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Market Watch

Headline crude prices for the week beginning 7 May 2017 – Brent: US$76/b; WTI: US$70/b

  • WTI crude breached the US$70/b mark for the first time in four years, with the main topic being the US decision to re-impose sanctions on Iran, thereby pulling out of the nuclear deal that the EU has been trying to save.
  • Increasing trouble at PDVSA – which a former official opined could be ‘going down’ - has also stoked worries about the shock to the market.
  • By Tuesday, President Trump confirmed that he was leaving the Iran nuclear deal – calling it an ‘embarrassment’ and re-imposing sanctions, with the EU mulling moves that could insulate it from the impact of the new sanctions.
  • Though it is unknown how strict the new sanctions will be, there will be a timeline for 180 days before the strictest measure – targeting international banks – can be applied. Analysts believe Iranian exports could be cut by 200-300,000 b/d as a result.
  • In the US, production continues to surge as the EIA confirms that American output hits 10.26 mmb/d in February.
  • Meanwhile, nine new oil rigs entered service in the US last week, bringing the oil rig total up to 834, with six of the increases being in the Permian as US drillers respond to the new average price of US$70/b for crude.
  • Crude price outlook: The deteriorating outlook for the Iran deal will keep crude prices at their current levels. Expect Brent to trade at US$74-75/b and WTI/Shanghai to US$68-69/b.

Headlines of the week

Upstream

  • Spain’s Repsol has officially requested for compensation from PetroVietnam and Vietnamese authorities over the suspension of its oil project in the offshore Red Emperor block over Chinese pressure.
  • Iraq’s North Oil Company and the UK’s BP have signed an agreement to triple the output of the former’s Kirkuk oil fields to 1 mmb/d, as the Iraq central government capitalises on recapturing the fields from the KRG.
  • Brent cargoes for May and June deliveries have been delayed by a shutdown at the Sullom Voe oil terminal in the UK; some 100,000 barrels of crude scheduled for May loading are expected to be affected.
  • The hits keep coming in Egypt, as Eni announced a new oil discovery – the third in a month – at the A-2X prospect in the Western Desert’s South West Meleiha licence. Early tests point to 2,300 barrels of light oil per day.
  • Brazil has proposed September 28 for its planned fifth auction of oil blocks, which include the pre-salt offshore plays in the Saturno, Tita, Pau-Brasil and Tartaruga Verde fields in the Campos and Santos basin.
  • Between ExxonMobil and Chevron, some 50 drilling rigs by American supermajors will start up in the US Permian shale play this year.
  • Indonesia has secured operators for four of the five direct tender blocks offered earlier this year, with Eni taking the East Ganal block in the Kutei basin, while Repsol, Lion Energy and local players took the rest.

Downstream

  • US refiner Marathon Petroleum has agreed to buy rival Andeavor for US$23.3 billion, creating the largest independent refiner in the US.
  • Nigeria’s Forte Oil plans to divest its upstream and power businesses in the country as well as its downstream unit in Ghana, as the private firm reorganises to focus on retail fuel distribution in its home market.
  • Peru has revived plans for a petrochemical plant in southern Peru – fed by a natural gas pipeline – after the plan to expand its downstream industries was derailed by the corruption scandal engulfing Brazil’s Odebrecht.

Natural Gas/LNG

  • Russia’s Gazprom has unveiled a plan for a US$5 billion gas processing plant near St. Petersburg, which would serve as an alternative outlet if its proposed Nord Stream 2 gas pipeline project is axed by the EU.
  • BP expects to take FID on Phase 1 of its Tortue-Ahmeyim gas project offshore Senegal and Mauritania by the end of this year.
  • China’s CNOOC has set itself a target to increase LNG imports by 20% in 2018 – roughly 25 million tons from 20.46 million tons in 2017 – to power the country’s push to move towards cleaner energy.
  • Italy’s Eni is launching a study on a possible LNG terminal in the Barents Sea off Norway to exploit its recent gas discoveries in the Arctic region.
  • Iran has warned that Total is at risk of losing its stake in the South Pars natural gas field to Chinese partner CNPC. The French company is forced to withdraw from Iran by the US decision to re-impose sanctions.
  • Running out of gas at home, Thailand’s PTTEP is attempting exploration drills in north Australia’s Cash-Maple area to support new LNG volumes.
  • BP has set itself an ambitious target of boosting its LNG portfolio volumes to 25 million tons per year as it plays catch-up with Shell.

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Royal Dutch Shell Poised To Become Just Shell

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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