Offshore Oil & Gas Decommissioning - Malaysia

Petroliam Nasional Berhad (PETRONAS) and Jawatankuasa Kerja Zon Ekonomi Eksklusif (JKZEE) are the primary approval authorities for offshore decommissioning in Malaysia, although multiple regulators are involved in approving and monitoring aspects of an offshore decommissioning project:

• PETRONAS

PETRONAS, through its Malaysia Petroleum Management (MPM) unit, acts as the de facto upstream regulator. 1  It reviews and approves abandonment plans for Petroleum Sharing Contract (PSC) operators. PETRONAS ensures that the decommissioning plan meets technical and safety standards and that the operator has a viable plan and funding. Throughout the decommissioning project, PETRONAS monitors progress (especially health, safety and environmental performance). Essentially, PETRONAS is the first gatekeeper: a PSC contractor must get PETRONAS’ approval before proceeding to other government approvals.

• JKZEE

This is the government committee which formally approves activities in the Exclusive Economic Zone. 2  Once PETRONAS endorses an abandonment plan, the operator applies to the JKZEE for government approval to decommission installations in the EEZ. The JKZEE evaluates the proposal to ensure it meets legal requirements (e.g. navigational safety, environmental protection). 3  Offshore structures may only be legally removed or abandoned with JKZEE’s approval. The Petroleum Licensing Section of the Ministry (KPDN) serves as the secretariat to this committee.

• Department of Environment (DOE)

The DOE oversees environmental compliance. It may require an Environmental Impact Assessment (EIA) for the decommissioning project if significant environmental impact is expected. The DOE has issued guidelines on offshore decommissioning to ensure operators mitigate pollution, protect marine life, and manage waste properly. The DOE will monitor that the abandonment and site restoration meet the standards of the Environmental Quality Act 1974 (e.g., no oil leaks, proper disposal of hazardous materials).

• Marine Department (Malaysia)

This agency is concerned with maritime safety and navigation. When offshore structures are removed, the Marine Department ensures that no hazards to navigation remain (for instance, that platforms are fully cleared or properly marked if left in situ). They work under laws like the Merchant Shipping Ordinance and also enforce EEZ Act provisions about removing disused installations for safety. The Marine Department may need to be notified to update nautical charts once a platform is removed.

• Others

Depending on the scope, other bodies can be involved. The Fisheries Department may be consulted if artificial reef concepts (rig-to-reef) are proposed, to ensure fisheries won't be harmed. The Department of Occupational Safety and Health (DOSH) may oversee worker safety aspects during offshore dismantling (under OSHA 1994). In essence, decommissioning requires multi-agency coordination.

Malaysia does not have a single dedicated law for offshore decommissioning. Instead, decommissioning is governed by a framework of multiple laws and guidelines, with oversight from various regulators.

The main laws include:

• Petroleum Development Act 1974

Vests ownership of petroleum resources in PETRONAS and underpins the Production Sharing Contract system (while not detailing decommissioning itself, it establishes PETRONAS’ authority in upstream operations).

• Exclusive Economic Zone Act 1984 (EEZA)

Requires government approval for any installation or structure in the EEZ (and by extension, approval for their removal). Decommissioning of offshore installations in the EEZ must be authorized by the relevant government committee set up pursuant to Section 21(1) and Section 22 of EEZA.

• Continental Shelf Act 1966

Governs activities on the continental shelf; reinforces that installations must be removed when no longer in use, in line with international conventions.

• Environmental Quality Act 1974

Mandates environmental protection. Decommissioning projects may require Environmental Impact Assessments, and any pollution or improper disposal during decommissioning can lead to penalties under this Act. The Department of Environment has also issued specific Environmental Guidelines for decommissioning of oil and gas facilities.

• Fisheries Act 1985

Protects fisheries; relevant if decommissioning activities (like asset removal or artificial reef creation) impact marine habitats.

• Petroleum (Safety Measures) Act 1984

Covers safety of petroleum operations, including safe abandonment of wells and facilities.

• Occupational Safety and Health Act 1994

Applies to worker safety during decommissioning operations

In addition to these laws, Malaysia’s national oil company, PETRONAS, has issued decommissioning guidelines under its Procedures and Guidelines for Upstream Activities (PPGUA). The PPGUA Decommissioning Guidelines play a crucial role and must be followed by all PETRONAS PSC contractors. These guidelines detail the technical and procedural requirements for abandoning wells and removing facilities.

Under Malaysian practice, the asset owner/operator is responsible for all stages of decommissioning, from planning to execution and post-monitoring. Key points on how liability is addressed:

• “Polluter Pays” Principle

This is not explicitly codified in a single law. However, it is based on the principle that those who profited from the oil/gas operations must bear the cost of decommissioning, which aligns with international norms that the benefiting party bears responsibility for site restoration. Malaysian regulators expect operators to plan and budget for decommissioning of the field from the start.

• Planning Stage

PETRONAS requires a Decommissioning Plan to be submitted early, typically at the field development stage itself, to ensure that decommissioning liability is acknowledged up front as part of the project’s lifecycle, covering technical approach, safety and environmental measures, and cost estimates for abandonment.

• Execution Stage

During decommissioning activities such as well plugging and platform removal, the operator is responsible for ensuring all tasks are performed in accordance with relevant regulations. PETRONAS, as the upstream custodian, monitors this process; for instance, PSC operators are required to submit monthly updates on Health, Safety, and Environment (HSE) performance throughout decommissioning. Waste and debris generated must be managed according to the approved plan and comply with environmental laws. Typically, operators engage decommissioning contractors, but retain oversight responsibility to ensure the work adheres to legal and safety standards.

• Post-Decommissioning Monitoring

After removal and site clearance, post-decommissioning environmental surveys are typically conducted a few months later. The operator is responsible for this monitoring to confirm that no adverse environmental impact remains (for example, checking for any debris or contamination left on the seabed). If issues are found, the operator can be required to take further remedial action. Liability thus extends beyond the physical removal – the operator must ensure the site is restored and will not pose ongoing hazards.

In summary, Malaysian regulations place decommissioning liability squarely on the current asset holders. They must plan early, execute safely, and verify the clean-up, under the oversight of PETRONAS and environmental authorities. Failure to do so leaves the operator subject to enforcement (as covered under penalties) and potentially on the hook for any damage caused.

Non-compliance with decommissioning obligations can lead to legal and financial penalties under various laws and contracts:

• Under Petroleum Contracts

If a PSC contractor fails to fulfil decommissioning commitments, PETRONAS can enforce the contract. This may include drawing on any performance bonds or guarantees provided, or withholding final contract settlements. The defaulting company could also face difficulty in future licensing. Essentially, there is a contractual liability to PETRONAS for abandonment obligations – breach could mean the government/PETRONAS carry out decommissioning and then recover costs from the company (or its guarantor).

• Environmental Laws

Breaching the Environmental Quality Act 1974 (for example, improper disposal of waste, or causing pollution during decommissioning) carries significant penalties. Offences under the EQA can incur fines (up to RM500,000 for serious pollution offences) and/or imprisonment for company officers, depending on the section violated. The authorities can also issue stop-work orders or require remediation at the operator’s cost.

• EEZ Act and Related Marine Laws

Operating or leaving structures in the EEZ without approval violates the EEZ Act 1984. While specific decommissioning penalties are not separately listed, the EEZA effectively prohibits unapproved installations – so failing to properly remove an installation (thus leaving an “unauthorized” structure) could be treated as an offence. 4  The Act provides for fines (and possibly confiscation) for violations. Similarly, the Continental Shelf Act 1966 may deem it unlawful to leave installations in place without consent, allowing the state to remove them at the owner’s expense.

• Safety Regulations

If decommissioning work is done unsafely, regulators like DOSH can penalize the operator under OSHA 1994. Accidents or hazards to workers could result in prosecution, fines or even imprisonment for negligence in safety duties.

• Marine Pollution Laws

In the event that decommissioning leads to oil spills or dumping at sea, Malaysia’s marine pollution regulations (aligned with MARPOL and London Convention commitments) impose penalties. The operator would have to bear cleanup costs and fines under laws like the EEZA (which incorporates marine pollution control).

The Malaysian government has recognized the heavy costs of decommissioning and has put in place tax provisions to mitigate the financial burden:

• Deductibility of Abandonment Expenditure

Under the Petroleum Income Tax Act 1967 regime (which governs upstream oil tax), abandonment and decommissioning expenses are tax-deductible. There are specific rules that allow decommissioning costs to be written off against petroleum income. 5

• Carry-Back of Losses

Malaysia’s Budget 2022 allows decommissioning losses to be carried back and offset against taxable income from the previous two years, enabling companies to claim tax refunds for abandonment costs after production ceases. This scheme is similar to the UK’s but on a smaller scale, ensuring deductions are not lost when a field closes. Unused losses after two years are disregarded.

• Accelerated Capital Allowances (ACA)

Also introduced for late-life assets, ACA allows faster depreciation of capital spent on assets (potentially including decommissioning-related equipment or work) for tax purposes. In late-life Production Sharing Contracts (LLA PSCs), the government provided ACA (20% initial, 40% annual) on qualifying costs to encourage investments that include eventual abandonment. Faster write-offs mean earlier tax relief.

• Reduced Tax Rate for Late-Life Fields

For approved late-life projects, the petroleum income tax rate was reduced from the usual 38% to 25%, partly to make it easier to finance their tail-end operations and closure. This lower tax rate indirectly helps with decommissioning affordability.

• State Participation via Cost Sharing

In the context of PSCs, PETRONAS sometimes bears a share of decommissioning cost, which can be viewed as a form of government incentive. For example, under the newer Late Life Asset PSC terms, decommissioning costs for aging oil fields are managed by PETRONAS sharing the expenses with the operators. Operators are required to save a set amount (agreed at contractual stage) in an abandonment fund (or cess) during production. The company contributes a fixed portion of the field’s revenue into this fund over time, up to a specified amount. Once that cap is reached, PETRONAS covers any excess decommissioning costs.

Example (simplified): Suppose the estimated decommissioning cost for a mature field is RM100 million. Under LLA PSC terms, the operator might be required to put, say, RM60 million into the abandonment fund over the remaining life. If the final decommissioning bill comes to RM100 million, the operator pays their RM60m (from the fund) and PETRONAS covers the remaining RM40m. If the costs were lower than RM60m (unlikely but possible), typically the contract would specify how the savings are handled (often shared or retained by PETRONAS, depending on the terms).

Decommissioning obligations in joint ventures are typically joint and several, meaning all co-venturers (partners in the oil field) are collectively responsible. If one owner cannot fulfil its share:

• Co-Venturer Liability

The remaining co-venturers would generally need to cover the shortfall. In practice, the PSC consortium or joint operating agreement will bind each party to the decommissioning liability. Thus, if one party defaults or is insolvent, the other partners must step in to ensure the work is done (each may be liable for the entire decommissioning, not just their fraction, to ensure the government is not left with an orphaned liability). This mirrors the approach in places like the UK, where other licensees must pick up a defaulter’s share. While Malaysia’s laws don’t explicitly codify this, it is implemented through contract: all PSC parties are collectively on the hook to PETRONAS.

• Ultimate Responsibility of PETRONAS/State

If none of the co-venturers can carry out the decommissioning, the liability would likely revert to PETRONAS (and by extension, the Malaysian government). PETRONAS, as resource owner, has a vested interest in ensuring decommissioning happens to avoid environmental or safety issues. In fact, due to legacy arrangements, a large number of future decommissioning projects are anticipated to be PETRONAS’ legal responsibility rather than the contractors’. This scenario arises if a PSC has ended and the contractor has relinquished the field without fully decommissioning (or if the contractor no longer exists). In such cases, PETRONAS may ultimately require to carry out the work and meet the cost.

• Preventative Measures

As a result, PETRONAS tries to prevent defaults by requiring financial security (see next sections) and by closely vetting any transfers of interest to ensure new owners are capable. Also, PSCs now incorporate explicit clauses that all parties remain liable until decommissioning is completed, even if they have assigned their interest (to avoid someone selling out and leaving a less solvent entity as the last owner). However, since Malaysian law does not impose statutory “trailing liability” on past owners, these issues must be managed by contract and oversight at the time of any change in ownership.

Yes, operators are required to provide financial security for decommissioning liabilities in Malaysia, both to the state and often to their joint-venture partners:

• Abandonment Cess Fund

PETRONAS mandates the creation of an abandonment fund (often called an abandonment cess). Under PSC terms, the contractor must contribute to this fund during the production phase so that money is set aside for future decommissioning. Typically, a fixed percentage of production revenue is allocated into a special account. This fund accumulates over the field’s life and is then used to pay for the abandonment when the time comes. The abandonment cess fund is held to PETRONAS’ order – in effect, securing the state’s interest by pre-funding much of the work. PETRONAS’ PPGUA guidelines make this a requirement, and newer PSC models (e.g., Late Life Asset PSCs) formalise it.

• Bank Guarantees/Letters of Credit

In some cases, especially for smaller operators or new entrants, PETRONAS may require a bank guarantee or standby letter of credit as security to cover decommissioning costs. The amount is often based on estimated abandonment costs (which might be fully or partially covered by a guarantee). As fields near their end, the required guarantee might be increased.

• Parent Company Guarantee

If the operating PSC entity is a subsidiary with limited assets, PETRONAS often asks for a parent company guarantee (PCG), effectively asking the parent company to co-sign the abandonment obligation.

• Joint Operating Agreement (JOA) provisions

Among co-venturers, JOAs typically include clauses requiring each party to provide security to the operator or to a trust fund for decommissioning. For example, partners might deposit funds into an escrow or provide cross-indemnities, particularly if one party is financially weaker.

• Regulatory Approval Condition

When approving field development plans or license transfers, regulators (PETRONAS/JKZEE) will check that a decommissioning security arrangement is in place. It can be a condition to getting approval that the abandonment fund is established or that a bond is posted. Essentially, no one is allowed to operate without showing how decommissioning will be funded.

A range of financial security mechanisms are employed in Malaysia’s upstream industry to manage decommissioning liability:

• Trust Funds / Cess Funds

As noted, the most common mechanism is an escrow-like fund accumulated over time. This could be structured as a joint account or trust exclusively for abandonment costs. The Late Life Asset (LLA) PSC model, for example, diverts a fixed share of production into such a fund. By end of field life, this fund partially covers the decommissioning budget.

• Insurance and Surety Bonds

Some operators may purchase decommissioning insurance or surety bonds. These instruments pay out if the operator cannot perform the abandonment. While not yet widespread, they are options – a surety bond from an insurer can operate in a way similar to a bank guarantee, ensuring funds for the government if called upon.

• Bank Guarantees/LCs

A bank guarantee or Letter of Credit can be provided to PETRONAS. This is typically unconditional and allows PETRONAS to claim a sum (up to the guaranteed amount) to apply toward decommissioning if necessary. For example, near the end of a field, PETRONAS might require a bank guarantee equal to the estimated abandonment shortfall (total cost minus whatever is in the fund already).

• Parent Company Guarantees (PCG)

Many PSCs include a PCG from the operator’s ultimate parent (especially if the operator is a special-purpose vehicle).

• Cost-Sharing Arrangements

In newer arrangements, PETRONAS shares some of the decommissioning cost, which can be seen as a form of security mechanism through risk-sharing. For instance, in the LLA PSC, if the collected abandonment fund (contractor’s contributions) is not enough, PETRONAS will co-fund the remainder to the agreed extent.

• Joint Account Escrows in Transfers

When an asset is being transferred to a new owner, sometimes the seller and buyer agree to put a portion of the sale proceeds into an escrow dedicated to future abandonment. That lump-sum acts as security that the new owner can only use for decommissioning. This is more of a transactional mechanism than a regulatory one, but it’s used to reassure PETRONAS and the parties that the liability is funded post-sale.

Overall, multiple layers of financial assurance are used. Often, more than one mechanism is in play simultaneously (e.g., a cess fund + PCG + insurance). The goal is to mitigate the risk of default and ensure all stakeholders have confidence that decommissioning obligations will be met without financial surprise.

When oil and gas assets (or companies owning such assets) are sold, decommissioning liabilities are a crucial part of the deal. In Malaysia:

• Buyer’s Assumption

The default position is that the buyer assumes responsibility for future decommissioning. The new owner, once the PSC interest is transferred or the company shares acquired, steps into the shoes of the previous owner for all obligations, including abandonment. PETRONAS will require an express commitment from the buyer to honour these obligations as a condition of approving the transfer. The PSC itself typically states that upon assignment, the assignee is bound by all terms (including abandonment liabilities).

• Seller’s Protections

As Malaysia does not impose statutory “trailing liability”, sellers generally aim for a definitive release from future obligations. Accordingly, sale and purchase agreements typically require buyers to indemnify sellers against decommissioning costs. Nonetheless, PETRONAS may request that sellers contribute to the abandonment fund at the point of sale. For instance, if a field is partially depleted, PETRONAS might stipulate that the fund be supplemented in proportion to production achieved before the seller is discharged from liability. In certain transactions, part of the sales proceeds may be placed in an escrow account specifically allocated for decommissioning purposes. These mechanisms are designed to ensure adequate funding of the asset at the time of transfer.

• PETRONAS Approval

All PSC transfers need PETRONAS (and government) consent. In evaluating a proposed buyer, PETRONAS will vet the financial and technical capability of the buyer to perform decommissioning. If PETRONAS is not convinced the new party can carry out the eventual abandonment (financially or technically), approval may be withheld.

• Contractual Liability and Indemnities

The sale agreement typically includes detailed provisions on decommissioning. For example, the buyer might covenant to assume all abandonment obligations and to use the existing abandonment fund only for that purpose. The seller will usually get an indemnity from the buyer against any future claims related to decommissioning. Given that Malaysia doesn’t impose liability on prior owners by law, once the deal is done and PETRONAS releases the seller, the risk shifts entirely to the buyer.

• Due Diligence and Pricing

Both parties pay close attention to the estimated decommissioning cost. Often an independent assessment is done. This estimate then factors into the price – a high abandonment cost might reduce the price. Alternatively, the seller might agree to retain a portion of the liability via a deferred payment linked to actual decommissioning cost (though this is less common in Malaysia, it can happen in creative deal structures).

• No Statutory Carry-Back Liability

Importantly, unlike some countries, Malaysia has no statute that can force a past operator to pay if the current one fails (no “carry-back” or joint liability once assignment is completed).

Several emerging issues and trends are shaping the decommissioning landscape in Malaysia. These include:

• Regulatory Reform and Clarity

There is ongoing dialogue within both industry and government regarding the absence of a comprehensive framework for decommissioning. The existing collection of laws is seen as fragmented and inefficient. As decommissioning activities increase, stakeholders are advocating for clearer legislation or, at a minimum, consolidated guidelines. Some recommendations include the creation of a dedicated decommissioning authority or an interagency committee with broad oversight responsibilities, similar to the UK's Offshore Petroleum Regulator for Environment & Decommissioning. Although no new legislation has been enacted, policymakers acknowledge this regulatory gap. This issue centres on enhancing the transparency and accessibility of decommissioning approvals and requirements.

• Financial Liability and Cost Management

The projected cost of decommissioning in Malaysia is substantial, with billions anticipated for upcoming abandonment activities. Discussions are ongoing about ensuring adequate financial provisions, including suggestions to strengthen the abandonment fund mechanism and formalise it through legislation. Recent actions by PETRONAS, such as introducing LLA incentives and requiring security, are aligned with this focus. The industry is monitoring developments regarding cost-sharing arrangements with PETRONAS, as numerous assets approach the end of their lifecycle, which may have implications for government exposure. Managing these liabilities while maintaining investor interest remains a key consideration. The question of “Who pays for decommissioning?” is central, with an emphasis on having operators contribute their share and planning for potential cost overruns. There are also ongoing efforts to implement international best practices and reduce costs through technology and knowledge transfer.

• Decommissioning Strategies – Rigs-to-Reefs and Reuse

Malaysia is proactively evaluating alternative decommissioning strategies to optimise costs and generate environmental benefits. A prominent approach is the “rig-to-reef” method, in which obsolete offshore platforms are either left in situ or repositioned at appropriate depths to function as artificial reefs. In 2017, PETRONAS successfully executed a rigs-to-reef initiative, transforming decommissioned platforms into marine habitats—a milestone illustrating both cost savings and enhancement of fisheries. As more platforms near decommissioning, each candidate undergoes a detailed case-by-case assessment to determine suitability for reefing, recognising that not all locations are appropriate.

As the energy industry transitions, there is increasing thought on how decommissioning of oil & gas assets intersects with low-carbon initiatives:

• Reuse for Renewable Energy or Carbon Storage

In Malaysia, there is currently no statutory requirement mandating the consideration of low-carbon alternatives prior to decommissioning, however, the concept of requiring evaluation of the potential for reusing facilities for renewable energy projects is steadily gaining prominence. For example, PETRONAS incorporates the assessment of repurposing opportunities during the decommissioning plan review process; although not legally required, it is considered industry best practice. Notably, Malaysia is progressing with Carbon Capture and Storage (CCS) initiatives - PETRONAS has approved the Kasawari CCS project off Sarawak, which will utilise a depleted field for CO₂ injection and is one of the world’s largest offshore CCS projects.

• Regulatory Support

Malaysia currently lacks a dedicated incentive programme for the re-purposing of oil and gas facilities. Nevertheless, increasing governmental focus on climate objectives, particularly Malaysia’s net-zero target for 2050, has prompted discussions regarding the integration of decommissioning activities with renewable energy deployment. For instance, there is potential for offshore platforms scheduled for removal to be retained as foundations for solar or wind energy installations within Malaysian waters. While technically feasible, such proposals would necessitate comprehensive feasibility assessments and regulatory approvals, as deviation from standard removal practices is not customary. Presently, each proposal is considered on a case-by-case basis; should an operator propose converting an existing platform into a permanent offshore power generation or research facility, regulators will evaluate the application based on its individual merits.