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Last Updated: July 27, 2018
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Market Watch

Headline crude prices for the week beginning 23 July 2018 – Brent: US$67/b; WTI: US$73/b

  • Signs that OPEC members are ramping up production are causing the market to worry about oversupply again. Saudi Arabia has turned on its spigots, and Iraq and Russia are both also raising output, ahead of the expected loss of Iranian volumes in November.
  • A flood is not expected, as Saudi Arabia has pledged not to ‘push oil into the market beyond its customers’ needs’, translating into support for prices at US$70/b.
  • The end of the oil workers’ strike in Norway on July 19 removed some concern over supply risk in the market, although a spat of worker kidnappings in Libya’s Sharara field may yet curb Libyan output.
  • Japan expects to import its last barrel of Iranian crude in October, a sign that America’s sanctions against Iran are being adhered to.
  • However, American belligerence may yet threaten the macroeconomic environment. Talks with the EU to reduce tariffs ‘to zero’ diffused the situation somewhat, but there are rocky waters ahead with China, Mexico and Canada. Meanwhile, the US is mulling anti-cartel legislation that could subject OPEC to antitrust lawsuits for manipulating energy prices.
  • Despite strong prices, worries over the US-China trade spat hurting demand led American drillers to cut the active rig count for a third consecutive week. Five oil rigs and three gas rigs were halted, lowering the total count to 1,046.
  • Crude price outlook: The market will be focusing on supply for the foreseeable future - whether or not the immediate rise in OPEC+ volumes will be enough to offset the loss of Iranian volumes. Prices should stay rangebound, at some US$73-75/b for Brent and US$67-69/b for WTI.

Headlines of the week

Upstream

  • Shell is reportedly looking to sell two Nigerian onshore oil licences in the Niger Delta, removing it from an oil-rich region beset with civil and militant strife to concentrate on safer offshore opportunities.
  • China’s CNOOC is looking to expand its presence in Nigeria, expecting to invest an additional US$3 billion into its existing operations with NNPC.
  • Lukoil has sanctioned development on the Rakushechnoye field in the Caspian Sea, with commercial output expected to begin in 2023.
  • The Intercontinental Exchange (ICE) has launched plans for a Permian West Texas Intermediate (WTI) crude oil futures contract for physical delivery into Houston, expected to begin in 3Q18.
  • An enduring impasse with local communities may force Tullow Oil to shut down operations in northern Kenya, threatening the country’s plans to ship crude from the Turkana region to the port of Mombasa.
  • Iraq’s crude exports have hit their fastest pace in the wake of the new OPEC resolution, jumping by 6% m-o-m to some 4.05 mmb/d in early July, according to port tracking data.
  • Russia too is planning to boost output, announcing plans to raise volumes at Sakhalin-1 from 215,000 b/d in 2Q18 to some 260,000 b/d in 3Q18.
  • Shell has obtained two new PSCs in Mauritania, bringing it into the West African Atlantic Margin for the first time with the C-10 and C-19 blocks.

Downstream

  • Malaysia has announced a new timeline for the introduction of B10 biodiesel, expecting to raise the national mandate from B7 in the second half of 2019 after twice delaying it due to unfavourable palm oil prices.
  • A minor fire at Saudi Aramco’s Riyadh refinery has been attributed to an ‘operational incident’ at a storage tank instead of a drone attack by Iranian-backed Houthi rebels from Yemen.
  • Weak profits have caused Azerbaijan’s Socar to refocus its trading arm from crude to LNG and marketing output from its new Turkish refinery.

Natural Gas/LNG

  • Woodside is exiting Port Arthur LNG in Texas, three years after buying into the Sempra Energy project, citing lower expected returns.
  • Sonatrach and Eni has signed a new agreement to strengthen their gas operations in Algeria, combining the BRN Block 43 and MLE Block 405b assets to create a major gas hub in the Berkine basin.
  • Vopak has agreed to purchase a 29% stake in Elenergy Terminal Pakistan, which is building Pakistan’s first LNG import site in Port Qasim.
  • TransCanada has completed its US$1.2 billion, 560 km Topolobampo natural gas pipeline in northern Mexico, adding some 670 mcf/d of capacity to markets in the Chihuahua and Sinaloa states.
  • PetroChina has inked a mid-term 3-year deal with the ExxonMobil-led PNG LNG project, purchasing 450,000 tons per year with immediate effect.

Corporate

  • Saudi Aramco is reportedly in talks to buy a strategic stake in SABIC, the world’s fourth largest petrochemical maker and fellow Saudi firm. The move could raise its market valuation but delay its planned IPO.

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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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