16 BUSINESS DAY C002D5556 Monday <strong>26</strong> <strong>Feb</strong>ruary <strong>2018</strong> In Association With A bigger gig OPEC mulls a long-term alliance with Russia to keep oil prices stable One aim is to allay fears that a current pact will unravel OIL bears beware. On <strong>Feb</strong>ruary 20thSuhail al-Mazrouei, OPEC’s rotating president and energy minister of the United Arab Emirates, said the 14-member producers’ group is working on a plan for a formal alliance with ten other petrostates, including Russia, aimed at propping up oil prices for the foreseeable future. If it comes to anything, it could be OPEC’s most ambitious venture in decades. The result will not be, he insists, a “supergroup”. The notion of Saudi Arabia and Russia joining forces as the Traveling Wilburys of the oil world may be a bit jarring. It remains an idea in “draft” form. But whatever its chances, it attempts to shift a belief widely held by participants in oil markets: that non-American oil producers are helpless against the shale revolution. Get our daily newsletter That belief has strengthened because of a renewed flood of American shale production in the latter part of 2017 after prices of West Texas Intermediate climbed above $50 a barrel. The International Energy Agency (IEA), the industry’s forecaster-in-chief, says America could overtake the two biggest producers, Russia and Saudi Arabia, this year. Such countries, it added, faced the “sobering thought” that America’s rise to the super league was reminiscent of the first wave of shale growth that ended with an oil-price crash in 2014. The shale resurgence comes at a delicate time for OPEC, Russia and the rest. It is largely their actions that have pushed up prices. In 14 months they have come close to their goal of curtailing oil production in order to return the oversupply of global crude to its more manageable five- Go east, young founder Chinese cities are competing to woo overseas entrepreneurs The authorities are offering foreign founders office space, cash, advice, logistics services and even basic furniture WHEN Maria Veikhman, founder of SCORISTA, a Russian credit-scoring startup, was considering expansion abroad, China immediately came to mind. She believes the scope there is vast, for two-fifths of Chinese have no credit records. Ms Veikhman settled in Tianfu Software Park, a stateowned incubator in Chengdu, capital of Sichuan province where city authorities “offer almost everything for free”. Complementary facilities range from office space, basic furniture and logistics services to detailed guidance on entrepreneurial methods. Chengdu aims to catch up with Beijing, Shanghai, and Shenzhen, which at present are in a different entrepreneurial league—together they have over a hundred unicorns, or private startups worth over $1bn. The south-western city allocated 200m yuan ($30m) in 2016 to an innovation-and-startup fund for overseas founders, and hands out up to 1m yuan in cash to well-capitalised year average (see chart). They still have about 74m barrels to go. As yet, Mr Mazrouei says, there is no “exit strategy” for when the agreement is reviewed in June. Fareed Mohamedi, chief economist at Rapidan Energy Group, an American consultancy, likens their task to central bankers unwinding ultra-easy monetary policy. They risk spooking the markets if they send the wrong signal. So the proposal of a pact lasting into the foreseeable future is a way to reassure the market that the grown-ups will continue to regulate supply. “They’re saying, ‘Daddy is back’.” A shift is under way in relations between Saudi Arabia and Russia, the two leaders of the OPEC/non- OPEC cabal. They appear to have set aside a mistrust, bordering on enmity, that was exacerbated by their support for opposing sides in the Syrian civil war. “The Russia-Saudi foreign startups and joint ventures. If the founders are “top international talents”, such as Nobel laureates, the incentive soars to 100m yuan. Last March Chengdu’s Hi-Tech Zone opened an office to provide startup services for expats, including corporate registrations. Some 3,000 foreigners now work there, many operating their own businesses. Other cities are making similar moves. Beijing and Zhejiang have opened well-funded centres for overseas entrepreneurs. The authorities may be particularly keen on attracting venturesome “sea turtles”, meaning foreign-educated or foreign-born Chinese, but they help non-ethnic Chinese too. Shanghai and Wuhan, the capital of Hubei province, are planning new facilities for winners of international startup competitions held in China. In at least ten provinces, new immigration policies are easing the visa process. Foreigners graduating from Chinese universities can apply for two- to five-year relationship is real. ‘Put a ring on it’, to quote Beyoncé,” says Helima Croft, an oil analyst at RBC Capital Markets. She says both countries need high prices to soothe tensions at home. Since King Salman of Saudi Arabia visited Moscow for the first time in October, the two countries’ oil ministers have frequently popped over to each other’s capitals. Mr Mohamedi says Muhammad bin Salman, the Saudi crown prince, needs oil at $70-80 a barrel to keep the economy steady as he enacts reforms, in particular the partial privatisation of Saudi Aramco, the state oil company. He believes Russia can help with that. Vladimir Putin, Russia’s president, who faces elections in March, sees eye-to-eye with Prince Muhammad. Furthermore, the two countries are discussing unprecedented residence permits marked “startup”. If they meet certain criteria, expatriates working for young firms can apply for permanent residence. In Zhongguancun, a tech hub in Beijing, 353 expatriates have been issued with “green cards” since 2016. A stateowned incubator there, Zhongguancun Inno Way, in 2017 incubated 878 startups; 121 of them were founded by foreigners or by sea turtles. Three big hurdles still stand in the way of foreign entrepreneurs. Despite cities’ efforts to smooth immigration, for many founders visas are still hard to come by. Ms Veikhman has been refused a visa for months with little explanation, and has to shuttle between Moscow and Chengdu each month. Tight internet control also cuts the efficiency of starting a business. Overseas entrepreneurs must work hard to adapt to the internet environment inside the “great firewall” where Google, Twitter and many other services are blocked. Notwithstanding the cash on ofinvestments in each other’s oil industries. A Russian sovereign wealth fund is considering buying shares in the Aramco listing. Aramco is mulling a stake in a vast liquefied-natural-gas project in the Russian Arctic. The possibility of long-term co-operation between the two countries to support oil prices also has a defensive logic. Not only is rising American oil production a threat, but in the coming decades demand for oil is expected to wane as it is replaced by cleaner sources of energy. This could cause a race to the bottom as big producers try to sell their oil before it becomes worthless. Restraining production is a way to postpone such feral competition, at least until Russia and Saudi Arabia can wean their economies off oil. But the perils of such a strategy may outweigh its benefits. If fer from Chengdu and other cities, raising proper finance also remains problematic. Capital controls make it difficult for venture-capital firms that use yuan to invest in foreign entities; they usually have to enter a joint venture with a Chinese citizen. Local investors tend to prefer backing fully Chinese enterprises. Yet the country’s other attractions are potent. “Even a niche market in China is a huge one,” says Greig Charlton, a former British banker who has run 247tickets.com, a ticketpurchase website, in Shanghai since 2014. Thanks to the promise of online ticket-booking in China, a relatively inexperienced entrepreneur like Mr Charlton has the opportunity to work with some of the world’s biggest concert-promoters. A deep pool of talent is another lure—the reason why, for example, App Annie, a market data and insights provider co-founded by a group of European entrepreneurs in Beijing, maintained its R&D centre in it works, and prices rise sharply above $70 a barrel, it will flush out yet more production in America and other big producing countries such as Brazil, as happened before 2014. That would reinforce what the IEA calls the risk of history repeating itself. So OPEC and non-OPEC producers would need strategies to keep prices from rising too high as well as falling too low. Bassam Fattouh of the Oxford Institute for Energy Studies, a think-tank, says that might require joint investment approaches, which are “extremely difficult, if not impossible”. If prices tumble, countries would need to cut production further. In OPEC’s history Saudi Arabia has reluctantly played the role of swing producer, regulating its output to keep the market in balance. A successful long-term arrangement would need Russia and OPEC members to share more of the burden, which they have mostly been loth to do. A further concern is Saudi Arabia’s OPEC strategy once Aramco sells shares to investors. Mohamed Ramady, the author of a new e- book, “Saudi Aramco 2030”, says that relations between partially privatised oil companies and their governments become strained when the interests of governments clash with those of shareholders. “Privatising Aramco could then become a double-edged sword for the kingdom,” he writes. At present, Saudi Arabia’s rulers appear to believe that the risks are worth taking. They may have more to fear from a restive population at home than shale producers abroad. But they underestimate the risk of shale, and overestimate their own ability to manage the market, at their peril. Beijing even after it shifted its headquarters to San Francisco. When Stuart Oda, a Japanese entrepreneur, cofounded Alesca Life, a Beijing-based agricultural-technology company, he found young Chinese executives far more willing to take a risk with a startup than Japanese ones were.
Monday <strong>26</strong> <strong>Feb</strong>ruary <strong>2018</strong> C002D5556 BUSINESS DAY 17