Sabah emerging as Malaysia’s next frontier of O&G investment
- SOGCE ADMIN
- Jul 22
- 4 min read
Published on: Monday, July 21, 2025
PETALING JAYA: Driven by investor-friendly policies and untapped reserves, Sabah is outranking Sarawak as a more appealing destination for foreign direct investment (FDI) in Malaysia’s upstream Oil and Gas (O&G) sector, according to industry observers.
Sabah is drawing increased interest from international oil companies as geopolitical instability in the Middle East shifts focus toward Malaysia’s stable investment climate, said economist Samirul Ariff Othman, an adjunct lecturer at Universiti Teknologi Petronas.
“The 2025 Iran-Israel conflict and escalating Red Sea tensions have driven up freight insurance and security costs while disrupting supply chains across the Middle East and North America,” he said, hinting that investors are looking for lower-risk and high-potential alternatives, with Southeast Asia, particularly Malaysia, emerging as a preferred destination.
The Sabah advantage
Samirul noted that Sabah is better positioned to capitalise on the shifting global investment trends, especially in terms of near-term foreign direct investment (FDI) inflows.
"Currently, Sabah is attracting the strongest near-term FDI inflows, followed by Sarawak,” he said, citing that ConocoPhillips' strategic shift from Sarawak to Sabah indicates the untapped potential of North Borneo's deepwater blocks.
Samirul also pointed out that while the Langkasuka basin off Peninsular Malaysia’s west coast is generating investor interest, monetisation through commercial development may be slow due to the lack of existing pipelines and processing facilities, as compared to the more developed infrastructure found in other basins, including that of Sabah.
“With ongoing studies in Blocks SB409 and SB310, and Kota Belud’s redevelopment, Sabah is set to gain momentum in the second half of 2025,” he said.
Regulatory roadblocks in Sarawak
Commenting on the competitive landscape in East Malaysia, Samirul observed that while Sarawak has strong LNG infrastructure and active basins such as the SK318 and SK408 gas blocks, regulatory uncertainty involving national oil company PETRONAS and the state-owned PETROS continues to undermine investor confidence.
"The overlapping authority between state and federal regulators has created a legal and fiscal limbo at the same time. Investors want clarity, not confusion. Until we resolve these jurisdictional ambiguities, billion-dollar projects will remain stuck at the drawing board," Samirul cautioned.
“While Sarawak’s state oil company PETROS has bolstered its role in managing upstream resources, overlapping jurisdictions have added ambiguity in fiscal split and licensing processes.”
In May, the federal and Sarawak governments announced a high-level agreement granting PETROS a bigger role as the state’s gas aggregator. However, both entities are still engaged in negotiations over legal frameworks, operational control, and commercial terms, with unresolved complexities still hampering progress.
Echoing this, Dr. Tricia Yeoh, associate professor at University of Nottingham Malaysia, remarked that Prime Minister Anwar Ibrahim’s announcement of a broad agreement reached in February this year with Sarawak Premier Abang Johari Openg did little to resolve the prolonged regulatory ambiguity.
"With PETRONAS and PETROS still locked in legal proceedings over an RM8 million bank guarantee in addition to the lack of regulatory clarity, investor confidence remains questionable," she said, hoping that both parties should jointly withdraw the suit and establish a clear, forward-looking partnership.
The good news is that there is one positive takeaway from the announcement - all existing PETRONAS contracts with third parties will remain honoured.
"However, this assurance still comes short of resolving the broader ambiguities surrounding the Petronas-Petros relationship as the statement does not address Sarawak’s claim to resources over 200 nautical miles of its territorial waters, for instance,” Yeoh said, referring to Anwar’s speech in the Dewan Rakyat on Feb 17 and a media statement issued by Abang Johari the following day.
Yeoh stressed that the federal government should clearly outline the conditions for exceptions or carve-outs granted to individual states.
“If the unclear and confusing situation drags on, it is not helping our national O&G development,” she warned, calling for a joint committee compromising legal, financial and technical representatives from the federal and state governments - to work out a solution.
“With a clear direction in place, the nation can then move forward constructively,” she said.
Production Sharing Contract (PSC)
By the same token, Samirul favours the idea of creating a more competitive environment through a clearly defined regulatory framework governing the Production Sharing Contract (PSC).
"Faster PSC approvals and better regulatory clarity in East Malaysia is needed to sustain FDI momentum through 2026 and beyond," he emphasised.
Nevertheless, he acknowledges that Malaysia’s PSC remains regionally competitive as compared to that of Indonesia and Vietnam where operators enjoy relatively low oil and gas royalties i.e. 5% to the federal government and 5% to state government - out of a 10% split - with up to 70% of cost recovery.
PETRONAS to strengthen partnership
Despite regulatory friction, PETRONAS continues to fortify its global ties with energy giants like ConocoPhillips, TotalEnergies, Eni, and Idemitsu, including upstream joint ventures in Indonesia.
Commenting this, Samirul said: “With global upstream costs rising due to inflation, supply chain bottlenecks, and deeper offshore exploration needs, joint ventures have become an essential risk mitigation strategy."
"By pooling resources, companies can distribute exploration costs, mitigate capital risk, and combine cutting-edge technologies to make ambitious projects more viable," he pointed this out, wishing for policy and legal frameworks to catch up with investor expectations.
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