Easwaran Kanason

Co - founder of NrgEdge
Last Updated: May 14, 2021
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Business Trends

In the past four months, a number of firsts were achieved in crude production and trading, offering a preview of a zero-neutral future as the world tackles the all-encompassing issue of climate change. In January, Occidental Petroleum delivered the first major carbon-neutral crude oil shipment to Reliance. And in April, Lundin completed what it calls the first ever fully-certified carbon-neutral crude oil sale from its Edvard Grieg field. Both are notable, especially in the details, in scoping out how carbon-neutral energy will eventually be the norm worldwide, instead of a headlining novelty achievement.

In Occidental’s case, the cargo of 2 million barrels of crude oil was delivered from the US Permian Basin to Reliance’s mammoth 1.45 mmb/d Jamnagar refinery. While the production of the crude itself was not carbon-neutral, Oxy Low Carbon Ventures, the carbon-neutral focused subsidiary of Occidental, matched the greenhouse gas emissions associated with the entire lifecycle of the crude cargo with CCS (Carbon Capture and Storage) offsets. Through a variety of projects verified under various standards, including the Verra Verified Carbon Standard and the International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), the amount of carbon emitted from wellhead to combustion was neutralised by Occidental. It is a first for a major crude oil shipment, though smaller cargoes have been traded and delivered under similar carbon-neutral terms through pilot and experimental trades. Arranged and structured by Australian investment bank Macquarie Group, the delivery also feeds into Mukesh Ambani’s goal to turn his Reliance into a net carbon zero company by 2035 and Occidental’s own ambitions to become carbon-neutral by 2050 (which, by its own admission, is a first of US energy companies). This illustrates how carbon-neutral ambitions of various players – upstream, downstream, midstream, trading and finance – are delicately intertwined, and how all sectors of the industry are galvanising themselves for a carbon-neutral future.

Then, in April, Norway’s Lundin Energy went a step further, delivering 600,000 barrels of carbon-neutral crude to Italian refiner Saras that was certified as such by certification body Intertek. Taking into account the ‘life of field’ emissions from exploration to development to production to transport to delivery, Lundin’s first is an ambitious step towards an even more ambitious target by having all its crude production be carbon-neutral by 2025. Rather than depend entirely on carbon credits, Lundin has invested heavily to turn crude from its Edvard Grief field low-carbon, with emissions of a mere 3.8kg/barrel of oil equivalent, with that lesser amount of GHG offset by certified projects and schemes. This is similar direction that the wider Norwegian upstream industry – powered by state oil firm Equinor – is driving full speed ahead with. The certification process is key distinction here, with independent verifications by specialists such as Intertek being necessary to validate the claims of producers.

Expect to see this replicated across the industry over the next 2 to 3 years. With all corners,  from supermajors such as BP and Shell, national oil companies such as Petronas and Petrobras and even technological laggards such as Pertamina, embracing CCS and carbon neutral crude production/delivery, such an achievement will no longer be a headline.

In fact, it isn’t already a headline in the other half of the energy industry: gas. The first recorded carbon-neutral LNG cargo was delivered in June 2019 from Shell to Japan’s Tokyo Gas and GS Energy. Credits used to offset that initial cargo contributed to Shell’s global portfolio of nature projects in Indonesia and Peru. Since then, seven carbon-neutral cargoes were delivered or traded up until November 2020, all to Asian buyers. Total, which is second only to Shell in the global LNG trading business, delivered its first carbon neutral LNG cargo to CNOOC in September 2020, while Shell sent two cargoes to Taiwan’s CPC Corporation over 2020.

That business is only going to grow. In April 2021, Pavilion Energy imported the first carbon neutral LNG cargo into Singapore, following an open tender with strict environmental criteria and carbon footprint requirements that was won by Qatar Petroleum. A month earlier, in March, Shell delivered the first ever carbon neutral LNG cargo into Europe, sourced from the Gazprom Group and sent to the Dragon LNG Terminal in Wales. And only just last week, US LNG giant Cheniere delivered its first carbon-neutral LNG cargo into Shell’s portfolio.

So far, all of these LNG trades have been dominated by the major gas traders, typically on a spot basis and capitalising on the huge global network of Shell and Total. But eventually, this will start filtering down into long-term contracts, with buyers demanding stricter carbon terms for their custom. In an upended LNG world where buyers call the shots now – the idea of a 20-year oil-indexed LNG contract is unfathomable right now – producers will have to respond, including those to which CCS is relatively new, including projects in Indonesia, Papua New Guinea, Mozambique and Angola. In fact, those producers have already responded, and the industry is starting to see the fruits of those carbon capture labours. The idea of a carbon-neutral oil and gas cargo may still seem fresh and new today, but it won’t be for much longer.   

Market Outlook:

  • Crude price trading range: Brent – US$67-69/b, WTI – US$64-66/b
  • Global crude benchmarks remain rangebound, as the global economic recovery moves ahead unevenly – accelerating in the US, Europe and China – but stalling in South Asia, particularly India, on a deadly resurgence of the Covid-19 virus
  • Crude prices had gotten a bit of a boost following the cyberattack that tuck out the US’ largest oil products pipeline system – highlighting the risk of cyber-terrorism – but this dissipated after services was restarted at the beginning of this week

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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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