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Last Updated: August 16, 2018
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Market Watch

Headline crude prices for the week beginning 13 August 2018 – Brent: US$72/b; WTI: US$67/b

  • Turbulence continues to buffet crude oil prices, which are being caught in between short- and long-term supply concerns and external turmoil.
  • This week, the Turkish lira went into meltdown, with the contagion spreading over to other emerging currencies, including India and Indonesia; conversely, the dollar is also strengthening, placing pressure on barrels.
  • With a full month of data after the OPEC+ resolution in June, OPEC crude production for July rose by 41,000 b/d to 32.32 mmb/d, despite declines in Libya, Iran and Saudi Arabia. That’s below its 1 mmb/d increase target, and with Iranian sanctions looming, meeting that target could be challenging.
  • On the Iran situation, the US appears to have accepted that it will not be able to reduce Iranian crude exports ‘to zero’. Instead, the Trump administration is now aiming to cut Iranian volumes by half, which would be in the 700,000 kb/d to 1 mmb/d range.
  • The Trump administration is also walking back on its previous hardline stance, announcing that it would consider partial exemption from oil sanctions against Iran for some countries, which could see Total not giving up its cherished stake in the South Pars 11 project to CNPC.
  • Meanwhile in China, the new Shanghai crude futures launched in March seems to be marching to the beat of its own drum, advancing almost 5% over the first half of August against declines in Brent and WTI, the possible result of speculative activity that could diminish its potential to be a benchmark.
  • In the US, a weak trend in prices did not dissuade American drillers from adding 10 new oil rigs and 3 new gas rigs – the single largest jump in the weekly active rig count since May. The EIA is also reporting increase output at major shale plays, expecting output to rise to 7.52 mmb/d in September and bringing the US closer to the 12 mmb/d mark.
  • Crude price outlook: The persistence of a strong dollar is likely to mitigate any upward rise in oil prices, although uncertainty over trade, tariffs and Turkey could pull prices up. We expect Brent to trade at US$70-72/b and WTI at US$64-66/b.

Headlines of the week

Upstream

  • India’s Ministry of Petroleum and Natural Gas has launched its DSF Bid Round II, with 60 discoveries clubbed into 26 new contract areas located in ‘large, commercially-producing basins’.
  • Quadrant Energy and Carnarvon Petroleum has announced a major onshore oil find in Western Australia (WA), describing the Dorado as a ‘truly incredible’ reservoir that could hold some 150 million barrels of oil – which would make it the largest oil find in WA over the last 20 years.
  • Pakistan is teasing a ‘big cache’ of oil discovered by ExxonMobil and Eni in the offshore Block G, located off the Indus Delta.
  • Mozambique has finally handed out contracts for oil concessions that were awarded in 2015, allowing companies like Statoil, Eni, ExxonMobil and Sasol to begin exploring in the oil-rich Northern Zambezi basin.

Downstream

  • Vietnam’s second refinery, the 200 kb/d Nghi Son site, expects to reach full capacity in September as it begins to apply for export permits to trim down Vietnam’s existing high levels of (imported) oil products.
  • Faced with rising inflation, the Energy Ministry of the Philippines has asked oil companies to switch back to selling cheaper Euro II-standard diesel, backtracking from the Euro II standards implemented in 2016.
  • Mexico’s largest oil refinery, Pemex’s 330 kb/d Salina Cruz site, managed to restart operations two days after a power outage halted production.
  • The ambitious 650 kb/d Dangote refinery planned in Nigeria by Africa’s richest man is likely to miss its target start date of 2020, with sources stating that operations could only begin in 2022 at the earliest.
  • A major fire broke out at BPCL’s 120 kb/d Maharashtra refinery, forcing the shutdown of a hydrocracker as 40 people were injured.
  • India is aiming to save up to US$1.7 billion in oil imports by 2022 and reduce its carbon emissions through increased usage of biofuels, announcing plans to build 12 bio-refineries that will run on crop, plant waste and municipal waste.

Natural Gas/LNG

  • Exports from Yamal LNG’s second train have begun with the first shipment leaving the port of Sabetta, doubling the project’s capacity to 11 mtpa.
  • Cheniere and CPC have signed a 25-year long term deal where the Taiwanese firm will take 2 million tpa of LNG beginning 2021.
  • American LNG firm Tellurian confirmed that it is on track to begin construction of its US$27.5 billion Driftwood LNG terminal in Louisiana in 1H19, with operations planned for a 2023 start.
  • Santos is reporting a ‘significant gas field’ at its Barikewa-3 well onshore in Papua New Guinea, in the prodigious Toro and Hedinia reservoirs.
  • Tanzania is planning to build a natural gas pipeline that would run through Uganda, delivering gas harvesting from offshore Tanzania through Dar es Salaam and Tanga, then crossing over to Uganda via Lake Victoria.

Corporate

  • Apache and Kayne Anderson Acquisition Corp are forming Altus Midstream, a US$3.5 billion pipeline joint venture focusing on the Permian.
  • Kosmos Energy has acquired Deep Gulf Energy for US$1.23 bn, expanding its presence in the Gulf of Mexico and doubling output to 70,000 boe/d.

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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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