The UAE’s OPEC+ Dilemma

UAE

Energy Policy

Commentary

Dr. Mohammad Salami

The United Arab Emirates (UAE) was one of the first members of the Organization of Petroleum Exporting Countries (OPEC), joining the organization in 1967. During its 56 years of membership, Abu Dhabi has generally been perceived as an integral member of OPEC. Largely content with its significant role in the cartel’s decision-making process, past rumors of a proposed Emirati withdrawal have invariably come to nothing. In spite of this history, however, recent events have forced the UAE to reassess the costs and benefits of its OPEC membership.

Quota Troubles

The UAE has planned to increase its production capacity to five million barrels per day (bpd) by 2027. However, OPEC’s production targets have effectively restricted Abu Dhabi to a daily production of three million barrels, even though the country’s current production capacity exceeds four million bpd. Such restrictions have made OPEC’s current production limits—long a weapon to ensure stable and relatively high oil prices—appear particularly severe to Emirati policymakers.

In recent years, the UAE has initiated plans to develop energy and grow its role in global energy markets, but these efforts are effectively nullified by OPEC production quotas. The Abu Dhabi National Oil Company (ADNOC) announced in November 2021 that it would invest $150 billion in its oil and gas industries over the next five years—an increase on the previous spending plan of $127 billion that was announced prior to the onset of the COVID-19 pandemic. This investment will help the UAE reach its intended capacity of five million bpd well in advance of 2030, the original development date.

The prospect of new investments in the Emirati oil and gas sector was raised after geological surveys revealed greater hydrocarbon reserves within the country’s fields. According to ADNOC, the UAE’s national reserves rose by four billion stock tank barrels (stb) of oil and 16 trillion standard cubic feet (scf) of natural gas, taking the respective totals to 111 billion stb and 289 trillion scf. As a result, the UAE now possesses the sixth-largest proven oil reserves and seventh-largest proven natural gas reserves in the world, further strengthening its position for future production and export capacity. Therefore, OPEC’s production quotas remain major obstacles for the UAE’s future energy ambitions; the current regime of global oil agreements have rendered about 30% of the UAE’s capacity idle.

Oil’s Uncertain Outlook

In addition to investing in the oil and gas industries, selling oil is a significant factor in financing and achieving the UAE’s ambitious economic plans in the region. One of them is the National In-Country Value Program (ICV), intended to increase demand for local goods and services and attract foreign direct investment (FDI) in the UAE’s industrial sector. Since the launch of ICV in 2018, the oil sector has driven 105 billion dirhams (USD $28.6 billion) back into the UAE economy and created over 3,000 jobs in the private sector, including more than 1,000 in 2022 alone. ADNOC aims to return over 160 billion dirhams (USD $43.5 billion) to the UAE economy from 2022 through 2026 under the same program.

Hydrocarbons continue to play a critical role in the Emirati economy, as the oil and gas industry constitutes 30% of the UAE’s GDP and 13% of its total exports. The over 80 trillion cubic feet of gas resources discovered at Jebel Ali in 2020 will allow the UAE to become self-sufficient in gas by 2030. The UAE also plans to extract oil derivatives; the Ruwais Derivatives Park (TA’ZIZ Industrial Chemicals Zone) in Abu Dhabi is a major project that will be an industrial hub for the chemical derivatives sector and is expected to become the world’s largest integrated refinery and petrochemicals complex.

Time is running out for the UAE, however, and the authorities have little patience for complying with OPEC’s restrictive rules for exporting energy to the world. According to OPEC’s World Oil Outlook, the share of oil in the global energy mix will drop from 31 percent to just below 29 percent. This shows that despite the increase in oil demand in the coming years, the countries of the world will move towards using renewable energy in the medium term. Indeed, the UAE has  committed itself to achieve net-zero emissions by 2050, which will inevitably erode its hydrocarbon usage. “Oil, no matter how much we defend it, it’s in decline mode,” Suhail Al Mazrouei, Minister of Energy and Infrastructure of the UAE, said in November 2022. “To assume oil is going to be there forever is wishful thinking.”

As one of the lowest-cost producers in OPEC, the UAE has a better chance to maximize its revenue and meet its national strategic interests outside restrictive OPEC agreements. The world of tomorrow’s energy will witness a range of changes in demands and breathtaking competition of countries in oil infrastructure investments.

Political Dimensions

To achieve economic growth through the sale of oil, the UAE must also cooperate with the West and reduce tensions with the United States. Here, once again, Abu Dhabi’s interests and OPEC’s have clashed—particularly in the wake of the oil cartel’s 2022 decision to cut production by two million barrels per day. Because this move drove up the price of oil at a tense geopolitical moment for the West, Washington reacted with fury at the perceived perfidy of its Gulf allies.

In November, the UAE and the United States signed a strategic partnership to invest $100 billion to produce 100 gigawatts of clean energy globally by 2035. The continuation of cooperation depends on pursuing responsible and reliable behavior in pricing and oil production to attract the attention of the U.S. To this end, the UAE announced in March 2022—after the increase in oil prices—that it would put pressure on OPEC members to pump more oil. “The UAE has been a reliable and responsible supplier of energy to global markets for more than 50 years and believes that stability in energy markets is critical to the global economy,” Yousef al-Otaiba, the UAE’s ambassador to the United States, said.

The UAE’s association with OPEC and OPEC+ oil policies will bring the risk of further discord between the UAE and the United States. Following Saudi Arabia’s decision to cut two million bpd, the Wall Street Journal reported that Sheikh Tahnoun bin Zayed Al Nahyan, UAE’s national security advisor went on a secret trip to Riyadh to negotiate with Saudi Crown Prince Mohammed bin Salman to dissuade him from raising oil prices by reducing quotas. During the meeting, Sheikh Tahnoun allegedly mentioned that Riyadh’s decision was not necessary from an economic point of view and would lead to political backlash from the United States.

If it seeks to maximize its national interests, the UAE will likely reach a stage where it does not consider loyalty to and membership in OPEC beneficial—a conclusion that Qatar also reached when it decided to withdraw in 2019. The UAE’s exit from OPEC is far from a reality, but if it decides to leave, it will be because the country believes that the alliance’s collective goals should remain subordinate to its national interests.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.