ADNOC, Aramco's converging oil capacity boost targets seen leading to market share spat

Saudi Arabia and the UAE are ramping up their crude oil production capacity in a bid to capture more market share, but their ambitious plans are likely to put the two OPEC allies in direct competition in the oil demand-growth economies of Asia.

Abu Dhabi National Oil Co., the UAE's biggest energy producer, on Nov. 28 announced plans to accelerate its capacity expansion from over 4 million b/d now, to 5 million b/d by 2027, ahead of a previous target of 2030, by boosting capex spending.

This puts ADNOC on the same timeline as state-run energy giant Saudi Aramco's own date to reach a maximum sustainable capacity of 13 million b/d.

"I think ADNOC and Aramcoare aligned in their estimation of market fundamentals and their respective imperatives for export, which they hope to manage along with their domestic consumption reduction targets," said Karen Young, a senior research scholar at the Center on Global Energy Policy at Columbia University.

"But this makes them more likely to be competitors within OPEC+ and especially competitive in any new markets, whether that is Asia or Europe. I think the stress point becomes OPEC+ and whether this coalition can really withstand pressure, especially as opportunities for underselling and arbitrage increase through this year and into early 2023."

Maximum sustainable capacity

Saudi Aramco has already set 2027 as a timeline for boosting its current maximum sustainable capacity of 12 million b/d by an extra 1 million b/d. Saudi Arabia claims a current production capacity of around 12 million b/d but S&P Global Commodity Insights analysts estimate this at closer to 11.5 million b/d. The kingdom, alongside UAE, holds virtually all of the world's remaining spare capacity.

"There's no competition between Aramco and ADNOC to see who can increase capacity faster," said Ellen Wald, president at Transversal Consulting and author of a book on the kingdom's oil industry. "What is significant is that production capacity is growing in Saudi Arabia and the UAE whereas it is decreasing in other OPEC countries and in non-OPEC producing countries. Saudi Arabia and the UAE are reinvesting in oil production whereas other areas are not. This means that in the future, a larger share of the global oil supply will come from these countries."

Under the current OPEC+ quotas, Saudi Arabia is required to hold its crude production to 10.478 million b/d, roughly 1 million b/d below its capacity. The UAE, meanwhile, must not exceed 3.019 million b/d, also about 1 million b/d below its capacity, according to analysis from S&P Global.

As a percentage of capacity that must remain idled, the UAE's is the highest among its OPEC+ peers, a fact that has chafed in the past.

UAE's growing influence

ADNOC's new 2027 timeline "doesn't have much bearing on OPEC+ today, but in the future the UAE will likely want higher quotas," said Wald. "As UAE's production capacity grows, its influence within OPEC+ will also grow."

Saudi Arabia is currently spearheading efforts to stem an oil price decline by prompting the Oct. 5 OPEC+ decision to trim 2 million b/d from production quotas starting November through to end of 2023 amid concerns of a global recession.

The UAE, OPEC's third largest producer, is toeing for now the Saudi line, but has in the past differed with its neighbor over baselines and quotas.

In the summer of 2021, the UAE fought to have a higher OPEC+ baseline, given its substantial investments in boosting its oil producing capacity.

UAE and Saudi Arabia made amends and in a July 18 meeting OPEC+ allocated five members more generous output quotas starting May 2022, resolving a dispute that had threatened to destabilize the oil market and the organization itself. Saudi Arabia, Russia, Iraq and Kuwait were also granted a higher baseline, starting May 2022.

Stranded assets

"The UAE will either expand its share of the market if it wants to utilize ADNOC's excess capacity, which will require negotiation if there are OPEC+ quotas in place, or idle the excess capacity, assuming ADNOC's commercial agreements allow it," said Bhushan Bahree, an executive director of oil markets, downstream and chemicals team at S&P Global.

However, Saudi Arabia-led decision to trim 2 million b/d through the end of 2023 is likely to spark discord in the group if the UAE demands a higher quota.

OPEC, however, remains confident in oil's long-term future, forecasting that demand for crude and liquid fuels will continue growing through at least 2040, when it will plateau for several years.

OPEC raised its estimate of how much oil the world will need to 109.8 million b/d by 2045, in its World Oil Outlook published Oct. 31, an increase of 1.6 million b/d over its forecast in the 2021 report.

ADNOC's new timeline for a capacity ramp-up may "add some urgency to the understanding of getting product to market as soon as possible to avoid both having stranded assets and to take advantage of expected volatility related to our current political limitations related to Russian supply, which could impact that production capacity for some time to come," said Young.