Easwaran Kanason

Co - founder of NrgEdge
Last Updated: April 15, 2021
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Business Trends

And then, there was hydrogen. Soon after the universe was formed through the Big Bang, the vast expanse of heat that sent time and space hurtling in infinite directions started to cool down. When this happened, the first nuclei began capturing electrons, forming the first two elements: hydrogen and helium. The lightest of all the gases, hydrogen is the first element in the periodic table – with only one proton and one electron – and the most abundant element in the universe. High school textbook facts aside, hydrogen is now a word buzzing with charisma in the energy industry as it could be the answer to decarbonising the world’s industries and spearheading a renewable future.

A quick primer on hydrogen. Current global demand stands at about 75 million metric tonnes, more than three times higher than equivalent consumption in 1975. About 40 million tonnes, or 53%, of this hydrogen is used in oil and natural gas refining – in processes such as hydrocracking or hydrotreating – while most of the remainder is used in the fertiliser industry to produce ammonia. Only a scant amount – 0.5% - is used in other applications.

But it isn’t about where hydrogen has been, but where it could go that has the world – energy and otherwise – excited. Over the past decade, many leading nation have started policies researching and supporting investment in hydrogen technologies, with at least 50 targets, mandates and policy incentives in place, and more arriving. There is a North-South divide in this, since hydrogen technology is being pursued by the likes of the European Union and Japan in their quest for a low or net-zero carbon future, while hydrogen is not mentioned at all in the most recent energy plans of countries such as Indonesia, Thailand, Pakistan or Nigeria. But the potential for hydrogen are a low-carbon replacement for heavy-carbon sources such as coal and fossil fuels is vast. In industry, where most of today’s hydrogen is used, hydrogen could increasingly be used in methanol and steel production, replacing the pollutant-heavy coal that coal, for example, plays in steel-making. In transport, hydrogen fuel cells are the future of road transportation, with alternatives also being developed for aviation and shipping. Hydrogen could also be blended in with existing natural gas networks without any major change in infrastructure for heating and cooling, while hydrogen-linked battery technologies are also the leading options for storing renewable energy from sources such as solar and wind farms. It could also be directly burnt in gas turbines as power generation; or more accurately, hydrogen-based ammonia could plan that role. With all these options in place – and the government backing to make it happen – it is not inconceivable that hydrogen demand could triple again over the next 30 years to over 200 million tonnes by 2050.

The problem is supply. Hydrogen is almost entirely supplied through fossil fuels, with an estimated 6% of global natural gas and 2% of coal dedicated solely to hydrogen production. So while hydrogen can be the replacement for carbon-intensive industries and fuels, the production of it is already carbon-heavy, with hydrogen production releasing some 830 million tonnes of carbon dioxide annually, more than the UK and Indonesia combined. Renewable hydrogen production is possible – mainly through water electrolysis – but infrastructure is scant because costs can be three times higher. This is why it is much cheaper to produce hydrogen in regions like the Middle East, Russia and North America - because natural gas is the largest component of production cost at between 45-75% - while the likes of Japan, China, India and South Korea have to import expensive natural gas to make even more expensive hydrogen.

Which is why the world is now no longer just talking about hydrogen, but an entire rainbow of hydrogen colours. There is brown hydrogen – directly extracted from coal using gasification. Then there is white hydrogen that is a by-product of industrial processes or black/grey hydrogen that is produced from natural gas using steam-methane reforming. Yellow hydrogen is produced through solar grid electricity via electrolysis while pink/red/purple hydrogen is a carbon-free option created through nuclear power that is politically-unfriendly. But the colours that are getting everyone the most excited are in the green-blue spectrum: turquoise hydrogen produced through the thermal splitting of methane that leaves solid carbon rather than carbon dioxide as a by-product; green hydrogen formed through water electrolysis with zero carbon emissions; and then blue hydrogen that is conventional black/grey or brown hydrogen but with all carbon dioxide emitted sequestered through Carbon Capture and Storage (CCS) technology.

The ideal solution is green hydrogen, but costs and infrastructure may prevent this from ever being the only solution. The same caveat applies to turquoise hydrogen. Like it or not, blue hydrogen – which the probably the cheapest of the low/zero-carbon solutions but has opposition from certain quarters – will still play a major role in satisfying future hydrogen demand, which in itself should start a virtuous loop of reducing carbon emissions in industries where hydrogen as a fuel can take hold. The world’s leading energy supermajors and majors are already preparing for this. BP has announced plans to build the largest blue hydrogen production facility in the UK by 2030, while the US climate envoy for the Biden administration John Kerry is calling on the US oil and gas industry to embrace ‘huge opportunities’ in hydrogen. Shell has invested in a tech start-up developing a hydrogen-based zero-emissions aviation engine, while even state oil firms are making moves: Malaysia’s Petronas is expanding its investment into green and blue hydrogen along with advanced CCS projects, while the ever-vigilant Equinor is already part of the EU’s largest green hydrogen project that expects to have 10 GW of capacity by 2040 using renewable offshore wind farms. Crude oil giant Saudi Arabia has plans to become the world’s largest hydrogen exporter through a combination of blue hydrogen from its natural gas reserves and green/yellow hydrogen from solar power plants being built at the city of Neom along the Red Sea by 2025. And Hyundai Oilbank has a unique solution as well: it has signed up to import LPG from Saudi Aramco and convert that into blue hydrogen onsite at its Daesan refinery complex in South Korea’s Seosan province, which could be a model that proves that clean hydrogen does not necessarily have to be produced where the source fuel originates to make the best commercial sense.

If the buzzword for the 2000s and 2010s in the energy industry were LNG and shale, respectively, then the buzzword for the 2020s is likely to be hydrogen. Too many moves are being made by governments and too many investments approved by industry titans for this to be ignored. After all, a net-zero world will benefit everyone. And it seems that the first ever element to be create in this universe is the key to creating that future.

Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
  • Global crude oil benchmarks edged up on a cocktail of opposing-factors, including fears of supply disruptions as Yemeni Houthi militants launched a fifth recent attack on Saudi Arabian oil infrastructure in Jubail and renewed fear of demand weakness as Covid infections rises alarmingly in certain regions, especially Europe, Brazil and India
  • The likelihood of prices returning to the US$70/b level is also unlikely, given that OPEC+ has signalled that it will begin easing supply quotas from May onwards – a decision supported by kingpin Saudi Arabia – but could be timely given recent fuels demand recovery in the US, UK, China and India, the latter having posted its stronger oil consumption figures in 15 months

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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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