15 DEC – Letter from the Middle East: The UAE and Opec—a problem postponed, not solved

The solution reached by Opec+ in early December may have calmed oil markets’ fears over lack of unity in the alliance’s appetite for retaining production curbs until the end of the year.

But month-by-month revisiting of output limits opens the prospect for tensions to emerge with each negotiation. And the potentially growing impatience of the UAE to remake its quota, to allow it to produce more, could thus emerge not as an issue bubbling in the background, but as an open and prolonged battle.

The UAE, represented effectively by Abu Dhabi, has traditionally been a strong supporter of Opec, despite not having been a founder member. It usually closely coordinates its policy with Mid-East Gulf ally Saudi Arabia, and it holds some spare capacity, albeit not quite to Riyadh’s extent.

During the summer, the UAE exceeded its Opec+ allocation to meet the need for associated gas to power air-conditioning but signalled its ongoing commitment by subsequently compensating for doing so. But this willingness to toe the line has been called into question by suggestions that the UAE has been considering its options, including even a potential exit from the organisation.

Opec does face challenges. The latest forecasts from both the cartel itself and the IEA see anaemic growth in oil demand to 2040 and a drop in Opec market share on 2019 levels that is not regained until 2030.

The UAE’s rumblings of discontent are more a jostling for position than a genuine threat to go it alone
There are internal tensions, too, Iranian exports might return if the Biden administration relaxes US sanctions, while Libya has already rebounded, albeit with its sustainability dependent on a ceasefire deal holding. On the other hand, Venezuelan production has collapsed to the levels of the 1940s, Angolan and Algerian output are on the wane, and planned Kuwaiti expansions are mired in politics.

Opec and its allies also face a balancing act. Restore production too quickly in 2021 and they collapse a fragile price recovery. If they act too slowly, they open the door for US shale to once again grab market share.

Among these moving parts—and perhaps motivated by an appetite for faster monetisation of its resources ahead of any oil demand peak that the energy transition may usher in within the next decade—the UAE is looking for a substantial increase as and when post-Covid quotas are re-ordered.

Pushing up capacity
Abu Dhabi’s Supreme Council announced in November an additional 2bn bl of conventional and 22bn bl of unconventional oil resources—the fruit of extensive 3D seismic and appraisal drilling. It was a timely reminder the rest of the group that the UAE, alongside Iraq and Saudi Arabia, has the resources and will to substantially boost production capacity.

Its NOC, Adnoc, is also bullish—hailing having reached a planned 4mn bl/d of capacity and reaffirmed a 5mn bl/d goal by 2030. It says the expansion can be covered by existing fields, so does not require success in current exploration efforts.

Even at 4mn bl/d, the UAE would be carrying more spare capacity, in percentage terms, than any other member, above its current 2.59mn bl/d Opec+ allowance. And it is not shy about its 5mn bl/d goal. It said it would accelerate its schedules during March’s brief price war, at the same time that Saudi Aramco talked of raising its maximum sustainable capacity from 12mn to 13mn bl/d (excluding the kingdom’s 0.25mn bl/d half-share of Neutral Zone production).

The UAE is looking for a substantial increase as and when post-Covid quotas are re-ordered
Iraq is also talking up its expansion plans—the country’s oil minister, Ihsan Abdul Jabbar, saying capacity would not be less than 7mn bl/d by 2027. Abu Dhabi may take comfort that, despite having a greater abundance of low-cost undeveloped resources than any Opec rival, poor fiscal terms for IOCs, a lack of infrastructure and the inability of the cash-strapped Baghdad government to carry its share of costs, mean attaining 7mn bl/d will be a long road.

The UAE benefits substantially from its membership of Opec. The cooperation with Saudi Arabia and, in recent years, Russia within the Opec+ framework, has brought political gains. Nor does it have gas production far outweighing oil that made its neighbour Qatar’s January 2019 Opec exit a logical move.

So, in all likelihood, it does not want to leave the organisation. But, in the Opec world, new production levels are taken, not given—often through a member’s show of strength to force partial concessions by others.

The UAE’s rumblings of discontent are more a jostling for position than a genuine threat to go it alone. But that does not mean that they will 2021’s Opec+ discussions any easier, so the oil market may expect the concerns leading up to December’s meeting to repeat, potentially on a monthly basis.

PETROLEUM ECONOMIST