Sabah emerges as Malaysia's strategic frontier for upstream O&G investment
The state offers international players a stable, underexplored and increasingly investor-friendly environment, industry analysts said.
The shift reflects broader regional realignments in upstream energy strategy, as geopolitical instability in traditional oil-producing regions pushes investors toward safer, high-potential frontiers especially in Southeast Asia, they added.
Economist Samirul Ariff Othman, an adjunct lecturer at Universiti Teknologi Petronas, told FMT that Sabah had recently been attracting more international oil companies.
This was spurred by instability in the Middle East and Malaysia's comparatively stable investment climate.
"Presently, Sabah leads in near-term FDI flows, followed by Sarawak," he said.
"The 2025 Iran-Israel skirmish and heightened Red Sea tensions have made freight insurance, security costs and supply stability in the Middle-East and North America increasingly uncertain.
"Investors are looking for lower-risk (and) high-potential alternatives, and Southeast Asia fits that profile," the portal quoted him as saying.
Sabah's Rising Profile in Deepwater Exploration
According to Samirul, Sabah's underexplored deepwater blocks particularly Blocks SB409 and SB310 are drawing renewed attention, alongside the redevelopment of the Kota Belud field, which is expected to ramp up activity in the second half of 2025.
Industry players have taken notice. ConocoPhillips' recent pivot away from Sarawak toward Sabah underscores growing confidence in the latter's upstream potential.
While Sarawak continues to command significant attention due to its advanced LNG infrastructure and active gas blocks such as SK318 and SK408, analysts warn that lingering regulatory ambiguities are clouding investor sentiment.
"The friction between Petronas and Sarawak's state oil company, Petros, has created uncertainty around fiscal terms and licensing processes," said Samirul.
In May, federal and state authorities announced a framework granting Petros the role of gas aggregator in Sarawak.
However, legal disputes and unclear operational boundaries between the two entities remain unresolved.
Tricia Yeoh, associate professor at University of Nottingham Malaysia, told the portal that Prime Minister Datuk Seri Anwar Ibrahim's announcement of broad agreement reached in February this year with Sarawak Premier Tan Sri Abang Johari Openg had failed to clear the air sufficiently.
"Neither statement addresses Sarawak's claim (to resources) over 200 nautical miles of territorial waters, so that remains at large," she said, referring to Anwar's speech in the Dewan Rakyat on Feb 17 and a media release issued by Abang Johari the following day.
Regulatory clarity is still lacking, Yeoh said, adding that ongoing lawsuits, such as the RM8 million bank guarantee dispute, continue to cast a shadow.
Malaysia's PSC Framework Still Competitive
Samirul acknowledged that Malaysia's production-sharing contracts (PSCs) remain among the most attractive in the region, especially when compared to Indonesia and Vietnam.
Under current terms, contractors pay five per cent royalty each to federal and state governments, after recovering 70 per cent of costs.
However, he warned that delays in PSC approvals, combined with high royalty burdens for marginal fields, could dull Malaysia's competitiveness.
"The fundamentals are strong but speed and predictability are everything in today's investment climate," he said.
Yeoh echoed the sentiment, calling on Putrajaya to clarify the conditions under which states like Sabah and Sarawak may receive PSC carve-outs.
"Dragging this issue for another year or 10 would severely damage Malaysia's upstream outlook," she cautioned.
"As I have stated previously, there needs to be a joint Petronas-Petros committee (comprising lawyers, financial and technical representatives and members of the federal and state governments) that works out these details."
Yeoh added that the joint committee should be given the space to deliberate in private until a consensus is reached after which the outcome should be made public.
"The nation can then move forward constructively," she said.
Stronger Petronas Future
Despite local challenges, Petronas continues to bolster its global standing through strategic upstream partnerships with international oil majors such as Eni, TotalEnergies, Idemitsu and ConocoPhillips both within Malaysia and in regional plays like Indonesia.
Joint ventures help Petronas hedge geopolitical and cost-related risks while gaining access to advanced technologies, particularly in deepwater exploration and carbon management, said Samirul.
"With global upstream costs rising due to inflation, supply chain bottlenecks, and deeper offshore exploration needs, joint ventures are a rational de-risking strategy," he said.
Samirul explained that shared equity spreads exploration costs, reduces capital exposure and allows partners to pool advanced technologies.
These partnerships also allow Petronas to gain technical know-how from international oil majors experienced in carbon management and digital exploration and production, which supports its energy transition goals, he added.
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