UAE Mulls Opec Stance Ahead of Meeting

The United Arab Emirates is understood to be holding internal discussions about its position in Opec-plus as it prepares for the group’s next ministerial meeting on Nov. 30-Dec. 1. At stake are simmering grievances among a number of Opec-plus members with Saudi-Russian domination of the group. An early sign of a more assertive position came Tuesday, when the UAE told Opec-plus’ Joint Ministerial Monitoring Committee (JMMC) that all members should meet their oil cut commitments in full before agreeing to changes or extension of the current pact, according to an Opec delegate (related). At the same time, some UAE officials have also started privately to ask hard questions about whether Opec membership remains in the country's longer-term interest, given a challenged outlook for oil demand and a need to monetize oil resources to avoid stranded assets. The UAE has long been one of the most committed and compliant Opec members. But current Opec production curbs sit awkwardly with Abu Dhabi's plan to expand oil production capacity by some 1 million barrels per day by 2030. Weighing Options Questions surrounding the UAE's participation in Opec are understood to involve a hypothetical examination of options at this stage. It is unclear how deeply the concerns run, and whether they largely reflect dissatisfaction with recent decisions and practices by Opec-plus or positioning for a better deal from Opec next year. The questions essentially involve weighing the pros and cons of membership, Energy Intelligence understands. A Saudi Arabian study in 2018 by the King Abdullah Petroleum Studies and Research Center (Kapsarc) caused a stir when the think tank asked similar questions, looking at short- and medium-term oil market scenarios if Opec were disbanded. The study was neither directed by the state nor reflective of official Saudi thinking, but an exercise of thinking "outside the box," Kapsarc President Adam Sieminski told Energy Intelligence at the time (IOD Nov.13'18). As in Saudi Arabia, the asking of such questions does not point toward an actual decision. There remain differences within the UAE on the benefits of Opec. And any policy decision would ultimately be taken by the UAE's powerful de facto ruler, Abu Dhabi Crown Prince Mohammed bin Zayed. The UAE has started carving out its own path in the Mideast Gulf in response to changing geopolitical conditions -- most notably by normalizing ties with Israel. But politically, the UAE has very good reasons to stay in Opec. Any departure would be viewed as highly controversial and damaging to the group, and the political fallout would undermine its close ties with key ally Saudi Arabia at a time when regional rivalry with Turkey and Iran is deepening. Opec membership also brings members a degree of political clout on the international stage. Under Pressure Energy Intelligence understands that some in the UAE believe current Opec-plus practices serve to benefit competitors outside the group, such as US shale producers. A version of this argument was previously made by Russian officials who claimed that Opec-plus cuts -- and resulting higher oil prices -- were helping US shale producers expand. In an out-of-character move, the usually compliant UAE pumped above its Opec quota this summer, citing a need to produce more associated gas to meet summer peak power demand (IOD Sep.1'20). Industry sources and traders said that Adnoc also wanted to preserve volumes for some of its key customers in Asia. UAE Energy Minister Suhail al-Mazrouei visited Riyadh in September for talks with his Saudi counterpart Prince Abdulaziz bin Salman, who has been the key force behind the drive to secure 100% compliance from all Opec-plus producers. The two appeared sitting next to each other at the virtual JMMC meeting that month (IOD Sep.17'20). The UAE promised to compensate for its overproduction and produced below quota in September and October, in a move widely considered to have been prompted by Saudi pressure. Intentionally or not, the UAE minister skipped the following JMMC meeting in October to go hunting with officials in the UAE desert, according to industry sources. In general, the Saudi-led pressure for strict adherence to the pact's deep cuts has led to some "compliance fatigue" in the group, some Opec officials say (related). Some delegates have also quietly criticized Saudi Arabia and Russia for their explosive fallout earlier this year that led to a brief oil price war. Facing Big Questions The world's low-carbon energy transition is acting as an undercurrent. The transition raises a fundamental question for all Opec members: Should low-cost producers maximize production and fend off higher-cost competitors, or cooperate in production restraint to prop up prices for government revenue? Doubts about future oil demand mean old assumptions of saving reserves for future generations are also starting to be questioned. Abu Dhabi's low-cost, lower-carbon crude production in theory puts it in a stronger position versus competitors in a potential world of flat or declining oil demand. Its target of raising capacity from about 4 million b/d to 5 million b/d by 2030 suggests that it intends to capture market share even in a demand-constrained future. Abu Dhabi's leadership also seems willing to push fields harder at the price of shorter plateaus, in a shift from conservative long-term management (EIP Nov.22’18). Yet the UAE's current production quota under the Opec-plus pact, of 2.59 million b/d, leaves roughly 1.4 million b/d of capacity shut in. This means the UAE is idling a larger proportion of its capacity than Saudi Arabia or Russia. It also lacks Saudi Arabia's history of maintaining a large capacity cushion as standard policy. In addition, the UAE tends to be more proactive and creative than other Opec members in its approach toward new economic conditions, and has been taking the energy transition seriously for longer than most. Some in the UAE believe that creating a stronger, more efficient oil industry would prepare producers better for the future and wonder if broad agreements under the Opec-plus framework simply serve to delay the pain. This contrasts with a Saudi belief that agreements involving a broad group of producers are essential to manage markets and preserve the role of oil in the future. Staff reports