Why OPEC Is Worried About The UAE

The UAE's largest oil company, ADNOC, this week approved its oil investments for the next five years, to US$122 billion. As ADNOC's five-year plans go, it's not the largest, (2019-2023 5-year plan was $132 billion), but considering what a rough year 2020 has been for oil demand, it's considerable. It may seem counterintuitive to pour substantial investments into oil production and oil refining at a time when OPEC is pulling back the reins on its producers in an attempt to draw down global oil inventories and rebalance the market that was thrown off-kilter with the pandemic and the oil price war waged by Saudi Arabia and Russia. But five years is a long time, and clearly, ADNOC sees oil demand rebounding to the point it would call for an increase in production.  

In fact, ADNOC is planning to increase its oil production capacity from 4 million bpd to 5 million bpd within the next ten years.

And it now has the means to do it. After finding 2 more billion barrels of conventional oil and 22 billion barrels of unconventional oil (bringing its total to 107 billion barrels of recoverable oil), Abu Dhabi is champing at the bit. The generous budget figure, taken in conjunction with last week's undenied rumor that Abu Dhabi was contemplating a withdrawal from the oil cartel, could be another outward expression of the UAE's distaste for the current level of cuts, and a sign to Saudi Arabia--and Russia--that it wants favor in the eyes of OPEC when it comes to hashing out who must cut what starting in January. 

And make no mistake, OPEC cannot afford to lose another member, least of all the UAE, who, before the 24-billion-barrel oil find, was already sitting on the world's sixth-largest oil reserves. 

The increase in oil reserves--and increase in UAE's bargaining power-- couldn't come at a worse time for OPEC, who will next week sit down and hash out a production quota plan for next year. Even some heavyweight analysts are questioning not only the outcome of the meeting as far as production quotas go, but the organization's existence entirely. As OPEC's third-largest producer, the UAE's exit from OPEC would be near catastrophic.

But the UAE has strong ties to Saudi Arabia, and its exit from the group is highly unlikely--but that doesn't mean OPEC isn't sweating bullets at the possibility. 

Angola, too, is struggling under the weight of the OPEC requirements and low oil prices, and this week announced it would sell off a stake in its state-run oil company, Sonangol, as it tries to drum up much-needed cash--and it's possible this could be through an IPO. This will not be an immediate relief but may lessen the country's reliance on oil revenues so that it may avoid a repeat of the current economic conditions in the country that have led many to take to the streets to protest the high cost of living and unemployment. 

The most logical course for OPEC to take in January is to delay its ramp-up in production that it had planned for January for a period of three months. But it's possible there will be a shakeup as to how much each country must cut. 

A Kremlin spokesperson said earlier in the week that it was not having separate talks with Saudi Arabia at the G20 meetings "so far". But Saudi Arabia and Russia have at the last minute requested an informal JMMC meeting for this Saturday to discuss the plans for January. The JMMC panel typically gives recommendations to the full group about oil policies.