Eighteen months after OPEC’s momentous decision in November 2016 to slash production in concert with a group of major non-OPEC producers to drain the world’s bloated inventories and shore up crude prices, the group is at a crossroads again.
Commercial oil inventories in the OECD countries are estimated to have finally come in line with or fallen slightly below their five-year average over the past two months, achieving OPEC’s target nearly nine months before its production restraint agreement is set to expire.
Disciplined OPEC/non-OPEC cuts, aided by strong global oil demand growth, have finally managed to reverse the persistent build in global oil stocks since early 2014 to a near-continuous draw-down from mid-2017.
Brent, which tanked to a 13-year-low of $27.88/barrel on 20 January 2016, repeatedly flirted with the $80 key psychological level this week.
The world is now bracing for more spikes, anticipating protracted supply issues in OPEC producers Iran and Venezuela, combined with intermittent disruptions in Libya and Nigeria against a thinning cushion of stocks and spare production capacity while consumption growth remains robust.
Alarm bells are going off among consumers and OPEC will need to respond. Neither the threat of declining Iranian supplies nor the downward spiral in Venezuelan production are problems of OPEC’s making. But if crude continues its march above $80, the group will be hard-put to justify its curbs — especially now that OECD stocks have fallen to five-year average levels.
The pressure is already on. Saudi energy minister Khalid al-Falih this week had phone conversations with his counterparts in the US, South Korea, India, the UAE and Russia as well as the International Energy Agency’s Executive Director Fatih Birol. In a call with the Indian oil minister Dharmendra Pradhan on Thursday, Al-Falih said Saudi Arabia will ensure market stability and adequate oil supplies. Pradhan expressed concern over the impact of high crude prices on the Indian consumer and economy.
UAE energy minister Suhail al-Mazrouei and Al-Falih were said to have concluded in their conversation that the oil market remained well-supplied and the recent price surge was driven by geopolitics rather than fundamentals.
That might well be the case. There appears to be enough prompt supply. The big worry is over an accelerated tightening in the coming months. The recent sharp narrowing of the backwardation at the front end of the Brent futures curve and the return of contango in the front two months of WTI futures contracts supports that view. It reflects active buying in forward contract months, lifting their prices relative to the prompt barrels.
Anxiety over a crimp in Iranian supply as US sanctions kick in on November 4, combined with a tailspin in Venezuelan production, especially if the US imposes sanctions against its oil sector, is real.
OPEC has to take a view beyond the spot market and factor in the fears. When it meets on June 22 in Vienna to decide on its supply policy for the next six months, it needs to have a strategy in place to address sudden supply shocks. If the group takes its role as a market balancing agent seriously, the time has come to walk the talk.
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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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