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Last Updated: July 26, 2019
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Market Watch 

Headline crude prices for the week beginning 22 July 2019 – Brent: US$63/b; WTI: US$56/b

  • After a week of weak demand sending Brent crude prices back down towards the US$60/b level, oil prices started the week on a higher note as tensions in the Middle East between Iran and the US heightened once again
  • The US warship USS Boxer downed an Iranian drone that approached the ship in the Strait of Hormuz, sending fears of military escalation in the key Persian Gulf chokepoint soaring once again
  • In retaliation for the British seizing of an Iranian crude tanker in the Mediterranean, the Iranian Revolutionary Guard seized a British-flagged tanker in the Strait of Hormuz; a second vessel – Liberian-flagged but reportedly British-owned – was also seized in the area
  • The fresh reminders of the fragile situation in the Middle East propped crude back up after a week where demand indications had faltered and weakened the trajectory for crude prices
  • But the economic risk is by no means removed; as the US and China return to the negotiating table once again, President Donald Trump once again ratcheted up the pressure by claiming he is willing to escalate the trade war even further
  • Against this backdrop, US crude oil exports reached an all-time high of 3.3 mmb/d as copious amounts of light shale oil enable refineries in Asia to diversify their crude slate
  • With OPEC warning that a supply glut is very much likely in 2020, even with the extension of the current OPEC+ supply deal to March, the only possible upside for crude prices currently lies with supply disruptions and military action
  • With this delicate environment, the active US oil and gas rig count fell for the third consecutive week – losing five oil rigs but gaining two gas rigs to a total active count of 954, or 92 fewer sites than the 1,046 reported last year
  • With the market currently balanced between demand fears and supply risks, crude prices will remain rangebound – with Brent trading at US$62-64/b and WTI at US$55-57


Headlines of the week

Upstream

  • Greece has offered an olive branch to Turkey, pledging to work together to exploit natural resources if Turkey would agree to back down from its drilling campaign offshore Cyprus that has drawn it into a dispute with the EU

Midstream/Downstream

  • Iran maintains that it will invest in the expansion of the CPCL Nagapattinam refinery in India’s Tamil Nadu despite US sanctions resulting in India dropping Iranian crude; the planned investment is part of a US$5.1 billion plan to replace the existing 20 kb/d plant with a new, modern 180 kb/d refinery
  • Tainted crude from Russia’s Druzhba pipeline is now being sent to PKN Orlen’s Mazeikiai refinery in Lithuania, where the Polish firm is ready to dilute contaminated crude with clean oil for processing
  • After two years of failed attempts to find a replacement for PDVSA’s expiring operation of the Isla refinery in Curacao, the island’s government is now evaluating 10 proposals to take over the site, which has lain idled this year
  • Refineries along the US Gulf Coast, including Phillips 66’s Alliance plant in Louisiana, have restarted operations back to full capacity following the threat of Tropical Storm Barry abating
  • Sinopec has set up a new fuel oil company in Sri Lanka in Hambantota with the aim of using it as a fuel supply hub along the major Indian Ocean trading route
  • After blackouts completed halted operations at Venezuela’s Amuay and Cardon refineries, the 645 kb/d Amuay site has been partially restarted

Natural Gas/LNG

  • Total is moving ahead with its plan to turn Oman into a regional LNG hub through the Sohar LNG Bunkering Project as new IMO low-sulfur rules for marine fuels kick in, with Total handing over the FEED contract to McDermott
  • Bolstered by the giant Brulpadda discovery earlier this year, Total is sending the Deepsea Stavanger semi-submersible rig back to South Africa to start on its Block 11B/12B offshore drilling campaign
  • Chevron has applied for permission to modify its 18 mtpa Kitimat LNG project in Canada’s British Columbia into an all-electric design in an attempt to market its LNG as ‘clean’ with the lowest GHG emissions per ton of fuel
  • BHP has completed phase 3 of its deepwater drilling campaign offshore Trinidad, with 3 wells – Bélé-1, Tuk-1 and Hi-Hat-1 – all hitting gas
  • The small Canadian Tilbury LNG terminal in Delta, British Columbia has won its first export contract, supplying 53,000 tons of LNG per year to China’s Top Speed Energy over a two-year contract period
  • Poland’s PGNiG has acquired a 20% stake in the Duva gas field on the Norwegian Continental Shelf, expanding its reach in the North Sea after recently acquiring stakes in the King Lear and Tommeliten Alpha fields
  • Mubadala Petroleum has reached a farmout agreement with the UK’s Premier Oil for a 20% stake in the Andaman I and South Andaman gas blocks offshore the Indonesian province of Aceh, consolidating its presence in the area
  • Total has struck a new deal to supply Benin’s SBEE power firm with up to 500,000 tpa of LNG from its global portfolio for 15 years beginning 2021

Corporate

  • Schlumberger has named Olivier Le Peuch as its new CEO, succeeding Paal Kibsgaard who has overseen the services firm as CEO for 8 years

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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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