Today's This Week in Petroleum articles were originally published throughout 2019. New feature articles of This Week in Petroleum will return on January 8, 2020. The retail price and inventory paragraphs, charts, and tables accompanying the feature article have been updated to reflect data from the latest Weekly Petroleum Status Report for the week ending December 27, 2019.
On Friday, June 21, the Philadelphia Energy Solutions (PES) 335,000 barrels per day (b/d) refinery in South Philadelphia experienced a major fire and explosion. The resulting damage to the refinery and preexisting financial strains led PES to announce its intention to shut down operations at the refinery. The closure of the Philadelphia refinery would decrease the number of operating East Coast refineries to seven and total operating capacity to 889,000 b/d (Figure 1). The U.S. Energy Information Administration (EIA) estimates closing the Philadelphia refinery would reduce East Coast gasoline supplies by approximately 160,000 b/d and distillate supplies by approximately 100,000 b/d. The potential shutdown of the largest refinery by capacity on the U.S. East Coast is likely to reconfigure petroleum product supply chains in the Central Atlantic.
(Published: July 17, 2019) The crude oil adjustment accounts for differences in supply and disposition
The U.S. Energy Information Administration's (EIA) Weekly Petroleum Status Report (WPSR) provides weekly estimates of U.S. crude oil supply, including a measure of how well the supply of crude oil and the disposition of crude oil balance with each other. This measure—referred to as the adjustment—is a derived term equal to the difference between supply and disposition. If the reported supply and disposition of crude oil balanced perfectly each week, the adjustment would equal zero. For several reasons, however, this is rarely the case.
(Published: September 18, 2019) Saudi Arabia crude oil production outage will affect global oil markets and U.S. gasoline prices
On Saturday, September 14, 2019, an attack damaged the Saudi Aramco Abqaiq oil processing facility and the Khurais oil field in eastern Saudi Arabia. The Abqaiq oil processing facility is the world's largest crude oil processing and stabilization plant with a capacity of 7 million barrels per day (b/d), equivalent to about 7% of global crude oil production capacity. On Monday, September 16, 2019, the first full day of trading after the attack, Brent and West Texas Intermediate (WTI) crude oil prices experienced the largest single day price increase since August 21, 2008 and June 29, 2012, respectively.
(Published: November 6, 2019) Changing nature of non-OPEC supply types may be affecting the crude oil futures market
Changes in the oil investment and production cycle may be affecting trading dynamics for West Texas Intermediate (WTI) and Brent crude oil futures contracts. Many U.S. producers that may have traditionally hedged production years in advance may now only need to hedge using short-dated portions of the futures curve. Many domestic producers have shifted their production portfolios toward tight oil production, which has a short investment and production cycle, and could be reducing their participation in long-dated WTI futures. For example, the ratio of open interest for WTI contract months 13 and longer to current U.S. monthly production has declined since 2013. In contrast, as of October 2019, a similar ratio for Brent crude oil to production outside the Organization of the Petroleum Exporting Countries (OPEC) and the United States increased to its third-highest level, suggesting increased liquidity in long-dated Brent futures (Figure 1). Brent is the relevant crude oil benchmark used among non-OPEC, non-U.S. oil producers. Similar research from the research from the U.S. Commodity Futures Trading Commission (CFTC) published last year suggests the lower open interest among long-dated WTI futures contracts is a result of the changing investment and production cycle for U.S. oil production. In contrast, new upstream projects outside the United States are primarily deepwater projects, which have a long investment and production horizon. These qualities could be contributing to increased participation in the long-dated portion of the Brent future curve.
(Published: December 4, 2019) September was the first month the United States recorded exporting more petroleum than it imported
In September 2019, the United States exported 89,000 barrels per day (b/d) more petroleum (crude oil and petroleum products) than it imported, the first month this happened since monthly records began in 1973 (Figure 1).
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose nearly 4 cents from the previous week to $2.57 per gallon on December 30, 31 cents higher than the same time last year. The Gulf Coast price rose nearly 7 cents to $2.28 per gallon, the Midwest price increased nearly 5 cents to $2.45 per gallon, and the East Coast price rose nearly 4 cents to $2.50 per gallon. The Rocky Mountain price fell nearly 3 cents to $2.66 per gallon, and the West Coast price fell nearly 1 cent to $3.22 per gallon.
The U.S. average diesel fuel price rose nearly 3 cents from the previous week to $3.07 per gallon on December 30, 2 cents higher than a year ago. The Gulf Coast price increased nearly 5 cents to $2.81 per gallon, the East Coast price rose more than 4 cents to $3.10 per gallon, the West Coast price increased nearly 3 cents to $3.62 per gallon, and the Midwest price increased 1 cent to $2.98 per gallon. The Rocky Mountain price fell more than 1 cent to $3.11 per gallon.
Propane/propylene inventories decline slightly
U.S. propane/propylene stocks decreased by 0.2 million barrels last week to 88.2 million barrels as of December 27, 2019, 8.1 million barrels (10.1%) greater than the five-year (2014-2018) average inventory levels for this same time of year. Midwest and Rocky Mountain/West Coast inventories decreased by 0.3 million barrels and 0.1 million barrels, respectively. East Coast inventories increased by 0.2 million barrels, and Gulf Coast inventories increased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 6.8% of total propane/propylene inventories.
Residential heating oil prices increase, propane prices decrease
As of December 30, 2019, residential heating oil prices averaged almost $3.08 per gallon, more than 2 cents per gallon above last week’s price but more than 2 cents per gallon below last year’s price at this time. Wholesale heating oil prices averaged nearly $2.16 per gallon, almost 3 cents per gallon higher than last week’s price and more than 38 cents per gallon higher than a year ago.
Residential propane prices averaged nearly $2.02 per gallon, less than 1 cent per gallon below last week’s price and almost 42 cents per gallon less than a year ago. Wholesale propane prices averaged more than $0.71 per gallon, almost 6 cents per gallon lower than last week’s price and more than 8 cents per gallon below last year’s price.
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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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