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Last Updated: November 1, 2019
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Market Watch  

Headline crude prices for the week beginning 28 October 2019 – Brent: US$61/b; WTI: US$55/b

  • After progressively gaining over the last week, crude oil prices took a breather at the start of the week, with prices remaining rangebound as traders look for more concrete signs that a full trade deal between the US and China is imminent
  • A surprise 1.7 million barrel drawdown in US crude stocks – as reported by the Department of Energy – supported higher prices previously, but this effect has petered out over this week
  • Despite the initial ‘partial trade deal’ heralded by both China and the US, pessimism still reigns over a comprehensive deal with both China and US officials warning that the stickiest points of the negotiations remain at a stalemate until Chinese demands that existing tariffs are rolled back are met
  • Meanwhile, more warning signs that global oil demand was waning came from India, where crude purchases and refinery run rates have plunged as its economy decelerates; in China, the manufacturing index dropped for its sixth consecutive month in October
  • Red is the colour of the US active rig count, as the Baker Hughes survey of operational rigs dropped by a huge 21 sites – 17 oil and 4 gas – bringing the total number down to 830, or down 238 y-o-y
  • There isn’t much room for crude prices to grow in the current environment; indeed, prices are likely to trade with a downward bias at US$58-60/b for Brent and US$53-55/bd for WTI

Headlines of the week

Upstream

  • Shell has exited the Khazar field and the Kalamkas-Sea projects in Kazakhstan’s prolific Kashagan area in the Caspian Sea, citing ‘stubbornly high costs’ linked to a high level of toxic hydrogen-sulfide gas; the Kazakh government is reportedly looking for new investors to develop the projects
  • Chevron has won a 90-day extension to its waiver on operating in Venezuelan upstream from the Trump White House, ensuring it will remain operating in the country for the immediate future
  • First shipments of Norway’s new Johan Sverdrup crude have begun making its way to Asia, possibly crowding out similar medium low-sulfur grades from Africa and South America as refiners brace for new IMO fuel rules
  • Ecopetrol has taken a 30% stake in the Gato do Mato offshore discovery in Brazil’s Santos basin from Shell, which reduces its participation in the pre-salt field to 50% alongside Total’s existing 20%
  • Lukoil and the government of Equatorial Guinea have signed an MoU for the Russian giant to begin participating in the African nation’s E&P sector
  • Waldorf Production Limited, a newly-formed upstream company focusing on the North Sea, has acquired Endeavour Energy UK Limited for an undisclosed sum, including oil and gas assets worth US$550 million
  • Eni’s streak of luck in Egypt continues, as its Sidri 36 well in the Gulf of Suez hit oil flows of about 5,000 b/d, forming part of the larger Sidri South discovery

Midstream/Downstream

  • India has relaxed rules for setting up fuel station networks in the country, paving the way for non-energy companies and oil majors to set up distribution networks in the rapidly-growing market
  • China’s Hengli Petrochemical is first private refiner in the country approved to supply jet fuel domestically, having recently started up its new 400 kb/d refinery
  • Egypt’s Qalaa Holdings is planning to raise the capacity of its Egyptian Refining Co site to 127 kb/d from the current 97 kb/d in 2021
  • Marathon Petroleum is reportedly looking to sell two of its American refineries – the 68 kb/d Kenai site in Alaska and the 58.5 kb/d Salt Lake City site in Utah – following a ‘comprehensive strategic review’
  • Russia state development bank VEB will be collaborating with the government of Morocco to develop a 100 kb/d, US$2.2 billion refinery in northern Morocco; the country’s sole refinery, Samir, has been shut since 2015 over unpaid taxes

Natural Gas/LNG

  • Saudi Aramco has partnered with Bangladesh’s ACWA Power to build an LNG-based power plant and terminal in either Cox’s Bazar or the port of Payra, continuing Aramco’s new-found interest in developing LNG capabilities
  • CNOOC has announced a major natural gas discovery in the South China Sea’s deepwater Qiongdongnan basin that could contain up to 100 bcm of gas
  • Abu Dhabi’s sovereign wealth fund Mubadala Investment has purchased a stake in NextDecade Corp, which is currently developing the 27 million tpa Rio Grande LNG export project in Brownsville, Texas
  • Eni has started gas and condensate production at the Obiafu 41 discovery in Nigeria, just 3 weeks after completing the well, using the harvested gas to generate electricity at its nearby Okpai power plant
  • PTTEP is planning to replace its gas pipeline in Myanmar to will lead to a more reliable supply of natural gas from the Zawtika field to Yangon

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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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