As expected, OPEC leaders Saudi Arabia and UAE have reached a so-called solution to the current export quota conflict. For two weeks, the global oil market was shocked by the strong position taken by Abu Dhabi’s power brokers, which demanded higher baseline production quota. OPEC sources now have stated that both countries have reached a compromise on production.
Even that the first reactions to the so-called agreement which includes a higher base line production level for the UAE are positive, the deal in reality is nothing more than a band aid. Officials in many oil importing nations are hoping that the agreement will help to cool soaring prices.
Reuters reports indicate that Riyadh has agreed to Abu Dhabi's request to have its baseline production level lifted to 3.65 million barrels per day (bpd) when the current pact expires in April 2022, according to the source. The current baseline for the UAE was around 3.17 million bpd.
With this gesture, Riyadh looks to keep the current OPEC+ agreement in place, while giving room to Abu Dhabi in order to claim a potential win-win situation. However, the higher production baseline will only be implemented in April 2022, and is a long way from the requested 3.8 million bpd at present. Knowing both sides, the first reactions will be positive, indicating a renewal of the Riyadh-Abu Dhabi-Moscow tandem, showing the market that OPEC is not heading towards a possible breakdown or implosion. It also shows that analysts that were expecting Abu Dhabi to leave OPEC were too quick to draw conclusions. Still, the unease about production quota may persist in the UAE, and the conflict could flare up again at the next OPEC+ meeting.
The high-profile clash between Saudi Crown Prince Mohammed bin Salman and Abu Dhabi Crown Prince Mohammed bin Zayed is not over, instead, it’s just been pushed aside for the moment being. For both parties, a more volatile oil (and gas) market is not the goal, as both pursue a stable situation where prices stay at a level that is acceptable for both producers and consumers.
OPEC also wants to continue the overall strong cooperation of the last years, as non-OPEC, especially Russia and FSU countries are starting to become unhappy about production and export levels. Russian companies are for sure willing to up the ante, bringing additional volumes to the market to reap the gains at present. Some other OPEC producers, including Iraq are also unhappy about missing out on higher revenues or market share due to OPEC policies.
Battling COVID-19’s economic impact, high unemployment, and the ongoing threat of energy-transition polices in the EU and OECD, a growing amount of countries want accelerate the monetization of their hydrocarbon resources. The UAE-Saudi spat is only a sign on the wall of future problems within the cartel. Whatever analysts were stating, MBS and MBZ are maybe competing on lots of issues, but oil and gas are still a binding factor for decision making and cooperation. Saudi Arabia also knows that Abu Dhabi’s continues to invest in increasing its production capacity, which it aims to boost to around 5 million bpd by 2030.
Related: Oil Stabilizes After Saudi-UAE Compromise Removes Major Uncertainty
The increases in production capacity are likely to become a point of contention within OPEC during the next couple of years. Today, ADNOC Offshore has awarded drilling contracts to Schlumberger, ADNOC Drilling and Halliburton, targeting integrated riggless services across six of ADNOC Offshore's artificial islands in the Upper Zakum and Satah Al Razboot fields. ADNOC’s investments until 2025 are already set at $122 billion on growth projects, including the ramp-up in oil production capacity to 5 million bpd by 2030 from around 4 million bpd at present.
On the sidelines, OPEC+ is also keeping an eye on U.S. shale developments. Until now, higher oil prices have not significantly boosted shale oil production, but this could change if prices go even higher. Oil prices of $75-80 are high enough for most drillers to commercially produce their reserves.
The last thing OPEC wants is a new wave of U.S. shale oil onto the market. The current market environment, even with a more belligerent Abu Dhabi, is too positive for Arab and Russian producers to destroy. External factors such as the COVID-19 Delta variant and a slowdown in Chinese oil imports is also being assessed. The European Green Deal presented today is still not seen as a major deal breaker, looking at the internal weakness of the European Union and lack of speed of implementation in general. With the global economic recovery picking up pace, and with oil demand on the rise, there is room for more production, but new conflicts within OPEC, and diverging production strategies are on the horizon.
By Cyril Widdershoven for Oilprice.com
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However, the concession given to UAE will open the door for more trouble inside OPEC+ in the future. Iraq whose production capacity is 50% larger than UAE’s will demand a lifting of its baseline from 3.75 mbd currently to 5 mbd followed by similar demands from Iran, Libya, Nigeria and Kuwait.
There could be more to the public spat between two close allies than meets the eye. While Saudi Arabia and UAE have agreed on a number of issues over the years, their national interests have also increasingly diverged. This begs the question as to whether the public spat has less to do with OPEC+’s production plans and far more to do with the UAE challenging the pre-eminence of Saudi Arabia in the Gulf region.
The UAE has of recent times taken few decisions which give the impression of challenging Saudi Arabia’s leadership like withdrawing most of its forces from Yemen in 2019, normalizing its relations with Israel, reaching a deal with Israel to ship part of its oil exports to European markets via the Israeli Eilat-Ashkelon oil pipeline (EAP) connecting the Gulf of Aqaba with the Mediterranean and also trying to establish itself as the United States’ closest ally in the Gulf’ by joining the US-Israel-India bloc confronting the China-Russia-Iran bloc.
And while the UAE joined Saudi Arabia, Bahrain and Egypt in imposing a boycott of Qatar in 2017, when an agreement to end the boycott was announced by Saudi Arabia in January, the UAE was disinclined to bury the hatchet.
To show its pleasure without escalating the spat further, Saudi Arabia amended on the fifth of July its rules on imports from other Gulf Cooperation Council (GCC) countries to exclude goods made in free zones or using Israeli input from preferential tariff concessions in an apparent challenge to the UAE’s status as the region’s trade and business hub.
Free zones, a major driver of the UAE’s economy, are areas in which foreign companies can operate under light regulation, and where foreign investors are allowed to take 100% ownership in companies.
The UAE and Israel signed a tax treaty last May as both sides work to spur on business development after normalising relations.
Still, I don’t think Saudi Arabia and UAE want the situation to escalate as both benefit immensely from cooperation in terms of trade and oil policies and prices.
A proposed long-term solution exists in what I call a division of interests and influence whereby the UAE accepts unreservedly the pre-eminent position of Saudi Arabia in the Gulf region in return for a Saudi acknowledgement of UAE’s role as the business hub of the region and the trade link between the Asia-Pacific and the Gulf regions.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London