UAE
Minister of Energy and Infrastructure Suhail Al Mazrouei [white thobe,
centre right] with OPEC Secretary General Haitham al-Ghais [white thobe,
centre left] and the OPEC delegation at the Abu Dhabi International
Petroleum Exhibition and Conference, November 1, 2022 [photo credit:
@OPECSecretariat]
Jim in your paper you note that the UAE has “the resource base
and sophisticated production and diplomatic skills that have made it a
central player” in OPEC. But that central player is feeling aggrieved.
How instrumental in that feeling of grievance has been the arrival of
Russia at the OPEC table in 2016?
It's been a big part of that. The expansion of OPEC+ in 2016 was a
pretty momentous event bringing Russia and some other countries into the
fold. All of that was really brought to you by US shale, this huge
expansion in oil production in the United States which basically pushed
Saudi Arabia and Russia, these former adversaries, to start making
common cause in the oil markets. And it also coincided with a turn back
towards resource nationalism in OPEC. So this long dormant force seemed
to re-emerge and we often hear this referred to as the ‘Saudi First
Policy’ but I think resource nationalism is a better way to describe it.
We're seeing more of a focus on maximising prices and revenues for
the member states, greater willingness to cut and to impose tough
quotas, an activist oil policy. You hear Prince Abdulaziz bin Salman,
the Saudi oil minister talking about pre-empting when he sees a weakness
in the markets and Russia is a part of this. Russia is not necessarily a
price hawk itself, i.e. one of the countries that really wants higher
prices. Traditionally Russia has been willing to accept lower prices.
The Russians have the advantage of a free-floating currency, the ruble,
it's not pegged to the dollar, like many other OPEC countries, so they
can accomplish the same thing as a price hike through monetary policy by
devaluating the ruble. And their industry costs are in rubles. So
they're pretty insulated or they are more insulated than some of the
other countries in OPEC.
But since the invasion of Ukraine, Russia really does need a higher
price. They're in the same boat now, and OPEC+, at the same time, we're
seeing it taking a more anti-US cast, this sort of ‘hey, let's punish
the Biden administration with higher oil prices’ and ‘let's stick it to
Biden at election time.’ That's new, the US used to have a greater
influence within OPEC through Riyadh, through the Saudis. Also there are
more poor countries in the organisation now. And those countries are
also more price hawkish. You’ve got new members, or some that have come
back, countries like Equatorial Guinea, Gabon, the Congo, tending to
make common cause with countries like Algeria, Angola and Nigeria. The
UAE has by far the wealthiest and most diversified economy, it's just a
much different country than most of the rest of the membership. It can
afford to invest upstream and push its diversification faster. And most
of OPEC just does not have the cash to do that. So the UAE sees itself
in a different light, as a peer country to the OECD more than as a peer
of these petro states that are seeking price maximisation.
What about the US-Emirati relations in this game of oil chess?
How is that faring? Because we know there are tensions between the
Saudis and the Americans, particularly in the Biden administration, but
where are the Emiratis sitting in all of that?
The UAE has come a long way in Washington. It is a very savvy player
in DC. It's more interested in partnering with technology ventures in
the US and the rest of the OECD and getting foreign direct investments
than picking pockets through the oil price. So I think there's more of a
wish within the UAE to stay on the good side of Washington, probably
more than in what we're seeing in Saudi Arabia. And I think the Saudis
really angered Washington with that 2 million barrel a day cut via OPEC+
back in October at election time. The UAE has been at pains to say that
it was opposed to that cut and it really has been trying to distance
itself from the Saudis. We've seen a stream of leaks that have blamed
the Saudis and talked about UAE attempts to talk MbS down from making
those drastic cuts. So we argue in the paper that for the UAE, by
departing this increasingly anti-US OPEC, would help it emerge from this
more confrontational road that the cartel is on, this ‘Saudi First’
road with Russia now in a prominent role. Leaving would allow the UAE to
chase its own interests rather than partnering with these more resource
nationalist countries and these underdeveloped countries that are more
concerned with basic revenue maximisation.
How annoyed then are the Emiratis with the Saudis, particularly in light of the recent OPEC meetings?
They have been marginalised and they've been complaining about it.
They've been pretty vocal through various press leaks and rumours we've
heard and they have a number of pretty reasonable complaints about the
size of their quotas and what they're sacrificing.
I think the outcome of this June 4 OPEC meeting really reflected that
the UAE has legitimate grievances, and that they weren't being
addressed through OPEC and it had other options. The UAE has been
complaining over the past few years about this really unfair burden that
keeps getting more unfair as upstream investment continues in the UAE.
So there have been different hints in the press and among diplomats, the
chatter that we hear, that it was thinking about quitting or on the
verge of quitting. In the OPEC meeting on June 4, the UAE was the only
country that really emerged in better shape than when it went in, it got
an extra 200,000 barrels a day of oil production, added to its baseline
production, which allows it basically to raise production from about
2.9 million barrels a day to close to 3.2 million barrels a day.
But they would like to be pumping more, wouldn't they?
They would for sure. They would like to go all the way up to four
million bpd. But I think they're mollified. We see this as a
recognition of the UAE option, that it's been pretty vocal about, to
quit OPEC. And there’s an increasingly strong rationale. It’s just
becoming plain that the UAE could be making a lot more money and going
its own way with little trouble and that it doesn't really need to be in
OPEC anymore.
Let’s look at that because you cite some big pluses for the
Emiratis were they to pull out. The biggest for me was this eye watering
amount of revenue that the UAE could cash in on, somewhere in the
neighbourhood of $50 to 70 billion per annum. Can you walk us through
that scenario?
The national oil company ADNOC, the Abu Dhabi National Oil Company,
has been investing big time in the past few years upstream in more oil
production and more gas production, about $150 billion over five years.
Again, most of the OPEC countries just don't have this kind of
wherewithal. And so this is a major campaign. They've been trumpeting
publicly that they didn't want to raise their production capacity from
where it was a couple of years ago, 3 million barrels a day, they want
to bring that all the way up to 5 million bpd by 2027. They're at about
4 million barrels a day of capacity right now. But the reference
baseline for their quota within OPEC was, until really recently, based
on that old 3 million barrels a day capacity. So the UAE’s quota was
being imposed on it from this unrealistically low base. And the base
never got revised to include the expanded production capacity that ADNOC
had been adding. That meant the UAE was sacrificing more than a quarter
of its production, a lot more than anybody else in percentage terms
within OPEC. It had been restricted to 2.9 million barrels a day. So
about 1.1 million barrels a day of oil production capacity was sitting
idle offline. Now, as I mentioned, recently that baseline has been
creeping up. So now as the baseline is catching up to reality, I think
some of these grievances are starting to be addressed. They can now
produce 3.2 million bpd, which is a pretty significant concession when
everybody else is being asked to sacrifice. And that figure that we
mentioned in the paper $US50 to 70 billion of additional revenue comes
from looking at what might happen if ADNOC finished its investment
campaign and then cranks the taps all the way up to 5 million barrels a
day from the previous 2.9 million and at prevailing oil prices that's
what it works out to. It's a lot of cash they're leaving on the table by
remaining in OPEC. But then they still need a couple more years to get
to 5 million barrels a day.
Yes, a lot of cash and a lot of temptation there. What are some
of the other wins? Is there a degree of flexibility, for example, in
getting out of the cartel?
We definitely think there's more flexibility. Being outside OPEC
would give the UAE a lot more freedom of action not only in oil
production and exports but also other longer term benefits. But in the
short term they wouldn’t need to adhere to quotas anymore, they could
maximise their production, they could basically free ride on the rest of
OPEC and the sacrifices that OPEC makes, kind of like what US shale
does. This is not a nice thing to do to your fellow petro states but it
would be appreciated in some quarters. US motorists are one group that
would sure appreciate that, and Washington; any adherents to the
internal combustion engine, in trying to keep that technology alive
versus electric vehicles, I'm sure would appreciate it. More
importantly, it would increase the amount of rents flowing to the state.
But longer term the UAE wants to basically produce more now to invest
in diversification of its economy, to protect itself from climate
action and the energy transition. So, it's basically shifting its
depletion horizon to fit a shorter time frame. They've got this big net
zero by 2050 plan, that's going to be expensive. I'm sure they're going
to flesh that out during the COP this fall in Dubai. And you've got a
very emissions intensive economy in the UAE. So it's going to be a
really heavy lift. They also want to minimise their stranded resources.
Oil is valuable now, is it always going to be that way? Nobody knows. So
yes I think leaving gives them more freedom of diplomatic manoeuvre,
freedom of manoeuvre around climate action, the energy transition, the
greater ability to push through some of these reforms, some improved
ties with Washington, or at least some parts of Washington. Because the
cartel and Saudi Arabia and Russia, in some ways, seem to be aiming to
help the Republican Party at election time.
You've taken us through the upsides for leaving. What's the downside?
The UAE has been complaining about their lack of influence within
OPEC, it's not going to increase if they leave the cartel. They're going
to lose influence, lose it all if they leave. And they could be
punished for it. We could see a price war. That's usually the typical
discipline tactic within OPEC but that probably wouldn't be so effective
for the UAE. It has a wealthy, diversified economy and could survive a
price war better than anybody. But they could see other types of
retaliation, like we saw with Qatar with the blockade, maybe some closed
borders or some trade issues or lack of airspace for their airlines,
which are a big part of the economy; maybe visa requirements for travel
with neighbouring states. I think the big thing it could really damage
is relations with Saudi Arabia, a really important regional partner.
You've got MbS who's likely to be in power for decades and this could
really damage relations with him.
Okay Jim the big question. The Emiratis, do they go or do they stay?
I think we see the threat of leaving as at a minimum a
bargaining chip to a better quota. And that seems to have worked
already. They've gotten a pretty decent sized concession. But they've
got a lot more investment upstream. They've got big ambitions, they've
got this big diversification and the net zero goal they are trying to
push through. In order to bring all of that new oil on line and reach
those goals, I think OPEC is constraining the UAE. It's holding it back
and I think it may have to leave OPEC to get to where it wants to go.