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Last Updated: September 13, 2018
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Market Watch

Headline crude prices for the week beginning 10 September 2018 – Brent: US$78/b; WTI: US$67/b

  • International oil prices are holding steady on the high end of their range, as ongoing concern over the Iranian situation and escalating trade tensions continues.
  • The abating of Tropical Storm Gordon led the WTI discount to Brent to grow to US$11/b, the widest spread in over a month; however, with three new tropical storms developing, including Hurricane Florence due to hit the Carolinas, WTI prices could be in for a rocky road.
  • In the ongoing trade spat between the US and China, President Trump is now threatening to impose tariffs on an additional US$267 billion worth of Chinese imports; China’s room to retaliate with like-for-like tariffs is now constrained, and crude and LNG will now inevitably be dragged into the fracas.
  • The route in emerging currencies – particularly the Turkish lira, Indian rupee and Indonesia rupiah – has sapped some strength from the market over worries that these large oil buyers would have to curb demand.
  • On the impending Iranian sanctions, the US is returning to more of a hard-line stance, saying that it will consider waivers for dependent buyers like India only if imports are eventually eliminated completely.
  • Meanwhile, South Korea became the first of Iran’s major customers to cut its imports to zero, hoping to appease its ally during a delicate time in its relations with North Korea.
  • OPEC believes that world oil consumption will reach 100 mmb/d by the end of 2018, earlier than previously forecast and a sign of robust demand that validates the organisation’s decision to expand its oil supply.
  • Despite concerns over growing crude inventories in the US, investment into the Permian Basin continues unabated; some shale assets recently sold for US$95,001 per acre, more than double the previous record of US$40,001, as overall sales in a recent auction raised almost a billion dollars over two days.
  • While the future of the Permian remains bright, immediate action is cautious; US drillers cut active oil rigs for the second time in three weeks, shedding two sites, although two additional gas rigs left the net count unchanged.
  • Crude price outlook: Uncertainty will keep oil prices on an upward trend, with Brent likely to test to US$80/b level again, while WTI returns to the US$69-71/b level as the Atlantic hurricane season kicks into full gear.


Headlines of the week                                                                                    

Upstream

  • Hot on the heels of ExxonMobil’s stellar discoveries in Guyana, Tullow Oil will be drilling its first well in the Orinduik licence, which borders the recent Hammerhead-1 discovery by ExxonMobil and Hess.
  • Total has ruled out investing in the US shale oil industry, citing a lack of its own infrastructure in the region and increasing competition.
  • CNOOC has signed a new agreement with Uganda National Oil Company, paving the way for new exploration in the promising Albertine Graben.
  • Norway’s Equinor will begin drilling in Brazil’s North Carcara field by the end of 2018, aiming to increase output to 300-500,000 b/d before 2030.
  • Israel’s Ratio Oil Exploration was finally awarded its upstream rights in the Philippines, after winning the 416,000 hectare East Palawan block in 2015.
  • Despite national attempts to pull back away from energy, there is still great interest in Norwegian upstream, with 38 firms bidding in the latest APA auction.
  • Mexico’s incoming President Andres Manuel Lopez Obrador has allocated US$3.9 billion in the 2019 budget to resuscitate flagging national output.
  • Equatorial Guinea is threatening to exclude service firms like Technip, Subsea 7 and Schlumberger from operating for not complying with local content rules.
  • Gazprom, Mubadala Petroleum and Russia’s RDIF fund have established a joint venture to develop oil fields in Western Siberia’s Tomsk and Omsk regions.
  • Santos has sold a suite of its non-core Asian assets to Ophir Energy for US$221 million, including its interest in Indonesia’s Sampang and Madura Offshores PSCs and the Block 12W PSC in Vietnam.

Downstream

  • China’s Hengyi Industries International has delayed the startup of its 175 kb/d Pulau Muara Besar refinery in Brunei by several months, with construction now set to be complete by Q119, receiving first crude by end-March 2019.
  • ExxonMobil is looking at constructing a major petrochemicals complex in Guangdong, which would incorporate a 1.2 mtpa ethylene cracker, which could begin operations in 2023 if all milestones are hit.
  • Delta Air Lines is looking to sell off a stake in its Monroe Energy refining business, after its attempt to control jet fuel supply proved to be too risky alone.
  • Ahead of Saudi Aramco’s attempt to acquire part of SABIC, the Saudi petrochemicals giant has now purchased a 24.99% stake in specialty chemicals leader Clariant, beefing up its overall petchems capacity.

Natural Gas/LNG

  • Qatargas has signed a new 22-year agreement with PetroChina to supply up to 3.4 mtpa of LNG annually through to 2040.
  • Enterprise Product Partners has begun construction of a new 150 kb/d NGL fractionator in Mont Belvieu Texas – its tenth – aimed at boosting its total capacity to 1.4 mmb/d to service growing markets in Asia.
  • Anadarko’s Area 1 in Mozambique is now estimated to hold some 50-75 tcf of natural gas, enough to create some 50 mtpa of LNG.
  • Spain’s Repsol has agreed to purchase 1 mtpa of LNG from Venture Global’s Calcasieu Pass LNG plant in Louisiana over a period of 20 years.

Corporate

  • Transocean and Ocean Rig UDW has agreed to merge in a cash-and-stock transaction valued at some US$2.7 billion, consolidating the deepwater submersible industry even further.

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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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