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UAE, Saudi Arabia Resolve Quota Deadlock

Copyright © 2021 Energy Intelligence Group

The United Arab Emirates (UAE) and Saudi Arabia appear to have resolved a dispute over the UAE's demand for an increase in its Opec-plus production quota. A senior industry source told Energy Intelligence about the agreement, which could pave the way for Opec-plus to supply substantial additional volumes of oil to the market in the coming months. The source said the two countries had reached agreement on an increase of 550,000 barrels per day in the UAE's so-called baseline production to 3.65 million b/d. What happens next will depend on the outcome of an as-yet-unannounced Opec-plus ministerial meeting, which is expected to take place ahead of the Jul. 19 start of the Islamic Eid al-Adha holiday. UAE Statement The proposed baseline change for the UAE would be discussed during the meeting by all members of the producer alliance. However, there is no guarantee that it would be approved by all members. And it could complicate matters by triggering demands from other countries for increases in their own production baselines. Neither the UAE nor Saudi Arabia made any official comment about a possible agreement between the two countries. However, the UAE did release a short statement that denied media reports of a compromise being reached between itself and Opec-plus on future oil supplies. "We would like to stress that no agreement has ... been reached yet with Opec-plus. Deliberations and consultations between concerned parties are ongoing," the statement said. Pandora's Box Concerns about a domino effect if the UAE's production baseline is raised may be well founded. Iraq, for one, would also seek an upward revision in its baseline, one Iraqi source told Energy Intelligence. A meeting of Opec-plus ministers over the next few days would therefore need deft handling to push through an increase for the UAE without destabilizing the alliance and putting its collaborative work on supply management at risk. Some member states -- Nigeria, Kazakhstan and Azerbaijan -- have previously managed to quietly negotiate adjustments to their baselines. But the increases they won were far smaller than the one the UAE appears to have agreed with Riyadh. Until the UAE blocked an agreement earlier this month, Opec-plus had been expected to start raising its combined output in monthly increments of 400,000 b/d from August. Given the lead times needed to schedule cargo deliveries, it may now be too late to stick to that timetable, even if a new ministerial meeting resolves all issues around production baselines. That could mean that the alliance opts to implement larger monthly increases in output, or that it extends their duration into early 2022. Bargaining Position The UAE triggered a collapse of Opec-plus talks earlier this month when it refused to support an extension of the group’s cooperation agreement, which expires in April 2022, unless it was granted a bigger production quota (IOD Jul.2'21). Abu Dhabi argued that recent increases in its production capacity meant that it had been shouldering a disproportionate share of the Opec-plus production cuts, which currently stand at around 5.7 million b/d. UAE Energy Minister Suhail al-Mazrouei asked for the country’s baseline, on which its production quota is calculated, to be raised from 3.1 million b/d to about 3.8 million b/d -- equal to its April 2018 production. Under Wednesday’s compromise between Abu Dhabi and Riyadh, the UAE’s baseline would be revised up to 3.65 million b/d, the senior industry source told Energy Intelligence. Opec-plus had previously been on track to increase its output by 400,000 b/d a month from August, with the subsequent adjustments subject to final approval at monthly ministerial meetings. With weaker oil demand anticipated in the first half of 2022, members would probably have paused the increases in December, resulting in a cumulative increase of 2 million b/d. Order Restored While behind-the-scenes efforts continued, there had been no obvious progress since Opec-plus ministers brought three days of fruitless talks to a halt over a week ago (IOD Jul.5'21). Opec-plus and Opec before it have experienced crises in the past, but the deadlock was the biggest challenge for Opec-plus since it implemented production cuts of 9.7 million b/d in May 2020 after the Covid-19 pandemic hammered oil demand. Positions were far apart as recently as Tuesday of this week, and it had seemed increasingly likely that any resolution would have to wait until next month at the earliest (IOD Jul.12'21). Wednesday's breakthrough is likely to come as a great relief for producers. The clash had prompted fears that it could become a catalyst for the UAE to quit Opec, a group it has belonged to since 1967. Heavy investment in new oil production capacity and a growing view among its leadership that the energy transition requires rapid monetization of reserves have prompted a shift in the UAE's thinking, including some internal questions about the country's long-term future in Opec. The agreement between Abu Dhabi and Riyadh will not remove such concerns, but at the very least, it likely buys Opec-plus and the UAE more time together. Rafiq Latta, Nicosia, Amena Bakr, Dubai, and Simon Martelli, London

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