The rising Middle East tensions come ahead of weekend talks in Oman between the United States and Iran over Tehran’s nuclear activity. The discussions appear to be deadlocked, though yesterday’s moves could put more pressure on Iran to budge from its hardened stance on enrichment.
Conflict in the Middle East obviously has big implication for oil and gas prices. Around one fifth of the world’s oil and gas supplies are exported from the region through the Strait of Hormuz, a narrow shipping lane between Iran and Oman. If Iran closes the strait, global energy prices would likely soar.
So it’s no surprise that Brent crude prices jumped on yesterday’s news, flirting with $70 a barrel on Wednesday, a level not seen since prices collapsed after Trump announced his tariff war on April 2. However, prices receded slightly on Thursday. The ratcheting up of Middle East tensions may simply be a negotiating tactic, but the risk of conflict is apt to keep energy markets on edge. |
Graphics are provided by Reuters. |
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Trump's sweeping tax and spending bill under review by the Senate includes an additional tax of up to 20% on foreign investors' income, such as dividends and royalties. The tax, known as Section 899, was devised as a pushback against countries that impose what the bill describes as "unfair foreign taxes" on U.S. companies, such as digital services taxes.
Section 899 is believed to be targeting companies headquartered in the European Union and Britain, which both have tax systems considered discriminatory by the Trump administration. The provision is a significant threat to London-listed Shell (SHEL.L), and BP (BP.L), as well as France's TotalEnergies (TTEF.PA), and Spain's Repsol (REP.MC), which all have sprawling operations in the United States.
Trump, who often used the slogan "drill, baby, drill" in his election campaign, has portrayed himself as pro-fossil fuel, vowing on his first day in office to maximise oil and gas production. But if approved, Section 899 could have the opposite effect.
BP last year invested more than $6 billion, about 40% of its capital expenditure, in the United States, where its interests include onshore and offshore oil and gas operations, two refineries, thousands of retail fuel stations and a power trading business. The country is also home to more than a third of BP's global workforce of about 90,000 and accounted for roughly 30% of its 2024 revenue of $189 billion and more than a quarter of its $21 billion net profit.
Shell, the biggest European oil major, is also a huge investor in the United States, which accounted for 23% of its 2024 revenue of $284 billion. It invests about 30% of its capital expenditure in the country, where it has oil and gas production facilities, a petrochemicals plant, a vast retail network, liquefied natural gas (LNG) purchasing agreements and major trading operations. |
According to Section 899, multinational companies could face a new tax on dividends sent overseas and inter-company loans, potentially reducing profit. The Gulf of Mexico accounted for about 10% of Shell's 2024 free cash flow of $40 billion, it said in a presentation. That means that Section 899 could shave $800 million from its free cash flow per year from Gulf of Mexico operations alone.
BP made about $1.5 billion in free cash flow in the United States last year, Reuters calculations show. A 20% dividend tax could translate into a $300 million loss in free cash flow. The United States became increasingly important to Big Oil companies in recent decades thanks to its stable fiscal and regulatory environment while other regions presented a variety of challenges.
The multinational nature of oil and gas companies means they have plenty of experience dealing with tax uncertainty, but shifting tax policies tend to delay investments. Company boards require long-term confidence to proceed with large, multi-decade capital projects such as oil and gas fields or LNG plants.
The industry's confidence in the United States was already shaken under Trump's predecessor, Joe Biden, who in 2020 revoked a construction permit for the Keystone XL pipeline. The Biden administration also paused approvals for new LNG projects in 2024 because of climate concerns.
Trump lifted the pause when he entered the White House. |
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ROI Asia Commodities columnist Clyde Russell wrote this week that Asian countries aren't rushing to buy U.S. energy commodities, even though lifting imports of crude oil, liquefied natural gas and coal will help meet President Donald Trump's demand for lower trade surpluses.
And ROI Energy Transition columnist Gavin Maguire wrote that forecasts for above-average temperatures across key Asian import markets could lift booming U.S. LNG exports even higher this summer.
And I had a look at how Europe's ambition to develop cheap, clean energy has recently received a harsh reality check, as countries are realizing that |
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