The Real Reason OPEC Talks Broke Down

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Yves here. Given the often Byzantine nature of Middle Eastern politics, it’s hard to keep on top of the changes in alliances and enmities, let alone filtering which ones really matter. This post contends that a divergence of interests between the UAE and Saudi Arabia is the reason the recent OPEC negotiations failed. While it argues that the two parties will kiss and make up, it;s hard to see how these fundamental differences, and the resulting frictions, go away.

By Dr. Cyril Widdershoven, who holds several advisory positions with international think tanks in the Middle East and energy sectors in the Netherlands, the United Kingdom, and the United States. He held several senior publishing positions in leading energy publications such as Afroil, Middle East Oil and Gas, and North Africa Oil and Gas Magazine Cairo, and he continues to oversee the Mediterranean Energy Political Risk Consultancy. Dr. Widdershoven worked on M&A operations in Egypt, Libya, Sudan, and Iran, he studied the pipeline operations in Libya, Algeria, Nigeria and Turkey, and he assessed risk for institutional investors and banks in Libya, Egypt, Saudi Arabia, Oman and Iraq, all while advising the Dutch government and international organizations on related issues. Originally published at OilPrice

Major cracks appear to be forming in the OPEC+ alliance. After several years of unprecedented cooperation between OPEC members and non-OPEC producers, the growing regional economic and power conflict between Saudi Arabia and Abu Dhabi is threatening the arrangement.

While much of the analysis of the recent OPEC+ disagreement has focused on why the UAE refused to commit to the new export plan, there are other factors that have been largely overlooked. A closer look at the ongoing investments by the UAE in its upstream and downstream industry is one such example. Abu Dhabi’s national oil company ADNOC has put in place a production capacity increase that calls for a total reassessment of the underlying OPEC production baselines, which were agreed in 2018. At present Abu Dhabi is allowed to produce around 3.2 million bpd, based on the 2018 baseline, but has a capacity now of more than 3.8-4 million bpd. Looking at ongoing new projects and planned investments, production of more than 4 million bpd is possible in the coming years.

The aggressive investment strategy of ADNOC means that the UAE is plenty of incentives to increase production. An extended and controlled OPEC+ export quota system would not only impact the UAE’s revenue streams but could even turn some of its multi-billion dollar investments into stranded assets in the long term.

Recently, Crown Prince Mohammed bin Zayed has been pushing an independent geopolitical and economic strategy for the UAE. After years of cooperating with Saudi Arabia on everything from OPEC policy to regional geopolitical crises, the two powers are now beginning to diverge. Former cooperation on issues such as the Yemen war and the Qatar blockade has weakened drastically.

At the same time, Mohammed bin Salman has been aggressively pushing Saudi Arabia’s regional power. Saudi Arabia’s Vision 2030, the Kingdom’s economic diversification plan, has driven the crown prince to take aim on other GCC countries as he attempts to force international investors and companies to set up shop in Saudi Arabia rather than Dubai or Doha. This transformation in the relationship between Saudi Arabia and the UAE certainly played a part in the recent OPEC+ conflict.

Riyadh is also targeting the logistics industry, an industry that the UAE has long dominated, establishing itself as a regional hub for logistics and connecting EU-Asian commodity and trade flows. In the last couple of months, Saudi Arabia has become increasingly aggressive in this space. While there has no been a direct conflict in this area, it is generally assumed that there is not enough space in the region for two supra-regional maritime logistic hubs. MBZ and Dubai are clearly unimpressed with Saudi Arabia’s attempts to muscle in on the industry.

Another area of discord between the two nations is the UAE’s increased cooperation with Israel.  UAE-Israel cooperation in logistics, technology, defense, and agriculture, is a possible threat to Saudi Arabia’s Vision 2030 projects. By bringing Israeli tech and know-how to Abu Dhabi and Dubai, the UAE projects will compete with the Saudi Giga-Projects, such as NEOM, for international investment. In response to these moves by the UEA, Riyadh has blocked technology and products exports by the UAE that are linked to Israel.

This economic and geopolitical confrontation is normal in the Arab world and is unlikely to cause a major rift between the two nations. The current cracks will likely be mended when one of the two parties is calling for a Majlis in the Desert. MBS and MBZ have more to win from cooperation than confrontation. A breakthrough in the OPEC discussions is certainly a possibility, but first, some saber-rattling must be done. Ultimately, MBS understands that both Aramco’s and ADNOC’s future revenues are important. Both NOCs will be able to gain a lot of market share in the coming years if they play their cards right. By being flexible while not losing face, both the nations could go on to cooperate in other fields. Emirati SWFs are still a viable source of financing for major projects in Saudi Arabia, while energy-transition projects in the Emirates thrive on Saudi cooperation and cash.

By showing a strong position in international and regional media, both Crown Princes aim to boost their own positions. MBS’s strong approach towards regional economic issues is clear and will inevitably come into conflict with others. MBZ’s more aggressive regional and supra-regional power aspirations are also set out for all to see. OPEC’s infighting is a natural place for these tensions to play out. Both parties know that their long-term alliance will be key in the future. A full confrontation between the two nations would only serve as an advantage to the long list of regional adversaries for these two nations. By threatening non-compliance, Abu Dhabi is showing its willingness to confront market developments head-on. Saudi Arabia and Russia now need to understand that a Riyadh-Moscow agreement is not going to be enough to placate the other members. ADNOC is unlikely to destabilize the market by opening up its taps, but the symbolism of its resistance is important. Statements about the UAE’s willingness to leave OPEC are based purely on rumors, not on facts. Stability is key in oil and gas, being part of the discussion inside of OPEC is more valuable to the UAE than being independent. There is plenty of complexity to unpick behind the scenes, but this particular disagreement is unlikely to cause any real problems for OPEC+

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  1. PlutoniumKun

    Its hard to say of course but I think those rifts are very real and very deep. Plus of course there is Qatar, which is doing its own thing and survived what looked liked an impossible situation when SA and UAE tried to crush it.

    It seems a long time ago now, but I think it was 2 years ago that the Houthi in Yemen looked doomed, SA and UAE had them in a pincer movement. I think that at the time, War Nerd (or maybe it was MoA) commented that it was mostly because the UAE hired better mercenaries than SA. But somehow (for reasons I’ve never fully understood), the Houthi not just survived, but started making real progress. It seems that for whatever reason the UAE backed out, leaving the Saudi’s high and dry militarily. If this is true, it was a serious deal, so it would indicate that this isn’t the normal tiff between neighbouring countries, but a deep division.

    Its probably bad news for the Saudi’s. The leaders of the smaller Gulf States have proven far more skillful than the House of Saud and have been growing relatively stronger over the years. I’m pretty sure international investors will have noticed and will prefer basing themselves in UAE, Kuwait or Qatar over SA. I think MBS is on increasingly thin ground, especially if they can’t hold the price of oil up.

  2. hunkerdown

    Shorter: if we don’t talk about Iranian influence and action in the region, it didn’t happen.

  3. The Rev Kev

    I suppose the truth of the matter is that Saudi Arabia would like to see a regional grouping of the Gulf States – with it as it’s head. The UAE has other ideas of course. The Saudis have had two tests of their power and have failed both times. They tried to secure their southern front by taking over Yemen in conjunction with the UAE and the west and failed and now Yemen is sucking in billions of dollars per month. When the UAE recognized this, they cut their losses but the Saudis are unwilling to do the same. Their second test was to thump Qatar and make them subservient to them but that failed as well after they got help from countries like Turkey, the US and Iran.

    The financial markets are now judging the present leadership of Saudi Arabia as too unstable which only adds to the Saudi’s financial problems. The UAE has its own problems but you cannot really have two centers of power in this region so I would expect to see a realignment of countries here given time. Who knows. It might even lead to the Saudis signing a truce with Iran and getting them to help them get out of Yemen. Stranger things have happened. But as the US shifts more military forces to the Chinese front, this process will intensify.

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