Brent had vaulted over the key psychological level of $70/barrel as we wrapped up this edition Friday night in Singapore, while WTI had climbed above $65. “Geopolitical storms poised to shake crude out of its languor” was the headline of our Viewsletter last Friday, and it proved to be prescient.
Worries over the fate of the Iran nuclear deal had already started gathering steam last week after US President Donald Trump fired Secretary of State Rex Tillerson, a moderate, and named Iran hardliner Mike Pompeo as his replacement.
The anxiety got worse this week. First, it was comments by Saudi Crown Prince Mohammed Bin Salman and Foreign Minister Adel Al-Jubeir during their visit to the US. Al-Jubeir denounced the 2015 multilateral Iran nuclear agreement as “flawed,” echoing Trump’s sentiment, while MBS reiterated his threat that Saudi Arabia would develop a nuclear bomb if Iran did so.
Exacerbating the picture was Trump’s appointment Thursday of John Bolton, a hawk on North Korea and Iran, as his national security advisor effective April 9, replacing H R McMaster. In an August 2017 piece Bolton wrote in the National Review magazine, he laid out a game plan for the US to abrogate the nuclear deal on the basis of “significant Iran violations,” which he said should be documented in detail in a white paper, alongside early consultations with “key players such as the UK, France, Germany, Israel and Saudi Arabia”, to get them on board.
Yemen’s Houthi rebels fired a ballistic missile across the border into Saudi Arabia’s Najran province Thursday. Though no damage or disruption to the oil and gas processing and loading operations was reported, the incident served as a reminder of the tensions bubbling just below the surface in the Middle East. Yemen has been racked by a proxy war between regional archrivals Iran and Saudi Arabia.
Canadian oil sands producer Cenovus Thursday said it had been forced to reduce output in the face of pipeline and rail capacity constraints in shipping crude. The country’s growing oil transportation bottlenecks over the past few months were well-known, but the Cenovus news lent more gravity to the situation and added to the market’s supply concerns.
NYMEX WTI futures comfortably returned to backwardation at the front end of the forward curve Wednesday, ending six days of contango. The backwardation along the rest of the curve also strengthened, suggesting tightening supply-demand balances.
The US Federal Reserve announced a quarter-point hike in interest rates Wednesday, as was widely expected, and more importantly, signalled it remained on course for two more increases this year. That gave the financial markets, rattled by fears of accelerating inflation leading to a more hawkish Fed since February, some breathing room. But not for long. The US announced plans to slap tariffs on $60 billion worth of annual imports of Chinese goods, and China retaliated with its own list of tariffs against the US. The trade wars have only just begun, it seems. The stock markets took a beating, but not crude — it was back in the grip of fundamentals and fears.
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On 10 December 2021, if all goes to plan Royal Dutch Shell will become just Shell. The energy supermajor will move its headquarters from The Hague in The Netherlands to London, UK. At least three-quarters of the company’s shareholders must vote in favour of the change at the upcoming general meeting, which has been sold by Shell as a means of simplifying its corporate structure and better return value to shareholders, as well as be ‘better positioned to seize opportunities and play a leading role in the energy transition’. In doing so, it will no longer meet Dutch conditions for ‘royal’ designation, dropping a moniker that has defined the company through decades of evolution since 1907.
But why this and why now?
There is a complex web of reasons why, some internal and some external but the ultimate reason boils down to improving growth sustainability. Royal Dutch Shell was born through the merger of Shell Transport and Trading Company (based in the UK) and Royal Dutch (based in The Netherlands) in 1907, with both companies engaging in exploration activities ranging from seashells to crude oil. Unified across international borders, Royal Dutch Shell emerged as Europe’s answer to John D Rockefeller’s Standard Oil empire, as the race to exploit oil (and later natural gas) reserves spilled out over the world. Along the way, Royal Dutch Shell chalked up a number of achievements including establishing the iconic Brent field in the North Sea to striking the first commercial oil in Nigeria. Unlike Standard Oil which was dissolved into 34 smaller companies in 1911, Royal Dutch Shell remained intact, operating as two entities until 2005, when they were finally combined in a dual-nationality structure: incorporated in the UK, but residing in the Netherlands. This managed to satisfy the national claims both countries make on the supermajor, second only to ExxonMobil in revenue and profits but proved to be costly to maintain. In 2020, fellow Anglo-Dutch conglomerate Unilever also ditched its dual structure, opting to be based fully out of the City of London. In that sense, Shell is following the direction of the wind, as forces in its (soon to be former) home country turn sour.
There is a specific grievance that Royal Dutch Shell has with the Dutch government, the 15% dividend tax collected for Dutch-domiciled companies. It is the reason why Unilever abandoned Rotterdam and is now the reason why Shell is abandoning The Hague. And this point is particularly existentialist for Shell, since its share prices has been battered in recent years following the industry downturn since 2015, the global pandemic and being in the crosshairs of climate change activists as an emblem of why the world’s average temperatures are going haywire. The latter has already caused the largest Dutch state pension fund ABP to stop investing in fossil fuels, thereby divesting itself of Royal Dutch Shell. This was largely a symbolic move, but as religious figures will know, symbols themselves carry much power. To combat this, Shell has done two things. First, it has positioned itself to be at the forefront of energy transition, announcing ambitious emissions reductions plans in line with its European counterparts to become carbon neutral by 2050. Second, it is looking to bump up its dividend payouts after slashing them through the depths of the Covid-19 pandemic and accelerating share buybacks to remain the bluest of blue-chip stocks. But then, earlier this year, a Dutch court ruled that Shell’s emissions targets were ‘not ambitious enough’, ordering a stricter aim within a tighter timeframe. And the 15% dividend tax remains – even though Prime Minister Mark Rutte’s coalition government has been attempting to scrap it, with (it is presumed) some lobbying from Royal Dutch Shell and Unilever.
As simplistic it is to think that Shell is leaving for London believes the citizens of the Netherlands has turned its back on the company, the ultimate reason was the dividend tax. Reportedly, CEO Ben van Buerden called up Mark Rutte on Sunday informing him of the planned move. Rutte’s reaction, it is said was of dismay. And he embarked on a last-ditch effort to persuade Royal Dutch Shell to change its mind, by immediately lobbying his government’s coalition partners to back an abolition of the dividend tax. The reaction was perhaps not what he expected, with left-wing and green parties calling Shell’s threat ‘blackmail’. With democracy drawing a line, Shell decided to walk; or at least present an exit plan endorsed by its Board to be voted by shareholders. Many in the Netherlands see Shell’s exit and the loss of the moniker Royal Dutch – as a blow to national pride, especially since the country has been basking in the glow of expanded reputation as a result of post-Brexit migration of financial activities to Amsterdam from London. The UK, on the other hand, sees Shell’s decision and Unilever’s – as an endorsement of the country’s post-Brexit potential.
The move, if passed and in its initial stages, will be mainly structural, transferring the tax residence of Shell to London. Just ten top executives including van Buerden and CFO Jessica Uhl will be making the move to London. Three major arms – Projects and Technology, Global Upstream and Integrated Gas and Renewable Energies – will remain in The Hague. As will Shell’s massive physical reach on Dutch soil: the huge integrated refinery in Pernis, the biofuels hub in Rotterdam, the country’s first offshore wind farm and the mammoth Porthos carbon capture project that will funnel emissions from Rotterdam to be stored in empty North Sea gas fields. And Shell’s troubles with activists will still continue. British climate change activists are as, if not more aggressive as their Dutch counterpart, this being the country where Extinction Rebellion was born. Perhaps more of a threat is activist investor Third Point, which recently acquired a chunk of Shell shares and has been advocating splitting the company into two – a legacy business for fossil fuels and a futures-focused business for renewables.
So Shell’s business remains, even though its address has changed. In the grand scheme of things, never mind the small matter of Dutch national pride – Royal Dutch Shell’s roadmap to remain an investment icon and a major driver of energy transition will continue in its current form. This is a quibble about money or rather, tax – that will have little to no impact on Shell’s operations or on its ambitions. Royal Dutch Shell is poised to become just Shell. Different name and a different house, but the same contents. Unless, of course, Queen Elizabeth II decides to provide royal assent, in which case, Shell might one day become Royal British Shell.
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