Easwaran Kanason

Co - founder of NrgEdge
Last Updated: April 1, 2021
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Business Trends
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So, after a week where more than 10% of global trade had to be halted, re-routed or completely disrupted, the 400m long Ever Given cargo ship that was wedged diagonally in the Suez Canal in Egypt has been unstuck. Nearly two dozen tugboats and assistance ships, along with many land salvage vehicles digging up sand, freed the massive ship after a six-day ordeal. The world cheered. Global trade was restored. About US$10 billion per day of trade, to be precise.

The Ever Given – operated by Taiwan’s Evergreen Marine – was carrying cargo as varied as tracksuits, electrical equipment and ginger when a sandstorm reduced visibility and strong winds blew the ship off course, such that its bow and stern were wedged on opposite sides of the Canal. The blockage, which happens at one of the narrowest areas of the Canal from its southern entry point from the Gulf of Suez, prevented over 300 vessels (including 24 crude oil tankers) from navigating one of the most important maritime arteries – the shortcut between Asia and Europe that shaves at least two weeks off the alternative journey through the Indian Ocean, past the Cape of Good Hope and up the coast of West Africa. When news of the Canal blockage first broke, crude oil prices jumped, although that rise was tempered by fears over fuel consumption growth as a result of new Covid-19 accelerating infections in Europe. When the Ever Given was finally freed, crude prices immediately fell by 2%.

The sensitivity of crude prices to the temporary crisis in the Suez does illustrate the hazards of maritime trade. For most part, shipping – which is the most efficient way of transporting huge amounts of cargo worldwide – travels on open seas. But it is not always smooth sailing. There are several maritime chokepoints in the world where a crisis like this can erupt. Blockage at any one of these is a tremendous disruptor, but in the world of energy trading and transport, it takes on a different dimensions because of complex geopolitics.

The EIA estimates that some 5.5 million b/d of crude oil is transported through the Suez Canal annually, mainly bringing crude oil and LNG from the Middle East to energy-hungry markets in Europe. That’s roughly 10% of global maritime oil trade, which makes the Suez the fourth busiest chokepoint for oil transit. The Ever Given crisis lasted for 6 days, but it could have easily been six weeks if it wasn’t for a favourable combination of high tides and specialist salvagers. If that happened, then the entire maritime supply chain would be chaos. Ships would have to be re-routed through the treacherous waters around South Africa, maritime brokering and insurance would be in a frenzy and onshore supply chains from High Street clothing stores to ingredients for restaurants could be affected. And it has happened before. The Six Day War between Israel and Egypt in 1967 resulted in the entire canal being closed for eight years, with both entrances littered with bombed shrapnel and ocean mines. Egypt and Israel have settled their differences since, but there is no guarantee that this can’t happen again.

And what about the 3 other maritime chokepoints, which rank above the Suez in oil transit volumes? Right at the top of the list is the Strait of Hormuz, the narrow sliver of waterway that connects the Persian Gulf to the Indian Ocean. Just 33km at its narrowest, this is the riskiest maritime chokepoint in the world in terms of crude trading. On opposites ends of the Strait are enemies – Iran on the north, and Saudi Arabia and its allies on the south. Nearly 33% of the world’s maritime oil trade passes through this small channel, making it particularly vulnerable to disruption. And it has been disrupted. Many times before. Even the threat of disruption – as Iran has wielded recently in its squabbles with Donald Trump’s USA – can send crude prices soaring. Because of that warships from the USA, UK and France are a regular presence in Hormuz, attempting to act as a deterrent if the always-volatile situation in the Middle East does flare up. It has not fully yet, but if it does, the consequences are devastating.

In second place is the Straits of Malacca. Though much wider than Hormuz, the Straits of Malacca is also far busier, since its traffic is not only focused on energy, but almost any cargo that is traded by East Asia westwards. In oil terms, about 30% of global maritime volumes pass through the Straits, which is controlled by Malaysia on one side and Indonesia on the other. And like Hormuz, there is no real alternative to the Straits of Malacca is terms of shipping traffic; alternative routes through the Indonesian archipelago are simply too narrow or too hazardous. Which is why there have been several ideas floated to reduce the risk of disruption here: slicing a canal through the Isthmus of Kra in Thailand, and perhaps (in oil terms) building oil pipelines cutting across Thailand to bypass the Strait or winding pipeline systems starting in Myanmar snaking up to China’s interior. Because the risk is there. In the 1960s, the Konfrontasi between Indonesia and Malaysia led the Straits to be used as a battleground, both weaponised and full of weapons. If that ever repeats, then more than oil is at stake.

The Cape of Good Hope in Africa is the third largest chokepoint for maritime oil trade (roughly 10%), but it is the fifth that is more risky – the Bab el-Mandab Strait between Yemen and Eriteria/Djibouti, that is the entrance to the Red Sea and the Suez Canal beyond. Any ship that passes through the Suez is most likely to pass through Bab el-Mandab, making it an equally risky flashpoint for any disruption in global oil trade. And given the instability in Yemen that has been egged on in proxy by Iran and Saudi Arabia, that conflict has occasionally spilled offshore. Not to mention the threat of pirates based in Somali that prowl these waters. 

Other marine chokepoints have a lower risk factor, though the risk is never zero. The important ones for energy are the Turkish Straits (connecting Black Sea oil to the wider world, 5% of global maritime oil trade) and the Panama Canal (increasingly important given the USA’s accelerating role in crude and LNG exports, 2%). The others – the Danish Straits and the Straits of Gibraltar – are, currently at least, quite safe. But, as the Ever Given crisis proves, disruption could occur at any time. A single ship caused a global tidal wave of interruption, heightened by increasingly complex and interlinked global supply chain. That thought will be on the minds of the entire maritime industry – and on crude oil trading – as key players start looking at ways and methods to prevent such a disaster from happening again. Hopefully.

Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
  • Global crude benchmarks wobbled in the face of two opposing developments: the blockage of the Suez Canal for nearly a week due to a grounded super cargo ship, and Europe entering into a new series of lockdowns as Covid infections surge
  • However, some bullishness may be coming from OPEC+, as reports suggest that the group is likely to roll over its existing level of supply curbs from April to May, a cautious approach taken as OPEC analysis shows that oil demand recovery has slowed down and will only begin reviving after Q2 2021

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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.

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