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On 7 May 2021, a most unusual occurrence took place in the USA. The Colonial Pipeline – which carries gasoline, jet fuel and other refined products from Houston to New York across the Southeastern and Eastern United States – halted all operations, triggering a fuel distribution panic. As the largest pipeline system for refined fuels in the US, capable of carrying up to 3 million barrels of fuel per day, the closure of the pipeline triggered some perplexing scenes – from the hoarding of gasoline in plastic bags to a lady expressing her reliance on gasoline to survive on TV despite her SUV being emblazoned with a ‘Say No To Pipelines’ sticker.
The panic lasted five days until 12 May, when portions of the pipeline were restarted. But what is far more worrying is why it happened. This was not the result of an act of nature that created a force majeure, or because of a structural fault that ruptured the operation of the pipeline. No, the Colonial Pipeline outage of May 2021 was a cyberattack. Hackers, believed to be from Eastern Europe, had infiltrated the Colonial Pipeline Company’s IT systems, triggering a cyberattack that impacted the computerised equipment managing 45% of all fuels delivered to the US East Coast. In response to the attack, Colonial Pipeline halted its entire operations to contain the situation, while dealing with the hackers’ ransomware demand of 75 bitcoins, which is worth almost US$5 million at current exchange rates.
Ransomware cyberattacks are not new, having been around since the internet first gained widespread use in the 1990s. But the sophistication of these attacks has increased, especially since corporate IT security systems have not kept pace with hacking techniques. But this is certainly the first large-scale and highest-profile cyberattack on American and global energy infrastructure, offering a nervous look at just how secure the crucial worldwide energy complex is, and how this should and must be improved before even larger cyberattacks are launched.
Because gone are the days when the pipeline disruptions had to be physical – whether it was Boko Haram militia sabotaging crude pipelines in Nigeria or undetected defects triggering spillages in the US-Canada Keystone pipeline. With much of the pipeline’s controls now done from a screen in an air-conditioned office, ill intent does not have to travel to a wet marshland to cause chaos. A simple backdoor vulnerability could give a malicious individual or group full access to a company’s inner system workings, to devastating consequences. This was exactly what happened to Colonial Pipeline, with the group responsible believed to have stolen over 100 gigabytes of data from company servers before Colonial even had a clue. And this is not unique to Colonial Pipeline. In fact, the risk is so widespread as to be alarming. Risk specialist and advisor Marsh has stated that the ‘global energy sector is increasingly vulnerable to cyber-attacks and hacking, due to widespread adoption of internet-based, or ‘open’, industrial controls systems to reduce costs, improve efficiency and streamline operations. The nature of the threat is beginning to change, and virtually all industry sectors have begun to witness much more intelligent and complex attacks.’ The dependence on common IT platforms and standards has certainly been to boon to business – a far cry from the 1980s and 1990s were each company tended to maintain its own proprietary systems – but that standardisation is also a major vulnerability. One backdoor identified by hackers is a backdoor into thousands of companies.
So major was this cyberattack that the Biden administrative pulled together an inter-agency task force over that weekend to address the breach, mitigate the impact and assess the wider scale of vulnerabilities across the US energy sector. The first two were handled deftly and quickly, but the last will take years. Meanwhile, the cat is out of the bag now. Because, despite publicly refuting it previously, Colonial Pipeline actually paid the ransom. And it paid it on the day of the outage itself (May 7) through bitcoin, which is beloved by hackers for its untraceability. Once paid, the hackers – thought to be a new group known as DarkSide – provided Colonial with a decrypting tool to restore its disable network, but the provide so slow that it took over five days for full services to be restored.
Paradoxically, though, the cyberattack has actually increased the average American’s opinion of oil and gas pipelines now that the disruption of a major one became so apparent, at least based on early polling. This could herald a shift in the position of the current US government regarding domestic pipeline infrastructure, moving away from demonising it to investing in it (or at least existing ones) if only to secure them against cyber-threats. And maybe, possibly, even soften Joe Biden’s stance on new projects, including Keystone XL?
In a statement posted on its dark webpage, DarkSide stated that it would vet ‘customers’ in the future to ‘avoid social consequences’. Which is all good and well, but the fact that the cyberattack was successful in the first place, and that Colonial Pipeline actually paid the ransom (against all FBI and federal advice) could mean a cyberattack frenzy in the near future. A few lines of code, a savvy hacker and an unknown vulnerability could yield millions of dollars in untraceable crypto-currencies. IT and risk departments across all energy companies worldwide must be quaking in their boots. Because the threat of cyberterrorism and ransomware is now ever-present and ever-dangerous, from Texas to Thailand, New York to Nigeria. In May 2021, it was the largest refined fuels pipeline in the US. It could be a rig, a cargo ship or even an entire refinery tomorrow.
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Market Outlook:
- Crude price trading range: Brent – US$67-69/b, WTI – US$64-66/b
- Steady is the global crude oil price ship, with benchmark contracts staying stable in their ranges on demand recovery in key consumption regions (US, Europe and China) smoothing over the asymmetrical global recovery as Covid-19 continues to flare up in South Asia, and even previously safe spots Taiwan, Singapore and Japan
- A new chapter of Israeli-Palestine violence may begin to add risk premiums to crude trading on the potential on infrastructure disruptions in the Middle East and a potential reset of Israel’s relationship with new allies like the UAE and Bahrain
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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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