Malaysia’s Oil and Gas Sector: Constant Expectations despite Diminishing Returns

Abstract

Since the oil and gas (O&G) sector’s take-off in the 1970s, this natural bounty has yielded myriad benefits to Malaysia. While not falling into the ‘resource curse’ of an unquestioned reliance on natural resources, the O&G sector is nonetheless a key enabler for many aspects of the country’s economy and public finances. Malaysia’s current account shows the significance of the sector, which has long accounted for a sizable proportion of merchandise exports and foreign exchange earnings. In 1990, for instance, the country’s global exports of fuel and derived products totaled US$5.4 billion and made up 18.3 per cent of all merchandise exports. In 2019, just before the COVID crisis struck, the corresponding figures were US$34.5 billion and 14.5 per cent. Beyond those in the country’s ledgers, indications of the O&G sector’s skyrocketing success are everywhere – most visibly in the country’s much-vaunted infrastructure. Examples include but are not limited to: the Petronas Towers, the erstwhile tallest buildings in the world and centrepiece of Kuala Lumpur’s skyline; Putrajaya, the country’s administrative capital; and the Kuala Lumpur International Airport. The sector has also underpinned many of Malaysia’s economic nationalist aspirations. Today, the government-owned corporate giant, Petronas, is a source of pride and, in 2021, was the nation’s sole Fortune Global 500 company. The government has also sought to foster an eco-system of local firms in the O&G sector to diversify the economy and foster more technologically-intensive tasks. And, when demand calls, it has used the country’s national flagship firm to bail out capsizing corporate captains. However, there are growing signs that, going forward, the sector will no longer be able to play such an outsized role. One statistic suffices to illustrate this trend. In 2009, as much as 40 per cent of government revenue was derived from O&G-related sources; in 2021, however, the corresponding figure had plummeted to a mere 19.2 per cent. Despite the O&G segment’s prodigious potential, it faces a number of structural constraints and policy challenges. In order to analyse these, this paper will first set out the historical development of the sector and the Malaysian government’s long-term policy objectives. The subsequent sections will look at the key challenges facing the sector and then conclude.