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After proving to be a thorn in the side of the planned merger between Japanese refiners Idemitsu and Showa Shell Sekiyu since 2016, the family of Idemitsu’s founder Sazo Idemitsu has now acquiesced to the wishes of Idemitsu’s board and dropped its opposition to the merger. This paves the way for the latest merger in the Japanese refining business, as the industry – once a global titan – prepares for a future of shrinking domestic demand.
The merger was first announced in 2016, the first planned merger in Japanese refining since an initial wave of consolidation in the 2000s. But opposition from the Idemitsu founding family – which hold a considerable stake in the company – meant that the merger remains uncompleted, while the Nippon Oil and Mitsubishi Oil and the JX Holdings and TonenGeneral mergers sped ahead, even though they were announced later. The completion of the Idemitsu-Showa Shell Sekiyu merger will slash the number of Japanese refiners from six to three, a trend backed by the Japanese government, which sees consolidation as the only way forward to optimise the industry. Although Idemitsu – Japan’s second-largest refiner – claims that no refineries will be closed post-merger, it seems inevitable; Japanese fuel demand peaked in the late 2000s and its decline is accelerating. From a peak of 4.6 mmb/d in refining capacity, consolidation means that Japanese capacity could halve to 2.3 mmb/d by 2030 – mainly by shuttering the country’s aging simple refineries. While this will increase Japan’s fuel product import bill, the Japanese government seems fine with this, given that the downstream companies will merely be swapping crude imports for product imports.
But back to the Idemitsu-Showa Shell Sekiyu merger. There were legitimate concerns from the Idemitsu family regarding the logic of the merger. They argued that cultural differences between the management of both companies and geopolitical factors – Idemitsu is a major importer of Iranian crude, while Saudi Aramco owns part of Showa Shell – were insurmountable. With the US now re-imposing sanctions on Iran crude, the latter has once again come into prominence. But even when Iranian crude returned to the world market in 2016, the Idemitsu family went as far as to increase its stake in the firm – in response to a strategic share dilution designed to reduce their veto power – to derail the merger. But the show went on despite their opposition – Idemitsu bought a 33% stake in Showa Shell in 2016, and since 2017 deepened ties through an exchange of directors and combining operations. A merger was always inevitable, and now even the Idemitsu clan has seen that. Even the family’s most strident voice, Shosuke Idemitsu, has fallen, agreeing on the condition that the new company ‘respect the values and principles that have guided Idemitsu since 1917.’ Two seats for the family on the board of the combined company have also been demanded.
The new merged company could be formed as early as the end of 2018. Since both firms are operating on a level just short of a full-merger, it seems almost a formality. But it is necessary. The JX-TonenGeneral merger was completed last April, now the country’s dominant player. Idemitsu-Showa Shell may form 30% of the domestic fuels market, but that is 30% of a shrinking market. As its rivals speed ahead, Idemitsu-Showa Shell can now begin to catch up.
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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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