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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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The OPEC Member That Could Derail The Production Cut Plan

After a week of contentious OPEC+ discussions, in which the UAE played a key role, it appears that the Abu Dhabi National Oil Company (ADNOC) is now aggressively pursuing market share. The UAE was very vocal during the OPEC+ meeting about its resentment of having to carry the burden of COVID-19 demand destruction and the global energy transition. Abu Dhabi’s Crown Prince Mohammed bin Zayed and ADNOC’s CEO Sultan Ahmed Al Jaber have now clearly decided that it is time to reap the rewards of their large-scale oil and gas investments. Today’s announcement made by ADNOC that it has awarded U.S. oil company Occidental an oil and gas exploration concession in its second competitive bidding round is a clear sign that the OPEC member is determined to increase production capacity to 5 million bpd by 2030. Occidental will own 100% of the concession during the exploration phase and will be required to invest around $140 million to explore the 4,212 square kilometer project. This is the second concession given to Occidental by ADNOC. In February 2019, Occidental won Onshore Block 3 in Abu Dhabi’s first competitive bid-round. According to the agreement, ADNOC will be able to own up to 65% of the concessions during their 35-year production phase. If successful, the ADNOC-Occidental joint venture could provide a much-needed boost to the nation’s oil output. Despite a brutal year for oil markets, ADNOC wants to increase its production capacity by 25% by 2030. 

The ADNOC-Occidental news followed last week’s Abu Dhabi Supreme Petroleum Council’s announcement that recoverable unconventional oil reserves have increased by 22 billion barrels, and conventional reserves by 2 billion. It is expected that several other concession agreements for the 2nd bid round will be soon announced. It is unclear which companies are favorites to win these concessions, but some Russian companies are expected to do well. Related: Large Oil Trader Trafigura Books Strongest Trading Year Ever

In a drive to extend its overall revenue base, ADNOC also announced that it has officially launched its second trading arm, ADNOC Global Trading (AGT), which is a joint venture between ADNOC (65%), Eni (20%), and OMV (15%). The new trading venture will be focusing on trading refined products globally. ADNOC, Aramco, and several other national oil companies are now determined to compete with the traditional trading giants VTTI, Vitol etc. As indicated by ADNOC’s CEO Al Jaber, the trading arm will be a cornerstone of ADNOC’s 2030 growth strategy. Increased trading shares and higher overall production are the main cornerstones for success. ADNOC is clearly determined to take a more active role in oil markets, refusing to wait for others to reap the possible rewards in the coming decade.  ADNOC also saw its first derivatives trade earlier this year and is preparing for ICE Futures Abu Dhabi (IFAD), which will launch Murban Futures on March 29, 2021. 

ADNOC’s current strategy, which has clearly moved on since the widely publicized Oil and Gas 4.0 Strategy, is a complete, integrated, future-proof market strategy. Its defense mechanisms against a potential low oil demand – low oil price scenario now include an open and all-out attack on market-share and hydrocarbon revenue stabilization. Without a doubt, Abu Dhabi is now on a collision course with the production cut strategy of OPEC+. It can be expected that new rifts will emerge within the group before the January 4, 2021 agreement comes into play. Abu Dhabi is no longer convinced that it will benefit from complying with OPEC’s demands. It doesn’t necessarily want to leave or reshape the cartel, but a more aggressive market share strategy suggests it is focused on maximizing revenue. By including crude oil and petrochemicals trading options, the national oil company is preparing for long-term changes to all its markets. In the coming months, the full intentions of Abu Dhabi will likely be revealed, but recent developments suggest that it is determined to move forward aggressively.

By Cyril Widdershoven for Oilprice.com

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  • One Second on December 11 2020 said:
    It will be interesting to see who will break ranks first. When global oil demand finally peaks and while there is also coming a lot of oil production online outside of OPEC, the cuts by OPEC+ that would be needed to prop oil prices enough will become excessive, so that there will come a point where it makes more sense for the big oil producers to go all in on production maximisation so that they can compensate for their income loss per barrel with much higher volume. This will drive a lot of other, smaller, higher price oil producer out of business and bring in much higher income over the rest of the oil age. The trick is to be able to survive that incoming price and market share war and it looks like the UAE think that they can pull it off.
  • Mamdouh Salameh on December 11 2020 said:
    That Abu Dhabi National Oil Company (ADNOC) is now aiming to enhance both its production capacity and market share is commendable but it will come with a price.

    To pursue such a long-term strategy, UAE might find it necessary to leave OPEC. However, UAE like Saudi Arabia knows full well that its membership in OPEC enhances its position as a major player in the global oil market economically and strategically. The benefits of membership far outweigh leaving it and going for a market share expansion, a strategy which has been used three times unsuccessfully by Saudi Arabia and found wanting.

    UAE has been for years pursuing successfully a diversification of its economy. It should persevere as this is the only guarantee against the volatility of oil prices.

    UAE decision-makers and also ADNOC’s shouldn’t be influenced by a concerted sinister campaign by a clique of analysts, media, investment banks, militant environmental activists, hydrocarbon divestment campaigners and vested interests aimed to persuade the world of the myth of approaching peak oil demand. There will neither be a post-oil era nor a peak oil demand either throughout the 21st century and probably far beyond.

    Furthermore, the global economy will continue to run on oil and gas well into the future. Oil prices are projected to rise to $60 in the first quarter of 2021 and $70-$80 by the third quarter. The trajectory will take prices to $100 by 2024. This means that UAE’s and other oil-producing countries’ oil revenues will improve very significantly and probably continue to rise.

    Since its founding sixty years ago, OPEC has time and again proven its pivotal role in helping stabilize the global oil market and prices the latest of which was during the COVID-19 pandemic. That speaks volumes about the importance of membership in it and UAE decision-makers should heed this fact before embarking on any strategies which could be construed as contrary to OPEC’s.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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