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Market Watch

Headline crude prices for the week beginning 28 May 2018 – Brent: US$75/b; WTI: US$66/b

  • Oil prices have retreated from their highs, as it becomes evident that OPEC and its NOPEC allies are moving to raise output, to counter potential supply shortfalls from Iran and Venezuela.
  • With fresh sanctions levied on Iran and Venezuela, crude prices had been riding a wave of risk-associated gains, with the market particularly worried about the ongoing ‘implosion’ in Venezuela.
  • With Russia and Saudi Arabia claiming a ‘common position on the future of the oil output cut deal’, both producers have signalled that their taps will open up to ensure a steady supply, calming fears in the market.
  • The new OPEC meeting is on June 22; this was originally supposed to be where OPEC would set out its ‘exit strategy’ from the current production freeze deal, but it seems that attention will be instead focusing on rejigging the numbers to keep prices in their current range.
  • Energy ministers from Saudi Arabia, the UAE and Kuwait will be meeting later this week ahead of the OPEC meeting to discuss a common position.
  • Spooked by OPEC’s move, hedge funds have reduced their net long position in Brent and WTI contracts by over 169 million barrels, sapping the strength in the long-term futures rally
  • The spread between Brent and WTI is now at its largest since 2015, potentially becoming a boon for US producers promoting exports.
  • After a brief pause, US drillers added 15 new oil rigs last week, the largest increase since February, with 859 active oil rigs taking advantage of the current high crude price environment.
  • American oil drillers took a pause in adding new units, with the US oil rig count holding steady last week after six consecutive weeks of gains, where the current total standing is 844 and 4 gains in the Permian offset by losses elsewhere.
  • Crude price outlook: OPEC’s moves may have calmed the market down slightly, but the ongoing issues in Iran and Venezuela are very real and tangible. Prices are unlikely to climb back to US$80/b for Brent, but will stay around US$77-78/b, or US$68-69/b for WTI. 

Headlines of the week

Upstream

  • Shell has made a large and significant deepwater discovery in the US Gulf of Mexico with its Dover well, its sixth in the offshore Norphlet play.  
  • CNOCC is anticipating production at its Kingfisher crude oil fields in Uganda – co-developed with Total – to begin in 2021, with FID in 2018.
  • Peru has cancelled five offshore oil contracts awarded to Tullow Oil, citing insufficient consultations made with coastal residents in the area.
  • Egypt has set October 1 and 8 as deadlines for two major international tenders for oil and gas blocks, which would offer 27 onshore and offshore blocks in a country riding a wave of successful discoveries.

Downstream

  • US refiner Valero and Supply de Mexico has signed long-term agreements to import fuel products from the Corpus Christi and Three Rivers refineries in Texas via pipeline into Nuevo Laredo, northern Mexico.
  • After entering operation in April, Vietnam’s second refinery – Nghi Son – has sold its first batch of diesel, with gasoline sales beginning earlier.
  • Indonesia is reportedly looking for a partner to finish the ongoing upgrade of its Balikpapan refinery in East Kalimantan.
  • Despite facing issues in meeting its current B20 biodiesel mandate, Indonesia is aiming to introduce a new B25 mandate next year.
  • The private 400 kb/d Hengli refinery in Dalian, China, is gearing up for trial operations in October, having purchased 2 million spot barrels of Saudi Arabia Medium crude for delivery in July.
  • The suit by Shell against five former employees of its Singapore refinery is ongoing, with Shell raising the value of fuel products allegedly stolen from its Pulau Bukom refinery to US$40 million.

Natural Gas/LNG

  • Total is taking a 10% stake in the upcoming Novatek-led Arctic LNG-2 project in Russia, with an option to raise its stake by a further 5%.
  • Curadrilla Resources has applied to the UK government to drill the country’s first ever horizontal shale gas well in Lanchashire.
  • ExxonMobil and Total has agreed on the capacity of three LNG trains to be built for PNG LNG, with capacity planned for 2.7 mtpa per train.
  • India’s ONGC is aiming to quadruple output from its offshore Deendayal natural gas block in the Bay of Bengal to some 1 mcf/d by January 2019.
  • BP has agreed to buy 2 mtpa of LNG over 20 years on a FOB basis from Venture Global, which is developing Calcasieu Pass LNG in Louisiana.
  • Rosneft has signed a deal to aid the semi-autonomous Kurdistan region in Iraq to develop its gas resources and build a major gas pipeline.
  • India’s GAIL is reportedly switching focus to short-term and spot deals for its LNG purchases, as a hedge against price volatility.
  • Cheniere has approved construction of a third liquefaction unit at its Corpus Christi LNG terminal, with the first two trains starting in 2019.

Corporate

  • Saudi Aramco’s planned IPO has been delayed to 2019, according to the firm at the St. Petersburg International Economic Forum.
  • Australia’s Santos has rejected a final US$10.8 billion takeover offer from US-based Harbour Energy, which failed in its fifth attempt to buy Santos.

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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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