Easwaran Kanason

Co - founder of NrgEdge
Last Updated: January 7, 2021
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Business Trends

In the closing days of 2020, Indonesia’s upstream regulator SKK Migas approved the Plan of Development submitted by operator Repsol, allowing the gas-rich Kaliberau field in South Sumatra’s Sakakemang block to now chase a production timeline of 2024/2025. At an estimated 2 trillion cubic feet of recoverable reserves, higher even than the 2001 Cepu oil field discovery that included 1.7 tcf of natural gas, Kaliberau is central to Indonesia’s future gas ambitions. As the statement from SKK Migas pointedly noted: Repsol is required to ‘immediately execute the plan to start production as soon as possible.’

That’s pretty obvious. In an industry characterised by huge investment sums and long development times, all parties involved will want to be able to make a return on their capital as soon as possible. But this being Indonesia, there is another level of ambition at play here, one that had already complicated Kaliberau’s pathway toward development.

Discovered in January 2019, the onshore Kaliberau discovery was a truly pleasant surprise, given that region in South Sumatra has already been thoroughly explored in the past. So Spain’s Repsol, along with its partners Petronas and MOECO, must have been over the moon with the discovery, especially when initial estimates indicated recoverable reserves exceeding 2 tcf. Even better, Kaliberau is just a mere 25km from the Grissik gas plant, which currently processes output from ConocoPhillips’ maturing Corridor concession for sale to Sumatra, West Java and Singapore; Repsol is also a partner in Corridor, along with Pertamina, and all three have been seeking new gas sources to extend the life of Corridor past 2024. Kaliberau comes at just the right time. Indonesia’s government must also have been overjoyed, given that the country has been aggressively seeking to reclaim its glory days from the 70s and 80s of being an energy powerhouse. A find of this size plays well into Indonesia’s goal of doubling domestic natural gas production by 2030 to transform the country (back) into a major gas exporter.

That’s all great so far. No complications there. But Indonesia also has secondary objectives that complicate the matter. Successive governments since the Suharto regime fell in 1998 have used energy subsidies as a means of national development. Part of this is self-preservation, subsidised gasoline and diesel is incredibly popular with the citizenry, and it has proven to be political suicide to attempt abolishing them. But the less-consumer facing aspect of this is the linkages to which energy powers the rest of Indonesia’s economy. The industrial sector in Indonesia currently pays some of the highest gas prices in Southeast Asia – at over US$9/mmBtu, compared to equivalent rates of US$6-8/mmBtu in Malaysia, Thailand or even Singapore, even since natural gas subsidies were ‘reformed’ without much political backlash. This makes the industries that the Indonesian government sees as crucial drivers of the economy – petrochemicals, fertiliser and steel – uncompetitive internationally. Which is why the government introduced a new gas price regulation in April 2020, which aims to (re)lower domestic gas prices for industries through government-funded subsidies.

Even in the richest of countries, subsidies can be a problem. But in Indonesia, it is not just a drain, but a financial haemorrhage. Mainly because Indonesia’s quixotic policies to simultaneously boost upstream production and divert a significant amount of those volumes domestically at the lowest price possible has seen upstream oil and gas production crater since the 1990s, forcing Indonesia to turn to imports. And, as an importer, it has to pay market rates.

Which is why one of the major sticking points about Kaliberau was the gas sales price, which is capped at US$6/mmBtu under the new regulation. It is an issue faced by many other natural gas projects in Indonesia, Inpex’s Masela Block (which has also finally been approved) and Genting Oil’s Kasuri but the sheer size of Kaliberau makes it stand out. Repsol has reportedly been gunning for a US$7/mmBtu price to commercialise Kaliberau; not necessarily because that was the breakeven level, but because a project of this size will be competing for capital within Repsol’s global upstream portfolio. SKK Migas’ decision to approve Kaliberau makes no mention of the gas price agreed between Repsol and the Indonesian government, and indeed, it may never be revealed but the approval suggests that a compromise was reached.

That’s one problem solved, and Kaliberau (along with Masela and its associate Abadi LNG plant) will now go ahead. But the existential quandary faced by the Indonesian government that has resulted in prolonged haggling of sales prices has drawn out what could have been a more straightforward process. And it does factor into the radar of other players, especially international upstream explorers that could easily divert capital earmarked for drilling in Indonesia elsewhere where government policy and dictates are not as mercurial. Local players like Pertamina don’t have a choice, but then again, Pertamina is in no position to fund any major exploration alone. Indonesia remains an appealing upstream target, if only because there are still many riches yet to be discovered across the vast archipelago. But the government remains more of an adversity, not an ally, in the race to tap those assets. You could argue that it is their right to play that role. So yes, Indonesia may hold all the cards in this game. But what use is holding all the cards if nobody else wants to play? Or pay?

Market Outlook:

  • Crude price trading range: Brent – US$49-51/b, WTI – US$47-49/b
  • Global crude oil benchmarks stick to their current range, as traders and market analysts watch for signs of how OPEC+ would react during its new monthly scheduled review of production levels
  • One of the main pillars of OPEC+, Russia, is signalling that it will support a further gradual increase – likely another 500,000 b/d – in February, citing that current global crude oil prices are at an ‘optimal’ range

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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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