In June, a major milestone was hit. Argentina exported its first-ever cargo of liquefied natural gas through its state oil firm YPF with the assistance of Cheniere. A light oil cargo, from Vista Oil & Gas, soon followed. But not only is it the first ever LNG sale for the country, it is also the first commercial output from the Vaca Muerta shale play – one of the world’s largest shale formations and a potential game changer for the hobbling Argentine economy.
Known as the ‘Argentine Permian’, Vaca Muerta was discovered as long ago as 1918, when it was recognised as the source of petroleum for formations in the prolific Neuquén Basin. In 2010, YPF (which was then Repsol-YPF) made a significant shale oil discovery and is now currently producing 45,000 b/d of light oil. Several other discoveries have since been made, with its potential labelled as ‘vast’. The Argentine government estimates that, if development proceeds smoothly, Vaca Muerta could double the country’s oil production to 1 mmb/d by 2023 and lift natural gas production to 260 cbm/d. The US EIA goes even further, estimating that the Vaca Muerta formation holds recoverable resources of up to 16.2 billion barrels of oil and 308 trillion cubic feet of natural gas, which would make it the largest hydrocarbon basin in Argentina, surpassing the Neuquén Basin.
But despite this potential, exploiting Vaca Muerta has proved challenging. Since the initial discoveries around 2010, drilling and development has commenced but the first tangible results are only starting to emerge. In the wider context, Argentina has been battling government changes and an economic malaise which has led to high costs, regulatory uncertainty and insufficient infrastructure despite billions in investment from supermajors. A currency crisis from last year is still impacting the economy, and with elections due in October, a U-turn in policy is a possibility. This has so far hampered efforts to build pipelines to connect Vaca Muerta – a 30,000 sq km formation about 600km from the nearest coastline – to necessary LNG facilities. But despite these hurdles, international oil firms such as ExxonMobil, Chevron, Shell and Total are still holding on to acreage positions in Vaca Muerta.
In Vaca Muerta, YPF is currently the leading producer, with output of 71,000 boe/d in Q119 from three projects – Loma Campana, La Amarga Chica and Bandurria Sur. Not far behind are its international rivals. Shell has announced that it is moving on to the development phase of the Sierra Blances, Cruz Lorena and Coiron Amargo Sur Oeste blocks with a projected output of 70,000 boe/d by the mid-2020s. ExxonMobil has announced plans to drill 90 wells, with first production of 55,000 b/d expected by 2024. Total is working on its Aguada Pichana Este licence while Chevron has plans to drill up to 2,000 wells in the El Trapial, Loma de Molle Norte and Narambuana deposits. Unlike the Permian, which was powered by small, nimble independents, the supermajors got into Vaca Muerta early and hold a significant position. But commercial interest also extends beyond these giants; private equity firms Riverstone and Southern Cross Group have invested in creating a midstream Vaca Muerta player called Aleph to boost pipeline infrastructure that will be necessary if Argentina is to continue growing its light oil exports from a projected 70,000 b/d in 2020 and boost LNG sales.
The potential is there, particularly since peak output in the southern hemisphere’s summer coincides with deep winter in northeast Asia, during which spot demand from China, Korea and Japan has spiked in recent seasons. Shipping costs would be lowered as well, since Argentine shipments could avoid tolls at the Panama Canal to provide a competitive alternative to US exports. Vaca Muerta might mean dead cow in Spanish, but it is giving new life to Argentina’s upstream industry. The wait has been long and it will just take a little longer
The Vaca Muerta Shale Basin:
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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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