Easwaran Kanason

Co - founder of NrgEdge
Last Updated: July 3, 2018
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Refining & Petrochem
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Announced in 2015, the West Coast Refining and Petrochemicals Project in India was to have been commissioned in 2022. A joint venture between the three Indian state refiners – IndianOil, HPCL and BPCL – to feed India’s soaring energy demand, land acquisition for the refinery in the Ratnagiri district of Maharashtra state hasn’t even been completed, making that target 2022 date very unlikely. But it will go through, not least because the refinery has now secured the backing of Saudi Aramco and Abu Dhabi’s Adnoc.

Last week, Adnoc signed on to buy a stake in the US$44 billion project, brought in as a strategic partner by Aramco. Together, the two Middle Eastern titans will hold an equal majority stake of 50% in the project, with IndianOil at 25% and BPCL and HPCL at 12.5% each. That’s an unusual move, considering that this is a state project, and some have questioned given the foreign firms such a high stake. But as much as Saudi Aramco and Adnoc need to secure outlets for their crude in an increasingly competitive world, India needs crude far more. And with the latest US moves possibly curbing India’s sourcing from Iran, the project has to fall back on the country’s stalwart providers.

And Ratnagiri will need a lot of crude. When completed – the new target date is a still-optimistic 2025 – it will equal or best the capacity of Jamnagar (also in India), the current largest refinery in the world. The planned capacity is for 1.2 million barrels per day of crude processing while petrochemical capacity is said to be in the 18 million tons per annum region. Currently, India has a refining capacity of about 232 mmtpa, with domestic demand reaching 194.2 mmtpa in fiscal 2017. According to the International Energy Agency, this demand is expected to reach 458 mmtpa by 2040. The country is also now the world's third-biggest oil importer. More than financial certainty and domestic demand, Aramco and Adnoc’s participation guarantees that Ratnagiri will always have enough crude to run. And it fulfils Aramco and Adnoc’s ambitions to move further down the value chain into downstream, with Aramco fulfilling its target of having stakes in key refineries in Asia (India, China, Southeast Asia through Malaysia) and the Americas (Port Arthur). Adnoc, too, has invested in India before – having bought a stake in the country’s strategic petroleum reserve in Mangalore.

With financing and partners in place, it would seem as if Ratnagiri is a done deal. But there is one major stumbling block – land. The state government of Maharashtra has yet to secure the 15,000 acres required for the refinery, facing stiff opposition from local farmers and laws that state that at least 70% of land owners must give consent for land acquisition. With general elections due in India next spring and opposition parties seizing on the issue, it is likely that no on-the-ground moves will be made until the next government is in place. The National Democratic Alliance (NDA) led by Narendra Modi is expected to win, but will be treading cautiously around this contentious issue. The 2025 target seems ambitious, and by the time it starts operations, India’s oil demand may have grown even more.

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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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