ABU DHABI - The OPEC Countries - Part 2.

In terms of diplomacy, there are few states in OPEC that can match the capabilities of Abu Dhabi, the main oil-producing emirate in the UAE. But the events of Sept. 11, 2001, posed a challenge even to its formidable but usually discreet skills. Abu Dhabi's ruler Shaikh Zayed Bin Sultan Al Nahyan, who is the ruler of the UAE, was quick to sympathise with the US and condemn the terror strikes on the WTC and the Pentagon. Since then, Abu Dhabi has extended full co-operation to the US in its war against terrorism.

The UAE has been caught up to some extent in this war, especially in terms of its financial aspects. It has emerged that the money that was transferred to Mohammed Atta, the leader among the hijackers involved in the Sept. 11 attacks, was channelled through Dubai. The federal government has co-operated closely with Washington in providing intelligence on such transactions and tightening regulations so that Islamist groups will find it hard to transfer funds through UAE financial institutions in future. Abu Dhabi recognises that, in the current geo-political climate worldwide, it could prove to be seriously damaging if the country becomes labelled as a channel of funds for terrorism.

Caution & Pragmatism Will Prevail: Abu Dhabi does not want to jeopardise its reputation and stature in the region or the energy world, especially after its experience in the early 1990s with the collapse of the Bank of Credit and Commerce International (BCCI). Financially and in terms of per capita income, Abu Dhabi is by far the wealthiest state in the Middle East. Its energy sector continues to expand at a rapid pace, with this base depending only on oil and gas.

The emirate has one of the biggest oil and gas reserves in the world. It has for long been one of the most attractive places in the world for foreign investors. Alert to any new opening or additional incentives offered in the neighbouring countries, the local government will always try to be competitive, if not the very best. Local and foreign investors will continue to be happy operating in this emirate.

The role of Abu Dhabi within OPEC will continue to be influential but discreet. The emirate has never tended to flex its muscle within the organisation, generally converging with the posture taken by Saudi Arabia. This line is expected to continue, observers say, because Abu Dhabi has achieved its objectives through this method. The overall approach will be one of (a) caution, with backstage diplomacy aimed at preventing OPEC members from going to extremes in any direction; and (b) pragmatism, to ensure that come what may Abu Dhabi retains its market share and maintains an acceptable level of export revenues in the process.

The observers say that Abu Dhabi cannot go wrong with this approach particularly in the case of revenues because, in view of its strong financial position, others members are likely to feel the economic pinch much faster if prices go down. This means corrective action by OPEC will be applied well before the situation becomes unbearable from Abu Dhabi's perspective.

On Dec. 28, 2001 OPEC held a meeting and confirmed a 1.5 million b/d production quota cut, effective January 1, 2002. The decision followed a non-OPEC production/export reduction commitment of 462,500 b/d, also effective Jan. 1, 2002. The UAE's OPEC quota for oil production since as of Jan. 1, 2002 is 1.894m b/d, down from 2.025m b/d. Although the other UAE emirates do not abide by OPEC decisions, in its commitment to the organisation Abu Dhabi takes into account the oil outputs of Dubai and Sharjah. (Dubai's oil production has declined to less than 200,000 b/d, due to field depletion, and is expected to fall below 175,000 b/d in 2002-03).

Abu Dhabi has the capacity to produce sustainably 2.5 million b/d of crude oil, compared to 2.37m b/d at end-1996 and 1.83m b/d in 1990/91, plus more than 280,000 b/d of condensates. This was achieved over a year ago. So in the event of any supply difficulties, it has the capability to contribute in a muscular way - albeit in a supporting role to Saudi Arabia - to ensure that the global market experiences no major jolts. This was what happened when Iraq and Kuwait went off the oil market in 1990/91.

This role is of particular importance to the US, from a strategic perspective, as it increases Washington's relative autonomy in dealing with what it regards as rogue states in the region. With President Bush recently having included both Iraq and Iran in his "axis of evil", the possibility that Abu Dhabi may be expected to suddenly boost production cannot be ruled out, especially if Iraqi production goes offline later this year. US Secretary of State Colin Powell has already indicated that a "regime change" in Iraq is on the cards.

Moreover, unlike its bigger GCC neighbours and other OPEC members, Abu Dhabi has foreign partners - mainly Western - sharing its burden in funding capacity expansions. They provide the best technology available. They also have a stake in the smooth functioning of the oil sector in the emirate, and this in turn provides a major security interest for the big powers to ensure the stability of the emirate.

Abu Dhabi's capacity to play the role of both a business partner and a reliable security ally to the West will endure in the coming years. Most of Abu Dhabi's oil and gas fields are being expanded. Total liquids capacity - excluding liquefied natural gas (LNG) and liquefied petroleum gas (LPG) - was projected to reach almost 3m b/d before end-2001. In the Abu Dhabi National Oil Company (ADNOC), upstream experts say this capacity will be sustainable for several years. In the sense of its capability to export oil, therefore, Abu Dhabi will remain at the forefront of OPEC states.

Prospects Of External Pressure: However, observers say that problems may emerge that have little to do with Abu Dhabi's capacity for sustainable production or with its readiness to cater to the oil and gas demands of the major importers. They say that, with the war against terror becoming a focus of all American interactions with the region, it is only a matter of time before the political implications begin to affect the emirate's oil diplomacy.

Searching for the root cause of terror, Western intellectuals are increasingly coming to the conclusion that the only workable long-term solution to end terrorism may be to get the regimes in the Middle East to move towards democracy. It is believed that such an approach will (a) minimise anti-Western sentiment among the general public in the Middle East, on the one hand, and (b) gradually lead to a stable democracies where fears about a ruler's stability or a coup will not contribute to price volatility (see OOD 1).

The Gulf Co-operation Council (GCC) states like the UAE and Saudi Arabia have been particularly resistant to Western pressure for democratisation in the past, partly because of their immense wealth, which insulated them from such pressures, and partly because domestic populations were not sufficiently dissatisfied to challenge the existing regimes. This began to change in Saudi Arabia by the mid-1990s as unemployment rose, per capita incomes dropped and economic austerity measures began to be implemented.

Yet the UAE - Abu Dhabi in particular - remained immune to these problems, by and large. It would have remained so for the foreseeable future, had it not been for the Sept. 11 attacks. At present the pressure is intensifying, and there are already results. Bahrain has announced that it will become a constitutional monarchy, after parliamentary elections on Oct. 24, 2002. Before that, on May 9, there will be municipal elections to five regional councils - which, it is proposed, will look after education, public works and roads among other things.

This would make both Kuwait and Bahrain parliamentary systems in the GCC, with Qatar not to be too far behind. The critical mass of pressure for change in the UAE will build up in parallel. Tentative steps are already being taken in that direction, with the UAE emirate of Dubai in the lead. It is setting up an e-government, which will allow direct interaction with citizens. Although it is not a democratic experiment in the Western sense, e-government allows for an unprecedented level of contact between the rulers and the ruled. Typically, Abu Dhabi has let Dubai to set the trends within the UAE and - if the experiment proves successful - follows in its own way. In the case of e-government, too, this pattern may be followed.