KUALA LUMPUR (REUTERS) - Malaysia is considering selling stakes in energy giant Petronas to two of its 13 states where the company's oil and gas fields are, Prime Minister Mahathir Mohamad told Reuters, in a bid to raise funds for the debt-laden government.

Such a move may also give states such as Sarawak and Sabah a say in the running of Petronas, the world's third-largest exporter of liquefied natural gas.

Tun Dr Mahathir said on Tuesday in an interview that the government could not meet a demand made by the states for a quadrupling of the royalties paid by the government-owned company to 20 per cent of its profit.

"It's fully owned by the government, it's up to the government to sell the shares privately not in the market, to states like Sabah and Sarawak," Dr Mahathir said in an interview in his office. "Petronas is a very big company, it depends on how much (the states) can pay also."

Sarawak and neighbouring Sabah have Malaysia's most prolific oil and gas reserves in their waters in the South China Sea.

Their longstanding demand to increase royalties could cost Petronas up to US$7 billion (S$9.5 billion) a year.

The Pakatan Harapan (PH) government in its 2018 election manifesto promised to raise petroleum royalties paid to the oil and gas producing states to 20 per cent from 5 per cent paid by the previous government.

The other two petroleum producing states are Terengganu and Kelantan.

The Sarawak state government, which is ruled by opposition alliance Gabungan Parti Sarawak has been pushing for PH to raise the royalty as promised.

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But Petronas chief executive officer Wan Zulkiflee Wan Ariffin said last week that increasing the oil royalty paid to 20 per cent was not possible, as production costs are high and profit margins low.

Tan Sri Wan Zulkiflee, who is also president of Petronas, was quoted by Malay Mail online news as saying the company makes a profit margin of only 3.7 per cent from oil production locally, after accounting for matters such as production costs, oil royalty, and tax.

Petronas, formally known as Petroliam Nasional Bhd, is the biggest money-spinner for the federal government.

Dr Mahathir said the government could also cut stakes in smaller listed or unlisted units of Petronas.

"What we need is to reduce our involvement, the number of shares that we hold, in order to raise some funds for ourselves," he said.

The company's main listed units are petrochemicals maker Petronas Chemicals Group, retail arm Petronas Dagangan, and gas infrastructure and utilities arm Petronas Gas.

Petronas Carigali is its exploration unit.

On Monday, Petronas said it has completed block trades of its shares in Petronas Dagangan, Petronas Gas and MISC Berhad.