Date first published: 12/03/2026
Key sectors: all; oil and gas
Key risks: policy uncertainty; regulatory changes; governability; governance; business risks; business disruptions
Risk development
On 10 January Petronas – the country’s national oil company – filed a legal suit in Malaysia’s Federal Court over hydrocarbon resource ownership in Sarawak state – a resource-rich state on the island of Borneo – followed by a counter-filing from the Sarawak state government on 23 February, challenging the 1974 Petroleum Development Act (PDA). While Sarawak is seeking regulatory authority over hydrocarbon reserves within its own territory, Petronas is seeking judicial confirmation that the PDA gives it the legal mandate to operate in Sarawak and that federal law takes precedence over state legislation. With a hearing scheduled for Petronas on 16 March, the two cases are shaping up to be one of the most serious constitutional test the country has faced since its formation in 1963.
Why it matters
If the Federal Court sides with Sarawak and strikes down the 1974 Petroleum Development Act (PDA), it could effectively dismantle Petronas as it currently operates. As Sarawak holds over 60 per cent of the country’s natural gas reserves and accounts for 90 per cent of its LNG exports – it is indispensable for Petronas’ financial position. The state is also eyeing Petronas’ role as the sole buyer and aggregator of all domestically produced and imported gas – a function estimated to generate around MYR10bln (USD2.3bln) annually and one that Sarawak state is actively seeking to secure a share of.
However, Petronas’ financial performance has deteriorated since last year. Revenue fell 17 per cent in 2025, while net profits dropped 18 per cent – a deterioration reflected in the fall of the government’s expected dividend from MYR 32bln (US$7.3bln) in 2025 to MYR20bln (US$4.5bln) – a revenue that is critical to the country’s public finances.
While a ruling in Sarawak’s favour could cripple Petronas financially, the dispute extends beyond the energy sector by encouraging other states to demand greater autonomy, challenging federal laws, and exposing Malaysia to international territorial disputes.
Background
Since 1974, Petronas has held executive authority over Malaysia’s hydrocarbon resources under the Petroleum Development Act (PDA), a federal law that has underpinned the country’s oil and gas governance for over five decades. However, the dispute flared in July 2024, when Sarawak challenged the constitutional validity of that arrangement, arguing that the PDA and two related federal laws – the Continental Shelf Act and the Petroleum Mining Act – unlawfully stripped the state of control over its own natural resources.
Risk outlook
While the dispute centres on oil and gas governance, its implications extend far beyond the energy sector – potentially redrawing the boundaries of federal and state powers across the country. A ruling in Sarawak’s favour could fundamentally undermine Petrona’s operational and financial foundations. However, it could also embolden other states to assert greater autonomy over their own resources and potentially expose Malaysia to overlapping international territorial claims – notably with the Philippines – if certain federal laws are invalidated, such as the Continental Shelf Act. While a hearing has been set for Petronas on 16 March, no date has been announced for Sarawak.
A definitive ruling could resolve long-standing ambiguities over federal-state jurisdiction. However, an inconclusive judgment risks formalising competing legal claims and prolonging uncertainty. The decision by both parties to pursue legal action represents a setback for Prime Minister Anwar Ibrahim, who declared in May 2025 that Petronas and Petros had agreed to jointly develop the country’s oil and gas sector. With claims that Petronas filing was backed by Anwar, the dispute puts the Prime Minister in a delicate position. Sarawak’s ruling coalition is a key ally in his unity government, with Sabah and Sarawak together holding 56 of 222 parliamentary seats – enough to determine the fate of federal governments. As Sarawak is unlikely to back down without a fight, pressure on Prime Minister Anwar Ibrahim to broker a solution before court hearings begin is high.