Energy and economic policy under UAE President MbZ

May 19, 2022

Our view

Sheikh Mohammed bin Zayed (MbZ) became the third president of the UAE on May 14 after a unanimous vote by the Federal Supreme Council.

As the de facto leader of the Emirates and ruler of Abu Dhabi for the last several years, MbZ has already put in place several pieces of his long-term strategy for the UAE. At their heart, his policies have aimed at – and succeeded in – making the Gulf state a key player in global geopolitics and economy. This is evidenced by the non-stop flow of world leaders and high-level delegations through Abu Dhabi since Sheikh Khalifa’s death.

Critical to MbZ’s success as president will be the future direction of the country’s energy policy and gradual transition to renewable and alternative sources – deemed key to creating a sustainable and diversified economy. On foreign policy, the UAE’s relations with Washington and Beijing will remain strategically important, but it  will also actively forge new bilateral trading partnerships. Diplomacy will take on an ever more economic element, with partnerships focused on commerce and investment ties rather than purely political alliances.

 

UAE in strong position on world stage

For almost a decade, MbZ’s de facto leadership has focused on putting the jigsaw pieces into place for this very moment of his accession. Trade and economic ties globally, and oil and gas concessions domestically, have left a powerful geopolitical imprint and strengthened Abu Dhabi’s status internationally. Relations with India, China and other emerging Asian economies have swelled, with partnerships not just in the energy sector but manufacturing and healthcare, among others.

The UAE’s economic development strategy is likely to remain the main driver of foreign policy regionally and globally. The Emirates’ decision to remain neutral over Russian actions in Ukraine has attracted US displeasure but proven economically beneficial, especially to Dubai’s real estate sector.

Following the Abraham Accords agreement with Israel, the UAE has now finalised terms for a free trade deal between the two states. A similar agreement with India came into force on May 1 and could take the value of bilateral trade to $100bn. Efforts to ensure lucrative contracts for UAE companies in North Africa and the Horn of Africa will continue, but the UAE faces competition for business and influence from Saudi Arabia and Qatar.

 

Energy strategy comes together

The evolution of the country’s energy policies will continue to be a key factor in MbZ’s future decision-making – and a measure of his success as leader. Oil and gas remain the driver of domestic growth, and the sector will be critical to building a sustainable economic future in the UAE.

MbZ has done much to professionalise the O&G industry over the past five years, especially as chairman of ADNOC. He has overseen not only the technical measures to invest in infrastructure and boost production but also the leveraging of investor demand to monetise O&G assets. On May 18 ADNOC announced it would be listing a 10% stake in the petrochemical company Borouge on the Abu Dhabi stock exchange. Borouge is a joint venture between ADNOC and Austria’s Borealis.

ADNOC is  expected to shoulder the responsibility of O&G capacity growth as well as play a central role in the country’s energy transition objectives, including a target to reach net zero emissions by 2050. Its growth strategy includes the issuance of bonds through a newly set up unit, ADNOC Murban, to diversify funding options amid expected strong investor appetite.

These objectives will be supported by a centralised power structure composed of a choice group of advisers tasked with implementing MbZ’s long-term strategy for energy, economic development, and investment. Chief among the power players is ADNOC CEO Sultan Al Jaber. A trusted member of MbZ’s inner circle, Al Jaber occupies multiple official roles, such as the Climate Envoy and Minister of State for Industry and Advanced Technology – both policy priorities.

Al Jaber’s seat on the Supreme Council for Financial and Economic Affairs – a who’s who of the UAE capital’s political, energy and financial elite – is testament to his influence and ADNOC’s growing role within the highest levels of political decision-making. Analysts expect Al Jaber to rise still further in the ranks, potentially taking on other ministerial portfolios.

Alongside neighbouring Saudi Arabia, the UAE will remain a major player in global energy markets. Within OPEC, it has pulled and tugged at the bloc over the past couple of years but stopped short of pulling the plug on its membership altogether, and it is unlikely to do so in future.

 

Funding green ambitions

Oil and gas revenue will be a vital source of financing for the advancement of another of the new president’s primary objectives: the energy transition towards renewables – a pillar in the UAE’s economic diversification drive.

The UAE became the first Middle East country to commit to net zero emissions by 2050, in October last year. The government intends to invest AED 600bn ($163bn) in renewable and alternative energy over the next three decades. As host of COP28 in 2023, Abu Dhabi’s push into hydrogen, electrification, solar power, and deeper downstream expansion is only likely to grow.

 

Laying the foundations of a sustainable, diversified economy

The leadership is aware that the energy transition will eventually require billions more in investments but calculates that increasing the role of alternative energy in domestic consumption will also free up more crude for export. The extra income generated can then be used to drive investment into a sustainable, diversified economy.

In order to facilitate diversification, MbZ has opted for practical measures, which in future may include more consolidation or sales of state assets, less stringent residency and labour policies, and more investment into an industrial strategy and domestic manufacturing capabilities.

As a result, the non-oil economy is increasingly important to overall GDP growth: the sector accounted for 72.3% of GDP in 2021, up from 71.3% the previous year. With supportive oil prices and a rebound in economic growth, the UAE is now in a comfortable position to increase spending at home for major projects and to increase investment in non-hydrocarbon sectors.

In this respect, SWFs will serve as important vehicles to reinvest in the domestic economy. State-owned ADIA, Mubadala and ADQ are adding to their investment portfolios and making hefty returns. Mubadala’s assets under management in 2021 rose 16% to $284bn.

 

Push for a “united” UAE

Amid these developments, the Abu Dhabi leadership is also hoping that increased collaboration with Dubai – the UAE’s commercial heart – will boost national economic prospects further and strenghen its capacity to pull off the post-oil transition. While control over Abu Dhabi and its future direction is a given, the UAE’s federal structure means that Dubai and the other emirates have independence over policy and legislation.

Certain sensitive issues, such as consolidation of assets, financial support, and inter-emirate competition in sectors such as aviation and logistics will require careful handling; however, cooperation between the city-states is steadily increasing – this was clear during Expo 2020 – and ADNOC and major Abu Dhabi entities will play a key role as Dubai continues to develop into different sectors.

 

Questions and comments to: Rachna Uppal, Director of Research ruppal@azure-strategy.com