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Barely had Saudi Arabia and Russia managed to rein in crude’s rally with a hard-earned OPEC/non-OPEC deal to increase output by up to 1 million b/d, that US President Donald Trump upped the ante again.
The US would press its allies to cut their crude imports from Iran to zero by November 4 (when US sanctions against Iran’s oil sector take effect), a senior State Department official told reporters in a “background briefing” in Washington on June 26, bringing crude bulls back into play.
Though there was some back-pedalling by US officials subsequently, the market was left rattled, once again. The surprising US declaration raised fears that the few OPEC/non-OPEC producers that do have meaningful spare capacity, would run out of steam if called upon to compensate, in theory, 2.4 million b/d of Iranian crude disappearing from the market.
The suggestion that the US was not inclined to waive sanctions against buyers in exchange for them paring their purchase of Iranian crude, as it did during the 2012-2015 sanctions era, prompted the market to factor in a much bigger potential loss of Iranian barrels than the 0.5-1.0 million b/d range estimated in recent weeks.
The June 26 State Department posturing could turn out to be a classic bargaining tactic — get an upper hand by starting out with an extreme demand — as the US dispatches its envoys to Iran’s crude customers China, India and Turkey.
A State Department official Thursday softened the original message, saying that the US was “prepared to work with the countries that are reducing their imports on a case-by-case basis.”
Comments on the same day by Nikki Haley, US ambassador to the UN on a visit to India, also suggested a moderation in stance. In an interview with a local TV channel, Haley acknowledged that India “can’t change its relationship with Iran in a day,” but nonetheless, said the US was encouraging it to re-evaluate that relationship.
Discussions between the US and China over Iran sanctions are bound to be more complicated, given that the two economic powers are locked in an increasingly fierce trade battle, having announced tit-for-tat import tariffs against each other. Besides, Beijing continues to stand by the 2015 Iran nuclear deal as one of its signatories.
China has another lever to pull — its substantial and rising purchases of US crude. The country, which is now neck and neck with Canada as the largest importer of US crude, has threatened a 25% import tariff on the product. That would effectively stem the flow of US crude into China by making it economically unviable.
Russia is also under US sanctions, but both China and India have continued their trade relations with that country.
While neither Chinese nor Indian refiners would want to risk secondary US sanctions, the Iran crude imports issue could get stuck in protracted diplomatic wrangling. That would keep the oil market on tenterhooks and the Iran fear premium intact in crude prices through the third quarter.
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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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