The surprising victory by Hope's Pact (Pakatan Harapan: PH) in Malaysia's May 2018 general election represents a deepening trend of contested and fractured political power in the country, a transformation that is likely to be sustained well into the 2020s. This increased national influence has allowed Sabah and Sarawak, Malaysia's foremost oil and gas producing states, to push for a larger share of revenues from, and greater control of, their upstream sectors, adding risk to investments in Malaysia's petroleum sector.

IHS Markit's Oil & Gas Risk team has therefore reduced Malaysia's ranking for petroleum-sector investment in 2019. However, we continue to believe in Malaysia's relative regional attractiveness for petroleum-sector investment.

Figure 1: Changes to Malaysia's Oil and Gas Risk Score in 2018

Malaysia's increased risk comes in response to our expectations that the new government will seek to find a balance between policies that grow its crucial political support base in Sabah and Sarawak via policies that encourage upstream investment, an important source of revenue. Rebalancing government priorities is likely to be a lengthy process. It is the uncertainty - rather than known policies that discourage E&P investment - that add to Malaysia's risk profile.

Indeed, the complexity of the issues in question, combined with the desire of all major parties to win seats in Sabah and Sarawak in future elections, suggest that these considerations are likely to stretch beyond the term of the new government, extending upstream policy uncertainty in these states, regardless of who is in power.

Figure 2: Select Oil and Gas Risk Scores: Far East and Australasia.

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Rachel Calvert is a Research & Analysis Associate Director in IHS Energy's Petroleum Sector Risk team, which specializes in forecasting and benchmarking above-ground risks to the upstream sector.
David Gates is a consultant to IHS Energy, primarily the Petroleum Sector Risk team, where the focus is forecasting and benchmarking above-ground risks to the upstream sector.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.