Opec-Plus: What's Behind the Saudi-UAE Deadlock?

The latest standoff between Opec members and longtime allies Saudi Arabia and the United Arab Emirates (UAE) over oil production policy was about more than the Opec-plus alliance's next steps in adjusting supply to demand. The disagreement brought into focus fundamental differences between core members over the future of Opec-plus once the existing output curb deal expires in April next year. These differences have been building as positioning for the energy transition prompts some to review their commitment to long-term production restraint, but reinforces the importance of a collective response for others. The dispute also raised alarm bells in Washington, triggering backdoor diplomatic efforts to help resolve the dispute between its key Mideast Gulf allies. Opec-plus ministerial talks began Thursday and ended without agreement Friday after the UAE objected to plans to extend the alliance's supply cuts until end-2022 while increasing production in the coming months -- a proposal that all other participating states had agreed to (IOD Jul.2'21). The UAE insisted that it would only agree to an extension of the overall agreement to end-2022 if its baseline production, from which supply cuts are determined, were revised upward. Planned talks for a third day to iron out the differences were “called off” late Monday, with a date for the next meeting to be decided “in due course,” Opec said. Inevitable Showdown? In a way, the showdown between the UAE and Saudi Arabia was inevitable. Energy Intelligence at the beginning of this year predicted that Opec-plus would face mounting internal pressures in 2021 as some members push against holding deep cuts for too long. The energy transition was seen playing into this dynamic, as some producers -- the UAE in particular -- increasingly question whether their interests are better served by collective restraint to protect revenues or expanded production to protect market share and monetize resources (EI Premium Jan.7'21). The UAE specifically has been unhappy with its low baseline for some time and last year even began internal discussions about the benefits of staying within Opec, Energy Intelligence was first to report (IOD Nov.17'20). Energy Minister Suhail al-Mazrouei told Energy Intelligence in an interview Sunday that the current Opec-plus agreement was “unfair” to the UAE, and argued that the country had sacrificed the most among members, given that one-third of its production has sat idle for two years. “No one has done what we have done, accepting one-third of our production capacity to be idled, and we did not complain and we are following this until the end of the agreement, which still has eight months,” he said. The Opec-plus production curbs run counter to Abu Dhabi's plans to raise oil production capacity to 5 million barrels per day by 2030 from just above 4 million b/d now. It also recently launched its Murban crude futures contract as a potential new benchmark for sales into Asia (IOD Mar.29'21). Saudi Arabia, by contrast, continues to pursue its traditionally more cautious position on market management. Riyadh wants to balance the market impact of raising production with an early assurance that market management will remain in place beyond the deal’s current expiry date. Riyadh also views collective participation by a broad group of producers as essential for market management going forward, and wants to lock in the Opec-plus partnership for the long term. An extension of the agreement serves that purpose, while any revision of baselines would threaten the group’s cohesion by opening up other demands. Why Now? After taking a more assertive stance at Opec-plus meetings at the turn of the year, the UAE went quiet in recent months -- possibly biding its time until the agreement ran its course. The Saudi-led push to extend the agreement meant that the UAE would have to wait longer to take full advantage of its locked-in capacity. In addition, political ties between Saudi Arabia and the UAE have been strained over foreign policy issues and increasing economic competition, as the two neighbors position themselves in a world that's moving toward a future less dependent on oil. The standoff has been followed closely by the US administration, sources told Energy Intelligence, as officials tried to gauge the seriousness of the Saudi-Emirati disagreement, just months after the regional rift with Qatar was brought to an end. The prospect of further oil price increases would add further pain at the pump for US consumers. Contentious Issue The UAE, long one of the most committed and compliant Opec members, says it stuck with the deal to support group cohesion given the unprecedented collapse in global oil demand and prices last year. But to accept a deal extension beyond April 2022, it wants to see its baseline raised to 3.841 million b/d from the current level of 3.168 million b/d. The production baselines were assigned to each country when the historic Opec-plus agreement was struck last year. The figures were set according to October 2018 production levels, except for Saudi Arabia and Russia, which were given the same baseline level of 11 million b/d. But reviewing baselines would open a can of worms for Opec-plus. It would require all members' production calculations to be reviewed and agreed on, a complex undertaking. Other member states including Iraq, Kazakhstan, Nigeria and Iran previously expressed grievances with their baselines and could also push for higher production bases. Diverging Positions When the deal extension came up last week, the UAE said it wanted to decouple the two issues at stake: a group production increase of 400,000 b/d each month for August to December this year, and an extension of the pact from April 2022 to the end of that year. Its position was based on a “legitimate request ... to segregate the two things from each other,” al-Mazrouei said. “The deal should be the increase, not the extension of the agreement. The extension of the agreement can wait,” he added. The Saudi position, by contrast, was that any output hike should be linked to a deal extension. “If everyone wants to raise production, then there has to be an extension,” Saudi Energy Minister Prince Abdulaziz bin Salman told Saudi-owned Al-Arabiya television late Sunday. “The extension is the basis and not a secondary issue. You have to balance addressing the current market situation with maintaining the ability to react to future developments.” Given uncertainties about the pace of recovery in oil demand next year, extending the pact through the end of 2022 could give the market added reassurances that Opec-plus remains committed to its management role for as long as needed (IOD Jun.30'21). To what extent Russia will support an extension of the supply cuts remains to be seen. In December, it successfully joined forces with the UAE in pressing for output increases (EC Dec.4'20). Now, Moscow is keen to raise output and temper crude prices -- although it has also reiterated its commitment to the Opec-plus alliance (EC Jul.2'21). Amena Bakr and Oliver Klaus, Dubai