In the early twentieth century, when British colonialism was about to end in Malaya, the petroleum industry was slowly replacing tin and rubber as pivotal commodities. Although in the Malay Peninsula, rubber still remained the main commodity export of the colonial government, in Bintulu, the export of petroleum started to replace that of other commodities.
In 1918, there was a rapid increase in petroleum production in that area. However, the boom in the production of petroleum in Sarawak decreased in 1941. In terms of the export of the vital commodities rubber and petroleum during the British rule it was difficult to determine which commodity played the most essential contribution to the country’s economic development. Rubber and petroleum were subject to market demand which would affect the unpredictability of prices that caused the rapid decline in the production of both commodities. Nevertheless, in the early and mid of twentieth century, it seemed that rubber was slightly more important as an export for the country.
It was not until the establishment of Petroliam Nasional Berhad (PETRONAS) in 1974 that petroleum essentially contributed to the economic development of the state by replacing rubber and tin as the main contributor to the growth of the past nation. In the second half of the 1970s, the production of oil and gas significantly contributed to national earnings in exports. By 1980, crude petroleum exports had assumed the historical position of rubber as the chief foreign exchange earner, and in the same year 16 per cent of government revenue came from petroleum, a figure that rose to 25 per cent by 1985.
PETRONAS was born in the context of the crisis created when the Middle Eastern countries were implementing a six-month oil embargo on the FOCs in 1971 resulting in the high increase of oil prices because of the shortage of oil production in many countries. At the beginning of 1972, the price of oil was US$1.50 /BBL and then rose to US$2.28. The war in the Middle East and the OPEC oil embargo combined to raise the price to US$12.00/BBL.
The Malaysian government took the initiative to control oil prices and this alone was a major incentive for the Malay society to seek a means of increasing their portion of the profits by establishing the NOC. Within the same situation, the Affirmative Programme was implemented to enhance Malays’ social and economic conditions after the introduction of the NEP in 1970, in order to resolve the crisis of ethnic disturbances of May 1969. The crisis broke out due to the disparity in social economic conditions between the Malays and Chinese due to the impact of British colonialism.
The establishment of the Petroleum Development Act (PDA) set up a new type of oil agreement with FOC, called as Production Sharing Contract (PSC). FOC had to follow the PSC agreement which was different from the traditional oil agreement system, the Concession Agreement (CA) that had been provided under the Petroleum Mining Act 1966. In the CA, the host country was only paid a royalty by the concessionaire out of the production and an income tax.
Indeed, PSC implementation was inspired from PERTAMINA’s experiences in imposing PSC on FOCs in which the contractors and the management of NOC were to provide funds and carry the risk. The operating income was split in the ratio of 60:40 or 20 per cent of the gross value of total production less domestic market obligation, with the bigger share going to the government.
The development of PETRONAS pays homage to the PSC agreement system in the way PETRONAS made its profits growth. The new agreement system enabled PETRONAS to step forward comprehensively to ensure the state’s self-reliance on natural resources. Through the PSC, petroleum ownership was vested in PETRONAS which claims sovereignty over national oil production. This legal instrument created a turning point of business relationships in the history of the state oil industry between Malaysia and the West which has in the meantime benefited PETRONAS.
The impact of gas utilization harnessed both power generation and the promotion of industrial growth. Other than that, it has replaced oil in a large measure in transportation and household uses. The tendency of PETRONAS to look for a new energy source was a lesson learnt from the 1973 oil crisis which created the need for the world economies to diversify their energy resources. Moreover, Japan was conveniently near and offered a huge market.
The idea to expand gas production into various uses was a strategic decision made by PETRONAS when it was realized that the components of gas consisting of methane, ethane, propane and butane would contribute to increased exports and revenue to the government. In the United States, the development of high-tensile steel pipe and the techniques for constructing, welding and laying large diameters would cater for the huge demand for gas production. After PETRONAS succeeded in producing gas in Bintulu, the gas utilization project in the Peninsula began to operate in 1983. That demand led to the Malaysian gas resources overtaking the market of oil production.