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Tax incentives to boost Malaysian oil production

Hydrocarbon Engineering,

Malaysia has long stood as one of the leading exporters of both crude oil and liquefied natural gas (LNG) in Asia-Pacific. However, the largest hydrocarbon fields in the country, all of which are either onshore or in shallow water, have entered terminal decline. As a result of the continuing drop in performance from these fields, the upstream sector in Malaysia shifted its sights towards the less economically attractive deepwater and marginal fields of the Malay Basin and Brunei-Sabah basins. In 2011, due to the high unit costs of both of these development scenarios, the government of Malaysia began instituting more lenient fiscal terms to spur exploration and investment to provide secure energy sources and revenues.

Marginal fields, such as the Balai Cluster, are defined by small reserve sizes of 30 million bbls of crude oil, or 500 billion ft3 of natural gas. Under Malaysia’s traditional Production Sharing Contract (PSC), these fields would be subject to a 25% petroleum income tax, down from the 38% which larger fields incur. With the newer Risk Service Contract (RSC), however, firms are only required to pay a 25% corporate income tax. While the latter of the two gives the contractor no ownership over produced hydrocarbons, if they meet their contracted production quota they are eligible for 100% reimbursement of their original investment, compared to the 70% of the PSC. In addition, once reimbursement is complete under an RSC, contractors receive 10% of per barrel revenue as a remuneration fee and also pay no royalties to the state.

Deepwater fields in Malaysia, which lie in over 1000 m of water, off the coast of Sabah, receive similar concessions. The standard PSC enforces a 50:50 profit oil split between contractors and the Malaysian government. If a deepwater field produces less than 50 000 bpd, the contractor will receive 86% of the profit oil. While these terms become less attractive with increased production volumes, the original PSC split only applies to fields which contain over 300 million bbls of oil reserves.

Deepwater investment

While the government of Malaysia increased the attractiveness of their PSC in the last several years, deepwater investment has proven somewhat lackluster. Gumusut-Kakap and Kikeh are currently the only deepwater fields which have come online, with only a handful of others slated to come online in the next several years. Given the sweeping changes Malaysia made to its PSC, and its introduction of the RSC, it is unlikely that the nation will make further amendments in the short to medium term. Though these new fiscal environments have not yielded perhaps the amount of investment Malaysia was expecting, they have succeeded at their primary goals of increasing gross national crude oil production and facilitating their skyrocketing natural gas production. Also, despite the relatively few deepwater developments actively under construction, a great deal of exploration has taken place as a result of their new fiscal terms.

The government will likely bide their time and monitor the performance of their current deepwater and marginal portfolios. It is clear that, based on the fact that nearly every type of offshore production facility is being unitized in their deepwater theater, the country is very much testing the waters. As a result, the future of their newest fiscal terms is somewhat ambiguous. If performance from their first batch of marginal and deepwater fields proves underwhelming, they may revise their fiscal environment further to increase its viability for new players. However, if the opposite holds true, the terms may tighten, providing a less friendly landscape for new firms to enter Malaysia’s new hydrocarbon arenas. Until the government selects which end member they will head towards, Malaysia’s newest fiscal terms will remain stable until they can evaluate whether their changes bear fruit.

Written by Jonathan Lacouture, GlobalData's lead analyst for the Asia-Pacific region.

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