Easwaran Kanason

Co - founder of NrgEdge
Last Updated: October 2, 2019
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Business Trends
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It seems to be the gift that keeps giving. The Guyanese goose that laid the golden egg. Just 4 years after first oil was struck in the South American nation of Guyana, which turned the sleepy former British colony into a hotbed of upstream activity, new discoveries are still piling up, seemingly on a monthly basis.

Just a week ago, ExxonMobil announced that it had made its 14th discovery at the offshore Staebroek block. Successful strikes at the Tripletail-1 well now brings total recoverable reserves at the block to over 6 billion barrels of oil equivalent, a startling amount in a world where findings this huge are now far and few in between. Having been the power behind exploration in Guyana, ExxonMobil is now poised to deliver first commercial oil from the Liza Phase 1 development by 2020. Volumes will be an initial 120,000 b/d, ramping up to 750,000 b/d by 2025 through the Liza Destiny FPSO. A second project has been approved, Liza Phase 2, starting in 2022 at an initial 220,000 b/d and a third, Payara, is currently going through governmental approvals and could start as early as 2023.

And it isn’t just ExxonMobil (and its partners) that are gleeful. Tullow Oil has also struck payload in Guyana, with the Orinduik licence providing two discoveries in the past two months. The back-to-back discoveries centred around the Jethro-1 and Joe-1 wells have been described as having a ‘multi-billion barrel potential’, and this has only served to elevated global interest in this stretch of the Pacific Ocean.

This might change. The discoveries by ExxonMobil could bring as much as US$300 million in revenue by 2020. This is equivalent to a third of Guyana’s current tax revenue. In a country where the average monthly wage is around US$400, those are huge numbers. And tax revenue from ExxonMobil’s own projects alone could surge to US$5 billion by 2025.

One might think that this dazzling change would be sufficient. But as with all petrostates that have seen overnight success, questions are now being asked. And the most pertinent question is: is Guyana being taken for a ride? Consider that the country’s petroleum laws were written in the 1980s, at a time when the country was more intent to promoting foreign investment and potential oil, rather than eking out maximum state revenue from proven oil. New laws have been proposed, which would grant the state a greater share in the spoils but none have been passed yet. The Guyanese Department of Energy is woefully underfunded, with an annual budget of reportedly only US$2 million. A comprehensive regulatory body to oversee all exploration and production has not even been set up yet. What has been set up is a sovereign wealth fund to soak up the expected oil riches.

It seems to be a recipe for corruption. Both in how the money will be spent, and how the exploration rights were sold off in the first place. Moves to update the petroleum laws, possibly retroactively, are in the works. But this could end badly. With no domestic infrastructure, Guyana is dependent on foreign expertise to create oil wealth. And if the state pushes back too hard as Papua New Guinea’s new government attempted to do against Total, there could be a severe backlash. Guyana is not prepared for its oil riches, that much is certain. And as the state gets to grips with this newfound paradigm, it should be looking to countries like Norway and Malaysia as examples of their path forward, instead of Indonesia, Papua New Guinea or even Uganda, where populist policies have stalled development.

Guyana’s Current Oil Tax Policy:

  • Current oil royalty rate described as ‘well below of what is observed internationally’
  • ExxonMobil contract for the 17,000 sq.km Staebroek block called ‘sweetheart deal’
  • Royalty rate for ExxonMobil contract set at 2% of all petroleum sold

Read more:
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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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