Influence of fiscal regime adjustment on investment climate of marginal oil fields in Malaysia: a scenario analysis

Abstract

Since 1970s, oil and gas sector in Malaysia has been undergoing series of fiscal regime adjustments. The rationale of which was connected to the country's desire to improve the investment climate of its remaining oil and gas fields. Recently in 2010, the fiscal changes were made for marginal fields. These new fiscal changes resulted in increase in tax incentives and change in fiscal arrangement from production sharing contract to risk service contract. In this study, a comparison of the marginal fields' investment climate under old and new fiscal regimes was conducted using nine different scenarios relating to oil prices and reserve levels. The results using investor's net present value and internal rate of return revealed that the new fiscal regime would likely render investment climate more favourable in the majority of the scenarios - with the exception to those relating to high oil prices, which fiscal regime under production sharing contract would likely be more favourable. The policy implication is that offering windfall incentive or increasing field's contractors' remuneration would likely improve the attractiveness of the new fiscal regime under risk service contract. However, the caveat is that considerations should be given to the assumptions employed in the study while applying its findings for a decision.