How China's Sorrow Could Make You a Fortune
By Matt Badiali, editor, S&A Oil Report
May 29, 2007

Starting in the Kunlun Mountains just south of the Gobi Desert, the Yellow River follows a meandering path through central China and empties into the Bohai Bay near Beijing.

The Chinese believe their civilization was born in the fertile basin surrounding the "Mother River." But China's second-longest river also has a deadly history...

Yellow River flooding has killed millions of people in the past century. The floods of 1931, for example, are considered the deadliest natural disasters in recorded history, killing between 1 million and 4 million people. And in 1938, nationalist soldiers under Chiang Kai-shek destroyed flood-control dykes to stop the advancement of Japanese troops, wiping out another half a million lives.

Flooding this extreme is why the Yellow is thought to be responsible for more deaths than any river in history... and why the Yellow carries the nickname "China's Sorrow."

The river derives both its fertility and deadliness from the enormous amount of yellow silt the river picks up along its path through the Loess Plateau. Extremely light and easily eroded, 1.6 billion tons of loess and sediment are deposited by the Yellow River each year... giving the Yellow the third-largest "sediment load" of the world's rivers.

While rivers with large sediment flows, such as the Amazon and Yellow, can produce incredible floods, they also create ideal reservoirs for oil and gas. The sediment flows of the Amazon are the source of much of the reserves booked by Brazilian oil giant Petrobras (PBR).

China's Bohai Bay is no exception. PetroChina (PTR) illustrated this early this month by announcing China's largest discovery in 30 years. The field holds 7.5 billion barrels and sent PetroChina shares surging. PetroChina is now the world's third-largest oil company by market capitalization, behind only ExxonMobil (XOM) and Royal Dutch Shell (RDS-A).

Oil-exploration companies have found several large fields in Bohai Bay over the last few years. ConocoPhillips (COP), Anadarko (APC), CNOOC (CEO), and PetroChina all hold significant reserves and production in the region.

Investors should be interested in Bohai Bay because – as PetroChina's discovery proved – it's elephant country. Bohai Bay is one of the last places left in the world where a few shallow wells can prove up millions or even billions of barrels of oil.

While you can invest in Big Oil players for exposure to these areas (S&A Oil Report readers are making great money with the aforementioned Petrobras), smaller oil explorers are where you'll make truly exceptional gains here.

Just last month, I recommended a small exploration company that perfected its shallow-shelf skills in the Gulf of Mexico and now is exploring the Bohai Bay. Today, you can buy its reserves for close to $9 per barrel of oil equivalent (BOE) and get the potential for a several million-barrel discovery.

As PetroChina's recent find illustrates, by focusing on oil deposits such as the one produced by China's Sorrow, you can set yourself up for elephant-sized returns.

Good investing,

Matt Badiali