Malaysia is the second-largest producer of oil in the region and is renowned as a leading exporter of liquefied natural gas worldwide. Moreover, Malaysia's advantageous geographical location makes it a crucial hub for maritime energy trade routes. The oil and gas sector has played a vital role in the country's progress, contributing nearly 20 percent to its overall gross domestic product.
The key laws and regulations in relation to oil and activities in Malaysia are:
The Petroleum Development Act (PDA) grants Petronas complete ownership rights and authority over the exploration and production of oil and gas in Malaysia, both offshore and onshore. This includes the transfer of full ownership, as well as the rights, privileges, and associated advantages related to these activities;
Exclusive Economic Zone Act & Continental Shelf Act - Apart from having sole rights over petroleum resources within Malaysia's territorial seas and onshore areas, Petronas also enjoys exclusive rights over petroleum in Malaysia's exclusive economic zone and continental shelf. These extended rights are granted through the Exclusive Economic Zone Act 1984 (EEZA) and the Continental Shelf Act 1966 (CSA) respectively;
The Petroleum Regulations outline the necessary licensing criteria for various activities related to the upstream and downstream sectors of the oil industry, including refining, marketing, and distribution of oil products;
The Petroleum (Safety Measures) Act 1984 (PSMA) and its accompanying regulations oversee the safe transportation, storage, and handling of petroleum;
The licensing guidelines provided by Petronas outline the fundamental criteria for obtaining Petronas licenses or registrations. These guidelines also specify the necessary local bumiputra participation requirements, such as equity ownership, board of directors, management, and employees, based on the Standardised Work and Equipment Categories (SWEC) criteria implemented by Petronas. Petronas, in accordance with its authority and obligations under the PDA and Petroleum Regulations, has mandated specific local incorporation and equity criteria for certain activities within the petroleum industry. As a result, corporations seeking to participate in these activities must adhere to these requirements to secure the essential licenses from Petronas for their business operations in Malaysia.;
The Companies Act 2016 establishes the legal framework governing the formation, operation, and management of companies. It provides the foundational principles and guidelines that companies must follow in their establishment and day-to-day operations;
The Environmental Quality Act 1974 (EQA) serves as the primary legislation responsible for safeguarding the environment and preventing oil spills and pollutants on land and in the waters of Malaysia. It sets the legal framework for environmental protection and outlines measures to be taken to prevent and mitigate environmental damage;
The Merchant Shipping Ordinance 1952 (MSO) is the principal legislation that regulates the licensing of vessels in Malaysia. It applies to all ships involved in providing shipping services within the domestic shipping sector of Malaysia. To operate in this sector, vessels must obtain a license from the Domestic Shipping Licensing Board, which operates under the Ministry of Transport.
Key Regulatory Bodies
Petronas, under the authority of the PDA, oversees and regulates all upstream activities such as exploration, development, and production of resources in Malaysia. This is done through Production Sharing Contracts (PSCs) and Risk Service Contracts (RSCs) that contractors must enter into with Petronas to obtain the right to explore and produce oil. Additionally, providers of goods and services in the upstream sector, including rigs, drilling services, and general supplies related to upstream operations, also require a license from Petronas.
Under the Petroleum Regulations, the Ministry of International Trade and Industry (MITI) is responsible for regulating the processing, refining, and manufacturing of petrochemical products from petroleum. On the other hand, the Ministry of Domestic Trade and Consumer Affairs (MDTCA) oversees the regulation of the marketing and distribution of petroleum and petrochemical products within Malaysia.
Licensing or Registration Requirements
As previously mentioned, contractors interested in engaging in oil exploration and production activities must obtain a license from Petronas, typically in the form of a Production Sharing Contract (PSC) or Risk Service Contract (RSC). The Petronas licensing guidelines, known as the Petronas Guidelines, outline the general requirements for obtaining Petronas licenses to provide goods or services in the upstream sector and for registration to participate in Petronas' tender and activities in the downstream sector. The equity requirements, if applicable, are determined based on the Standardised Work and Equipment Categories (SWEC) established by Petronas. Currently, there is no publicly available official register that provides information on oilfield ownership or operatorship.
Local Content Requirement
In general, companies that aim to provide goods and services in the upstream sector or offer downstream services to Petronas must comply with local or bumiputra equity conditions under the licensing and registration framework of Petronas.
As elaborated below, companies seeking to supply goods or services to operators involved in upstream activities must acquire a license from Petronas and adhere to the Petronas Guidelines and licensing requirements. These requirements may include a minimum local or bumiputra equity obligation based on the SWEC.
Consequently, foreign companies operating in these sectors must either establish agency agreements with locally licensed companies endorsed by Petronas or form joint ventures with local companies/individuals. If agency services are employed, the company providing such services must hold a license from Petronas. In the case of joint ventures, the necessary licensing, permits, or authorizations from Petronas must still be obtained.
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Looking to invest in the Malaysian Oil & Gas industry? Let us assist you right from entity incorporation, regulatory compliance to preparation/review of the relevant legal documents. Please contact us at +6012-6582798 or rajvin@rajvingill.com to schedule a complementary chat.
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