Petroleum Development Act 1974: Malaysia's Oil & Gas Framework

An act only a few pages long transferred ownership of all petroleum in Malaysia — onshore and on the seabed — to a single company, and to this day the dividing line it drew is still argued over in the courts and at the negotiating table.

The Petroleum Development Act 1974 (Act 144) received royal assent on 30 July 1974, was published in the Gazette on 22 August 1974, and came into force on 1 October 1974. This article explains what its text provides, the payment arrangements that flow from it, and why it remains a sensitive issue in federal-state relations. It is descriptive and neutral; it presents the facts and the range of views without taking sides.

What does the PDA 1974 actually provide?

The core of the Act lies in Section 2. It provides that “the entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore of Malaysia shall be vested in a Corporation”. Section 2(2) states that this transfer of rights takes effect when an instrument in the form of the Schedule is executed, and Section 2(3) affirms that the ownership and rights are “irrevocable and shall enure for the benefit of the Corporation and its successors”. The Schedule to the Act frames the instrument of assignment that grants those rights to Petronas “in perpetuity”.

Section 3 names the corporation — even contrary to the ordinary rules of the Companies Act 1965 on company names — as Petroliam Nasional Berhad, or Petronas for short, and places it under the “control and direction of the Prime Minister”, whose directions bind the corporation. This framework centralises ownership and regulation in a single federal entity.

Section	Subject
1	Short title
2	Ownership (vested in the Corporation; irrevocable)
3	The Corporation (named Petronas; under the direction of the Prime Minister)
3A	Powers of the Corporation
4	Cash payments by the Corporation
5	National Petroleum Advisory Council
6	Permission of the Prime Minister required for downstream operations
7	Power to make regulations
10	Definition of “petroleum”

Section 6 extends control along the value chain: no one other than Petronas may process, refine or manufacture petrochemical products — and then market or distribute them — without the Prime Minister’s permission, with penalties of up to a RM1 million fine or five years’ imprisonment for an offence. Section 5 establishes the National Petroleum Advisory Council, whose membership includes representatives of the “relevant states”.

How much do the states receive?

This is where the text of the Act is often misunderstood. Section 4 provides that “in consideration of” the ownership and rights vested in it, Petronas “shall make to the Government of the Federation and the Government of any relevant State such cash payment as may be agreed between the parties concerned”. The Act itself mentions no percentage.

The commonly cited figure — 5% to the state where the petroleum is found and 5% to the Federal Government — comes from a series of assignment deeds and supplemental agreements signed between Petronas, the federation and each state around 1975-76, not from Act 144 itself. Because the payment arises from agreements, its precise terms — including whether a particular well qualifies — become a matter that can be disputed.

Why does this become a constitutional issue?

The dispute mainly revolves around a single question: how far out to sea does a state “end”? Several legal events shape the positions of the different parties:

• The 1969 emergency — during the emergency, waters beyond 3 nautical miles from the coast of any state were placed under federal control.
• The Continental Shelf Act 1966 and the Exclusive Economic Zone Act 1984 — federal laws that link petroleum rights to the continental shelf and the exclusive economic zone.
• The Territorial Sea Act 2012 — again limited a state’s territorial sea to 3 nautical miles.

Based on this interpretation, the Federal Government holds that petroleum produced beyond 3 nautical miles does not qualify for payment to the state. Several states disagree. A summary of the differing views:

• Kelantan once filed a court claim against Petronas and the Federal Government, arguing that it was entitled to petroleum payments, and later withdrew the claim. (The specific dates of filing and withdrawal require verification against court records; they are not found in the sources cited here.)
• Sarawak and Sabah argue that their oil and gas rights are preserved by the constitution, state law, and the Malaysia Agreement 1963 (MA63). According to Adil Legal, Sarawak rejected the Territorial Sea Act 2012 through a State Legislative Assembly motion in 2015, and in 2014 the Sarawak State Legislative Assembly passed a motion asking for royalties to be raised from 5% to 20%.

The Federal Government, through ministers such as Azalina Othman Said, has stated that “MA63 does not contain provisions relating to the ownership, management or regulation of oil and gas resources” — while acknowledging that MA63 grants Sarawak broader autonomy. Sarawak, for its part, maintains the position that its rights are guaranteed under MA63, the Federal Constitution and its own state laws, including the Oil Mining Ordinance 1958. Both positions are presented here as facts of the dispute, not as an assessment.

How has this dispute played out in the courts and at the negotiating table?

Besides Kelantan’s later-withdrawn claim, the most active fault line is between Petronas and Sarawak. Sarawak established its state oil company, Petroleum Sarawak Berhad (Petros), on 7 August 2017, and enacted the Distribution of Gas Ordinance 2016. Petros claims the right to be the sole gas aggregator under that state law, while Petronas holds that its rights under the Petroleum Development Act 1974 override state law.

Several developments have been reported publicly: in May 2020, Petronas was reported to have agreed to pay RM2 billion in sales tax on petroleum products to Sarawak as a settlement; and in May 2025, the Prime Minister and the Premier of Sarawak were reported to have signed a joint declaration recognising both the Petroleum Development Act 1974 and the Distribution of Gas Ordinance. These commercial and political arrangements exist alongside — and do not fully resolve — the underlying constitutional question of jurisdiction.

What comes next

The core framework remains as it was in 1974: ownership is vested in Petronas, “irrevocable”, with cash payments to the federation and the states determined through agreement rather than by a statutory rate. What continues to change is the layer above it — state laws, state entities such as Petros, commercial settlements, and joint declarations.

For readers following these developments, three things are worth checking against primary sources before drawing any conclusions: (1) the precise terms of any assignment deed or settlement, which are rarely published in full; (2) any recent court ruling on state versus federal jurisdiction; and (3) the updated text of Act 144 on the Attorney General’s Chambers portal, since figures and amendments can change. This draft was prepared with AI assistance and requires human review before publication.