Last Updated: October 6, 2020
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The Malampaya gas field, located in the West Philippine Sea, off the coast of Palawan, was discovered in 1989 through the Camago-1 well. It was the first major natural gas discovery in the Philippines, and indeed, the first major upstream discovery of any kind. Developed by Shell, Chevron and the Philippine National Oil Company (PNOC), first gas flowed in 2001 and commercial production in 2002. Malampaya Phase 2 kicked off in 2013 and Phase 3 in 2015, while the gas itself powered a huge gas-to-power network in the industrial city of Batangas that provides up to 40% of the energy demand in the island of Luzon. For a single project to have such impact is transformative. But that’s not the problem. The problem is that Malampaya is still the only major upstream project in the Philippines. And it won’t be around forever.

In fact, if estimates are correct, it won’t even be around for another decade. Output from current wells is expected to fall steeply in 2024 and dry out in 2027. If that happens, the complicated network of pipelines criss-crossing the sea into Batangas and then north towards the capital will be empty. What options does the Philippines have?

Of course, Malampaya itself isn’t fully tapped. In fact, there is an undeveloped portion called Malampaya East that could hold up to 2.83 bcm of natural gas. If correct and commercialised properly, the lifespan of Malampaya could be extended into the early 2030s. However, the entire field lies in challenging deep waters. Global supermajors Shell and Chevron had the expertise to draw those volumes of hydrocarbons to the surface, but now they want out. Chevron exited Malampaya in November 2019, as part of an asset review to re-focus on shale, selling its 45% stake to local player Phoenix Petroleum that is part of the Udenna conglomerate. And now Shell, which is operator of Malampaya, wants out as well, offering up its own 45% stake as it starts rationalising its own portfolio. In a Covid-19 world, no major player wants to be holding on to a depleting asset, unless there are national issues at stake.

The natural candidate to acquire Shell’s departing stake would be PNOC, which is already 10% owner of Malampaya, since that would bring the disparate and minor upstream assets in the Philippines under more centralised control. PNOC has already expressed interest. Politically-connected Udenna also wants to expand, calling itself the ‘most suitable party’ to assume Shell’s interest (in Malampaya). And finally, San Miguel Corp, which owns and operates the power plants running on Malampaya gas (under service contracts that expire in 2022/24) is also keen to secure its crucial supply. On paper, all three are suitable suitors. In reality, however, none has the depth of technical expertise required to expand and explore Malampaya. They could be custodians of an expiring asset but may not be able to jolt it back to life.

Efforts by the Philippines to replace Malampaya have been not very successful, with only minor fields to show. Coupled with the country’s on-again, off-again showdown with China in the portion of the South China Sea that falls within the so-called ‘nine-dash line’, it is unlikely that a second Malampaya will ever be discovered very soon. Maritime confrontations have so far centred around fishing rights, but that’s only because no large hydrocarbon assets have been found in disputed waters. And, given Rodrigo Duterte’s current stand towards China, it is unlikely to change substantially.

Which leaves the Philippines one more option to replace Malampaya: LNG. The master plan for LNG centred around replacing and supplementing the infrastructure in Batangas with LNG receiving and regasification operations. Various versions of this plan have been floating around since the mid-2000s. In fact, the Philippine government reportedly came close to approving one of the several competing LNG project plans, some backed by international players, but most consisting of domestic firms, several times over the last ten years. But for some reason or other, no official order was ever issued. And time is running out.

Buying gas into the Philippines is relatively more straight forward, compared to exploring and investing into new gas fields. There’s plenty of LNG around: from Australia, Qatar, the US, even nearby from Malaysia or Indonesia. With the current glut in the market, it would have been an easy option to secure a major long-term supply contract that secure the future of natural gas in the Philippines now. Nothing has been built yet.

But it soon might. The Philippine government has finally given the official nod to an LNG scheme by local player First Gen Corporation (backed by Japan’s Tokyo Gas). The plan calls for an FSRU to be operational by 2H 2022, which is quite an ambitious timeline. Allowing for inevitable delays, the First Gen LNG project will cut it quite close to the projected plunge in Malampaya volumes due in 2024. It might be the first, but it won’t be the last. The Philippines will need more LNG infrastructure built to power its own growing demand. This all could have been put into motion several years ago if the government had not dragged its feet. Better late than never, but the result is a country cutting it very close to a depleting energy line.

End of Article

Market Outlook:

  • Crude price trading range: Brent – US$38-40/b, WTI – US$36-38/b
  • Oil prices slide back a notch below the US$40/b level, with growing concerns that the nascent recovery in demand will be cut short by the current second – and potentially wider – resurgence in the global Covid-19 pandemic
  • A huge gasoil glut in Europe – triggered as refineries cut back on jet fuel and moved to diesel – might grow worldwide as well; several European refineries are already idling and making plans to permanently move away from refining
  • The return of supply from Libya is also a concern; OPEC+ is also grappling with quota flouts not just from the usual suspects but also Saudi allies, which might rumble the club’s plan to stick to its tiered schedule for production cuts

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December, 01 2021
Royal Dutch Shell Poised To Become Just Shell

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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