The recent doom and gloom between UAE and Saudi Arabia appears to be lifting as both sides soften – there is nothing more sobering than demand destruction looming on the horizon – but unless the hardwired distance between Riyadh and Abu Dhabi is bridged, further OPEC+ negotiations could be derailed and a period of uncapped price volatility ushered in.
This is the second time the UAE has made clear its displeasure with the rudiments of the April 2020 production agreement – the first time was following the November OPEC meeting – and it is hard to imagine either Emiratis or Saudis backing down from their fundamental positions at the next OPEC Joint Ministerial Monitoring Committee (JMMC) and set of ministerial meetings.
Unless its core grievances are alleviated and the country’s strong sense of injustice addressed, Abu Dhabi is facing a stark choice – either serve its immediate national interest and walk away from OPEC or succumb to Saudi Arabia’s leadership and lose face. The UAE leadership is unlikely to take the second option and will fight hard behind the scenes to secure a new baseline, which it deems fairer.
Production capacity in dispute
The basis of the disagreement is well-known. The UAE is willing to increase production in accordance with OPEC’s plan of 2mbd increase between August and December in monthly increments of 400kbd, but it is unwilling to sign up to an agreement which extends cuts from April to December 2022 unless its baseline is revised from 3.2mbd to 3.8mbd, reflecting its increased production capacity.
The UAE continues to argue it is simply unfair to anchor its quota to an out-of-date baseline which no longer reflects productive capacity, and therefore penalizes the Emirates while rewarding more profligate producers. It has pushed strongly for the two issues – timely production increases and extension of the agreement – to be decoupled to meet increasing demand now and support longer-term market management.
Kuwait, Russia, Kazakhstan, and Mexico were reportedly open to this suggestion but all shied away from openly opposing Saudi Arabia’s position which has remained steadfast in linking them. Many analysts attribute this standoff to broad and intensifying economic competition between the UAE and Saudi Arabia – and the imposing personalities of Abu Dhabi Crown Prince Mohammed bin Zayed and Saudi crown prince Mohammed bin Salman.
Attributing the OPEC spat to a growing rift between these erstwhile allies is possibly true, but there are also arguments to suggest otherwise. Certainly this grievance is discrete and reflects their different positions relative to the future of hydrocarbons and the pace and depth of economic transition in each country – meaning both positions are rational, serve national interests, and are somewhat distinct from other stresses and strains in the relationship.
Saudi Arabia’s position argues for providing forward-looking stability and guidance to the markets, especially in anticipation of Iran’s return and continued uncertainty over COVID-19. The kingdom is pushing for a domestic rebound from the effects of COVID-19 and fast-tracking the Vision 2030’s mega-projects given the drag on FDI – and that requires sustained higher oil prices.
The success of Vision 2030 and the country’s economic transition remains dependent upon the health of the kingdom’s oil industry and will be for a long time to come. Saudi energy minister Prince Abdulaziz bin Salman (AbS) has made it clear the kingdom will max-out its hydrocarbon endowment to the full – lifting production to 13.5mbd – and so remain ‘last man standing’ among oil producers, as Baker Institute for Public Policy’s Jim Krane puts it.
At the same time, Riyadh plans to manage the market and corral all OPEC and non-OPEC members so that not only does it provide stability but also props up prices – useful given that Iranian volumes look set to return should the US return to the JCPOA and Iran exercise compliance. AbS is playing the long game.
Market share of a declining industry
The Emiratis are much more advanced in their efforts to diversify away from oil and see an opportunity to maximise their endowment in the short-term – knowing full well that as the sun begins to set on the oil industry the Saudis, as the lowest cost producers, will readily soak up market share including Abu Dhabi’s.
o, the UAE is in a hurry to ensure it is not burdened with a stranded asset and want to make hay while the sun shines. It has already invested heavily in boosting productive capacity – with a stated goal of 5mbd by 2030 – and wants to get that to market quickly.
Clearly the UAE is not averse to market management having been part of a trio of countries – with Saudi Arabia and Kuwait – called upon many times to provide spare capacity, and the UAE has rarely been quota non-compliant.
But energy minister Suhail Al Mazrouei believes the UAE has curtailed production much more than other OPEC members under the terms of April 2020 agreement and is no longer prepared to carry the burden. If its new Murban grade takes off, the UAE may need to exit OPEC or be prepared justify its continued membership of a club that essentially manages oil prices.
Dr Neil Quilliam, Associate Fellow, Middle East and North Africa Programme.