There are times when the market gets a prediction right. After all, what is a prediction but an opinion made by assessing a situation from all angles and aspects, then deciding on what the logical outcome for a rational player would be? Take the current situation in global crude oil fundamentals. Consumption is recovering, as Covid-19 vaccinations accelerate. Supply is tight, with news of crude inventory draws globally signalling that more supply was needed. And, crucially, there was pressure building up with the OPEC+ club of 25 oil-producing nations to ease production cuts. Logically, this should have led to OPEC+ announcing another gradual easing of its landmark supply quotas for April 2021.
That didn’t happen. Instead, OPEC+ agreed to keep April output steady to the existing levels for February and March – after what was described as a ‘quick virtual meeting’, no less. There were some exceptions; Russia and Kazakhstan were allowed to bump up their collective output by just over 100,000 b/d, but the rest of OPEC heavyweights like the UAE, Kuwait, Iraq and Iran were granted no leeway. And any increase from Russia or Kazakhstan or indeed some non-compliance by itchy OPEC members would be dwarfed by Saudi Arabia’s decision to maintain its voluntary 1 million b/d production cut into April. This is a victory for the increasing small Saudi Arabia camp of OPEC+. It caught the market by surprise, and any predictions that had been priced into the crude oil futures curve were thrown out the window. The Brent crude benchmark topped US$68/b while WTI hit US$65/b.
A couple of days later, Brent jumped above US$70/b, as Saudi Arabia reported that Iranian-backed Houthi rebels from Yemen attacked one of the world’s largest (and most heavily protected) crude oil infrastructure sites. A drone entered the Ras Tanura oil export terminal to target an oil storage tank farm there, causing a ‘fair’ amount of damage but no deaths. Crude prices soared on the news, even though Saudi Arabia said the attack was ‘intercepted’ and oil output was ‘unaffected’. But the fact that the very thought of a supply outage to trigger a rally in crude oil prices illustrates the tightness in the market right now. Ras Tanura is the world’s largest oil terminal, with capacity to ship 6.5 million b/d. If this heavily protected ‘Fort Knox’ of crude oil could be breached, then what happens while the Yemeni rebels step up their game?
Not everyone is happy with the current situation. In fact, most players on the chessboard are unhappy. Although crude oil prices have retreated below the US$70/b level, they are still close to a price range where demand destruction begins ie. the reluctance to consume oil sets in because crude oil prices are too high. Before the OPEC+ meeting, India called on the club to increase oil production progressively over Q2 2020, stating that ‘artificial cuts to keep the price going up is not something that we support.’ China, too, is reportedly lobbying for increased supply behind the scenes. On the supply side, while the elevated level of pricing does increase revenue for oil-producing nations, there is a wider camp that believes that increased output at a more moderate price level is a better outcome. These would be countries such as the UAE, formerly one of Saudi Arabia’s most staunch supporters, that have invested heavily in oil production and export infrastructure, and are itching to use that capacity, not leave it idle. Economists are also raising the alarm that higher crude prices could lead to inflationary pressure as a time when the health of the global economy remains fragile.
One group, however, stands to benefit from higher prices, US shale producers. Data from Baker Hughes shows that the US oil and gas rig count is above the 400-site mark and growing steadily, a far cry from the situation ten months ago when onshore shale drillers were virtually wiped out. As WTI prices sit firmly above the US$60/b threshold, some surviving Permian producers, including EOG Resources, the largest private producer in the basin, announced big output boosting plans. But Saudi Arabia has a different opinion. It believes that the wild ‘drill, baby, drill’ days of American shale are over, and the industry will be forced to adopt discipline as shareholders prioritise returns over unfettered growth. It is an opinion not shared by most in OPEC+, especially Russia, but does have some evidence to back it up. The American stock market chose to punish listed Permian producers that promised increased drilling and rewarding more disciplined players, while Big Oil players in the shale arena have scaled down their ambitions. And there are also consumption trends to consider. While the Covid-19 situation in the USA is getting under control, it is still raging wildly in Mexico and, especially, Brazil, where a new, more virulent variant has emerged. Both countries happen to be major destinations for US gasoil and gasoline exports from Texan refineries; if that demand withers, then the already-beleaguered refineries in Texas won’t be needing as much feedstock.
That’s a lot of words to describe a fluid situation. OPEC+’s decision is limited to April 2021 only; the group will have to meet again in early April to decide on its targets for May and June. This means that there is plenty of room for the club to adjust its position. Some analysts estimate that the market could comfortably absorb an additional 1.2 million b/d of crude in March, which could moderate prices back to US$60/b. Perhaps OPEC+ will choose to meet that demand in May, either through easing quotas for all members or Saudi Arabia rescinding its voluntary cuts. And if US shale producers prove to be less disciplined than envisaged, then there is also room for OPEC+ to manoeuvre around that.
If anything, this latest OPEC+ decision continues to value Saudi Arabia as the world’s swing producer and the club’s kingpin. And for now, Saudi Arabia wants to remain cautious. Perhaps it is being overly optimistic regarding US shale producers, and it has been spectacularly wrong before in the past but it has also engineered a situation where it can react if it needs to, which it has also demonstrated dramatically in the past.
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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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