The word odyssey is of Greek origin, closely linked to the myth of Odysseus and his epic journey home after the Trojan War. In the modern context, it means a long, often maritime, voyage marked with many changes of fortune. Roald Amundsen’s journey to the south pole, for example, is an odyssey. ExxonMobil’s journey from a splinter of John D Rockefeller’s Standard Oil to become the largest oil supermajor is also an odyssey. And now, it looks increasingly likely that South Africa’s long upstream journey can be characterised as one too.
The next chapter of this odyssey is now unfolding. Just right now, Total has readied the Odfjell DeepSea Stavanger drill rig in the turbulent waters off South Africa, ready to spud a new wildcat in the offshore Block 11B/12B. This Luiperd-1 well is being very closely watched. Not just because it promises some blockbuster results based on initial assessments, but because of how it could change the narrative of energy in South Africa.
In this tale, the DeepSea Stavanger rig is the hero. In early 2019, the 44,000 tonne rig parked itself in the strong currents of South Africa’s south coast, where a well of 3,633 metres was drilled. Gas condensate was struck; potentially over a billion barrels of that and the Brulpadda discovery changed the story of South African upstream. It was a form of affirmation for Total, which owns 45% of the block’s licensing rights alongside other partners like Qatar Petroleum and Canadian Natural Resources, because several attempts had been made to drill Brulpadda as early as 2014, but failed due to the complicated weather and ocean patterns that plague this part of the sea. Fresh off this victory, the DeepSea Stavanger has now been relocated to Luiperd, with hopes of striking black gold.
Early indications are promising. The Block 11B/12B is located in the Outeniqua basin 175km offshore, with depths ranging from 200-1800 metres. This is where the Indian Ocean meets the Atlantic, and the confluence creates a rich patch of sea where spectacular wildlife displays thrive, but also creates dramatically difficult weather and oceanic conditions. Drillers have long-known that this Block held potential energy riches, but were unable to tame the waters. Until Brulpadda. Its discovery proved not just that large hydrocarbon resources were present but also that the naturally difficult conditions could be overcome. Brulpadda was a game changer, and its successful discovery meant that nearby pools of opportunity had been de-risked. Luiperd is sufficiently close to Brulpadda to promise a continuation of that success story (and through preliminary 3D seismic work), lying in the southwest corner of the block. Which is exactly why the Luiperd-1 wildcat is so closely watched: it has all the main elements of a TV drama - potential riches, a proven hero and a turbulent backdrop. And if Luiperd-1 meets expectations, it will be more than just success for Total, it will turn South Africa’s upstream journey from a tragedy to an epic heroic tale.
South Africa might be the largest economy in Africa, but its upstream industry is only a minnow. Historically, upstream production came only from Block 9 and South Coast Gas fields (located in the Outeniqua Basin); oil production began in 1997 and ceased in 2013, while natural gas fared better, starting in 1992 and still supplying the Mossel Bay gas-to-liquids plant. The offshore Tugela, Orange and Bredasdo RP Basin hold potential, but exploration have always been stymied by the depth of the seabed in these areas and the turbulent waters above. The former issue has been solved by major advances in deepwater technology, but the latter seems unsurmountable. Until the Odfjell DeepSea Stavanger rig showed up.
With its appearance, South African upstream had suddenly moved from a distant possibility to a concrete opportunity through Brulpadda. It is a game changer; not just because the government hopes to leverage this to attract billions in potential investments but also because of the fiscal impact: South Africa is a major refining centre for sub-Saharan Africa, but imports all of its oil and is running short on gas. Brulpadda changed that. Which is why Luiperd is so important. The results there will either extend the success narrative, or throw some caution onto currently unbridled optimism. South Africa will be hoping that it will be the former. Because only then can its upstream Renaissance truly turn into an odyssey. Watch out Guyana.
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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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