Though OPEC members earlier this month settled their latest dispute over how much and how fast to bring back shuttered oil production, the longevity of the peace could be influenced by an emerging attitude at two of the cartel’s top three producers.
Saudi Arabia and the United Arab Emirates reportedly want to pump as much crude as they can while prices are good and the world is still running on petrol, before the predicted decline in consumption really takes hold as countries accelerate the shift to cleaner energies.
It makes sense from a business perspective: maximize income while buyers want the product. But it also seems an acknowledgement that buyers will not want as much oil in the decades ahead.
“Stranded assets” is not a term that oil producers want to add to their financial statements.
In June, at a private event organized by Bank of America Corp., as reported by Bloomberg news service on July 21, Saudi Energy Minister Prince Abdulaziz bin Salman said: “We are still going to be the last man standing, and every molecule of hydrocarbon will come out.”
That’s a lot of molecules for the Middle East powerhouse, 297 billion barrels, according to BP’s Statistical Review of World Energy, issued in June and based on 2020 numbers. The Saudis’ storehouse is more than four times U.S. proved reserves and almost three times those of Russia; the three countries are the top oil producers in the world.
The holdout that delayed the latest OPEC+ production deal, the UAE, is no slouch in the oil reserves charts. Its 98 billion barrels is far ahead of the U.S. and close to Russia. The UAE’s pre-pandemic production of 4 million barrels per day in 2019 put it in third place among OPEC member nations.
But why settle for No. 3 when you could be No. 2? The UAE’s state-owned Abu Dhabi National Oil Co. announced in 2020 it would spend more than $120 billion as part of a plan to boost its production capacity to 5 million barrels per day by 2030, passing Iraq into the No. 2 spot.
“This is the time to maximize the value of the country’s hydrocarbon resources, while they have value,” The Wall Street Journal this month quoted a person briefed on the UAE strategy. “The aim of the investment is to generate revenue for the diversification of the economy, both for investment in new energy and, as importantly, in new revenue streams.”
“Market share is a key factor here,” a senior UAE oil executive told the newspaper. “We want a bigger market share, to monetize as much as we can from our reserves, especially when we have spent billions developing them.”
The country’s energy minister called the constraints on its output “totally unfair.”
The UAE’s plan to boost production followed by a few months a Saudi Aramco announcement that it planned to invest billions to add 1 million barrels per day to its output capacity.
It sure looks like an impending fight over market share, especially as both the UAE and Saudi Arabia have money to invest in more capacity, along with low per-barrel production costs, while much of their competition, particularly U.S. and European companies, are holding back from large projects.
Oil majors BP and Shell already have announced plans to reduce oil production as part of a global shift to cleaner energies.
The UAE is “in the race for market share ahead of peak demand,” Robin Mills, chief executive of Dubai-based consulting firm Qamar Energy and a former manager in the Emirati oil industry, told The Wall Street Journal.
“Saudi Arabia is not in a comfortable position,” Karen Young, a senior fellow at the Washington-based Middle East Institute was quoted by Bloomberg. “There will be customers for oil in 10 and 20 years from now. But (every oil producer) is going to be competing for a smaller and smaller number of buyers.”
Neither country sounds too worried about a sudden drop in demand. They expect their customers will buy crude for a long time, but less of it longer term. Until then, selling as much as they can, at strong prices, can help the Saudis and UAE as the world moves away from oil. Leaders in both countries have talked of building post-oil economies.
Which means turning all that crude underground into cash for whatever comes next.
“The historic alliance (because the UAE and Saudi Arabia) is being tested,” Christyan Malek, who is in charge of global energy at JP Morgan &Chase, told The Wall Street Journal. “The rivalry is no longer just in the oil market, but for the post-oil economy.”
The UAE succeeded in winning higher production numbers in the latest OPEC+ deal, but they will not kick in until April 2022. It was a compromise, averting a potential price war while stemming a steep rise in oil prices that was squeezing buyers and causing anguish for the leaders of consuming nations.
Meanwhile, Russia is always ready to produce and export more oil in its own quest for market share. The country has been among the strongest advocates of substantial increases in production quotas for the 23-member OPEC+ alliance. In addition to the UAE, Russia also gained higher production limits under the July agreement, as did Kuwait and Iraq.
Analysts surveyed by Bloomberg said Russia could boost output by between 500,000 and 950,000 barrels per day within six to 12 months. That could return the country to near its post-Soviet record of 11.25 million barrels a day, reached in 2019.
“Russian producers have repeatedly proven that they can add back idle production on very short notice,” Ron Smith, a senior oil and gas analyst at BCS Global Markets, told Bloomberg in June. “I think the market may be underestimating Russia’s ability to raise output.”
Speaking at a press conference after OPEC+ announced its latest agreement, the Saudi oil minister said: “What bonds us together is way beyond what you imagine.”
The desire for strong prices may bind the countries, but that binding could stretch as global consumption heads down and the big players don’t want to be left holding a bag of unproduced crude.