Petronas’s upstream collaborations with ConocoPhillips, Eni, TotalEnergies, and Idemitsu have enhanced Malaysia’s upstream credibility and allowed the company to hedge against operational and geopolitical risks. (AFP pic) PETALING JAYA: Sabah is outpacing Sarawak as a more appealing destination for foreign direct investment (FDI) in Malaysia’s upstream oil and gas (O&G) sector, according to industry insiders. Economist Samirul Ariff Othman, an adjunct lecturer at Universiti Teknologi Petronas, said Sabah has recently been attracting more international oil companies, spurred by instability in the Middle East and Malaysia’s comparatively stable investment climate. “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,” he said. “Investors are looking for lower-risk (and) high-potential alternatives, and Southeast Asia fits that profile.” Samirul told FMT certain O&G zones in Malaysia will benefit more from these trends. He said that while the Langkasuka basin off Peninsular Malaysia’s west coast is receiving a certain level of interest, monetisation may be slow on account of its less developed infrastructure. “Presently, Sabah leads in near-term FDI flows, followed by Sarawak,” he said, adding that Conoco Philip’s pivot away from Sarawak reflects a belief in the North Borneo state’s underexplored deepwater blocks. “With ongoing studies in Blocks SB409 and SB310, and Kota Belud’s redevelopment, Sabah is poised for more activity in H2 2025,” said Samirul. Previously, it was reported that the O&G giant had pulled out of Sarawak, partly due to regulatory uncertainty. Samirul said that despite Sarawak’s strong LNG infrastructure and active basins— including the SK318 and SK408 gas blocks, regulatory uncertainty continues to undermine investor confidence. “Regulatory friction between Petronas and Petros remains a political risk variable,” he added. “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 on a new arrangement which will see Petros take on the gas aggregator role in Sarawak. However, both companies remain locked in negotiations over the legal, operational and commercial terms, and the attendant overlaps and complications. Tricia Yeoh, associate professor at University of Nottingham Malaysia said Prime Minister Anwar Ibrahim’s announcement of broad agreement reached in February this year with Sarawak Premier Abang Johari Openg had failed to clear the air sufficiently. She told FMT the announcement lacked regulatory clarity, leaving investor sentiment unresolved, especially with legal proceedings between Petronas and Petros over a RM8 million bank guarantee still ongoing. Yeoh said both parties should jointly withdraw the suit and establish a clear forward- looking agreement. She, however, identified one positive in the announcement, namely that all existing Petronas contracts with third parties will continue to be honoured, though there were broader ambiguities surrounding the Petronas-Petros relationship. “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. Samirul said domestic reform—particularly faster production-sharing contract (PSC) approvals and better regulatory clarity in East Malaysia—was needed to sustain FDI momentum through 2026 and beyond. He said that Malaysia’s PSCs are competitive, especially compared to regional peers particularly Indonesia and Vietnam, with companies paying federal and state governments 5% royalty or cash payment each after 70% of revenue is used to pay for oil costs. However, the combined royalty burden of 10% can be high for smaller fields, especially offshore gas, and PSC approvals could be faster, said Samirul. Yeoh urged Putrajaya to outline in clear terms the conditions under which carve-outs or exceptions may be granted to specific states, along with the rationale behind each decision. “Dragging this out for another year—or 10—would be horrifically detrimental to national oil and gas development,” she warned. “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,” she said. Yeoh said 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 Commenting on recent joint ventures, Samirul said Petronas has been strengthening its upstream collaborations with ConocoPhillips, Eni, TotalEnergies, and Idemitsu—including in Indonesia—enhancing Malaysia’s upstream credibility while hedging against operational and geopolitical risks. “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 E&P (exploration and production), which supports its energy transition goals, he added.