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Contracting for Oil and Gas Sector in Malaysia – Understanding SWEC Code in Malaysia

Amid COVID-19 worldwide rife (which is now entering into endemic period), Malaysia remains a coveted market for oil & gas business to the global industry players. Since global outbreak of the infectious malady in 2019, the local economy in the industry is rapidly recovering although it is expected that the oil price continues to be volatile1.

As perspective, PETRONAS2 recorded over two-fold increase in its profit after tax for the first quarter this year: from RM9.22 billion last year to RM23.44 billion3.

 

How to Participate in Malaysia’s Oil & Gas Sector?

To start with, PETRONAS i.e. the national oil & gas company, via the Petroleum Development Act 19744, is vested with entire ownership in, and the exclusive rights, powers, liberties and privileges of exploring, exploiting, winning and obtaining petroleum whether onshore or offshore of Malaysia5. Further, by virtue of the Petroleum Regulations 19746, PETRONAS is provided with the right and power to issue licenses to the industry players for their participation in mainly the upstream activities in the oil & gas sector in Malaysia7, particularly for the exploration, exploitation, winning and obtaining of petroleum, onshore or offshore of Malaysia, and for the supply of equipment and facilities and services required in connection with such exploration, exploitation, winning and obtaining of petroleum.

Based on the above, there two (2) types of standard licenses under the purview of PETRONAS, as follows:-

(i) license to explore, exploit, win and obtain petroleum in Malaysia (“License to Explore”); and

(ii) license to supply equipment and facilities and services in connection with the exploration, exploitation, wining and obtaining petroleum in Malaysia (“License to Supply”).

Essentially, PETRONAS serves as the regulator of or authority responsible for Malaysia’s oil & gas industry. In other words, entity who wishes to participate in mainly Malaysia’s upstream oil & gas activities, whether for the exploration, development and production of petroleum activities, or for the provision of products or services in respect of such activities, needs to apply and obtain the relevant license from PETRONAS.

Further, PETRONAS stipulates that participation in oil & gas sector in Malaysia is by way of contracting with PETRONAS (for the License to Explore) or with the PETRONAS-awarded contract holder (for the License to Supply) i.e. the industry player will need to enter into contract with PETRONAS or the said contract holder, as the case may be, in order to undertake the participation proper. Participation via either of the licenses will be done through bidding process.

 

(1) Contracting under License to Explore8

The tender bidding exercise will be managed by Malaysia Petroleum Management (MPM), an office under PETRONAS entrusted to act for and on behalf of PETRONAS in the overall management of Malaysia’s petroleum resources throughout the lifecycle of upstream oil and gas assets as the governing body for the country’s petroleum development. The governing document to be entered into between PETRONAS and the bidder is called Petroleum Arrangement Contract (PAC) based on production sharing or risk service arrangement (which can be implemented via any of the various PETRONAS-endorsed structures), whereby the successful bidder is referred to as PA Contractor. In fact, the License to Explore takes the form of the PAC itself.

 

(2) Contracting under License to Supply9

In order to be eligible to participate in the bidding exercise, the bidder is required to be licensed with PETRONAS as the holder of the License to Supply. The application and issuance of this license is managed by PETRONAS License & Registration, unit under PETRONAS Group Procurement, via PETRONAS License Management System (PLMS) using the concept of self-service.

Under this type of licensing, there are two (2) kinds i.e. license and registration. License enables the holder to provide services to upstream and/ or downstream activities whereas registration only enables the holder to provide services to downstream activities. For both kinds, provision of services to downstream activities is only to PETRONAS group of companies.

Briefly, the general requirements for such license or registration with PETRONAS are as follows:-

(i) the applicant must be a locally incorporated company or locally registered professional body;

(ii) the applicant must satisfy certain minimal capital (depending on whether the application is for license or registration); and

(iii) the applicant must have positive shareholders’ fund.

The discussion on SWEC Code is very relevant under this License to Supply as bulk of the industry players are holders of such license.

 

Understanding SWEC Code10

Standardised Work & Equipment Category (SWEC) refers to a listing issued by PETRONAS on the products and services to be provided by the holders of the License to Supply to the holders of the PETRONAS-awarded contracts, based on specific categories enumerating the respective licensing application requirements in terms of modes of operation, technical requirements and Bumiputera participation thresholds.

Each category will have its own unique code allocated thereto (“SWEC Code”). The relevancy of SWEC Code is that a company where the shareholder and/or director is a shareholder and/ or director of another company is not eligible to apply for a certain SWEC Code if that another company has already obtained approval for the same SWEC Code, on the reason of conflict of interest. In other words, the shareholder and/ or director is/are not allowed to hold more than one (1) License to Supply under the same SWEC Code at any one time.

The most recurring issue concerning SWEC Code is the Bumiputera participation thresholds. In order to be eligible to apply for the License to Supply, the applicant shall satisfy this kind of thresholds at equity level, directorship level, management level and employee level. The thresholds differ from one category to another. Furthermore, the thresholds will not always be parallel for all the levels. For example, the equity level may have higher threshold than that of the directorship level, or vice versa. As such, the applicant should be wary and give careful attention on this requirement on case to case basis.

Generally, the thresholds range from 30%, 51% to 100%. Even, certain categories do not impose any minimum threshold. This is to say that where there is any such threshold set out, the applicant must first ensure that the Bumiputera participation complies with the threshold being set out at each level.

In addition, for a foreign industry player wishing to participate in the Malaysia’s oil & gas sector under the License to Supply, the participation can only be undertaken via formation of joint venture with local, establishment of local branch, or entering into of agency with local player (which will serve as the local representative and service provider), each complying with the minimal Bumiputera participation threshold requirements.

 

Conclusion

Contracting in oil & gas sector in Malaysia specifically under the License to Supply requires the interested industry players to obtained licensing with PETRONAS beforehand. In applying for the license, SWEC Code is an important component.

The applicant will need to study and proceed with the submission based on the applicable standards and specifications especially on the participation thresholds, modes of operation and technical requirements.

 

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  1. PETRONAS Activity Outlook 2022-2024/ December 2021.
  2. short form of Petroliam Nasional Berhad, a corporation wholly-owned by the Federal Government of Malaysia which is established under the Petroleum Development Act 1974 (Act 144).
  3. Kenanga Research: Domestic oil and gas activity to pick up gradually/ BERNAMA.com/ 1st June 2022.
  4. Petroleum Development Act 1974 (Act 144) is the main piece of legislation governing oil & gas sector in Malaysia.
  5. see Section 2(1) of the Petroleum Development Act 1974 (Act 144).
  6. Petroleum Regulations 1974 (PU(A) 432/1974) is subsidiary legislation made under Section 7 of the Petroleum Development Act 1974 (Act 144).
  7. see Regulation 3 of the Petroleum Regulations 1974 (PU(A) 432/1974).
  8. petronas.com.
  9. General Guidelines: PETRONAS License and Registration Applications.
  10. General Guidelines: PETRONAS License and Registration Applications.

 

Written by:

Mohammad Ashraf Mohamed Sopiee (Senior Associate 2) ashraf.sopiee@azmilaw.com

Fatin Razanah Rezduan (Associate) fatin.razanah@azmilaw.com