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Unprecedented is a word that has captured headlines since January 2020, when the Covid-19 pandemic first began to accelerate in China. Unprecedented contagion, unprecedented lockdowns, unprecedented demand destruction, all leading up to what could be the worst economic recession since the Great Depression almost a century ago. And now, unprecedented oil prices, as the WTI crude price marker slipped into negative territory for the first time ever.
Not just any negative territory, but double digits negative. The front month WTI contract for deliveries in May fell as low as -US$37.63.b on Monday. The discount between WTI and Brent also crashed to its lowest point ever, at a peak of -US$62/b, as Brent continues to trade in the mid-US$20/b level. That’s unprecedented. It isn’t just WTI; other US grades are also deep in the negative, as well as Western Canada Select. This essentially means American and Canadian producers are paying to offload their crude oil to (a thin pool) of potential buyers.
There are many reasons for this. Demand for refined fuels has virtually dried up as the US imposed strict lockdown conditions to contain the virus. Jet travel has evaporated, and though gasoline prices have reportedly fallen by 75% in some parts of the US, there is nowhere to drive to. At least three North American refineries have been idled in the face of oil demand destruction, and there are certainly more to come. Try as much as President Donald Trump wants to re-open the US economy, the threat of the virus re-accelerating is worse. This huge dip in demand and refining meant that all the crude and shale oil being produced had nowhere to go but into storage. But storage is rapidly getting maxed out; spare capacity in the main hub of Cushing is fast depleting, and there are even plans to store oil in train cars and in halted pipelines. Storage in the US Strategic Petroleum Reserve is available, but even that is limited.
What makes this even more unprecedented is that much of this oil is onshore, very far inland. This had the same effect, though different contributing factors in 2019, when WTI prices were depressed because demand was high but pipeline capacity was insufficient to carry crude to refining centres along the US Gulf Coast, creating a shale glut. In a way, that paved the way to the current catastrophe; many shale producers picked up a lot of debt during this time, and were forced to pump oil even more aggressively just to stay alive. In the world of a growing oversupply, inland oil is overflowing as storage fills to the brim. Offshore production doesn’t face the same issue. As long as crude can be delivered on the coast, it can be placed on a tanker and stored offshore indefinitely, especially with so many ships idled due to the slowdown in economic activity. This is already happening in Singapore, in Fujairah, in the North Sea, and is the reason that the global crude marker, Brent, has not collapsed.
But the main reason for the unprecedented demolition of US crude prices hinges on a technicality. The Brent NYMEX contract is settled in cash. WTI contracts, however, are settled physically; those holding the contract must therefore take physical delivery at expiry. That expiry date for May contracts is April 21. The dive into deep red territory came because of extreme selling pressure to avoid have to physically receive the oil, especially with nowhere onshore to store it. News that large cargoes of Saudi crude were heading to the US Gulf made matters worse. However, further WTI futures contracts for June and beyond, are still trading at a far more normal range of US$20-30/b; there is still enough time for demand to recover (or for more storage to be found) for these contracts. But for the May contract? It is a bloodbath.
The situation certainly isn’t as dire as it seems, though the headlines might seem apocalyptic. This knee-jerk reaction will almost certainly sort itself out over the medium term. Already, the expiring May WTI contract recovered to -US$6/b in after-hours trading. WTI should return to a more normal range with the switchover to the June benchmark contract on Wednesday. Economic pressure will keep prices low, but not that low. At least not yet. But it will be a whole new galaxy of pain for the US oil industry, especially those that are completely reliant on shale and those that service them. The Saudi-Russia oil price war may have begun as a battle for market share, but might have inadvertently achieved a secondary objective, wiping out US shale production that was undermining supply control efforts. In just three months, the entire oil world has been turned upside down. In response, the industry is recalibrating. There will be some winners, and some losers. In these unprecedented times, expect unprecedented things.
WTI’s Great Fall:
-Traded prices on NYMEX, 20 April 2020
- 10am: US$11.28/b
- 2pm: US$4.88/b
- 2.30pm: -US$0.02/b
- 3pm: -US$.6.89/b
- 4pm: -US$37.63/b
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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.
End of Article
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