Easwaran Kanason

Co - founder of NrgEdge
Last Updated: April 11, 2021
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Business Trends
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In the swirling currents and featureless expanses of the ocean, it is difficult to establish boundaries. Which is why maritime border disputes are particularly common, especially if those waters contain or are thought to contain rich hydrocarbon deposits.

Malaysia is no stranger to such a situation. With the country’s maritime borders crossing over with at least seven other countries, it has been involved with plenty of marine disputes – the Pedra Branca dispute with Singapore, the squabble over the Sipadan islands with The Philippines and, of course, the most incendiary of them all, China’s infamous nine-dashed line that claims huge portions of waters owned and administered by Malaysia. Some of these disputes have led to arbitration but most have led to bilateral agreements, which is particularly common when underwater hydrocarbons are involved. The natural world does not understand the human concept of borders, so an oil field or a gas basin could see its geological formation stretch across multiple borders. If so, who then owns the oil or gas? Who is allowed to exploit it? Which is where bilateral ties come in, the basis of which are Malaysia’s two existing joint development areas – the Malaysia-Thailand JDA and the Malaysia-Vietnam CAA.

Over in East Malaysia, a third joint development area has been in plans since 2009, involving the hydrocarbon-rich waters that flow between the Sultanate of Brunei and the state of Sabah. This led to preliminary unitisation deals agreed in 2017 for four projects – the Kinabalu West NAG, Maharaja Lela North, Gumusut-Kakap and Geronggong-Jagus East – between state oil firms Petronas and PetroleumBrunei. However, with the election of a new government in Malaysia in 2018, there were rumblings that the new administration was unhappy with the previously agreed revenue-split underpinning these unitisation deals and wanted renegotiation. That apparently fell through, and in 2020, Petronas revoked the cross-border agreement that would have tied Brunei’s Block CA-1 and CA-2 together with Sabah’s Block J and K.

However, with a new government in place since March 2020, the tides have turned again. Last week, Petronas re-started and formalised the Unitisation Agreement (UA) for Gumusut-Kakap and Geronggong-Jagus East, enabling joint development to proceed once again. This is important, since the crude output levels of both countries is in decline, but definitely pressing to Brunei, which is keen to exploit a cluster of gas-rich fields in Block CA-2 (including the promising Kelidang field) with Petronas to replenish feedstock at its Brunei LNG plant. The Gumusut-Kakap assets in Sabah are also in the focus as well, given that its position and vast platform-and-pipeline infrastructure means that remote and disparate deepwater offshore discoveries that would otherwise be uncommercial could be tied back to the platform.

You would think that the main beneficiaries of this new cooperation deal would be the countries themselves, but you could also argue that the party that will see the most benefits is Royal Dutch Shell. Present on both of the border, Shell will actually intensify its grip on the upstream industry in both Brunei and Sabah because of this. When the cross-border unitisation agreement was halted by Kuala Lumpur in 2020, the freeze temporarily disrupted a proposed sale between supermajors Total and Shell, with the French giant agreeing to sell its 86.95% operating interest in Brunei’s Block CA-1 along the maritime boundary to Shell, which would include various other offshore PSCs in the area including Total’s portion of the Gumusut-Kakap project. The deal, valued at some US$300 million, was initially expected to close by December 2019, but the government-level spat derailed the timeline. The sale concluded in April 2020, but until the unitisation question was resolved, Shell’s hands were tied to optimising its new assets.

Now that unitisation has happened, Shell is free is start stitching together its vast assets in the area. Shell’s pursuing of Total’s share of Block CA-1 had always been slightly at odds with its global strategy, where the Anglo-Dutch supermajor was attempting to sell off non-optimal assets to pay for its acquisition of gas giant BG Group in 2015. So, obviously, Shell’s assets in Malaysia and Brunei were considered strategic enough to retain and even add to. Here’s why.

Following the Total sale, Shell is now in control of all four quadrants of the Gumusut-Kakap resource – the two quadrants on the Malaysian side and the two quadrants on the Bruneian side. This makes Shell the most important player in the development of the resource, since it has very deep ties with Brunei and a healthy working relationship with Petronas. Not to mention, it is also in the best position to understand the true geology and ultimate potential of the Gumusut-Kakap basin across both borders. As a quick primer, the Gumusut-Kakap, was Shell’s first deepwater project in Malaysia, producing some 148,000 b/d of crude oil or nearly 20% of Malaysia’s overall crude output. Output from the same formation on the Bruneian side is smaller – at around 5,000 b/d – but there is still potential there. Of particular focus is Shell’s own deepwater Jagus East discovery in Block CA-1, which geology suggests is connected to the Gumusut-Kakap structure that lies within Malaysian territorial waters. This would necessitate bilateral cooperation, which has now been provided by the unitisation deal. Also on the radar is Shell’s Geronggong oilfield – Brunei’s deepest and most remote offshore discovery to date – which would be challenging to integrate into existing domestic infrastructure, but relatively facile to exploit as a tie-back to the Gumusut-Kakap platform.

Cooperation is better than consternation, it is said. And now that Malaysia and Brunei have put their differences aside, and agreed on the money that underpins the deal, joint development can proceed. Malaysia will benefit, Brunei will benefit and Royal Dutch Shell will definitely benefit, since there seems to still be plenty of jewels to be found in the South China Sea. At least, until China decides to change its position on its nine-dashed line from rhetoric to action. Which will hopefully never happen.

Market Outlook:

  • Crude price trading range: Brent – US$61-63/b, WTI – US$58-60/b
  • With the OPEC+ club announcing plans to gradually relax oil production quotas from May to July, responding to expectations of increased demand from economic recovery and also declining oversupply in the market
  • Saudi Arabia will also begin phasing out its own voluntary 1 mmb/d supply cut, in parallel with the club’s own supply easing, which has caused crude oil prices to retreat back towards the US$60/b gravitational point

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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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