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Last Updated: July 20, 2018
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Market Watch

Headline crude prices for the week beginning 16 July 2018 – Brent: US$71/b; WTI: US$68/b

  • Signs that crude oil supply could expand in coming weeks have dragged crude prices down to a three-month low, particularly the promise of more oil from OPEC and its allies.
  • While Saudi Arabia will be reluctant to use up all its spare capacity and the question of replacing Iranian volumes is still up in the air, Russia stated that the OPEC+ group of 24 countries could boost production by more than the 1 mmb/d agreed in Vienna last month, if need be.
  • The re-opening of four key export terminals in Libya – following the ending of a blockade by eastern rebel factions – should reverse the decline in Libyan exports. However, a recent abduction at the Sharara oil field shows the situation is still fragile.
  • An ongoing strike by upstream oil workers in Norway is also feeding into concerns over short-term global supply, but the market seems to be assured that OPEC+ will be able to act to balance things.
  • News that China’s second quarter GDP growth was slower than expected – and June factory output slowing to a two-year low – caused worries that high oil prices could be arresting fuel demand growth at a time when China’s trade war with the US is intensifying.
  • Although American economic data is robust, there are fears of a slowdown elsewhere in the world, which could further hurt the demand-led improvement in crude prices over 2018.
  • With signs of cloudy weather over crude prices, American drillers took a step back, leaving the active oil rig count unchanged last week, while adding 2 new gas rigs to bring the total up to 1,054.
  • Crude price outlook: The market is balanced between immediate supply concerns and cloudier forecasts over mid and long-term demand, which should keep prices stable. The return of some functions at Suncor’s Syncrude facility should allow the Brent-WTI differential to fall. We expect Brent to range in US$70-73/b and WTI at US$65-67/b.

Headlines of the week

Upstream

  • Norwegian oil workers have gone on strike for the first time since 2012 in a dispute over wages and pensions, which has already forced Shell to close down production at its Knarr field.
  • BP is now the frontrunner in the race to buy BHP Billiton’s US onshore oil and gas operations, which the mining giant wants to sell as a single package.
  • Eni’s streak in Egypt continues, announcing a second light oil discovery at the B1-X prospect within the Faghur basin, which Eni is hoping will combine with its previously discovered A2-X well to form a new productive area.
  • The UK’s Oil and Gas Authority (OGA) has launched its 31st Offshore Licensing Round, with some 1,766 blocks covering 370,000 square kilometres from the Shetlands, North Sea and English Channel up for grabs.
  • Crude production in Kazakhstan has risen by some 6.2% y-o-y in the first half of 2018, with expansions at the Tengischevroil, Kashagan and Karachaganak fields contributing to a total output figure of 1.046 mmb/d. Over the same period, Kazakh exports were up 6% to 845,000 b/d.
  • The outage at Suncor’s Syncrude oil sands project in Alberta, Canada, which caused the dramatic narrowing of the WTI-Brent spread recently, will only be fully quelled by September, although some output will resume over July.

Downstream

  • The US Environmental Protection Agency will be ditching a plan requiring refiners to raise biofuel blending levels in 2019 to compensate for its waver program, capitulating to intense protest from the American refining industry.
  • Japanese refiners Idemitsu Kosan and Showa Shell Sekiyu have finally agreed to merge on April 1, 2019 through a share swap, after the Idemitsu founding family was convinced to drop its long-standing opposition to the plan.
  • Iraq has extended its deadline for submissions to build a planned 100,000 b/d refinery in its Kut province, with the new deadline being October 4.
  • Just as China unveiled measures to ease foreign investment, BASF announced that it is considering building China’s first fully-foreign-owned petrochemical plant in Guangdong, a US$10 billion project scheduled for 2030.

Natural Gas/LNG

  • Total has completed its acquisition of Engie’s upstream LNG assets, purchased for US$1.5 billion, making the French major the world’s second largest LNG player behind Shell.
  • ExxonMobil, Eni and CNPC – partners in Mozambique Rovuma Venture – have submitted their development plan for the first phase of the Rovuma LNG project, which include two LNG trains with 7.6 mmtpa capacity each.
  • Nigeria has started on its US$12 billion plan to expand its LNG capacity by a third, with Nigeria LNG – a joint venture between NNPC, Total, Shell and Eni – signing off on new trains that would increase capacity to 30 mmtpa by 2030.
  • Gazprom expects full-scale development of the Kharasaveyskoye gas and condensate field in the Yamal Peninsula to begin in 2019.
  • As the US LNG industry continues to take off, Cheniere and the CME Group are working to develop the first US physical LNG futures contract based on deliveries from Cheniere’s Sabine Pass export terminal.
  • Even as Inpex’s Ichthys LNG project approaches its long-delayed start, Australia’s safety regulator has reportedly found some electrical mistakes, which could delay the project’s start-up.

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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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