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Just after the calendar officially turned over to 2020, reports from China suggested that a ‘new strain of viral pneumonia of an unknown cause’ had been detected in the city of Wuhan. As investigations began, normal life continued, which included the mass movement of several million people in Wuhan and the surrounding Hubei province in preparation for the Lunar New Year festivities. As the extent of pandemic became apparent, Wuhan was placed on virtual lockdown on 23 January; several other cities in Hubei – totalling almost 60 million people – followed suit. The World Health Organisation declare the Wuhan Coronavirus Outbreak a ‘global emergency’, as the first death outside of China was declared in the Philippines.
Traced to the Huanan Seafood Wholesale Market in Wuhan, a mutating melting pot for infections with the cramped presence of all forms of live animals, domesticated and wild – the Wuhan pandemic has now exceeded the 2003 SARS crisis in terms of infections, nearing 20,000 in over a month vs just over 8,000 over five months. Infections and deaths have been mainly localised to China, with over 26 countries have reported cases (vs 29 for SARS). The University of Hong Kong predicts that the cases in Wuhan alone could peak at 75,000. In response, China has curtailed outbound travel, other countries have closed their borders to visitors with recent travel to China and airlines have cancelled thousands of flights. Economic activity in Hubei – as well as other Chinese provinces – has slowed down, with orders to work from home and public/private transportation banned. Given that the Wuhan Coronavirus is only in its second months, it is very likely that its broader impact will be far greater than SARS.
But let’s focus on its impact on oil. Crude oil prices plunged as the impact of the Wuhan pandemic deepened. Much of this is sentiment-based, pricing in a long-lasting economic disruption on pessimistic expectations of the outbreak. How true is this prognosis? In 2003, a similar fall in crude prices accompanied the SARS crisis. However, this cannot be a true parallel as coordinated OPEC efforts reduced crude prices that had risen as the US invaded Iraq at the same time. In China, the SARS effects on oil demand was broadly localised to one quarter – Q2 – and then also localised to one product – jet fuel. LPG, naphtha, gasoline and gasoil demand were relatively unaffected, with annual growth of 8-12% for the year vs 1% for jet fuel (which had grown by 28% the previous year). Will the Wuhan pandemic follow this pattern?
There is reason to believe it won’t. Take jet fuel. In 2003, Chinese jet fuel demand was 160,000 b/d; in 2019, it has grown six-fold to 860,000 b/d. In 17 years, China has become increasingly more connected to the world by air. The SARS crisis affected an estimated 21% of jet fuel demand in 2003. Apply that to 2019 and over 180,000 b/d of jet fuel demand could be eliminated. With the government placing restrictions on domestic and international air travel in China – something that was only implemented partially during SARS – the effect could be even higher. There is also global jet fuel demand to consider. As major airlines scale back or even cancel all flights to China, it will be tough times depending on how long the pandemic lasts. Refining margins for jet fuel in Asia are now at their lowest level in 4 years.
Other fuel products could be affected. Unlike SARS, China been praised for its speedy response to the pandemic – including extended civil lockdowns, activity shutdowns and extending official holiday periods – but that has curtailed tourist activity, transport movements and manufacturing operations. Gasoline and gasoil, in particular, will be impacted by this. Against a backdrop of already-decelerating oil and gas demand, Standard Chartered estimates that the Wuhan pandemic could reduce oil demand growth in 2020 from 1 mmb/d to 900,000 b/d – a 10% fall. A lot will depend on how soon and how well the pandemic can be contained. This new pandemic might not be as fatal as SARS thus far, but its effect on oil demand could be graver.
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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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