Petroleum Development Act 1974
The 1974 law that placed ownership of all Malaysian petroleum in a single federal company, PETRONAS. The Act itself names no percentage; the 5% cash payment that Sabah and Sarawak politicians have argued over ever since comes from the separate state agreements signed under it in 1975 and 1976.
What happened
The Petroleum Development Act 1974 is short, and its central move is contained in one sentence. Section 2(1) vests "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" in a single corporation. Section 3 names that corporation PETRONAS and places it under the direction of the Prime Minister.
The Act took effect on 1 October 1974, and the transfer itself only became operative once each state executed the one-paragraph instrument set out in the Schedule, which grants the rights "in perpetuity" and says the grant "shall be irrevocable."
What the states received in return is set out in section 4. The Act specifies no figure. It says only that 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 5% does not appear in the statute at all; it sits in the separate agreements signed between 1975 and 1976, with Sarawak's dated 27 March 1975 and signed under Chief Minister Abdul Rahman Ya'kub.
Sabah took longer. Tengku Razaleigh Hamzah's account is that Chief Minister Mustapha Harun refused to discuss oil at all, that the Berjaya party was formed to displace him with Fuad Stephens as its president, and that once Berjaya had won "the agreement was signed."
The Sabah agreement followed this sequence:
- April 1976Berjaya won.
- 14 April 1976Fuad Stephens became Chief Minister.
- 6 June 1976he died in the Double Six air crash, and his deputy Harris Salleh succeeded him.
- 14 June 1976the Sabah agreement was signed, eight days later.
Whether Fuad Stephens would have accepted 5% is argued about in Sabah to this day and is not settled by any document on the public record.
Fifty years on, the two sides read the same arrangement differently, and they do not always measure the same thing.
- JC Fong
- Sarawak's legal counsel, said in September 2025 that the state had received about RM49 billion in cash payments from 1975 to 2024, and that "the remaining 95 per cent went to Petronas."
- Anwar Ibrahim
- The Prime Minister told the Dewan Rakyat on 17 February 2025 that the cash payment is only part of the picture, putting total financial benefits to Sarawak above RM96 billion and upstream investment in the state above RM280 billion.
- Jamil Ghani
- An industry analyst, argued that the 95% framing leaves out cost recovery, which takes at least 70% of project revenue under Malaysia's production-sharing contracts, along with the taxes and dividends that flow back afterwards.
These figures are not rival readings of one number: a payment rate, a cumulative payment total, a cumulative benefit total and a capital investment total are four different quantities, and investment in a state is not a payment to its government.
Tengku Razaleigh has said the 5% quantum was Sarawak's own proposal, and that the design was 5% to the state and a further 5% to the federal government rather than a single 5% divided between them; commentators in Sarawak outlets present it as a federal design. Whether 5% is a floor, a ceiling, or something to renegotiate is not settled by the text of the Act, and this page does not attempt to settle it.
The dispute has also moved from politics into the courts, more than once, and the cases are about different things.
- Kelantan
- sued over payments in 2010 and withdrew nine years later.
- Sarawak
- imposed a 5% state sales tax on petroleum products from 2019 (a tax, not the cash payment), won in the Kuching High Court in March 2020, and PETRONAS withdrew its appeal that August.
- Sabah
- its 40% special grant entitlement under Articles 112C and 112D concerns the state's share of federal revenue rather than petroleum ownership; it was allowed to proceed to judicial review when the Federal Court refused the Attorney General leave to appeal in October 2024, and after a High Court ruling in Sabah's favour the Court of Appeal granted Putrajaya a stay in April 2026.
- The live petroleum case
- a fourth thing again: which law governs the gas industry in Sarawak. PETRONAS filed at the Federal Court in January 2026, after negotiations with the state company Petros stalled despite the joint declaration Anwar and Premier Abang Johari signed in May 2025; the Chief Judge of Malaya granted leave on 16 March 2026, with Putrajaya telling the court it had no objection and Sarawak arguing the matter belonged in the High Court. Sarawak has filed its own petition challenging the constitutional validity and application of the PDA and the two 1966 petroleum statutes. As at August 2026 the petitions are still at case management.
For a first-time voter, the practical point is that this argument has run for fifty years and is now before the highest court. Amalina Anuar of ISEAS – Yusof Ishak Institute has argued that "legal resolution will not lead to political resolution," and that pushing the question into court may remove the ambiguity that let federal and state arrangements coexist. The Act's own words are clear enough about ownership; what remains disputed is the price, who agreed to it, and whether a 1974 statute and a set of 1975 and 1976 instruments can be reopened.
What the sources say
A 2026 parliamentary reply states that PETRONAS’s payment agreements require 5% cash payments directly to the Federal Government and 5% directly to the relevant state government for petroleum won and saved within the stated three-nautical-mile territorial waters; federal receipts, including this royalty, are credited to the Consolidated Fund.
PETRONAS and the Sabah government publicly announced a Commercial Collaboration Agreement on 7 December 2021.
The statute itself
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 by P.U. (B) 501/1974.
Laws of Malaysiacorroborated by the same text hosted by the Prime Minister's Department
Section 2(1) provides: "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 to be incorporated under the Companies Act 1965 or under the law relating to incorporation of companies."
Petroleum Development Act 1974same wording in the FAO Faolex copy
Section 2(2) makes the vesting operative only on execution of an instrument in the form set out in the Schedule to the Act, and section 2(3) provides that the ownership and rights "so vested shall be irrevocable and shall enure for the benefit of the Corporation and its successor."
The Schedule form of vesting instrument reads, in part: "hereby grant in perpetuity and convey to and vest in PETRONAS the ownership in and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether lying onshore or offshore of Malaysia. The grant, conveyance and vesting made hereunder shall be irrevocable and shall enure for the benefit of PETRONAS and its successor."
Section 3 provides that the corporation "shall be styled as the Petroleum Nasional Berhad or in short form PETRONAS" — the company itself is registered as Petroliam Nasional Berhad — places it "subject to the control and direction of the Prime Minister who may from time to time issue such direction as he may deem fit," and makes those directions binding notwithstanding the Companies Act 1965 or any other written law.
Section 4, headed "Cash payment by the Corporation," provides in full: "In return for the ownership and the rights, powers, liberties and privileges vested in it by virtue of this Act, the Corporation 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 names no percentage.
Petroleum Development Act 1974same text in the FAO Faolex copy
Section 6 requires the Prime Minister's permission for downstream petroleum businesses (processing, refining, petrochemicals, and by later amendment marketing and distribution) carried on by anyone other than PETRONAS, with a fine of up to RM1 million, up to five years' imprisonment, or both, on conviction.
Section 5 establishes a National Petroleum Advisory Council, appointed by the Prime Minister and including persons "from the relevant States," to advise him on national petroleum policy.
The vesting instruments and the 5%
27 March 1975
The vesting of petroleum in PETRONAS was effected by separate instruments signed between the states and PETRONAS in 1975–1976; the Sarawak petroleum agreement is dated 27 March 1975, and the consideration recorded in these arrangements is a cash payment of 5% to the relevant state. Tengku Razaleigh Hamzah, PETRONAS's founding chairman, describes the arrangement as two separate 5% payments rather than one 5% divided: "what we get (the income of Petronas) we give five per cent from the income garnered to the State and five per cent to the Federal Government...but this is not oil royalty."
5pc payment was S'wak's ideaAnthony Milner et al.Proper Basis for Computations on royalty
In Sarawak the vesting deed was signed under Chief Minister Abdul Rahman Ya'kub. In Sabah the government of Chief Minister Mustapha Harun refused: Tengku Razaleigh's account is that Mustapha would not discuss oil with him, that the Berjaya party was formed to displace him with Fuad Stephens as its president, and that after Berjaya won "the agreement was signed."
14 April 1976
Berjaya won the Sabah state election of April 1976 and Fuad Stephens was sworn in as Chief Minister on 14 April 1976. He died in the Double Six air crash on 6 June 1976, his deputy Harris Salleh succeeded him, and the Sabah petroleum agreement providing the 5% cash payment was signed on 14 June 1976 under Harris Salleh's government.
4 September 2025
Sarawak's legal counsel Datuk Seri JC Fong stated on 4 September 2025 that "From 1975 until 2024, Sarawak has received approximately RM49 billion in cash payments from Petronas," and that "The remaining 95 per cent went to Petronas from the oil and gas resources found in Sarawak." — What is established here is that Fong said this. His "remaining 95 per cent" is a characterisation of where value went, not a published accounting of PETRONAS's receipts, and the underlying proposition is disputed.
Industry analyst Jamil Ghani disputed the 95% framing the day before Fong's remarks were reported, telling Free Malaysia Today that under Malaysia's production-sharing contracts at least 70% of project revenue goes to cost recovery and 10% is shared between the federal and state governments, so that "At most, Petronas receives only 10% to 20% of the profit made off O&G fields," shared in turn with partners such as Shell and returned in part to Putrajaya through dividends, income taxes and export duties. He put Sarawak's receipts at RM49 billion in cash payments, RM28.6 billion in dividends and RM18.66 billion in state sales tax, alongside RM280 billion of PETRONAS upstream investment in the state.
What followed politically and in court
Four different disputes are commonly discussed together and are separate, so a ruling in one does not decide another: the PDA cash payment (the 5% agreed under section 4 in the 1975 and 1976 state instruments, which no court has been asked to set); Sarawak's state sales tax on petroleum products (a tax, not the cash payment, upheld by the Kuching High Court in 2020); which law governs the gas industry in Sarawak (the PDA 1974 against Sarawak's own ordinances, now before the Federal Court); and Sabah's 40% special grant (a claim about the state's share of federal revenue under Articles 112C and 112D of the Federal Constitution, which is not a petroleum-ownership case and does not turn on the PDA).
Petroleum Development Act 1974A timeline of the oil sales tax disputeFree Malaysia TodayThe Star
1 January 2019
Sarawak imposed a 5% state sales tax on petroleum products with effect from 1 January 2019; PETRONAS challenged it, Kuching High Court judge Azhahari Kamal Ramli ruled in March 2020 that the state could levy the tax, PETRONAS withdrew its appeal in August 2020, and the state subsequently received several billion ringgit in arrears.
A timeline of the oil sales tax disputeSarawak hopes Petronas pays state sales tax following High Court ruling
30 August 2010
Kelantan sued over petroleum payments on 30 August 2010; the state withdrew the suit against PETRONAS on 13 May 2019 and High Court judge Datuk Ahmad Bache struck it out with no order as to costs, and Kelantan dropped the related action against the federal government in June 2019.
Kelantan withdraws 9-year oil royalty suit against PetronasKelantan drops oil royalty suit against Putrajaya
17 October 2024
On 17 October 2024 a Federal Court panel led by Justice Tan Sri Nallini Pathmanathan refused the Attorney General leave to appeal, allowing the Sabah Law Society's judicial review over Sabah's 40% special grant entitlement under Article 112C and 112D of the Federal Constitution to proceed to the Kota Kinabalu High Court.
The StarSabah Law Society v The Government of the Federation of Malaysia & Anor
17 February 2025
Prime Minister Anwar Ibrahim told the Dewan Rakyat on 17 February 2025 that Sarawak had received more than RM96 billion in financial benefits from petroleum and LNG up to the end of 2024, comprising the RM49 billion in cash payments plus items including RM28.6 billion in dividends from the state's shareholding in Malaysia LNG, and that more than RM280 billion had been invested in Sarawak's upstream sector and infrastructure since 1976. These are cumulative benefit totals spanning cash payments, dividends, tax and capital investment; they are not a restatement of the cash payment and are not measured on the same basis as the 5%.
21 May 2025
On 21 May 2025 Anwar Ibrahim and Sarawak Premier Abang Johari Tun Openg signed a joint declaration. The Prime Minister's Office said PETRONAS "will continue to fulfil its function, activities, responsibilities and obligations as mandated under the Petroleum Development Act 1974," that "All Federal and Sarawak State laws related to gas distribution in Sarawak must coexist and be respected by all parties," and that the state's appointment of Petros as gas aggregator with effect from 1 March 2025 "shall be respected by all parties undertaking the business of marketing, distribution and supply of gas to consumers in Sarawak."
Amalina Anuar of ISEAS – Yusof Ishak Institute describes that declaration as having set a ceiling on both sides' demands rather than resolving the underlying difference, and records that after PETRONAS filed in January 2026 the Sarawak government in turn challenged the constitutional validity and applicability to the state of the PDA 1974 and the Continental Shelf Act 1966 and Petroleum Mining Act 1966.
PETRONAS filed a motion at the Federal Court in January 2026 seeking clarity on which laws govern its operations in Sarawak. On 16 March 2026 the Chief Judge of Malaya, Hashim Hamzah, sitting as a single judge, granted PETRONAS leave to pursue the challenge, saying it "has met the threshold for the court to hear its petition," and gave it 21 days to file the petition. Sarawak's counsel JC Fong opposed leave on the ground that the application belonged in the High Court; senior federal counsel Ahmad Hanir Hambaly told the court Putrajaya had no objection to the challenge proceeding.
26 May 2026
PETRONAS filed its petition in April 2026 and, in documents dated 26 May 2026, applied to have it heard separately from the Sarawak government's own petition, having earlier sought a full Federal Court bench. A Sabah group, the Registered Trustees of Sabah Action Body Advocating Rights, applied on 18 May 2026 to intervene in the Sarawak petition on questions about the application to Sabah of the Continental Shelf Act 1966 and Petroleum Mining Act 1966. As at August 2026 no hearing date or substantive ruling has been retrieved.
Where accounts differ
No Sarawak Legislative Assembly record ratifying the petroleum vesting deed has been located; the absence of a located record does not establish that no legislative action occurred.
searched: Sarawak Legislative Assembly and legal-commentary records
Whether the 5% cash payment is a floor, a ceiling, or a figure open to renegotiation is. The Act itself fixes no number, saying only "such cash payment as may be agreed between the parties concerned" (s 4), while the state-level agreements record 5%. Sarawak's legal counsel JC Fong frames the arrangement as leaving 95% of the value of Sarawak's resources with PETRONAS; the federal position, as put by Anwar Ibrahim in the Dewan Rakyat, is that the cash payment is one component of a much larger benefit stream to the state; and industry analyst Jamil Ghani argues the 95% figure ignores cost recovery under production-sharing contracts and the tax and dividend flows that follow. These are not competing measurements of one quantity: the 5% is a payment rate, RM49 billion a cumulative payment total, RM96 billion a cumulative benefit total across several categories, and RM280 billion capital investment rather than money paid to the state.
Petroleum Development Act 1974Malay MailDagangNewsFree Malaysia Today
Whether Fuad Stephens would have accepted the 5% is and cannot be resolved from the record. Conrad Mojuntin has said Fuad Stephens would never have agreed to that figure; Harris Salleh has said Fuad Stephens supported the parliamentary arrangement, that the PDA and the 5% were federal matters settled in Parliament with Sabah and Sarawak representation, and that the state cabinet's role was only to take note. Joseph Pairin Kitingan has accused Harris Salleh of acting unilaterally, which Harris rejects. No contemporaneous document setting out Fuad Stephens's own position has been retrieved.
Whose idea the 5% figure was is. Tengku Razaleigh Hamzah, PETRONAS's founding chairman, is reported as saying the quantum was proposed by Sarawak Chief Minister Abdul Rahman Ya'kub and then applied to all states; Sarawak commentators writing in DayakDaily present the 5% as a federally designed arrangement that worked around the limits of section 4 and the 1975 Sarawak agreement.
5pc payment was S'wak's ideaProper Basis for Computations on royalty
Whether federal law under the PDA 1974 overrides Sarawak's own oil and gas legislation is and before the courts. PETRONAS's stated position is that "only Parliament can legislate on matters relating to upstream petroleum industry" through the PDA 1974; Sarawak's government asserts that Petros is the lawful gas aggregator under the state's Distribution of Gas Ordinance.
Whether the Malaysia Agreement 1963 governs oil and gas is. Minister in the Prime Minister's Department Azalina Othman Said is reported as saying MA63 grants Sarawak broader autonomy but contains no oil and gas provisions; Sarawak and Sabah figures argue the resource question is inseparable from MA63 rights.
The consequences of litigating rather than negotiating are. Amalina Anuar of ISEAS – Yusof Ishak Institute argues that "Legal resolution will not lead to political resolution," and that court rulings could remove the legal ambiguity that has allowed federal and state arrangements to coexist.
The status of Sabah's 40% claim is at first instance but not final. This claim is about the state's share of federal revenue under Articles 112C and 112D of the Federal Constitution, not about petroleum ownership or the PDA cash payment, and its outcome does not set the 5%. Reporting indicates the Kota Kinabalu High Court ruled in Sabah's favour in October 2025 and ordered a review under Article 112D, and that on 6 April 2026 the Court of Appeal granted the federal government a stay pending disposal of its appeal; the substantive constitutional questions remain to be determined on appeal.
Common questions
What did the Petroleum Development Act 1974 actually do?
It vested ownership of, and exclusive rights to explore for, exploit, win and obtain petroleum onshore and offshore of Malaysia in a corporation. The Act names that corporation Petroleum Nasional Berhad, or PETRONAS, and makes the transfer operative when the statutory vesting instrument is executed.
Petroleum Development Act 1974same wording in the FAO Faolex copy
Does the Act say Sabah and Sarawak get 5%?
No. Section 4 says PETRONAS must make the federal government and a relevant state the cash payment they agree, but it gives no percentage. The 5% recorded for the relevant state comes from the separate state instruments signed in 1975 and 1976; Tengku Razaleigh Hamzah described the arrangement as a further 5% payment to the federal government.
Who controls PETRONAS under the Act?
The Act places PETRONAS under the control and direction of the Prime Minister. It says the Prime Minister may issue directions he considers fit, and that those directions bind PETRONAS despite the Companies Act 1965 or another written law.
Is Sarawak's petroleum cash payment the same as its sales tax?
No. The cash payment is the payment agreed under section 4 and the 1975 and 1976 state instruments, while Sarawak's 5% state sales tax on petroleum products is a tax. Sarawak imposed that tax from 1 January 2019; the Kuching High Court ruled in March 2020 that the state could levy it, and PETRONAS withdrew its appeal in August 2020.
Petroleum Development Act 1974A timeline of the oil sales tax dispute
What is the PETRONAS-Sarawak court case about?
It concerns which laws govern PETRONAS's oil and gas operations in Sarawak, rather than the 5% cash-payment rate. PETRONAS sought Federal Court clarification in January 2026 and received leave in March; Sarawak later filed its own petition challenging the constitutional validity and application to the state of the PDA 1974 and two 1966 petroleum statutes. As at August 2026, no substantive ruling had been retrieved.
Still open
- The exact clause wording of the 1975 Sarawak petroleum agreement and the 1976 Sabah agreement; the instruments do not appear to have been publicly gazetted.
- Whether the 5% is calculated on gross sales value, value at the wellhead, or a net figure after cost recovery; descriptions differ between commentators and no authoritative computation basis has been published.
- The current terms of Sabah's separate cash-payment arrangement, and whether it has been renegotiated since the 7 December 2021 Commercial Collaboration Agreement.