POLICY
The Future of OPEC+ By: Neil Quilliam
Saudi Arabia is confident that even though a decisive shift away from hydrocarbons is underway and the world has now entered peak demand, it will continue to play a leading role in global energy affairs as the dominant producer in the twilight of the oil age maining market, as higher cost producers are left stranded. It also sees its competitive advantage given the lower average carbon intensity of oil produced by Saudi Aramco in comparison to high carbon-intensity crudes from competitors, which resort to flaring associated natural gas (Russia, United States, Nigeria, Iraq), or require energy-intensive recovery techniques (Canada, Venezuela, Oman, Indonesia) or complex refining (Canada, Venezuela, Nigeria). In other words, Saudi Arabia is confident that even though a decisive shift away from hydrocarbons is underway and the world has now entered peak demand, it will continue to play a leading role in global energy affairs as the dominant producer in the twilight of the oil age. Saudi Aramco has developed a number of strategies aimed at protecting oil’s role in the world economy and increasing Saudi Arabia’s share of that global oil market. First, it has actively pursued vertical integration, and that involves combining its mature upstream sector with its growing downstream sector, especially in Asia, which is configured specifically for Saudi crudes. The vertical integration strategy is driven, in part, by climate risk. Saudi Aramco has begun investing in markets, particularly in developing Asian countries, where policymaking prioritizes advances in development over concerns about environmental damage. It is in these countries where oil demand is most likely to grow strongest in coming decades, even as it falls away elsewhere. Aramco’s downstream investments, therefore, are aimed at ensuring that (continued next page)
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About the author: Neil Quilliam leads the strategic advisory practice at Azure Strategy and is responsible for driving the company’s mission and objectives. He is a foreign affairs specialist with extensive experience consulting to governments and corporate clients on geopolitics and energy in the Middle East. An Associate Fellow at Chatham House, his previous positions have included CEO of Castlereagh Associates and senior Energy Adviser to the UK’s Foreign and Commonwealth Office. Neil has lived in Saudi Arabia, Jordan and the UAE and is a fluent Arabic speaker. He is a regular marathon runner and is often in running shoes during meetings. nquilliam@azure-strategy.com
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he UAE’s decision to play hardball at the most recent OPEC ministerial and OPEC+ meetings in early December was based on three factors. First, it believes that amongst the winners and losers of the OPEC+ deal first agreed in April, it belongs firmly in the latter category, given that its reference point production figure does not reflect its true production capacity. Second, there is an underlying resentment amongst its leadership that Saudi Arabia and Russia have “bullied” the alliance into accepting cuts that are — in the case of Abu Dhabi — inimical to its national interests, and third, it does not want to see its hydrocarbon resources stranded as the pace of the energy transition picks up and, therefore, would rather monetize them now. It is not surprising then, that the main bone of contention between the UAE and Saudi Arabia — giving rise to Abu Dhabi’s hint that it will contemplate leaving OPEC altogether — is based on how they view their hydrocarbon futures. The UAE sees it as a race against the clock; it needs to produce as many barrels as possible before the oil market itself shrinks, and alternatives compete on price. Saudi Arabia, on the other hand, has the advantage of being the world’s lowest-cost producer ($3 a barrel) and feels comforted that it will eventually soak up the re-