The new Murban oil futures contract is a further sign of UAE's wavering commitment to OPEC, desire for independence, and hopes of partnering with global powers.
Although the jury remains out on whether the Abu Dhabi National Oil Company (ADNOC) Murban oil futures contract will become the new regional benchmark, it does reveal Abu Dhabi's clear vision of its future and the role hydrocarbons are going to continue to play in it.
Only time will tell, but setting up the Murban contract to launch on Abu Dhabi-based exchange ICE Futures is certainly part of ADNOC'S strategy to displace S&P Global Platts monthly crude price assessments and 'hold the pen' on the emirate's oil future, leveraging its hydrocarbon endowment to the full.
The futures trading platform tests the market appetite for Murban, which looks promising and, if successful, helps Abu Dhabi consolidate its position as a major producer in a shrinking oil market as well as again call into question the UAE's commitment to the Organization of the Petroleum Exporting Countries (OPEC) - unclear since December's Joint Ministerial Monitoring Committee.
What is certainly clear is that Abu Dhabi is now putting down a huge marker to become an increasingly independent actor in a bid to outpace regional allies in favour of strengthening its future ties with Israel, China, and India
But trading the contract is much more than an attempt to build out the UAE's future hydrocarbon position - it is firmly in line with the UAE's broader strategic goal of pursuing a path independent of its immediate neighbours, hedged by diversifying relations with the US and Asia.
Closer ties with global powers
The UAE - in particular Abu Dhabi - is trying to carve out a role as an indispensable partner to major powers, bringing a skillset including invaluable expertise in conflict resolution, green technologies, defence production, special force deployment, and significant investment.
In many ways the UAE is trying to outpace and outmanoeuvre its neighbours, especially Saudi Arabia and Qatar. But it is noteworthy that ADNOC is playing such a central role in Abu Dhabi's growth strategy in much the same way Saudi Aramco has done in Saudi Arabia because it points to the centralizing impulse of Abu Dhabi's leadership and dependence on a handful of trusted technocrats.
It comes as no surprise ADNOC chief Sultan Al Jaber was recently appointed to the new Supreme Council for Financial and Economic Affairs and is at the centre of the new industrial policy currently under development.
This demonstrates how much faith Abu Dhabi's Crown Prince Mohammed bin Zayed's places in Al Jaber and the pivotal role he is expected to play in that transition given his dual titles as chair of ADNOC and Special Envoy for Climate Change. Sultan Al Jaber is the UAE's very own Khaled Al Falih - the keystone to every vision.
As to why ADNOC has a central role in Abu Dhabi's economic growth strategy, this is self-evident. The UAE holds 5.6 per cent of the world's known oil reserves and oil and gas account for about 30 per cent of the country's GDP with ADNOC being the largest and most significant actor, and a major national employer with around 55,000 employees.
Although the city state's long-term investment strategy remains to transition to a post-oil economy, it does want to monetize crude assets as quickly as possible while simultaneously preparing alternative and green investment strategies with ADNOC at the centre of those too. As a result, ADNOC plans to boost oil production capacity by 25 per cent to 5m b/d by 2030 with half that capacity expected to be Murban grade.
The official export price for June-loading crude is to be set by the Ice Futures Abu Dhabi (IFAD) contract by the end of April. After almost a year-long delay due to regulatory hurdles brought about by the pandemic, the contract will trade on the new IFAD Exchange and solidify ADNOC's ambition to benchmark Murban as the price determinant for Middle Eastern crude.
ADNOC's goal is for the Abu Dhabi grades, and eventually other crudes, to trade on the spot market against the IFAD contract, making Murban a regional marker. Murban has a production capacity of approximately 2mbpd with around 1mbpd reportedly available for export.
But it is unlikely that figure is accurate as local refining requirements and OPEC quotas which restrict production means less will be available to market. ADNOC is hopeful of high demand for its Murban grade and must ensure it has liquidity to support the contract.
The UAE - in particular Abu Dhabi - is trying to carve out a role as an indispensable partner to major powers, bringing a skillset including invaluable expertise in conflict resolution, green technologies, defence production, special force deployment, and significant investment
Although OPEC curbs technically apply to production not supply, it is considered bad form to increase exports while under quotas. ADNOC believes it has sufficient storage capacity to meet the expected uptick in demand but OPEC restrictions on future production will begin to grate. Given the Murban contract is a key component in the UAE strategy to monetize its resources now, this approach sets it on a potential collision course with OPEC.
ADNOC has also started to import crude for its Ruwais refinery - which until recently processed only Murban - in order to free up more Murban for export and for spot trades. Plus it has announced plans to lift destination restrictions on Murban and all other term crude exports from June, likely to result in more spot activity.
With 90 per cent of the light grade oil being sold to Asian markets, nine companies have already signed on to be shareholders, including BP, Shell, Total, and Vitol. Two major Chinese crude importers - its largest refiner Rongsheng and state-run trading firm Unipec - have also expressed interest.
But concerns over adoption remain as other Gulf producers, notably Saudi Arabia, use different mechanisms to set their term export prices and are expected to be slow to change old habits. Some buyers may also wish to continue to buy Murban and other Abu Dhabi crudes on the spot market at differentials to Dubai because of familiarity with that system and because their other imports are linked to Dubai as well.
However, regardless of whether these concerns become a reality or not, what is certainly clear is that Abu Dhabi is now putting down a huge marker to become an increasingly independent actor in a bid to outpace regional allies in favour of strengthening its future ties with Israel, China, and India.
Dr Neil Quilliam
Associate Fellow, Middle East and North Africa Programme