From The Center for Strategic and International Studies (CSIS)
Media www.rajawalisiber.com – For the past five years, Crown Prince Mohammed bin Zayed al-Nahyan’s modernization agenda has reshaped Abu Dhabi’s oil and gas policy. Mohammed bin Zayed, the de facto ruler of Abu Dhabi since the 2014 stroke suffered by his brother Sheikh Khalifa bin Zayed, cemented his control of the oil and gas sector in 2016 by shaking up the Supreme Petroleum Council. Replacing an older cohort of conservative technocrats and advisers enabled a fresh approach to energy policy.
Energy Transition Reshapes Strategy
As the world’s seventh-largest holder of proven reserves, the United Arab Emirates (UAE) has traditionally taken a cautious approach to managing its oil resources, but several factors have changed its strategy. First, the shale revolution and explosive growth of oil production in the United States and elsewhere over the past decade led to surplus production and lower prices. The non-OPEC (Organization of the Petroleum Exporting Countries) production boom created a new flexibility and responsiveness in the global oil sector that undercut OPEC’s influence. The second factor was an accelerating global energy transition. UAE energy officials have not explicitly stated that concerns over peak oil demand convinced them to ramp up production. But the major resource-holding states can no longer count on robust oil demand for decades to come.
In this context, the target of producing 5 million b/d by 2030 ensures that major resources are developed in time to enjoy several decades of production and brings forward oil revenue to help fund long-term economic diversification strategies. ADNOC (along with the other Gulf national oil companies) is also focusing on reducing its operational emissions and its carbon footprint as it ramps up production, emphasizing its “low-carbon oil” and its interest in carbon capture and storage.
Production Ramp and Implications for OPEC
Abu Dhabi’s rising production capacity is at odds with its OPEC quota. The UAE’s reference production volume in the OPEC-plus deal is 3.168 million b/d (based on October 2018 volumes), but after deep OPEC production cuts, its quota in the second half of 2020 stood at just 2.59 million b/d. The UAE grew increasingly frustrated last year at the gap between this number and its production capacity (around 4 million b/d at the time). Despite an easing of OPEC production cuts in the past few months, the UAE’s quota for May stands at just 2.66 million b/d.
On March 29, Abu Dhabi took a consequential step that should reinforce its desire to raise production. ADNOC launched a new futures contract for its flagship Murban crude, which accounts for nearly half of its production. The futures contract, traded on an Abu Dhabi-based system operated by the Intercontinental Exchange (ICE), will establish a forward curve for Murban. Buyers will take delivery at the port of Fujairah, and Abu Dhabi is investing in 42 million barrels of underground oil storage capacity there to help ensure sufficient storage to support futures trading.
The ICE Futures Abu Dhabi (IFAD) contract allows consumers to trade a large Middle Eastern benchmark crude without restrictions, unlike other Gulf national oil companies. As a light, medium sour crude that is familiar to Asian buyers, Murban crude could become one of the world’s most important benchmarks. If consumers can lock in volumes and hedge prices through the IFAD contract, Murban could potentially undercut other Gulf producers relying on rigid nominations and term contracts at official sales prices. ADNOC hopes it will become the leading benchmark for Asia-bound crude oil.
In theory, Abu Dhabi has the right pieces in place. But unlike other benchmark crudes such as West Texas Intermediate and Brent, Murban is currently marketed by a state-owned company (ADNOC partners market their own equity volumes of Murban) that is subject to OPEC quota restrictions. There is skepticism that Abu Dhabi will truly leave Murban to market forces.
As Abu Dhabi looks ahead to its 5 million b/d target, it will become increasingly important for the UAE to push for a more realistic OPEC quota. This will create significant challenges for OPEC. A new target for the UAE would probably lead Iraq and other states to demand higher quotas as well, and each concession would jeopardize OPEC cooperation and production discipline.
While it seems unlikely that the UAE will leave OPEC, the country will follow its national interests. If it believes collective cuts are hindering rather than advancing its goals, it is not inconceivable that the UAE will be prepared to walk away. At this stage it seems more likely that OPEC will pull off a compromise to keep the UAE onside. But as time goes on, Abu Dhabi’s plans are becoming more out of step with production restraint.
This commentary was adapted from a forthcoming paper to be published by the Arab Gulf States Institute in Washington.
Ben Cahill is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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