Last Updated: July 28, 2018
1 view
Business Trends

The oil market may be underestimating Iran’s ability to disrupt oil flows in and out of the Middle East and its potential repercussions.

Consensus opinion has been dismissive of Iran’s recently renewed threats to block oil flows through the Strait of Hormuz in retaliation against US sanctions as pure bluster, especially in view of the heavy US military presence around the Persian Gulf. But an attack by the Iran-aligned Houthi rebels in Yemen on two Saudi oil tankers, which prompted Aramco to indefinitely suspend oil shipments through the Bab el-Mandeb strait from July 26, shows that Tehran has the other major chokepoint of the Arabian Peninsula within its reach as well.

Other Middle Eastern producers’ oil shipments through the Bab el-Mandeb, a narrow waterway that connects the Red Sea with the Arabian Sea, have remained normal and traders were expecting Saudi shipments to resume once the kingdom had made adequate security escort arrangements for its tankers. But it would be dangerous to discount the nuisance value of the Houthis, who have stepped up missile attacks against Saudi Arabia over the past several months, and who may be leveraged even more by Tehran amid an escalating war rhetoric with the US.

While the target of the Houthi rebels, who took over the government in Sana’a in late 2014, is Saudi Arabia, which backs the now exiled government of Yemen, an escalation of attacks in the Bab el-Mandeb strait or the Red Sea could bring all oil traffic through those waters to a complete halt.

The strait is a busy channel for crude and refined product shipments moving in both directions, north and south. An estimated 4.8 million b/d of crude and refined products flowed through the waterway in 2016, according to the US Energy Information Administration. The strait is also a conduit for Middle East crude and refined product shipments to Europe and the US through the Suez Canal and the SUMED pipeline to its north in Egypt, which connect the Red Sea to the Mediterranean Sea. Some 3.9 million b/d of crude and products passed through the Suez Canal in 2016, while the SUMED pipeline system has the capacity to move 2.34 million b/d of crude, according to the EIA.

Crude flows into and refined product exports out of the Yanbu and Rabigh refineries on the west coast of Saudi Arabia, each with a capacity of 400,000 b/d, also need access to the Bab el-Mandeb. Only the Yanbu refinery can receive Saudi crude from Jubail via an overland East-West pipeline system.

For Iran, targeting the Bab el-Mandeb and onshore Saudi oil installations through the Houthis provides wider access to the kingdom’s facilities as well as deniability, which it would not have, were it to attack the Strait of Hormuz on its own.

The crude market largely shrugged off the growing war of words between the US administration and Iranian leaders this week. But it will be forced to take notice if the Houthis escalate attacks against Saudi Arabia and maybe even its ally the UAE, or continue targeting ship movements through the Red Sea. Houthis claimed they attacked the international airport in Abu Dhabi using an armed drone that flew over 1,500 km to its destination on Thursday, though the UAE flatly denied such an incident occurred, while experts doubted that the rebels have such capability.

Though crude’s price recovery this week from the depths plumbed last week was also helped by a draw reported for last week in US crude and refined product stocks, the upside was limited. Two major bearish factors remain in view: increased supply from Saudi Arabia and a few other OPEC/non-OPEC producers, and a possible slowdown in oil demand if the US-China trade war continues to fester.

A potential supply shock if Washington adopts a tough stance against buyers of Iran crude may seem distant, given the November 4 implementation of US sanctions against Iran’s oil sector. But the Bab el-Mandeb attack this week shows oil supply could be jolted from other directions and at any time.

iran US sanctions oil crude opec
3 0

Something interesting to share?
Join NrgEdge and create your own NrgBuzz today

Latest NrgBuzz

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.

End of Article 

Get timely updates about latest developments in oil & gas delivered to your inbox. Join our email list and get your targeted content regularly for free or follow-us on LinkedIn.

No alt text provided for this image

Download Your 2022 Energy Industry Training Calendar

November, 28 2021
high efficiency oil boiler

high efficiency oil boiler - Boyle Energy Provide best Oil Furnace Repair & Installation experts. We also provide free installation estimates for new High Efficiency oil furnaces. Oil furnaces & boilers with high efficiency save your energy & money over time

November, 18 2021