China is more dependent on the flow of Middle East oil than any other country in the world. This highlights the importance of the physical infrastructure needed to move oil and gas around the world. In a peaceful world based on commerce and trade, these energy networks expand and function freely.
In a world with an unstable monetary order, shifting energy alliances, and increasing demand for scarce resources, the movement of oil and energy can’t be taken for granted. One of globalisation’s great feats was that it made the transport of goods and services across great distances routine. It may not be routine in the coming years.
This was clear to some people as early as 1996. John Noer of the US National Defence University published a paper called Chokepoints: Maritime Economic Concerns in South East Asia in 1996. I found a copy of the paper online while looking for statistics on the quantity of imports travelling to Australia through the straits of Lomboc and Sunda in the Indonesian archipelago. I ran across the map you see below.
The map is obviously out of date. Today, a much greater volume of oil, Liquefied Natural Gas (LNG), iron ore, coal, and agricultural exports pass through the same three or four narrow shipping channels to and from Australia. But of all the charts I found, this one most clearly shows you how trade can literally, physically, be choked off.
China is aware of this risk. It’s using state-owned oil companies to make deals to mitigate the risk of having its oil and energy supply choked off. In addition, it’s aggressively pursuing oil and gas interests the South China Sea (a topic for much more discussion in the future). This effort to by-pass chokepoints could become an investment opportunity.
The best example is the cross-border natural gas pipeline that starts in the Bay of Bengal and crosses Myanmar to the Chinese city of Kunming in the province of Yunnan. The Chinese plan to import 400 million cubic feet of gas a day from Shwe and Zawtika, two gas projects off the coast of Myanmar. Korean company Daewoo, which is involved in the projects, reckons just two of the exploration blocks in the Shwe project could hold as much as 7.7 trillion cubic feet of gas.
The companies involved in oil and gas extraction from the Bay of Bengal are mostly Korean, Chinese, Thai, and Indian. The investment opportunities are limited. And almost all of them trade on foreign exchanges.
Meanwhile, in the strategic picture, you can see exactly what China is trying to do. It’s building a land bridge through Myanmar. That bridge bypasses the Strait of Malacca, currently patrolled and controlled by the US Navy’s 7th fleet. It also connects China directly with off-shore gas fields in the Bay of Bengal…and further east… all the way to the developing oil and gas provinces off the coast of East Africa.
It’s a new kind of Silk Road, but built for energy.
China’s investment in oil and gas infrastructure is just one aspect of the infrastructure story. For example, here in Australia, over $112 billion worth of projects are on the books to expand the capacity of the country’s rails and ports. Most of that construction is designed to facilitate the commodity trade with India and China.
From an investment perspective, most of the companies getting the contracts to build the big projects are either foreign or very large. This makes them behemoths. Size itself is not a problem. But the share price of large companies is not usually affected by one or two projects, no matter how big those projects are.
The better bet – if you’re looking for big investment gains from the global energy infrastructure story – is to look for the small oil and natural gas companies in close proximity to this new Silk Road for energy.
Editor, Australian Wealth Gameplan
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From the Archives…
2012-02-10 – Kris Sayce
2012-02-09 – Kris Sayce
2012-02-08 – Kris Sayce
2012-02-07 – Greg Canavan
2012-02-06 – Dr. Alex Cowie
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Written by Dan Denning
Dan Denning is Editor in Chief at The Daily Reckoning and the Publisher of Port Phillip Publishing.
Dan is also the investment analyst and editor of The Denning Report. His high-level, macro-economic and stock market forecasts are read by more than 35,000 high-dollar investors and fund managers in over 70 countries.
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