Investor Opportunity in a China Power Blackout

By: Sara_Nunnally

You've got a perfect hand at the blackjack table... and you've got a lot of patacas in your bet pile.

The night's been lucky for you at the Lisboa Macau, and you've got an upgrade coming your way if your luck holds out. The dealer's showing 15, then 19, then bust! Looks like you'll be smiling all the way to your luxury suite.

The dealer's counting your winnings when the Lisboa suddenly goes dark...

It's pandemonium. Like something out of Ocean's 13, when George Clooney and Brad Pitt engineer a fake earthquake to empty out their rival's casino, the Bank -- people screaming, grabbing chips, pushing, stampeding to get out.

But it's not a movie.

China's Guangdong province just cut power supplies, and outages have trickled down to the luxury playground of Macau.

Think it can't happen? Insiders are already predicting it will.

China Southern Electric Power Grid said five southern provinces -- including Guangdong -- could face power shortages of up to 7 or 8 gigawatts (GW) in the third quarter of this year. The word "could" implies a chance of power shortages, but there's more than just a chance in this instance.

In the first half of 2011, these five provinces have had to cut 9.01 GW because of tight electricity supplies and high demand.

Is it any wonder, then, that China is rushing around spending tens of billions of dollars on foreign energy acquisitions?

The latest grab is CNOOC's (CEO:NYSE) $2.1 billion deal to buy OPTI Canada (OPC:TSX), an oil sands company short on cash. The deal will give CNOOC 195 million barrels of proven reserves. It's not the first Canadian oil sands deal that CNOOC has entered. In 2005 the company bought a stake in MEG Energy Corp. (MEG:TSX). The $158 million deal bought CNOOC reserves, and access to expertise that the company could use for projects in China.

(We talked about this kind of "educational" acquisition in Monday's Smart Investing Daily. Don't forget to sign up for Smart Investing Daily and let me and fellow editor Jared Levy simplify the market for you with our easy-to-understand articles.)

Chinese companies are hungry for energy deals. Over the past five years, China has bid $88 billion on international energy assets.

Power consumption is up in China. This isn't anything new for the fast-moving country, but what is new is the rate at which China is importing its natural gas.

Reuters reports:

The [National Development and Reform Commission] said China's natural gas imports in the first half of this year grew 100 percent from a year ago to 14.1 billion cubic metres (bcm).

This suggests the country brought in a record 2.7 bcm of the fuel last month based on January-to-May import figure released earlier by the commission.

Of the imports in the first six months, gas piped in from central Asia totalled 6.9 bcm and imports in the form of liquefied natural gas were at 7.2 bcm, it said.

The overall imports accounted for 22.4 percent of China's national gas consumption, 9 percentage points higher than a year earlier.

Apparent gas consumption in the first half gained 21 percent on year to 63.1 bcm, according to the commission.

China is in the midst of a huge energy shift. It wants to generate more power from natural gas, and less power from coal. But its domestic resources can't keep up. PetroChina (PTR:NYSE) supplied 1.83 billion cubic meters of natural gas to six power plants -- a boost of 64.9% from the previous year.

That kind of growth is unsustainable -- unless you get supplies from other sources.

And that's why China is so frenzied... That's why companies are shelling out billions for energy deals. Many of these deals involve Canadian companies, and there are a lot of investment opportunities in this region.

Look to the smaller, cash-strapped companies for possible acquisitions, and look to the bigger, established companies for joint ventures.

But there's another area that China's struggling to make a deal with: Russia.

Despite a memorandum signed by both countries in 2009, a pipeline is still just a pipe dream. The two countries can't agree on a price for natural gas. Russia wants to charge $350 per cubic kilometer, but China doesn't want to pay more than $235.

Why such a big difference? Russia charges its European customers $350, but China can buy natural gas from Central Asia or Australia for less than $180.

There will eventually be a deal between these two countries, but it will take a lot of haggling. When it happens, though, keep an eye on Russian energy companies, and pipe builders. Some analysts say a deal could add 2% to Russia's GDP.

That kind of economic boost paired with China's increasing demand for natural gas makes a pipeline deal almost inevitable.

Publisher's Note: The action between China and Canada has played out exactly as Taipan's Zach Scheidt said it would. In fact, earlier this week, one of his recent picks surged by 62% overnight... all thanks to a merger almost exactly like the one above.

To read where China and its billion-dollar billfold are headed, read Zach's latest special report.

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Source : http://www.taipanpublishinggroup.com/tpg/smart-investing-daily/smart-investing-072111.html

By Sara Nunnally
http://www.taipanpublishinggroup.com/

Sara is Managing Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally's diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC's Squawk Box, as well as numerous radio shows around the country. Most recently, Sara co-authored a book with Sandy Franks called, Barbarians of Wealth.

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