Billionaire investor Wilbur Ross of WL Ross & Co. explains why he is seeking a stake in China’s shale in a joint venture with EXCO Resources.
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mr. ross has recently returned from a trip to asia, actually yesterday. he joins us here on set. always great to see you. good to be back. you dent looklagged at all.it’s deceptive. so much possibility is being talked about. beijing is on board establishing targets of the number of metric feet they want to have produced in the cotry. at the same time, e are key differences between what is going on here in the marcellusshale and in other places in terms of the geology. a lot of the gas is found in sichuan, which is obviously a seismic risk.that’s a whole lot of questions. china believes it has half asmuch shale gas as we do. 36 trillion versus 24 trillion. but it’s very early days. they’ve only drilled 63 wells. and of those, only three were with theorizontal drilling and fracturing technologies.so it really is wild west in the sense of being totally unexplored.the formations are different. the ones in the states are latepaleozoic era. what that means is it’s older. and therefore there’s been more tectonic shifting of the rock formations themselves. so there’s a good chance that as opposed to the nice, big, continuous reservoir that is we have here, you may have a series of smaller ones there. so that could be a problem because it’s a lot harder to deal with the smaller quantity. second, they appear to be probably 1,000 feet buried deeper than they are here. that raises the cost of drillingbecause here it’s generally between 2,000 and 3,000 feet. so that’s an issue. on the other hand, labor is cheaper there. the permitting and all that is probably going to be a lot lessexpensive than it is here. a structural issue, though, in sichuan and elsewhere, fracking uses a tremendous amount of water.and water is in somewhat short supply. in fact, the joke is, ifeverybody in china took a shower every day, there would be nowater left for the rest of the world. there seems to be some danger of that happening anytime soon. but it is an issue. so one of the problems is going to be, how do you get the water to and from the sites. so in terms of actually finding a chinese partner with exco to participate in this first foreign option, howspeculative is this, given all the risks that you outline? if you take a look at the cost to create and to operate a well here in the u.s., it’s generally $5 million to $6 million, the going rate. right. in terms of order of magnitude and cost, how much more do you think it could be in china? you must have run the numbers. it’s probably a couple of million dollars more. obviously, you can’tovergeneralize. but we think the key to high drilling success — and exco has had very good success. of the last 335 wells theydrilled, 332, not only were productive but were commerciallyproductive. so i don’t know that that average can be reproduced in china. the number you talked about early, the lack of use ofhorial drilling was shocking to me. they are really just on thebeginning edge of learning how to take a shaft down and make it turn and move into opposite directions? you make it sound simple. it’s very difficult. not quite so difficultly. they are at the early days of it. that’s why i feel it makes logical sense for the people over there to joint venture with folks here who have drilled a lot of wells. exco has drilled 8,000 wells in recent years. r. ross, you seem to be one of the first foreign playerstrying to form one of these. how aggressive is the competition here? again, it seems as if the rapid essentially viability of shale in this country has made this a place where guyseel like they can come right in. you’re competing around the world even though we know this is the best technology here. labor is cheaper but isn’t the technology much more important? oh, sure it is. and that’s why i was very well welcomed in china because they recognize it. i was a little bit surprised that there wasn’t more evidence of a big u.s. presence over there because the bidding is october 26th, which is not very long away to get in there and nize — analyzeeismic data and doing things of thatsort. shale gas industry is in a bit of disarray here. there are probably lots of reasons why. but i’m a china fan and have been for a long time. and i’m out there a lot. so it’s different. so speaking of china, then, you just came back. a lot of things we fret about here in the markets is a collapse of the chinese economy, whether they grow at 4%, which would be a disaster for the chinese. you just came back from there. how is the economy, boots on the ground? i think it’s going to growsomewhere between 6% and 7%. the biggest fear i had had was that they maybe have been overdoing the housing.remember, the housing had a tremendous boom, government, ithink, quite rightly said, we have to ramp this down. and they did. they tightened on awful lot of screws. they went a little far.and now they’ve started to loosen up. so in the most recently reported month, housing prices actually rose slightly and total value rose slightly. so it feels like maybe that worry has kind of bottomed out. your bigger concern is japan, these brewing tensions. we’ve already heard about toyota and nissan curtailing production in plants in china. they say there’s a slowdown in also the tensions. what’s your take on that? what surprised me so much is the street people, the ordinary people are really wound up over this controversy with japan over the islands. and i know they are in japan as well. i chaired the japan soc, you may know. so what worries me is if you have two countries where it’s not just the governments but thepopulations are wound up, how do you climb back down? how do you make this have an easy solution? and so that worries me because that’s the last thing we need is another trouble spot in the world. wilbur, great to have you with us. thanks for coming by. always love to have you here on set. guy, the question i pose to you, unless you’re a man like wilbur ross who can go over there and have a joint venture with a chinese company, it’s different to take part of this shale gas boom that would be happening in china. is this like the gold mining boom here in the u.s. where if you sold the picks and the shovels, you could have made a pretty penny too? he brought up the wateraspect — there are interesting ways to play it — companies like a pent air in the diversified water business, that’s an interesting stock. it’s sol off and given