OPEC is no stranger to squabbles, but at a time when it should be reveling in higher oil prices, it is embroiled in its latest crisis, fueled by core member UAE's desire for a higher output target, with plans to boost production capacity and turn its flagship Murban crude into an international benchmark.
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With the UAE alone standing in the way of a deal between OPEC and its allies to increase their collective oil output gradually in the coming months and extend their supply management pact through the end of 2022, according to delegates, its ties to the coalition may remain frayed for the foreseeable future.
The UAE's baseline under the current pact, determined by its October 2018 production level, is 3.168 million b/d, but the country now claims a capacity closer to 4 million b/d.
This is taking place at a time when key producer Abu Dhabi National Oil Co is spending $122 billion up to 2025 on growth projects including a 25% ramp up in its production capacity to 5 million b/d by 2030.
"October 2018 is a long time ago and the UAE's reference volume is at odds with its current capacity," said Ben Cahill, senior fellow, Energy Security and Climate Change Program, at the US-based Center for Strategic and International Studies. "Their plans to go to 5 million b/d capacity are advancing, and they're not doing this just to build spare capacity. This is not like the maximum sustainable capacity in Saudi Arabia."
As a self-appointed gatekeeper of oil markets, Saudi Arabia has tended to hold the most spare capacity offline among major producers, to provide a cushion for prices and flows in case of disruption to global trade.
As for the UAE, ADNOC is rushing to develop its oil and gas reserves before they become stranded assets amid talk of peak demand scenarios.
"There is clearly a rush to make the most of this next and perhaps last oil boom," said Karen Young, a senior fellow and founding director of the Program on Economics and Energy at the Middle East Institute. "I think for the Gulf producers, the competition now becomes more of a customer relationship game, and also, different pressures from investors to accelerate a return."
ADNOC also is not going it alone in its oil and gas ambitions.
To hike its oil and gas production, ADNOC has partnered with the likes of ExxonMobil, TotalEnergies and other international oil companies to help finance and develop fields at a time when these western majors are facing shareholder pressure to limit their exposure and investments in fossil fuels.
"This has been a building strategy since the spring of 2020, as the UAE's ability to expand production is tied to new investments in its capabilities and in new partnerships in some of its ADNOC assets," Young said. "The profit calculation has shifted and market share is more of a priority. More quota extensions through 2022 would affect their flexibility, especially as the pressure builds to boost output when prices are on an upward curve."
The OPEC+ talks' impasse helped push oil prices higher, with S&P Global Platts assessing Dated Brent at $77.62/b on July 2, its highest since October 2018.
The deal under consideration would call for the 23-country OPEC+ alliance to gradually raise production by 400,000 b/d each month to meet growing demand, subject to monthly reviews, and continue cooperating on supply management beyond the current deal's April expiry to the end of 2022.
"The UAE believes that the market needs an increase in production and supports an increase from August," the energy ministry said in a July 4 statement posted on state-run WAM news agency. However, extending the current agreement would "prolong the UAE's unfair reference production baseline until December 2022," it added.
ADNOC's oil ambitions didn't always jar with Saudi Arabia, which as co-leader of OPEC+ with Russia has opposed the UAE's request, according to sources involved in the talks.
At the height of an oil price war between Saudi Arabia and Russia in March 2020 when the two countries' disagreement over extension of output cuts threatened to tear apart the OPEC+ coalition, both ADNOC and Saudi Aramco turned on the taps and slashed oil prices in April 2020, prompting Russia to come back to the negotiating table and sign up to the current agreement.
However, it only took a few months for the UAE to fall afoul of Saudi Arabia's determination to keep quota compliance in check. The UAE breached its August quota by 103,000 b/d, a rare instance of non-compliance from a country that only in June had joined Saudi Arabia and Kuwait in implementing voluntary extra cuts to help balance the oil market.
But the cracks in UAE's OPEC+ relationship were brought to the fore in November, when news circulated about the country's potential exit from OPEC just a few days before Abu Dhabi's Supreme Petroleum Council, the former highest energy policy-making body for the emirate, approved the capex plan and announced the discovery of new oil reserves.
Besides the capacity boost, ADNOC has another ambition it wants to fulfill, turning its flagship Murban crude, responsible for nearly half of its production, into an international benchmark that can stand side by side with Brent and WTI.
On March 29, the Intercontinental Exchange, ADNOC and nine other partners launched the Murban futures contract on ICE Futures Abu Dhabi, setting into motion a process that requires more barrels of the grade for its success.
"The new Murban futures contract just adds to the pressure," said Cahill. "Market confidence in the new benchmark depends on liquidity and reliable volumes, and with a national oil company behind the Murban contract, there are already doubts about this."