SHIPPING AND THE MALAYSIAN OIL AND GAS INDUSTRY

Thinking of providing shipping services to the Malaysian Oil and Gas Industry? Faizah explains the legal intricacies.

 

 

INTRODUCTION

As Malaysia's oil and gas fields are all located offshore of the coast of Terengganu, Sarawak, Sabah and in the Malaysia-Thai Joint Development Area, shipping services play an important role in supporting the Malaysian upstream oil and gas industry.

 

The Malaysian Government has allocated RM13.1 billion for upstream oil and gas activities under the Ninth Malaysia Plan ("9MP").  Under the 9MP, the Government is committed to maximizing reserves recovery in the existing fields and to attracting international oil and gas companies to invest in deepwater and ultra-deepwater exploration activities.

 

With the emphasis on the exploration and development of deepwater and ultra deepwater fields under the 9MP, more and more vessels will be required to support these petroleum operations, which consist of exploration for petroleum, development of petroleum fields and the production of petroleum.

 

This article aims to highlight the issues relating to the provision of shipping services to the Malaysian oil and gas industry.

 

 

 

THE REQUIREMENT OF MALAYSIAN FLAGGED VESSELS


 

Malaysia's Cabotage Policy

On 1 January 1980, the Malaysian Government had introduced the country's cabotage policy, which reserves domestic shipping to Malaysian registered vessels. To implement the policy, the Merchant Shipping Ordinance 1952 ("MSO") was amended to introduce Part IIB and the establishment of the Domestic Shipping and Licensing Board ("DLSB").

 

Section 65A of Part IIB of the MSO defines "domestic shipping" as the use of a ship:

 

(a) to provide services, other than fishing, in the territorial waters of Malaysia or the exclusive economic zone; or

(b) for the shipment of goods or the carriage of passengers (i) from any port of place in Malaysia to another port or place in Malaysia; or (ii) from any port or place in Malaysia to any place in the exclusive economic zone or vice versa.

 

Section 65KA of the MSO prohibits non-Malaysian ships from engaging in domestic shipping and section 65L of the MSO prohibits any ship, unless exempted, from engaging in domestic shipping without a license from the DSLB.

 

As mentioned in the Introduction above, all of Malaysia's oil and gas fields are located offshore in Malaysian territorial waters or in the exclusive economic zone. Therefore, the provision of shipping services in the territorial waters of Malaysia or the exclusive economic zone constitutes "domestic shipping" under the MSO. Accordingly, a vessel that services the Malaysian oil and gas fields must be registered as a Malaysian ship and must hold a domestic shipping license, unless exempted either under section 65L or exempted by the Minister of Transport pursuant to section 65U of the MSO.

 

Among the vessels that are exempted under section 65L from the requirement of a domestic shipping licence are boats of less than 500 tons gross tonnage that ply within the rivers of a state navigable by sea-going vessels or within the coastal waters of such state extending up to the outer limits of Malaysia's territorial waters. However, section 5 of the Merchant Shipping (Amendment) Act 1998 ("MSA 98") amended the MSO by making it a requirement that every boat below 500 tons gross tonnage that plies any port, river or place in Malaysia for "trade or business" must obtain a license under section 475 under the MSO. The definition of "trade or business" under the new section 473A of the MSO is designed to cover activities related to the oil and gas industry.  These activities include, among others, cable-laying, offshore exploration, marine constructions and port services.

 

These smaller boats which are licensed under section 475 of the MSO are exempted from the requirement of registration as a Malaysian ship under Part IIA of the MSO and the requirement to be licensed by the DSLB.

 

 

PETRONAS' Procurement Policy

The Petroleum Development Act 1974 vested in Petroliam Nasional Berhad ("PETRONAS") the entire ownership in, and the exclusive rights, powers and privileges of exploring, exploiting, winning and obtaining petroleum (which as defined, includes hydrocarbons, natural gas and bituminous shales) onshore or offshore of Malaysia.

 

Oil and gas companies that wish to explore for and produce petroleum in Malaysia have to enter into a production sharing contract ("PSC") with PETRONAS. One of the requirements of a PSC is that these oil and gas companies ("PSC Contractors") must comply with the national objective of maximizing Malaysian participation in the use of local equipment, facilities, goods, materials, supplies and services in petroleum operations.

 

To meet this national objective, PETRONAS requires the PSC Contractors to give priority to Malaysian ships registered under the MSO in their procurement of shipping services for their petroleum operations. Pursuant to PETRONAS' procurement policy, in any tender exercise, priority is to be given to Malaysian registered vessels. A contract will be awarded to a foreign registered vessel only if there are no Malaysian registered vessels available to perform the required services.

 

Pursuant to the Petroleum Regulations 1974, companies that wish to participate in any business or services to supply of equipment, facilities and services to the upstream oil and gas activities must obtain a licence from PETRONAS.

 

Therefore, companies that wish to provide shipping services to PSC Contractors must first hold a valid license from PETRONAS. Second, it must own or charter a Malaysian registered vessel for purposes of providing the shipping services to the PSC Contractors. Third, the vessel must hold a valid domestic shipping licence from the DSLB. Smaller boats below 500 tons gross tonnage that ply the coastal waters for "trade or business" are exempted from the registration and domestic license requirements but must be licensed under section 475 of the MSO.

 

REGISTRATION AS A MALAYSIAN SHIP

Having identified the criteria required to be fulfilled for the provision of shipping services to the Malaysian oil and gas industry, we now discuss the conditions that have to be fulfilled for a ship to qualify as a Malaysian ship.

 

Section 4 of the MSA 98 introduced a new Part IIC that created the Malaysia International Ship Registry ("MISR"). The amendments came into force on 16 August 2006.  Ships can now be registered under Part IIA of the MSO at the Malaysian ship registry or at the Malaysia International Ship Registry under the new Part IIC.  Labuan has been designated the port of the MISR.

 

Registration under Part IIA

Under Part IIA of the MSO, ownership of a Malaysian registered ship is restricted to Malaysian citizens or Malaysian incorporated corporations where the principal office of the corporation is in Malaysia, the management of the corporation is carried out mainly in Malaysia and the majority of the directors are Malaysian citizens and the majority of the shareholding of the corporation is held by Malaysian citizens free from any trust or obligation in favour of non-Malaysians.

 

Registration under Part IIC

The new Part IIC of the MSO allows non-Malaysian to own Malaysian ships registered at the MISR.  Section 66B of the MSO states that the Registrar General may register a ship as a Malaysian ship, if it is owned by a Malaysian incorporated corporation whose office is established in Malaysia and the majority of its shareholding, including voting shares, are held by non-Malaysians.

 

The ship owner before applying to register the vessel at the MISR, must appoint a ship manager, who is a Malaysian citizen with a permanent residence in Malaysia or a company incorporated in Malaysia and having its principal place of business in Malaysia. The corporation for purposes of the registration of its first ship, must have a minimum paid-up capital of 10% of the value of the ship or RM1 million, which ever is higher.

 

The ship must be fitted with mechanical means of propulsion, weigh not less than 1,600 tons gross tonnage and shall not be more than 15 years old if it is a tanker or bulk carrier or more than 20 years old if it is any other type of vessel.

 

Nevertheless, compliance with the above conditions does not ensure registration under Part IIC as the Registrar General has the discretion to refuse registration under Part IIC. Further, the Minister of Transport may, if he thinks fit, prescribe additional requirements for registration at the MISR.

 

CONCLUSION

Part IIA of the MSO enables vessels to be registered as a Malaysian ship where the majority of the shareholding is held by Malaysian citizens.

 

The establishment of the MISR allows for non-Malaysians to own Malaysian registered vessels and accordingly, participate in providing shipping services to the Malaysian oil and gas industry.

 

Oddly, the current provisions of the MSO do not provide for equal shareholding between the Malaysian and non-Malaysian shareholder of a ship-owning corporation. In such a situation, the vessel will not qualify for registration under Part IIA or Part IIC of the MSO and will not be entitled to provide shipping services to the Malaysian oil and gas industry unless otherwise exempted by the Minister of Transport under section 65U of the MSO.

 

 

FAIZAH JAMALUDIN

 
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