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Brief Overview of the Regulatory Framework and Health, Safety and Environment Management in Malaysian Oil & Gas Industry

I. Malaysia Current Oil & Gas Regulatory Framework

In Malaysia, the oil and gas industry is a heavily regulated industry. The principal legislations which form the foundation of the regulatory framework of the oil and gas industry in Malaysia are the Petroleum Development Act 1974 (PDA), the Petroleum Regulations 1974 (Petroleum Regulations) and the Gas Supply Act 1993 (GSA).

Generally, the PDA applies to all activities in the value chain of the industry in Malaysia, except for the supply of gas through the pipelines to consumers, which is regulated by the GSA.

 

Petroleum Development Act 1974

Pursuant to the PDA, Petroliam Nasional Berhad (PETRONAS) was formed to safeguard the country’s oil and gas resources. PETRONAS is vested with the entire ownership of, as well as rights, privileges and benefits in relation to exploring and producing oil and gas, offshore and onshore in Malaysia.

While PETRONAS is the responsible authority for licensing any third party contractors wishing to participate in upstream petroleum activities and licensing goods and service providers operating in the upstream sector, including providers of rigs and drilling services and supply of general goods and services related to upstream operations, the Ministry of International Trade and Industry (MITI) and the Ministry of Domestic Trade, Co-operatives and Consumerism (MDTCC) are vested with powers to regulate the downstream sector including issuance of permits and licences for downstream activities.

 

Sarawak

With respect to upstream activities in Sarawak, the Sarawak Chief Minister had in May 2018 said with effect from July 1, 2018, oil and gas (O&G) industry players must abide by state laws such as the Oil Mining Ordinance (OMO) 1958 and Gas Distribution Ordinance (GDO) 2016[1]. Subsequently, PETRONAS had filed an application for leave to the Federal Court seeking a declaration that PDA is duly enacted by Parliament and it is the exclusive regulatory authority for the upstream industry throughout Malaysia including in Sarawak and that the OMO was impliedly repealed by the PDA.

However, such leave application was rejected on the grounds that “the declaratory reliefs sought by the Applicant (i.e. PETRONAS) do not come within the ambit of Articles 4(3) and 4(4) of the Federal Constitution. Hence, the declaratory reliefs sought by the Applicant are not within the exclusive original jurisdiction of the Federal Court. The declaratory reliefs sought are within the original jurisdiction of the High Court.[2]” Thus, the question of leave under Article 4(4) of the Federal Constitution does not arise. In our view, this decision does not in any way affect the rights of PETRONAS to file a fresh application at the High Court to declare that the OMO had been impliedly repealed by the PDA.

Therefore, until such declaration is pronounced, all licence applications for upstream activities in Sarawak should be made to PETRONAS under the PDA.

However, the applicants will have to take note of the position taken by the Sarawak government that such applications will have to be made to the Sarawak government by virtue of the OMO.

 

Gas Supply Act 1993

The GSA was gazetted in 1993 for the purpose of safeguarding the interest of consumers who receive the supply of gas through pipelines. Consumers are commercial and industrial outlets as well as residentials. The act provides for the licensing of the supply of gas to consumers through pipelines and related matters, the supply of gas at reasonable prices, the control of gas supply pipelines, installations and appliances with respect to matters relating to safety of persons and for purposes connected therewith.

The GSA was amended in 2016 and came into effect on 16 January 2017 to provide a legal framework for the Third Party Access System (TPA), a system initiated by the Malaysian government under the Economic Transformation Program to liberalise the gas market in Malaysia by allowing third parties to access gas facilities owned and operated by companies like PETRONAS or Gas Malaysia Berhad.

At the moment, there are three types of gas facilities that fall under the scope of the TPA, namely regasification terminals, transmission pipelines and distribution pipelines[3]. Under the TPA, any qualified party who intends to participate in the activities are required to apply for relevant licences from the Energy Commission.

 

Other Relevant Legislations

The oil and gas industry is also bound by other acts at the Federal, State and Local Government levels.

The Federal legislations which may be applicable to the oil and gas industry include the Continental Shelf Act 1966, National Land Code 1965, Land Acquisition Act 1960, Environmental Quality Act 1974, Occupational Safety and Health Act 1994, Factories and Machinery Act 1967, Merchant Shipping Ordinance 1952, Land Public Transport Act 2010, Road Transport Act 1987, Industrial Co-ordination Act 1975, Excise Act 1976, Customs Act 1967, and Petroleum and Electricity (Control of Supplies) Act 1974.

Land matters in the Peninsular Malaysia are governed by Acts such as the National Land Code 1965, and Land Acquisition Act 1960 while Sabah and Sarawak have rights to enact its own laws in relation to land matter. In the case of states in the Peninsular, state authorities are empowered to make rules for carrying out the objects and purposes of the National Land Code as well as empowered to approve or reject application for acquisition of land within their respective states.

In the case of persons intending to supply and generate electricity, such persons must be licenced by the Energy Commission under the Electricity Supply Act 1990 and comply with the necessary requirements therein.

In relation to onshore and downstream activities, matters pertaining to local governments are subject to the Local Government Act 1976, The Town and Country Planning Act 1976 and The Street, Drainage and Building Act 1974.

The Acts empower local governments with the authority on local planning, licensing, certain taxes, construction of buildings, housing and commercial and public utilities.

 

II. Health, Safety and Environment (“HSE”) Management in Oil & Gas Industry

The oil and gas industry is not alien to risks involving health, safety and environmental hazards as evidenced by the Piper Alpha incident, the Deepwater Horizon oil spill in the Gulf of Mexico in April 2010 and the oil spill occurred within Malacca Straits in 1992. All these incidents indicate that accidents occurring within the industry can have catastrophic effects on people, the environment, assets and reputation.

As a result of the unpredictable immense danger in the operation of the oil and gas activities, it is crucial to include a proper HSE management system in the operation to ensure safety of all workers involved in activities across the value chain of the oil and gas industry. A holistic approach in managing workplace hazards is key to protecting the health and welfare of people and the environment from adverse impacts due to human and industrial activities.

The Federal regulations relating to HSE in the oil and gas industry include the Petroleum (Safety Measures) Act 1984, Environmental Quality Act 1974, Occupational Safety and Health Act 1994, and the Factories and Machinery Act 1967.

The Petroleum (Safety Measures) Act 1984 consolidates laws relating to safety in the transportation, and storage and utilisation of petroleum and other matters relating thereto. Modes of transportation of petroleum prescribed by the act are water, road, railway and pipelines.

There are also two regulations made under the Act, namely the Petroleum (Safety Measures) (Transportation of Petroleum by Pipelines) Regulations 1985 and Petroleum (Safety Measures) (Transportation of Petroleum by Water) Regulations 1985.

The Environmental Quality Act 1974 is the primary legislation on all aspects of environmental management in Malaysia and it is seen to be the most comprehensive legislation covering pollutions on soil, water and air so as to suit the national’s objective in preserving the quality of environment in the country.

Sections 27 of the Act provides that no person shall, unless licensed, discharge or spill any oil or mixture containing oil into Malaysian waters in contravention of the certain conditions. In addition, licences are required from the Department of Environment (DOE), for activities that give rise to pollutions, such as emission of noise, emission or disposal of wastes into the atmosphere, water, or land.

It is compulsory to conduct an Environmental Impact Assessment (EIA) for any proposed project to assess its potential impact on the environment, and subsequently propose measures to control such impact.

The Occupational Safety and Health Act 1994 makes provisions for securing the safety, health and welfare of persons at work, for protecting others against risks to safety or health in connection with the activities of persons at work, to establish the National Council for Occupational Safety and Health, and for matters connected therewith. The Act defines the general duties of employers, employees, manufacturers and others. The Act is enforced by the Department of Occupational Safety and Health (DOSH), under the Ministry of Human Resources (MOHR). The Act is applicable throughout Malaysia to various industries specified in the first schedule including manufacturing of petroleum products.

The oil and gas industry must also abide by the Factories and Machinery Act 1967, which provides for the control of factories and machineries with respect to matters relating to the safety, health and welfare of person therein, the registration and inspection of machinery and for matters connected therewith. A written permission or approval of the inspector is required before a person can occupy or use any premises as a factory and install any machinery in a factory. In relation to machinery, which requires a certificate of fitness, the occupier or owner of the factory must serve a written notice to the Inspector or a licensed person who will make an inspection of the machinery.

 

PETRONAS Procedures and Guidelines for Upstream Activities

With respect to upstream activities, PETRONAS may from time to time issue and/or update their procedures and guidelines such as the Procedures and Guidelines for Upstream Activities which includes the guidelines on the management of Health, Safety & Environment (“Guidelines”).

Under these Guidelines, the contractors may be required to have in place a documented HSE Management System or its equivalent to ensure that the operational integrity of its upstream operations meets the PETRONAS HSE requirements inclusive of statutory requirements. For upstream activities which are associated with the substantially high degree of risks, the contractor is responsible to ensure that its HSE Management System is integrated into its activities. In our view, PETRONAS will expect the contractor to be self-regulated in managing HSE aspects of its operations including compliance with all regulatory requirements and in the absence of regulatory requirements and PETRONAS standards, the contractor should apply international standards and best practices.

Furthermore, the contractor must ensure that there is a structured HSE risk management and analysis process in place that identifies and establishes an inventory list of all health, safety and environmental risks and hazards for all exploration and production operations. In respect of planning, the contractor is required to ensure that its HSE Plan is strategically developed in line with its corporate strategic objectives. The contractor may also be required to develop both, an annual and a five-year HSE plan which have to be submitted to PETRONAS by December of the preceding year and track the implementation of its HSE Plan including any HSE activities carried out by third party contractors.

In addition to the above, contractors may also be obligated to carry out regular inspection and management visits at all site locations. All incidents must be investigated by contractor as soon as possible and any incident related to its operations must be informed to PETRONAS immediately.

 

III. Conclusion

Compliance with the laws and regulations in the oil and gas industry is not a complex procedure. Like all other jurisdictions, the legal compliance, particularly in respect of HSE, shall be taken seriously by all industry players as the projects involve significant costs and significant number of interfaces, interdependencies, complexity and risks.

Failure to adhere to such requirements may result in severe fine/penalty, imprisonment and issuance of a stop work order which may lead to loss of profit, nonrecovery of cost or loss of business opportunities.

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1 https://www.freemalaysiatoday.com/category/nation/2018/05/16/oil-and-gasfirms-must-follow-state-laws-from-july-1-saysabang-jo/
2 Petroliam Nasional Bhd (Petronas) v Kerajaan Negeri Sarawak [2018] MLJU 1371
3 https://www.st.gov.my/web/industry/details/3/4

 

Prepared by:

Mohd Farizal Farhan Abd Ghafar (Partner) farizal_farhan@azmilaw.com

Ng Joo Yee (Associate) general@azmilaw.com