Board regulates and controls the licensing of ships that conduct domestic shipping between any ports in Malaysia.

Pursuant to Section 51 of the Land Public Transport Act 2010, the operation of certain land-based vehicles used to transport petroleum products (such as prime movers) which fall within the meaning of “goods vehicles” under the Land Public Transport Act 2010 require a licence issued by the Land Public Transport Agency (https://www.apad.gov.my/en/).

Processing and refining of petroleum and manufacturing of petrochemical products

Section 6 of the PDA governs downstream operations in Malaysia. Pursuant to Section 6(1) of the PDA, the Prime Minister’s permission is required for any person to carry out:

• processing or refining of petroleum; or
• manufacturing of petrochemical products from petroleum.

Regulation 3A(1) of the Petroleum Regulations provides that application for permission to commence or continue any business of processing or refining petroleum, or of the manufacture of petrochemical products from petroleum under Section 6(1) PDA, shall be made to the Secretary-General, Ministry of International Trade and Industry – now known as the Ministry of Investment, Trade and Industry (https://www.miti.gov.my/) (MITI).

The MITI regulates such activities through its agent, the Malaysian Investment Development Authority (https://www.mida.gov.my/) (MIDA).

The MIDA issued a Guideline on Application for Permits under the Petroleum Development Act, 1974 (the “MIDA PDA Guidelines”) which sets out, among others, the eligibility criteria and application procedures for such permission under Section 6(1) PDA (the “MIDA PDA Permission”).

In respect of processing, refining and manufacturing activities, the MIDA’s approval is typically issued alongside the manufacturing licence under the Industrial Co-ordination Act 1975 (ICA) applicable to such activities (the “Manufacturing Licence”). “Manufacturing activity” is defined as “the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal, and includes the assembly of parts and ship repairing but shall not include any activity normally associated with retail or wholesale trade”. Pursuant to the Industrial Co-ordination (Exemption) (Amendment) Order 1986, any manufacturers with shareholders’ funds of less than MYR2.5 million and with less than 75 full-time paid employees are exempted from the requirement to apply for a Manufacturing Licence.

Marketing and distribution of petroleum or petrochemical products

Pursuant to Section 6(1) of the PDA, the Prime Minister’s permission is also required for any person to carry out the business of marketing or distribution of petroleum or petrochemical products.

Regulation 3A(2) of the Petroleum Regulations provides that application for permission to commence or continue any business of marketing or distribution of petroleum or petrochemical products under Section 6(3) of the Act must be made to the Secretary General, Ministry of Internal Trade and Consumer Affairs – now known as the Ministry of Domestic Trade and Cost of Living (https://www.kpdn.gov.my/en/) (MDTCL).

The MDTCL has issued guidelines (the “PDA Guidelines”) which provide the criteria and qualifications required for obtaining the Prime Minister’s permission pursuant to Sections 6(1) and 6(3) PDA (“MDTCL PDA Permission”). Under the PDA Guidelines, there are four such categories:

• Permission for Operation of Petrol Stations, Skid Tanks and Floating Barges  (“MDTCL PDA 1 Permission”);
• Permission for Provision of Bunkering Services in Malaysia (“MDTCL PDA 2 Permission”);
• Permission for Provision of Logistics Services for Petroleum Products, including transportation activities of petroleum products from one place to another in Malaysia, without the involvement of any sale transaction using any vehicle registered for the transportation of petroleum products  (“MDTCL PDA 3 Permission”); and
• Permission for Wholesale Marketing and Distribution of Petroleum Products (ie, including fuel oil, gasoline, diesel oil, methane, ammonia nitrate, etc) (“MDTCL PDA 4 Permission”).

Registration with Petronas for providing downstream services to Petronas’ group of companies

Any person wishing to provide downstream services to Petronas’ group of companies is required to register with Petronas and comply with the requirements set out in the Petronas General Guidelines.

Supply of gas through pipelines to consumers

Specifically in relation to the supply of gas through pipelines to consumers, the Gas Supply Act 1993 (GSA) governs:

• the licensing of the supply of gas to consumers through pipelines and related matters;
• the supply of gas at reasonable prices; and
• the control of gas supply pipelines, installations and appliances with respect to matters of safety of persons and for purposes connected therewith.

Section 5 of the Gas Supply (Amendment) Act 2016 (the “Amendment Act”) amended the GSA to provide the legal framework for the third-party access system (the “TPA System”), which allows utilisation of existing and future gas infrastructures by multiple parties for importing gas into the country. Section 6 of the Amendment Act introduced the Energy Commission as the regulator of the gas industry. The Energy Commission has powers under Sections 37B and 37C of the GSA, and has issued guidelines and codes which licensees must comply with, including:

• the TPA Code for Malaysian Transmission Pipelines;
• the TPA Code for Malaysian Distribution Pipelines; and
• the Guidelines on Licence Applications.

The above codes and guidelines have force of law, and any breach thereof would constitute a breach of the GSA.

Pursuant to Section 11 of the GSA, the following supply activities require a licence issued by the Energy Commission:

• transportation of gas though the transmission pipeline under an arrangement with a shipping licensee; and
• distribution of gas through the distribution pipeline.

As stated in 1.1 System of Hydrocarbon Ownership, Petronas is the national oil and gas company.

The principal laws and regulations governing oil and gas activities in Malaysia are:

• the PDA;
• the Petroleum Regulations;
• the PSMA;
• the Environmental Quality Act 1974 (EQA);
• the Occupational Safety and Health Act 1994 (OSHA);
• the Factories and Machinery Act 1967;
• the MSO; and
• the GSA.

Pooling and Unitisation Rules

PSCs typically include terms on pooling and unitisation, which seek to ensure that the hydrocarbon resources are developed in an optimum and efficient manner and enhance the value that may be derived from the various petroleum fields.

Such terms may stipulate that if Petronas is of the view that the strata in one PSC contract area overlaps with another PSC contract area, Petronas may request that the affected PSC contractors pool their resources and unitise the reservoirs. These terms are generally used in circumstances where Petronas considers this to be in the national interest, in order to secure the maximum recovery of petroleum and to avoid unnecessary competitive drilling of the petroleum fields.

For cross-border reservoirs, Petronas may collaborate with the owners of oil rights in other jurisdictions through international unitisation agreements. In April 2021, Petronas entered into a unitisation agreement with the government of Brunei Darussalam in respect of the oil fields that straddle along the Malaysia-Brunei maritime boundary.

As stated in 1.2 Regulatory Bodies, private investors require a licence from Petronas to obtain the right to explore for, develop and produce petroleum and natural gas, which typically takes the form of a PSC or RSC.

Such rights granted under the PSC and RSC are contractual. There are no historic forms of contract that are still in effect but no longer issued.

PSCs and RSCs

Regulations 3 and 5 of the Petroleum Regulations provide that the applications for a licence should be made to the President of Petronas. The Chairman and the Chief Executive of Petronas shall process the applications, which are then forwarded to the Prime Minister for their approval.

The licences for oil exploration and production are generally secured through Petronas’ yearly invitation to bid for PSCs or RSCs, which aim to market oil and gas opportunities to companies who are interested in conducting exploration, development and production activities in Malaysia. Alternatively, farm-ins into the existing contracts may be undertaken with the prior approval of Petronas.

For the purposes of obtaining the licence, Petronas has introduced guidelines – referred to as the Petronas General Guidelines – setting out the requisite criteria. The interested entity must be:

• registered with the Companies Commission of Malaysia as a private limited company or public limited company;
• registered with the Registrar of Business as a sole proprietorship or partnership; or
• registered with the relevant professional bodies – ie, the Board of Surveyors, the Board of Valuers, Appraisers and Estate Agents or the Board of Architects.

Under the Petronas General Guidelines, the company is also required, among others, to have a minimum paid-up capital for a licence application of MYR 100,000, and a Bumiputera participation requirement in accordance with the applicable standardised work equipment categories (SWEC). The minimum Bumiputera participation rate must be met at the equity, board of directors, management and employment level.

The term “Bumiputera” is used to describe:

• persons of Malay ethnicity defined by Article 160 of the Federal Constitution to mean persons born to Malaysian parents who profess the religion of Islam, habitually speak the Malay language and conform to Malay custom; and
• natives of the states of Sabah and Sarawak.

For PSCs, contracting parties may consist of one company or multiple companies, but at least one must be designated as the “operator” to operate on behalf of the contracting parties. Where there are multiple contractors involved in a PSC, such contractors typically enter into a joint operating agreement (JOA). The JOA regulates the contractual relationship, rights and responsibilities of the parties to the joint venture and outlines each party’s respective interests and obligations within the joint venture. In addition to Petronas itself, Petronas’ policy is for its exploration and production arm, Petronas Carigali Sdn Bhd, to be made a contracting party to each PSC and RSC, although this is not a legal requirement.

Licence to Supply Goods or Services in the Upstream Sector

Similar to PSCs and RSCs, an applicant for a Petronas licence to supply goods or services in the upstream sector must also satisfy the aforementioned requirements in the Petronas General Guidelines.

PSCs and RSCs

In Malaysia, traditional PSCs and RSCs have evolved and have varying fiscal terms.

The different fiscal terms are adopted in the relevant PSC or RSC and tailored to the asset types involved in the investment, to provide optimum sharing of the oil and gas profits between Petronas and investors. This includes, but is not limited to, the following:

• deepwater/ultra-deep water PSC (terms based on water depth and catering for high-risk deepwater environments, targeting major players with deepwater experience);
• revenue-over-cost (R/C) PSC (profitability based on a sliding scale aimed at attracting investments and promoting cost-effective technology in exploring high-risk areas);
• high-pressure/high-temperature R/C PSC (terms for attracting investments in the challenging conditions of deeper reservoirs);
• risk-service contract terms;
• progressive volume-based terms (accelerated cost recovery upon resource monetisation to attract new development in brownfields); and
• deepwater R/C PSC (profitability-based fiscal terms with a self-adjusting mechanism that offers greater flexibility to investors and improves the competitiveness of deepwater assets).

For further information, see https://www.petronas.com/mpm/investment-opportunities/fiscal-terms.

Most existing PSCs are premised on an R/C structure with profit tranches based on the ratio of revenue against cost incurred and with additional claw-back functions built in. Under the deepwater R/C PSC terms:

• cash payment to the federal and state government is 10% of the gross production;
• the cost recovery ceiling will be self-adjusted up to a maximum of 80% based on profitability, which will accelerate cost recovery during low-profitability periods;
• the remaining production after cash payment and cost recovery is treated as profit that is shared between Petronas and the contractor based on the self-adjusted profit-sharing mechanism – the contractor’s profit share will be automatically self-adjusted up to a maximum of 80% based on profitability; and
• there is a temporary relief on supplementary payment where claw-back on excess profit triggers only after reaching a “breakeven” point, at an R/C index of 1.2 for oil and 1.4 for gas.

In recent years, three new fiscal terms have been drawn up, designed to provide equitable returns and match the associated risks with the opportunity to accelerate development and monetisation:

• small-field assets (facilitates’ effective monetisation of small fields, with the flexibility to optimise operational costs and maximise profit margins);
• late-life assets (designed to empower contractors and reward efficiency by encouraging cost savings); and
• enhanced profitability PSC fiscal terms (offers more attractive returns to contractors with a more equitable sharing of upside rewards).

Under tax law, the governmental body responsible for tax collection and administration of direct tax is the Inland Revenue Board of Malaysia (IRB). The Royal Malaysian Customs Department administers customs and excise duties, and sales and services tax.

Tax matters in the oil and gas sector are mainly governed by:

• the Petroleum (Income Tax) Act 1967 (PITA); and
• the Income Tax Act 1967 (ITA).

Tax Regime Applicable to Upstream Operations

For upstream operations, petroleum income tax is chargeable at a rate of 38% of the income derived by a chargeable person from “petroleum operations” under the PITA. 

Under Section 2 of the PITA, “petroleum operations” are defined as (among others):

• the search for and winning or obtaining of petroleum in Malaysia; and
• any sale or disposal of petroleum so won or obtained, including the transportation of the petroleum to any point of sale, delivery or exportation.

Petroleum operations do not include:

• any transportation of petroleum outside Malaysia;
• any process of refining or liquefying petroleum;
• any dealings with products so refined or liquefied; or
• services involving the supply and use of rigs, derricks, ocean tankers and barges.

For petroleum operations derived from a Joint Development Area (defined under the Malaysia-Thailand Joint Authority Act 1990 as the defined area of the continental shelf of Malaysia and the Kingdom of Thailand in the Gulf of Thailand), the chargeable income is subject to petroleum income tax at the rate of:

• 0% for the first eight years;
• 10% for the next seven years; and
• 20% for the subsequent years of production, provided that the prescribed conditions are complied with (Section 23(2) PITA).

Tax Incentives for Upstream Operations

Tax incentives applicable to petroleum operations include a tax exemption for a portion of chargeable income from marginal fields, which results in a reduction of the effective tax rate from 38% to 25% for petroleum operations in such marginal fields under Section 4 of the Petroleum (Income Tax) (Exemption) Order 2013 (the “2013 Exemption Order”). A “marginal field” is a field determined by the Minister of Finance as being a field in a petroleum agreement area which has potential crude oil reserves not exceeding 30 million stock tank barrels or natural gas reserves not exceeding 500 billion standard cubic feet.

Other Taxes and Duties

The sales and services tax regime (having replaced the goods and services tax regime commencing September 2018), may also be applicable to sale transactions in the upstream oil sector. Sales tax is a single-stage tax imposed on taxable goods manufactured or imported into Malaysia. Service tax is a consumption tax levied and charged on any taxable services provided in Malaysia by a registered person.

The Customs Act 1976 (the “Customs Act”) and its regulations and orders apply to cross-border sales and deliveries of crude oil. Export duties are generally imposed on Malaysia’s main export commodities, such as crude petroleum.

Stamp duty is chargeable on instruments in accordance with the Stamp Act 1949 (the “Stamp Act”). This ranges from MYR10 to ad valorem rates.

As stated in 1.1 System of Hydrocarbon Ownership, Petronas has the entire ownership in and exclusive rights, power, liberties and privileges of exploring, exploiting, winning and obtaining petroleum in Malaysia, whether onshore or offshore. Petronas’ rights are contractual and set out in the PSC and RSC negotiated between the contracting parties. Commonly negotiated provisions in a PSC and RSC include those that grant Petronas:

• rights to be carried;
• back-in rights;
• rights to operate or take over operations;
• rights to secondary personnel; and
• rights to protect the interests of Petronas and ensure effective management of petroleum resources.

PSCs and RSCs

There are no local content requirements applicable to upstream operation by private investors. Foreign companies wishing to participate in upstream operations must obtain a licence from Petronas in the form of a PSC or RSC, and must comply with the requirements set out by Petronas in the PSC or RSC (as the case may be) to participate in exploration and production activities. Under the Petronas General Guidelines, the company is also required to (among others) meet the Bumiputera participation requirement in accordance with the applicable SWEC. 

Licences to Supply Goods and Services in the Upstream Sector

Similar to PSCs and RSCs, an applicant for a Petronas licence to supply goods or services in the upstream sector must also satisfy the Bumiputera participation requirement in accordance with the applicable SWEC.

There are no specific requirements on the use of a minimum amount of locally sourced goods, services or capital. Local use is encouraged and incentivised through importation restrictions or import duties on imports.

Exploration rights are granted to oil and gas exploration companies through the relevant PSC or RSC. The successful company explores for hydrocarbons on behalf of Petronas, and if oil or gas is discovered within the duration of the PSC, the company can proceed to develop and produce the hydrocarbon resources.

The PSC or RSC contractor will have to comply with requirements imposed by Petronas under the PSC or RSC. Pursuant to the Petroleum Regulations, any person who fails to comply with any condition of the Petronas licence shall be guilty of an offence, and on conviction shall be liable to a fine not exceeding MYR50,000 or to imprisonment for a term not exceeding two years, or both. In the case of a continuing offence, they shall be liable to a further fine of MYR1,000 for each day or part of a day during which the offence continues after the first day in respect of which the conviction was recorded.

Based on information published on Petronas’ website, the PSC and RSC typically specify the following:

• duration and scope of contract;
• contract area;
• work programme and budget;
• management and operations;
• division of gross production and cost recovery;
• accounts and audits;
• procurement of equipment, facilities, goods, materials, supplies and services;
• governing law and dispute resolution;
• taxes; and
• abandonment.

The terms of PSCs and RSCs vary. Typically, PSCs and RSCs will specify durations for exploration, development and production. For PSCs, the duration for production is typically 15 to 20 years, which may be subsequently extended from time to time upon application for such extension.

The PSC or RSC typically provides that the titles to all equipment and assets purchased by PSC contractors and used for operations are vested with Petronas. The contractors may use those assets for the duration of the relevant PSC. The costs of such items are recoverable in barrels of cost oil or gas equivalent. Another key term typical to PSCs and RSCs is that Petronas retains title and ownership of all original data (whether raw, processed or interpreted) acquired during and for the purposes of the contract. 

The limitation of liabilities of each party is typically set out in the PSC or RSC. Under the PSC, the contractors are usually required to provide financing and to bear the risks of the activities they carry out under the relevant contract in exchange for a share of the total production. PSC contractors are also typically required to seek authorisation prior to incurring costs exceeding a specified threshold, and to seek other approvals from Petronas throughout the duration of the contract’s activities. Failure to comply with these terms may give rise to a termination of their rights under the respective agreement(s).

The PSC or RSC may also contain terms stipulating that where transportation is required for any materials in respect of the facilities in which petroleum-related work is being carried out, this shall be arranged by the contractor through the multimodal transport operators (MTO), which are licensed by the government to handle shipment of governmental cargo.

Transfer of Upstream Licences

PSCs and RSCs typically provide that Petronas’ prior approval is required before the interests of a contractor in the relevant PSC or RSC may be transferred or assigned. The consent of other contractors is required for a transfer or assignment of such participating interest to any third party. PSCs and RSCs also typically contain change-in-control clauses, which require a contractor to obtain written consent from Petronas before effecting a change in control.

Licences issued by Petronas for the supply of products or services in the upstream sectors are typically not transferable to another party.

Transfer of Upstream Assets Between Private Investors

As the ownership of extracted petroleum vests in Petronas under the PDA, any transfer or disposal of title in the extracted petroleum must be with Petronas’ consent or approval. The PSC or RSC applicable between the private investor (or its special purpose vehicle) and Petronas typically sets out the terms of the transfer of title of the extracted petroleum and any restrictions.

PSCs and RSCs usually provide that assets purchased by the PSC or RSC contractors for the purposes of the contract are vested with Petronas. The contractors typically retain the right to use those assets for the duration of the PSC or RSC, and can recover the cost of purchase of such assets as cost oil or gas.

Malaysia is not a member of the Organization of the Petroleum Exporting Countries (OPEC), and there are no legal or regulatory restrictions on production rates. However, a PSC may stipulate terms that reduce entitlement of production for respective PSC contractors once the PSC contractors reach certain cost-recovery milestones laid down in the PSC.

Also, as a member of the Organization of the Petroleum Exporting Countries and Allies (OPEC+), Malaysia may from time to time impose voluntary production cuts. For instance, in October 2022, Malaysia agreed to OPEC+’s oil production cut of two million barrels per day collectively, and to cut the country’s daily crude oil output by 27,000 barrels, to 567,000 barrels.

There is no government or private monopoly in the downstream sector. Private investors may invest in midstream or downstream operations subject to certain shareholding restrictions and to local or Bumiputera equity conditions in the relevant licences or permissions required for downstream operations (as further detailed in 2.2 Issuing Upstream Licences/Obtaining Hydrocarbon Rights and 3.3 Issuing Midstream/Downstream Licences.

As stated in 3.1 Forms of Private Investment: Midstream/Downstream, there is no national monopoly for downstream operations.

As stated in 2.2 Issuing Upstream Licences/Obtaining Hydrocarbon Rights, midstream/downstream operations are regulated by the MIDA and the MDTCL.

MIDA PDA Permission

The MIDA PDA Guidelines set out eligibility criteria and application procedures, among others. According to the MIDA PDA Guidelines, the application for the MIDA PDA Permission should be made online at https://investmalaysia.mida.gov.my/.

Manufacturing Licence

For downstream operators engaging in “manufacturing activities”, the Guideline on Application for the E-Manufacturing Licence (E-ML) (the “MIDA Manufacturing Licence Guidelines”) sets out the eligibility criteria and application procedures for a Manufacturing Licence. Applications for a Manufacturing Licence should be made online at https://investmalaysia.mida.gov.my/. The applicant must fulfil the following criteria, among others:

• the capital investment per employee (CIPE) of the project to be undertaken by the applicant must be at least MYR140,000;
• the total full-time workforce of the company must be at least 80% comprised of Malaysians;
• at least 25% of the applicant’s full-time workforce must be managerial, technical and supervisory (MTS) staff with a degree and/or diploma/certificate, or where the added product’s value is at least 40%; and
• the project to be undertaken by the applicant must be consistent with national economic and social objectives, and promote an orderly development of manufacturing activities in Malaysia.

MDTCL PDA Permissions

The MDTCL has issued four guidelines setting out the requirements and application procedures for the four categories of PDA Permissions:

• Guidelines for the Application of PDA 1 – Operation of Petrol Stations/Mini-Petrol Stations/Portable Container Systems/Skid Tanks/Floating Barges (“MDTCL PDA 1 Guidelines”);
• Guidelines for the Application of PDA 2 – Bunkering Services (“MDTCL PDA 2 Guidelines”);
• Guidelines for the Application of PDA 3 – Transportation Service for Petroleum Products (“MDTCL PDA 3 Guidelines”); and
• Guidelines for the Application of PDA 4 – Wholesale Marketing and Distribution of Petroleum Products (“MDTCL PDA 4 Guidelines”).

Applications for all four categories of MDTCL PDA Permissions should be made online through the BLESS 2.0 website (https:/bless2.bless.gov.my/bless2) and hard copies of the requisite supporting documents should be submitted to the MDTCL.

As further detailed in 3.7 Local Content Requirements: Midstream/Downstream, an applicant needs to fulfil certain local content requirements to apply for an MDTCL PDA Permission, as discussed here.

PDA 1 Permission

If the applicant is a private company, it must have a minimum paid-up capital as follows:

• for petrol stations – MYR200,000;
• for mini-petrol stations – MYR50,000; and
• for portable container systems – MYR50,000.

If the applicant is a sole proprietorship, partnership, association or co-operation, it must have a valid and subsisting business premise licence issued by the local authority, and have a minimum paid-up capital as follows:

• for petrol stations – MYR200,000;
• for mini-petrol stations – MYR50,000;
• for portable container systems – MYR50,000; and
• for skid tanks – MYR50,000.

PDA 2 Permission

The applicant must (among others):

• be a private or public company incorporated in Malaysia;
• have a minimum paid-up capital of MYR500,000; and
• have a valid and subsisting business premise licence issued by the local authority.

PDA 3 Permission

The applicant must (among others):

• have a minimum paid-up capital of MYR100,000 if it is a private company;
• have a minimum paid-up capital of MYR50,000 if it is a sole proprietorship or partnership; and
• have a valid and subsisting business premise licence issued by the local authority.

PDA 4 Permission

The applicant must (among others):

• have a minimum paid-up capital of MYR100,000 if it is a private company;
• have a minimum paid-up capital of MYR50,000 if it is a sole proprietorship or partnership; and
• have a valid and subsisting business premise licence issued by the local authority.

Registration With Petronas to Provide Downstream Services to Petronas’ Group of Companies

Any person wishing to provide downstream services to Petronas’ group of companies is required to register with Petronas and comply with the requirements set out in the Petronas Guidelines, including having a minimum paid-up capital of MYR10,000 and complying with the applicable Bumiputera equity ownership requirements, depending on the applicable SWEC.

There are no sector-specific fiscal terms or production-sharing schemes for the downstream sector. As stated in 1.2 Regulatory Bodies, the government regulates downstream operations through licences such as the MIDA PDA Permissions, MDTCL PDA Permissions and the Manufacturing Licence.

Income Tax

For midstream/downstream operations, the chargeable income (profits, dividends, royalties, etc) from such activities are subject to the general tax regime in the ITA. Typical midstream/downstream activities (ie, transportation, marketing and distribution of petroleum products) are taxable under the ITA. The Act provides that resident and non-resident companies be taxed at the rate of 24% on every ringgit of chargeable income, save for those with paid-up capital of MYR2.5 million or less, which are taxed at 15% for the first MYR150,000, 17% for the next MYR450,000 of income, and 24% for any excess of MYR600,000.

Other Taxes and Customs Duties

As with upstream operations, the sales and services tax regime and stamp duty under the Stamp Act may be applicable to transactions in the downstream oil sector. The Customs Act and its regulations and orders are applicable to cross-border sales and deliveries of crude oil products. Export duties are imposed on commodities such as crude petroleum (see 3.13 Laws and Regulations: Imports and Exports). An export licence may also be required for certain categories of products.

Petronas is not given special rights in connection with midstream/downstream licences.

However, contractors who provide downstream services to Petronas’ group of companies are required to register with Petronas and comply with the requirements under the Petronas Guidelines, including having a minimum paid-up capital of MYR10,000 for registration and complying with the applicable Bumiputera participation requirement in accordance with the SWEC.

For downstream operations, local content requirements differ from licence to licence.

MIDA PDA Permission and Manufacturing Licence

The MIDA PDA Permission and the Manufacturing Licence do not impose any local equity requirements on manufacturing and refining. Foreign companies may establish a 100% owned subsidiary for such purpose.

The respective MDTCL PDA Guidelines prescribe the following local content requirements.

PDA 1 Permission

The requirements are as follows.

• Equity ownership must be local.
• For petrol stations that are owned by fuel-supplying companies but are also owned by appointed operators (ie, company-owned, dealer-operated):
1. if the applicant is a sole proprietorship, it must be wholly owned by a Bumiputera; or
2. if the applicant is a partnership or a private company, it must have at least 30% Bumiputera equity ownership.
• For petrol stations that are both owned and operated by individuals and companies (dealer-owned, dealer-operated), there is no minimum Bumiputera equity ownership requirement.

PDA 2 Permission

The requirements are as follows:

• minimum Bumiputera equity ownership of 30%; and
• not more than 30% foreign equity ownership.

PDA 3 Permission

The requirements are as follows:

• minimum Bumiputera equity ownership of 30%; and
• the equity ownership must be local.

PDA 4 Permission

The requirements are as follows.

• For wholesale of petroleum products other than liquefied petroleum gas (LPG), minimum Bumiputera equity ownership of 30%.
• For wholesale of LPG:
1. must be wholly owned by Bumiputera if the applicant is a sole proprietorship – but if the business including the relevant land and storage facility is wholly owned by the applicant, the applicant is exempted from such Bumiputera ownership requirements;
2. must have minimum Bumiputera equity ownership of 51% if the applicant is a partnership or a private company; and
3. the equity ownership must be local.

Locally Sourced Goods, Services or Capital

Similar to the upstream sector, there are no specific requirements regarding the use of a minimum amount of locally sourced goods, services or capital. Local use is encouraged and incentivised through importation restrictions or import duties on imports.

Local Employment

There is currently no requirement for local employment in the midstream/downstream sector. Foreign workers may be employed under the permitted sectors (including the manufacturing, services and construction sectors), and in January 2023 the government announced the Foreign Worker Employment Relaxation Plan. However, the Ministry of Home Affairs has indicated that the hiring of foreign workers should only be a temporary measure to meet the needs of the industry, and the employment of locals should be prioritised.

The MITI has announced that by 31 December 2024 manufacturing companies must abide by an 80:20 local-to-foreign worker ratio.

Registration With Petronas to Provide Downstream Services to Petronas’ Group of Companies

Any person wishing to provide downstream services to Petronas’ group of companies is required to register with Petronas and comply with (among others) the applicable Bumiputera equity ownership requirements, depending on the applicable SWEC.

Manufacturing Licence

A Manufacturing Licence typically provides for the following.

• That the licence be issued to the licence holder in respect of the products and address stated.
• That any disposal of shares by the licence holder be notified to the MITI and MIDA.
• That the licence holder shall train Malaysians in order for the transfer of technology and expertise to be channelled across all position levels.
• That the licence shall comply with the capital investment per employee (CIPE) requirement of at least MYR140,000 (the “CIPE Condition”). Based on the Guideline on Application for Manufacturing Licences issued by the MIDA, CIPE is measured by taking into account fixed-assets investment, including payment of rent (ten years) for land and buildings. The formula for the CIPE ratio is as follows: CIPE (RM) = capital investment as of a company’s financial year ÷ number of full-time employees (defined to mean all persons normally working in the establishment for at least six hours a day and at least 20 days a month for 12 months during the year, and who receive a salary) as of the same financial year.

MDTCL PDA Permissions

The MDTCL PDA Permissions typically provide for the following terms:

• that the MDTCL PDA Permission shall not be transferred without the consent or approval of the MDTCL;
• that the MDTCL PDA Permission shall be exhibited clearly on the approved business premises;
• that the PDA Permission holder shall obtain the MDTCL’s prior approval for any change in company structure in respect of equity shareholding, board of directors, ownership, suppliers, etc;
• that renewal of this PDA Permission shall be made three months before its expiry; and
• that the MDTCL PDA Permission holder shall comply with all the conditions and orders stipulated or imposed by the MDTCL from time to time.       

For the transportation of petroleum and petroleum products, the licensee may also be required to engage the services of MTOs.

A private investor constructing infrastructure does not have condemnation/eminent domain rights.

Malaysian land is bought and sold using the title and registration system. Surface rights belong to the registered owner of the land.  Foreign entities or persons wishing to purchase land in Malaysia must obtain the approval of the state authority (the Yang di-Pertua Negeri of the state). However, all minerals in or on any land in Malaysia vest in the respective state authorities. Under the State Mineral Enactment 2002, property in minerals can only pass to a person or company that has won a concession and has paid the relevant fee.

See 1.2 Regulatory Bodies.

The TPA System introduced by the Malaysian government under the Economic Transformation Programme to liberalise the gas market is governed by the GSA. It allows multiple entities to access and utilise gas facilities available in Malaysia that they do not own or operate.

Midstream/downstream licences do not provide open access rights in privately constructed infrastructure to third parties.

There are no restrictions on product sales into the local market as long as the requisite licences, permits and/or approvals have been obtained.

The Customs Act and its regulations and orders govern (among others) the exportation of crude oil, natural gas and petroleum products. There are no prohibitions on the exportation or production of petroleum and natural gas under the Customs Act; however, certain classes of petroleum products may require an export licence. Under the Customs Duties Order 2022, crude petroleum oils are subject to export duties of 10%.

Downstream licences such as the MIDA PDA Permission, Manufacturing Licences and MDTCL PDA Permission generally may not be transferred without the relevant regulator’s consent. These licences also typically contain change-in-control conditions which require the licence holder to obtain prior approval of the relevant regulator(s) for any change in shareholders or board of directors of the licence holder.

Foreign Investment Rules

There are no special requirements or limitations at law on the participation of foreign companies for upstream exploration and production activities. To participate in such activities, foreign companies must receive a licence from Petronas, which in practice normally takes the form of a PSC or RSC.

There are substantial local or Bumiputera equity conditions for companies wishing to supply goods and services, which are enforced through the Petronas licensing regime.

As such, foreign companies in the business of supplying goods and services to the upstream oil industry in Malaysia often either do so through an agency agreement with local companies licensed by Petronas, or by forming a joint venture with a local company/individual.

Incentives for Foreign Investment

There are no special incentives specific to foreign investment in the oil and gas sector. Foreign investors in oil and gas enjoy the general incentives applicable to the oil and gas sector, subject to the fulfilment of the eligibility criteria, such as the pioneer status, investment tax allowance and tax incentive under Section 4 of the 2013 Exemption Order (see 2.4 Income or Profits Tax Regime: Upstream).

Local Trends

To date, there are no specific local trends or policies in Malaysia aimed at restricting or blocking foreign investment in the oil and gas sector.

There are currently no unilateral sanctions imposed by Malaysia as regards investment in oil and gas assets, or as regards conducting business in the oil and gas sector with foreign counterparties or governments or in certain foreign jurisdictions. However, on 2 March 2022, a Russian-flagged oil tanker sanctioned by the United States of America (following the Russia-Ukraine conflict) was denied entry by Malaysia.

Further, under Section 9(3) of the Strategic Trade Act 2010 (STA), no person may export, tranship or bring in transit strategic items or unlisted items to a prohibited end user specified in Subsection 8(2) of the STA. “Strategic items” are military items as specified in Part 1 and dual-use items as specified in Part 2 of the Schedule of the Strategic Trade (Strategic Items) Order 2010, which may include drilling equipment, specialised machinery, and materials or chemicals used in upstream or downstream operations.

To date, entities and individuals designated by the Minister as “prohibited end users” under the Strategic Trade (Restricted End Users and Prohibited End Users) Order 2010 are as follows:

• the Democratic People’s Republic of Korea (DPRK);
• entities or individuals listed in the list established, maintained and updated by the United Nations Security Council pursuant to United Nations Security Council Resolution 1718 (2006) and made available on the official website of the United Nations at https://www.un.org;
• the Islamic Republic of Iran; and
• entities or individuals listed in the list established, maintained and updated by the United Nations Security Council pursuant to United Nations Security Council Resolution 2231 (2015) and made available on the official website of the United Nations at https://www.un.org; and

The EQA and its regulations are the primary legislation governing (among others) the protection of the environment and the prevention of oil spills and pollutants on land and in Malaysian waters. Relevant subsidiary legislation promulgated under the EQA includes:

• the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 2015 (the “Environmental Impact Assessment Order”);
• the Environmental Quality (Prescribed Premises) (Scheduled Wastes Treatment and Disposal Facilities) Order 1989; and
• the Environmental Quality (Scheduled Wastes) Regulations 2005.

Administration of the EQA and its regulations is carried out by the Department of Environment (https://www.doe.gov.my/en/utama-english/) (DOE) under the supervision and instruction of the Director General of Environmental Quality, who is empowered to carry out and delegate enforcement actions under the EQA.

The EQA and its regulations require that the following be conducted in relation to hydrocarbon projects:

• an environmental impact assessment (EIA);
• a project siting evaluation;
• a pollution control assessment; and
• monitoring and self-enforcement.

Prior to the implementation of prescribed industrial projects or activities, the following approvals, among others, must be obtained from the Director General of Environmental Quality:

• EIA for prescribed activities (Section 34A of the EQA);
• site-suitability evaluation (for non-prescribed activities);
• written notification or permission to construct (Section 19(b) of the EQA);
• written approval for installation of incinerators, fuel-burning equipment and chimneys (Regulation 5 of the Environmental Quality (Clean Air) Regulations 2014); and
• a licence to occupy and operate prescribed premises and prescribed conveyances (Section 19(a) of the EQA).

Under the First Schedule of the Environmental Impact Assessment Order, the development and construction of petroleum-related facilities are classified as prescribed activities. An EIA must be carried out and submitted to the Director General of Environmental Quality for approval, if the project involves:

• the development of an oil field, gas field or oil and gas field;
• construction of offshore or onshore pipelines exceeding 30 kilometres in length;
• construction of oil or gas separation, processing, handling and storage facilities; and
• construction of product depots for the storage of petrol, gas or diesel that have a combined storage capacity of 60,000 barrels or more (excluding service stations) within three kilometres of any commercial, industrial or residential area.

Under Section 34A(8) of the EQA, it is an offence to carry out a prescribed activity without submitting an EIA report. This offence carries liability to a fine not exceeding MYR500,000 or imprisonment for a period not exceeding five years, or both, and to a further fine of MYR1,000 for every day that the offence is continued after receiving a notice from the Director General requiring compliance with the act specified in the notice.

Section 34B(1) of the EQA also prohibits any person from (among others) placing, depositing or disposing of any scheduled wastes on land or into Malaysian waters (except at prescribed premises only) without any prior written approval of the Director General of Environmental Quality. Section 34B(4) of the EQA provides that any person in contravention of this section shall be guilty of an offence, and on conviction shall be punished with imprisonment for a term not exceeding five years and shall pay a fine not exceeding MYR500,000.

There are no specific health and safety legislations or regulations for offshore development. The general legislation (the OSHA) would apply to offshore development. The OSHA was enacted to:

• secure the safety, health and welfare of persons at work;
• protect persons at a place of work, other than persons at work, against risks to safety or health arising out of the activities of persons at work; and
• promote an occupational environment for persons at work which is adapted to their physiological and psychological needs.

The OSHA is enforced by the DOSH and applies to petroleum-related activities.

The EQA prohibits an unlicensed person from discharging or spilling any oil or mixture containing oil into Malaysian waters in contravention of conditions specified under the EQA for the emission, discharge or depositing of oil or any mixture containing oil. Persons in breach shall be guilty of an offence and shall be liable to a fine not exceeding MYR500,000 or to imprisonment not exceeding five years, or both. An unlicensed person is also not permitted (unless by regulations issued by the Minister of Natural Resources, Environment and Climate Change) to discharge any environmentally hazardous substances into Malaysian waters. Contravention of this prohibition will lead to a fine not exceeding MYR100,000 or to imprisonment for a period not exceeding five years, or both.

Safety matters in respect of the transportation, storage and utilisation of petroleum are under the purview of Section 19 of the PSMA, which provides that storage and handling of petroleum require licences authorising the storage or handling of petroleum in accordance with the conditions, if any, attached to the licence.

Liability under the PSMA is vicarious as well as personal. Where a person is liable under the PSMA for any act, omission, neglect or default, such person will also be liable for any act, omission, neglect or default of any agent or servant employed by them in the course of business. These agents or servants employed by a licensed person shall also be liable under Section 41 of the PSMA as though they were the person to whom such licence was granted.

Presently, the domestic regulatory framework as regards the decommissioning of oil and gas facilities in Malaysia is fragmented. It can be found in the following statutes: 

• the EQA – prohibits discharge of oil and wastes into Malaysian waters;
• the Continental Shelf Act 1996 – empowers the Yang di-Pertuan Agong to make regulations for, among others, the removal of installations or devices constructed, erected or placed in, on or above the continental shelf which have been abandoned or become disused;
• the OSHA – covers the health, safety and welfare of persons at work and the protection of others against risks to health and safety in connection with the activities of persons at work;
• the Merchant Shipping Ordinance 1952 – empowers the Minister of Transport to make regulations that ensure the safety of and control over offshore industry structures, offshore industry mobile units and vessels; and
• the Exclusive Economic Zone Act 1984 – requires the owner of any submarine cable or pipeline which has fallen into disuse or is beyond repair to inform the government and to remove such cable or pipeline where directed to do so by the government.

The above statutes generally require relevant operators in the oil and gas industry to ensure that the abandonment and decommissioning activities are carried out in a safe manner, and further must not cause any pollution or interfere with other offshore activities.

Petronas has also issued Guidelines for Decommissioning of Upstream Installations as part of the Petronas Procedures and Guidelines for Upstream Activities (PPGUA), which must be complied with by parties to PSCs and RSCs. Under the PPGUA, all aspects of decommissioning carried out under PSCs are subject to Petronas’ approval. 

Malaysia is also a party to various international conventions regulating the decommissioning of offshore installations, such as:

• the London Dumping Convention 1972/1996;
• the Geneva Convention on the Continental Shelf 1958; and
• the United Nations Convention on the Law of the Sea 1982.

Separately, the respective PSC, RSC or licence may include terms relating to decommissioning, such as requiring a fund to be set up with the aim of offsetting future decommissioning costs.

As stated in 5.1 Environmental Laws and Environmental Regulator(s) and 5.2 Environmental Obligations for a Major Hydrocarbon Project, the EQA, and its regulations and orders, are the main legislation governing the prevention, abatement and control of pollution and the enhancement of the environment. There are no specific provisions relating to the oil and gas industry. As such, the general provisions and prohibitions under the EQA and its regulations and orders will be applicable to the oil and gas industry.

In general, upstream activities are managed and supervised by Petronas. Governmental regulators may limit oil and gas development in the downstream sector through licences such as the MIDA PDA Permissions, Manufacturing Licences and the MDTCL PDA Permissions.

No information is available on this topic.

As stated in paragraph 1.2 Regulatory Bodies, the PDA, the regulations enacted thereunder, and the rules and guidelines issued by the Malaysian government that apply to petroleum also apply to LNG projects.

There is currently no specific policy or roadmap in place regarding energy transition in Malaysia. The Ministry of Energy and Natural Resources and the Sustainable Energy Development Authority (SEDA) did launch the Malaysia Renewable Energy Roadmap (MyRER), which aims to achieve a 31% renewable energy share in the national capacity mix by the year 2025 and to attain decarbonisation of the electricity section in Malaysia by the year 2035.

On 27 July 2023, the first of two parts of Malaysia’s National Energy Transition Roadmap (NETR) was launched.  The NETR sets out the roadmap to accelerate Malaysia’s transition to clean energy and is underpinned by four principles:

• the NETR is based on national aspirations;
• the transition to clean energy shall be just, cost inclusive and cost-effective;
• the need for effective governance and a whole-of-nation approach; and
• the creation of high-impact job opportunities and the involvement of small and medium enterprises.

The first part of the NETR (“NETR 1”) identifies six energy transition levers through which the government will facilitate the transition to clean energy – namely energy efficiency, renewable energy, hydrogen, bioenergy, green mobility and carbon capture, utilisation and storage. NETR 1 also outlines the flagship catalyst projects and initiatives which will kick-start the transition.

The second part of the NETR (which has yet to be announced) will focus on establishing the low-carbon pathway, national energy mix and emissions reduction targets along with the enablers needed for the energy transition.

The NETR will be complemented with policies and strategies targeted at strengthening Malaysia’s low-carbon transition. These include:

• the Nationally Determined Contribution Roadmap;
• the Long Term Low Emission Development Strategy;
• the Carbon Pricing Instrument;
• the Hydrogen Economy and Technology Roadmap; and
• the National Biomass Action Plan.

Together, these measures will pave the way for the achievement of environmentally sustainable, long-term energy security in Malaysia, driven by technological innovation.

To date, there is no specific incentive for energy transition in place. The Green Investment Tax Allowance, the Green Income Tax Exemption and the Green Technology Financing Scheme 2.0 are applicable, respectively, to:

• purchases of green technology assets;
• uses of green technology services; and
• investors who invest in production of green products, in utilisation of green technologies and in investments or assets related to energy-efficient projects or energy performance contracting, including energy transition projects.

The Malaysian Minister of Economic Affairs recently announced that the government is considering providing incentives for green energy transition in the form of structured financing instead of subsidies.

No information is available on this topic.

No information is available on this topic.