The signs going into OPEC’s bi-annual meeting in Vienna were broadly positive. On one hand, you had some key members – including Iraq, surprisingly – stating the need for the broader OPEC+ club to make further cuts to its supply deal. On the other hand, there was Saudi Arabia, which needed a win to support Saudi Aramco’s upcoming IPO. What emerged was a little something for everyone, that was still broadly positive but scant on the details.
The headlines spinning out of the December 5 meeting was that the OPEC+ alliance agreed to slash a further 500,000 b/d, with Saudi Arabia pledging an additional voluntary cut of 400,000 b/d. Collectively, this would raise the club’s total supply reduction to 2.1 mmb/d – or over 2% of global oil demand – up from the previous 1.2 mmb/d target. Beneath those headlines, however, the details of the new adjustment to the deal were murkier. The 500,000 b/d cut is, in fact, more of a formalisation of the current production levels within OPEC. It won’t remove additional barrels from the market, but it won’t add them back into global supply either.
Saudi Arabia is, once again, key to this equation. Even with the attacks on the heart of its crude processing facilities in September, Saudi Arabia has been shouldering the extra burden within the deal, making up for errant members that have consistently overshot their quotas. These include Nigeria and Iraq, and crucially Russia. The caveat that the new targets – especially Saudi Arabia’s voluntary portion – will only come into force if all members of the OPEC+ club implement 100% of their pledged cuts underscores the Kingdom’s new, more hardline stance that full compliance is required before it makes additional concessions. Because even with the declines in Venezuela and Iran, Saudi Arabia has trimmed its output to below 10 mmb/d in an attempt to show leadership through example. But its patience is now wearing thin.
But it is those details that are sketchy right now. OPEC states that the new deal formalises current production levels and will make up for Saudi overcompliance by ‘redistributing’ those volumes across other OPEC+ members. But no specifics on that split were given – a worrying sign that more arguments were coming – with the group preferring to meet compliance first before moving on to the fresh cuts.
Full adherence to the targets is tough. But it might get easier. Russia – which has only met its quota 3 months this year, when the Druzhba oil pipeline crisis hit – won a significant concession. Its argument that the only reason it was not hitting its target was due to condensate production, a by-product of its increasing natural gas output, was accepted; the quotas will exclude condensate, and Russian Energy Minister Alexander Novak was optimistic that it could meet its quota of a 300,000 b/d reduction for the first quarter of 2020. And the first quarter of 2020 is crucial, as that is the remaining length of the supply deal. Ahead of the March 31 expiry in 2020, OPEC has agreed to hold an extraordinary general meeting to assess the situation – the point which the deal either ends or is extended.
Underpinning this bet is some sentiment-based optimism from OPEC. The rise and rise of US shale has diluted OPEC’s impact over the past five years, requiring it to make deeper and deeper cuts that were muted by increasing amounts of American crude. But OPEC is betting that the wind will go out of US shale sails next year, hoping that it will allow output within OPEC+ to rise again. But low growth in US shale does not mean no growth. And perhaps for this reason, the price impact on the new OPEC decision has been muted. Despite the club’s attempt to prove that it is still effective, the market simply doesn’t believe the new cut will do much. Crude prices reflect that. Call it cynicism, but the market might have more faith if full compliance was reached and that is exactly what OPEC is striving towards.
The OPEC+ supply deal:
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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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