“Worldwide Spiraling”

It’s good to know inflation is tame—at least, that’s what anybody buying ten-year bonds with a 4.20 yield are telling us.

But that’s not what Royal Dutch/Shell is telling us, according to today’s WSJ:

“Shell said costs in the second phase of the massive Sakhalin II natural-gas project…may double to $20 billion, and it expects the project to be delayed by half a year.” The Sakhalin II project is a huge Liquified Natural Gas development off Sakhalin Island near Japan, designed to supply “the growing economies of Southeast Asia,” as described on the Sakhalin web site.

According to the folks at Shell, the sudden, overnight increase of $10 billion in the cost of this project owes itself partly to Sakhalin-specific issues, including environmental costs and pipeline-laying complications; and partly to “a world-wide spiraling of commodity and project costs,” as per the WSJ.

“We do not see these pressures decreasing in the near to midterm,” the Shell CFO told listeners on a hastily-organized conference call.

Just last week, in “But They Won’t Drill With It…Not For Now, Anyway,” I wrote about the fact that despite the doubling in oil prices this past year and the resulting massive increase in cash flows to the major oil companies, those same oil companies maintained cautious drilling plans—preferring to return much of the spare cash flow to shareholders via hefty dividends and share repurchases.

Looks like there’s going to be at least $10 billion less spare cash flow—either for returning to shareholders or for the drilling and exploration that the world is going to need to avoid another energy crunch.

Could be a long, cold winter for the bond market.

Jeff Matthews I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.