Three key developments were announced last week by the UAE in line with its role as a principal member of the U.S.’s new Middle East strategy to counter China’s dramatically increasing influence over the region: plans for a major economic expansion; plans to attract more oil trade into new contracts; and plans to counter Iranian threats to oil supplies through the Strait of Hormuz.
The first of these developments - announced by UAE Vice President and Prime Minister, Sheikh Mohammed bin Rashid Al Maktoum, vice president and prime minister of the UAE and ruler of Dubai – is ‘Operation 300 Billion’. This is an initiative that intends to raise the contribution of the UAE’s industrial sector to AED300 billion (US$81 billion) from the current AED133 billion within the next 10 years. The objective will be achieved in large part through the creation of 13,500 industrial companies over that period, covering the manufacturing, construction, electricity, gas, mining and quarrying sectors in the first instance. At the centre of these plans, which in turn fall within the UAE’s Circular Economy Policy 2021-2031, will be an adjunct build-out of the UAE’s energy sector. This includes an overall target crude oil production increase for the UAE’s flagship oil and gas company – the Abu Dhabi Oil Company (ADNOC) – from around 4 million barrels per day (bpd) to at least 5 million bpd by 2030 at the latest. Related: Record High COVID Cases Could Stall India’s Oil Imports
Much of this increase – and similar increases that will come from the other Arab states that align decisively with the U.S. through its sponsored ‘relationship normalisation deals’ – will be geared towards India as the prime end-user in the East that is being cultivated by the U.S. to become a more active regional rival to neighbouring China. The 15 June 2020 clash between military units of the two great Asia powers in the disputed territory of the Galwan Valley in the Himalayas reflected a much greater change in the core relationship between the two countries than the relatively small number of casualties might have implied. It marked a new ‘push back’ strategy from India against China’s policy of seeking to increase its economic and military alliances from Asia through the Middle East and into Southern Europe, in line with its multi-layered multi-generational ‘One Belt, One Road’ (OBOR) project.
Until China dramatically upped the tempo of this OBOR-related policy – at around the same time as the U.S. signalled its lack of interest in continuing its own large-scale activities in the Middle East through its withdrawal from the Joint Comprehensive Plan of Action with Iran and its withdrawal from much of Syria – India had stuck to a policy of trying to contain China. A series of reports recently on the expected growth in India’s demand for oil, gas, and other energy products will allow it to occupy this position as a viable alternative end-user for China and to advance a more aggressive version of its own rival policy to China’s OBOR strategy – India’s ‘Neighbourhood First’ initiative.
Since the UAE signed its own ‘relationship normalisation’ deal with Israel, its flagship oil producer, ADNOC, now plays a key role in the management of India’s vital strategic petroleum reserves (SPR) and a slew of new oil deals are expected between the UAE and India. Following on from this, ADNOC’s chief executive officer, Sultan al-Jaber, stated at the end of March that the new investments to be made by the UAE, along with new conventional and unconventional oil discoveries, will help boost the production of Murban. This dovetails into the second key development announced last week, which was the finalisation of plans to attract more oil trade into new contracts. Specifically, last week saw the launch by ADNOC of a dedicated Murban futures contract on a new Abu Dhabi-based exchange – the ICE Futures Abu Dhabi platform (IFAD) - in partnership with the Intercontinental Exchange (ICE). Related: Goldman Sachs Sees Large Oil Demand Rebound This Summer
The light, sweet Murban crude oil grade is one of the four crudes produced by ADNOC, although it accounted for around half of the UAE’s total near-4 million bpd crude oil production before the outbreak of the COVID-19 pandemic. According to ICE and ADNOC, Murban futures is the second physically delivered futures contracts traded on a regional exchange after Dubai Mercantile Exchange’s Oman crude futures, and Murban is also a deliverable grade in the Platts benchmark Dubai and Oman crude assessments. ICE and ADNOC partnered with BP, GS Caltex, Inpex, ENEOS, PetroChina, PTT, Shell, Total and Vitol to launch the IFAD, and ICE has also announced agreements with Chevron, Trafigura, and Occidental to explore using the contract to price crude exports from the U.S. to Asia.
The new Murban contract on the new IFAD exchange also then ties into the final part of the trio of announcements last week, with this being that the UAE’s Fujairah emirate is to dramatically expand over the next 10 years. Already the world’s third biggest bunkering centre, Fujairah is set to continue to benefit from its highly advantageous strategic position outside the perennially troublesome Strait of Hormuz and outside the rest of the Persian Gulf as well. Instead, Fujairah offers an unencumbered direct port on the eastern side of the Gulf of Oman, which means that any oil kept there will be able to avoid any blockade that Iran might again impose on ships passing through the Strait of Hormuz. This option will become increasingly attractive to Iran as it finalises its Guriyeh-Jask oil pipeline that will allow its oil to flow without going through the Strait even as it blockades 30 per cent of the rest of the world’s oil supply. Fujairah’s geographical position also allows any oil kept there to avoid any future problems that may arise with Oman if the Sultanate succumbs to China’s current wooing of it to become part of its OBOR-related sphere of influence.
Even as it stands, Fujairah is the key hub from which the UAE’s Murban oil is exported, making its way there through the 360 kilometre Abu Dhabi Crude Oil Pipeline from the Habshan onshore field in Abu Dhabi and capable of transporting 1.8 million bpd. ADNOC is also currently developing underground oil storage caverns in Fujairah that can hold 42 million barrels, including Murban, with the project expected to be completed in 2022. According to recent statements from the Fujairah port development authorities, it may add a tenth berth shortly as part of plans to boost overall storage capacity across the site to 17 million cubic metres in the next three to four years.
By Simon Watkins for Oilprice.com
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The second key development of attracting more oil trade for the Murban crude futures contract will meet with success but it will also meet with huge competition from well-established benchmarks principally Brent Blend, West Texas Intermediate (WTI) and Dubai Crude in addition to China’s yuan-denominated crude oil futures in Shanghai. Moreover, it could clash with OPEC’s ability to balance the global oil market and bolster oil prices unless UAE has plans to leave OPEC altogether. Still, only time will tell whether the Murban futures contract will be a success or a flop.
The third key development is for Fujairah to become the key hub from which the Murban crude is exported. However, Fujarah’s position has already been established when the Habshan-Fujairah oil pipeline with a capacity of transporting up to 1.8 million barrels a day (mbd) was built. And contrary to what the author is saying, UAE’s oil production over the last 15 years never exceeded on average 3.0 mbd so the talk about UAE already producing 4 mbd is inaccurate. Furthermore, a production of 5.0 mbd if far beyond UAE’s capacity.
One important observation is that the proposed USA-Israel-UAE-India alliance will never arrest China’s rising strategic and economic influence in the Gulf region. China’s rise is underpinned by the fact that it is the driver of both the global economy and the global oil market, the world’s largest economy based on purchasing power parity (PPP) and the expanding Belt and Road Initiative (BRI). Some analysts likened the BRI to the US Marshall Plan in the aftermath of the World War II. Nothing is further from the truth.
The Marshall Plan was ideologically-motivated and was aimed at preventing Europe from falling into the lap of communism while the BRI is helping poorer countries of the world build infrastructure and wealth-creation projects with financial support from China. Naturally China benefits from their expanding markets.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London