In good times, the instinct of any company is to expand. In bad times, that instinct reverses to consolidation. This cycle is no more apparent anywhere else than in the oil and gas sector, where periodic boom-bust periods have been a regular feature since David Beaty drilled the first modern oilfield back in 1875 in Pennsylvania. The year 2020 is proving to be a year of reckoning for the entire industry, for obvious reasons, with all firms of all sizes announcing or preparing to announce major impairments. What follows is usually a swathe of divestments.
Two major sales by supermajors have captured the headlines recently: BP’s exit from the petrochemicals sector through a sale to INEOS, and Shell reaffirming its desire to sell its 35% stake in the Abadi LNG project in Indonesia. Both deals paint a picture of companies retreating from peripheral, though still profitable activities, in order to focus on core activities.
In BP’s case, it will be selling its last remaining petrochemical sites to INEOS, owned by UK billionaire Jim Ratcliffe. The sale encompasses 15 sites in the Americas, Europe and Asia focused on aromatics, acetyls and related businesses for US$5 billion, to be paid in US$1 billion instalments after an initial US$400 million deposit. Charmingly, it brings the INEOS story full circle: INEOS was first formed in 1998 to buy out a BP petrochemicals business in Belgium, and in 2005, paid US$9 billion to purchase Innovene, another BP subsidiary that made up a large proportion of BP’s then-existing chemicals assets.
For INEOS, it’s a great win as it adds aromatics and acetyl capacity where it is lacking, and significantly boosts presence in Asia, described as ‘two big pieces of chemistry in (that) portfolio that (INEOS) didn’t have before, completing the set’. From BP’s perspective, however, the sale runs counter to the prevailing trend in the energy sector where firms are actively expanding their petrochemicals presence, from China to the US Gulf Coast, seeing it as a stable and lower-carbon alternative to complement zero-carbon operational transformations. But BP’s footprint in the petrochemicals business has been shrinking over the past two decades, ceding ground to Shell, ExxonMobil, Total and other national players. It might prove to be a canny move, there has been a massive surge in capacity for petrochemicals recently, with huge oversupply in certain grades that has placed major pressure on petchems profit margins. Global campaigns to reduce single-use plastics also blunted growth prospects. A global pandemic further tarnished the lustre of the sector. For BP, it would have been easy to say yes to pocketing a pretty penny from Jim Ratcliffe, which would allow it to, in the words of CEO Bernard Looney – ‘build a more focused, more integrated BP, (with) other opportunities that are more aligned with our future direction’.
Unlike BP, Shell has announced no intention to reduce its presence in petrochemicals. But it is looking to divest its stake in the Abadi LNG project in Indonesia led by Japan’s Inpex. Why it wants to do that might throw up some questioning looks. Shell through its takeover of natural gas giant BG Group is the world’s largest LNG trader by far. Surely, then, retaining a 35% stake in a large natural gas project would be a good thing. Right?
Perhaps not. Reports that Shell has been wanting to sell its 35% stake in the Abadi LNG project surfaced in 2019. The Abadi LNG project centred on the Masela gas block deep in the Arafura Sea has had a particularly chequered past. Debates between Japan’s Inpex and the Indonesian government over the direction and location of the project has plagued it with delays. Inpex and Shell had favoured floating LNG plant but Joko Widodo’s government was pushing for an onshore plant, tempted by better local employment prospects. The government won out in the end, finally confirming in 2019 an offshore production facility and a 9.5 mtpa onshore plant that would be operational in 2028, extending the Masela PSC by 20 years. Negotiations, it was reported, were particularly strenuous. And perhaps Shell lost patience.
Shell could sell its stake, valued at up to U$2 billion to Inpex, which owns the remaining 65%, or to other players. But few players have the appetite to navigate Indonesia’s complicated upstream sector. For Shell, the exit may be a relief. Particularly since it already has other, equally gigantic LNG assets nearby in Australia. Those LNG assets are expected to take a US$8-9 billion hit as part of a potential US$15-22 billion impairment charge for Q2 2020 on low gas prices. Shell’s view on long-term gas prices is alreadt on the bleaker side. So why not divest now for ready cash, instead of waiting 8 more years for an asset that might be worth even less then?
BP and Shell have offered up an intriguing preview of where the industry could go in these trying times, exits and consolidations, and we expect that there will be a lot more similar divestment announcements to roll out over the remainder of 2020 and in 2021.
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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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