Behind the Conflict in OPEC: Increasing Competition in the Gulf

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The conflict between the United Arab Emirates and Saudi Arabia over oil production had lasted for months or even years.

Emirates, a seven-member federation of states in the Persian Gulf, has ambitious plans to expand and modernize its economy, including billions spent on the energy industry. Eventually, these aspirations would meet the expectations of its powerful neighbor, Saudi Arabia, as both countries sought to position themselves for changes in energy production and other areas of their economy in the coming years.

Tensions that would normally be resolved in a phone call from one royal palace to another culminated in meetings of the oil producers’ group known as OPEC Plus. Authorities failed to reach an agreement to increase production on Thursday and Friday, and then a meeting scheduled for Monday had been cancelled.

The main roadblock: The United Arab Emirates insisted on raising production limits. The Saudis resisted, and the lack of a deal on Tuesday caused oil prices to fluctuate.

The conflict could signal a fundamental reorganization of the nations in the gulf. The Emirate’s ambitions for a more diverse economy, seeded by Western investment, spur it to step more vigorously outside of Saudi Arabia’s shadow.

“It’s a more competitive landscape at bay on a number of economic issues,” said Karen Young, a senior fellow at the Middle East Institute, a research organization in Washington.

Dubai-run Emirates, with its collection of futuristic skyscrapers and attractive shopping malls, has established itself as a business, financial and tourist hub even though the pandemic was clearly a setback.

But the real power in the Emirates lies in Abu Dhabi, which produces the oil that funds it. Abu Dhabi has reserves of 98 billion barrels, about 6 percent of the world’s total.

But it has also invested heavily in renewable energy, such as wind and solar, at home and abroad, ahead of its regional rivals. He set up two mutual funds, the Abu Dhabi Investment Authority and the Mubadala Investment Company, with an estimated $900 billion in assets.

This financial strength has given the Emirate a chance to stand apart from other countries in the region and get some views that may seem unusual. According to Abu Dhabi’s leadership, environmental pressures forcing multinational oil companies to turn back investments in new wells could work out in favor of the oil-rich emirate, which does not have to deal with such concerns in its own country.

Oil demand is expected to increase for at least a few years, and Abu Dhabi wants to be there to supply its customers.

Abu Dhabi National Oil Company, known as ADNOC, plans to spend $120 billion over the next five years to increase crude oil production rather than curb investment. Abu Dhabi has brought in companies like Occidental Petroleum and Italy’s Eni to explore and develop more oil.

The thinking at ADNOC, and indeed at Saudi national oil company Saudi Aramco, is that “even if the pie gets smaller, they will dominate a shrinking pie,” said Helima Croft, head of commodities at RBC Capital Markets. investment bank.

ADNOC CEO Sultan Al Jaber has recruited expats to set up a sophisticated oil trading operation that is considered a key business tool at companies like Royal Dutch Shell and BP. And it has raised billions of dollars by selling stakes in pipelines and other infrastructure to investors like BlackRock and KKR – a practice the Saudis are following.

Ms Young said that having these financially stronger investors means Abu Dhabi must deliver quickly. This means that Emirates is willing to pump and sell more oil at today’s higher prices.

These grand ambitions inevitably raised eyebrows in Saudi Arabia, the longtime de facto leader of the Organization of the Petroleum Exporting Countries.

“All this heralds a far more independent place independent of the Saudis,” said Gerald Kepes, an independent oil industry consultant.

Lately, OPEC has seemed like a straitjacket for Abu Dhabi. β€œThe United Arab Emirates feels that the quotas they have do not reflect what has changed in the last three years,” Ms. Young said.

Emirates has increased its production capacity to around 3.8 million barrels per day and is looking to increase it to five million barrels by 2030.

These numbers do not work with the country’s current production limit of 2.7 million barrels per day. In the context of production cuts agreed in early 2020 as oil demand evaporated, Emirates was proportionately the biggest hit among the major players in OPEC Plus – about a third of its capacity.

“It was not a fair deal for us in the UAE,” Suhail al Mazrouei, the Emirates’ energy minister, told CNBC on Sunday.

The first signs of trouble emerged last summer when Emirates significantly exceeded the amount allowed to pump, but issues arose on Thursday when Mr Mazrouei demanded a substantial recalculation of his country’s quota if it was to go with a deal. The Saudis plan to extend the overall production deal when it expires after April.

The Emirate’s stance has offended the Saudis, who have impartially pretended to work for the benefit of OPEC Plus. “I represent a balanced country that considers the interests of all,” Saudi oil minister Prince Abdulaziz bin Salman told Saudi news channel Al Arabiya on Sunday.

Oil is just one of the areas where the two gulf countries disagree. The Saudis, for example, refused to follow the Emirates. making peace with Israel. Recently, the Saudis announced measures aimed at halting trade with the United Arab Emirates, including imposing restrictions on some of their imports. As a blow to Dubai’s role in the region, Riyadh has threatened not to award government contracts to multinationals with their Middle Eastern headquarters outside Saudi Arabia.

Analysts say it won’t be easy to get Emirates back into OPEC and Saudi orbit.

“Questions about the UAE’s commitment to stay in OPEC will likely increase,” Ms. Croft said in a note to her clients on Monday. While Emirates will want to maintain ties with OPEC, it is clearly taking a different path from many other members.

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