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This one mentions the Chinese in VZ and may be of interest to KRY long.

Get the $%#^! Out of Malacca

by Dave Forest
June 21, 2010

China is a force to be reckoned with in the international oil market.

A few indicative stats.

China is today the world's second-largest oil consumer, after the mighty U.S. And an increasing amount of China's oil use is being supplied by imports. In 2009, China's import crude volume exceeded domestic production for the first time ever.

This means the Chinese are looking abroad for more oil. China's national oil companies have been extremely active in buying, farming into or leasing oil acreage in other nations. During the first quarter of 2010, Chinese NOCs accounted for 25% of global petroleum M&A. These national companies now produce 25% of China's imported crude.

Much of the focus has been on the usual players in the oil market. Last year, China became the largest import destination for crude from Saudi Arabia, passing the U.S. And plans are on the books to significantly grow imports from Kuwait and Iraq.

But there are some less-expected patterns emerging as China continues searching for foreign oil supplies. One of them being a focus on the Americas.

As a recent report from Japan's Institute of Energy Economics notes, China is concerned about how its crude imports are shipped. Specifically, the government is worried that 80% of Chinese imports currently sail through the Straits of Malacca, between Malaysia and Indonesia.

This is the preferred route for any ships heading to eastern Asia from the Middle East. Ditto Africa.

Apparently, the Chinese are so concerned about potential disruptions in this concentrated shipping lane that they are making a point to look for oil in non-Malacca-dependent places.

This may be an important part of the rationale behind a $20 billion loan extended to Venezuela in April. In exchange for the money, China has received oil supply guarantees. Oil that can sail freely across the Pacific to Chinese ports.

The fear of Malacca may also explain recent acquisitions by Chinese NOCs in Argentina. And the fact that Chinese companies continue to buzz around the Alberta oil sands (despite the current lack of a pipeline to the Pacific).

The most interesting question is: where next? Colombia could be a good fit. The nation has seen phenomenal growth in its petroleum sector over the last five years. And with an abundance of Pacific ports, it's an easy sail to China.

Moreover, Chinese companies seem to be getting a warmer welcome in Colombia than in other parts of South America (Chinese mining operations in Peru have been getting some flack lately). Last time I was in Medellin, I was told the extensive renovations to the international airport have been contracted to a Chinese firm.

We've known for a while that China is after oil. The drive to "escape the Straits" puts an interesting spin on what projects might be targeted. Something to consider for energy investors.

Here's to secure supply,

Dave Forest