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"Once-in-a-Generation" Energy Shift...Plus Investment Banking Outlook for Latin America

2018-02-02

"We are looking at a once-in-a-generation secular change in the way we produce power," says Gonzalo Garcia, co-head of the Global Natural Resources Group in Goldman Sachs' Investment Banking Division and co-head of Latin America for the firm. In addition to discussing the shift to renewable energy and how CEOs are adapting, Garcia also addresses the macroeconomic backdrop of Latin America and why clients view the region as an attractive growth opportunity.

This podcast was recorded on January 17, 2018.

The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. The recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.

Copyright 2018 Goldman Sachs & Co. LLC. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, where we discussed it elements currently shaping markets, industries in the global economy. I'm Joe seaward global, had of corporate communications here at the firm. My guest today, Gonzalo Garcia, where's, two hats at the firm. The first is global co head of natural resources in our investment banking division, and the second is, as co head of our business in Latin America will be chatting that key issues cross all his responsibilities today, Gonzalo welcome to the programme. Thank you very much pleasure to be here. So you ve got a big job. Let's start with one piece: vit natural resources: that's a sector that are undergoing significant change. A large part of your job is advising ceos of global power in Utah.
companies. What are the key trends that seals are focused on right now, a good place to start on a very good question. I think we are looking at a once in a generation. Sex a change in the way we produce power and thus having very profound implications to the industry worldwide ever sees humanity to use electricity as a convenient way of delivering energy to homes. We produce It is mainly by burning fossil fuels. If you take a snapshot, say a couple of years ago, around seventy percent of the power that we consume is produced by burning fossil feels that is, oil, gas and coal A few years back led by Europe, mainly politicians and regulators, decided to encourage their migration. Towards renewable energy, mainly wind and solar. Basically, by climate change, concerns
and will now looking very different picture so by some estimates in the next two or three years The share of renewable energy would have increased significantly around ten percent and five year period, ten percent of the world electricity, a lotta megawatt, is a lot of megawatt her all of Europe right. Just to put that in perspective, I think there are some people who resisted the chain by now. I ll think anybody is fighting it anymore. I think people are too different degrees, embracing the change and I think that we move in very steadily too. Well, where most of the energy will come from renewable sources odyssey. We ve talked to bid on this programme about the change in the transportation sectors while, but there
later so, if we see more battery operated, cars adopted will need to see new infrastructure for electric vehicles, our clients, thinking about that shift in the technology. And how soon might we see that infrastructure become the new normal people asked this question all the time they say you know, the transition to electric vehicles will be very difficult because we don't have the infrastructure Armenia think about it. When we started to produce in use combustion engine vehicles, it wasn't infrastructure in place infrastructure. With oil gas station. There were no gas ashes Eddie. What exactly is the infrastructure was built from scratch There's no reason why we couldn't do the same for electricity now ass. It happened. I dont think that the infrastructure is gonna. Look like that, I think is gonna look very differently. So, if you think about technology today we can charge
phones, wirelessly and their people around the world, the won't kinds of work and research around where we call electrical highways that would charge to vehicles ass. They drive soap I don't think a rolling out the infrastructure is gonna, be a constrain for the roll out of electrical beagles. I can't tell you how that infrastructures will look, but I don't think he's gonna look like petrol stations today with the electricity charging points every so many kilometres, because the cause these doktor recharge. I think he's gonna, look something different. Another thing is getting a lot of attention. Is the digitization of the electrical grid? Explain to us what that means and what the implications are for the clients you have in the sector when you think about the complexity of an electricity network where say this: a football match. You have millions of people turning on the tv at the same time and that produce a huge spike in the consumption of electricity or you have it.
Storm that hit line, and you need to rewrite the electricity or you need to find alternative sources to produce electricity and then multiply bad by thousands and thousands on wind farms and smaller farms. That could be work in one minute and not work in the next minute, because the winners no blowing, so the greatness, to react to all of those changes. Instantaneously did utilization allows distributing the ability for the grid to react to the new information and make the necessary changes and adjustments at the speed that it is required so that we as users continue to how reliable supply of electricity and whose incentivize today to invest in that is the tellers themselves. Are the governments are some combination of the two for networks on natural monopolies? Are many would be inefficient for us?
competing providers off electricity infrastructure and having multiple, wise Coventry home. You only have one. Why come into your house? So that's. Why has to be regulated. Regulation works slightly different different parts of the world, but most regulation basically rewards the investment. So you have some kind of central planning that decides what type of infrastructure needs to be built on, approve the company's build it, and then they get rewarded by being allowed to charge for the usage without infrastructure. When you think about what is happening today play with the girls and renewables. We have to expand those network in Europe and increasing in the US were going to start seeing offshore wind farm. So these are things that I installed miles off the coast. You need to connect them to the grid. That's when the regulators come in and provide appropriate incentives for the private sector to
Those lies knowing that they will get a return on the investment by allowing people to use that infrastructure, but it's a monopoly. In most cases, monopolies are they. Never companies are granted the right to use that monopoly for a certain period of time in exchange for building it The transition to a low carbon economy is having some profound effects on the sector. Talk about here, clients. Many homer large european utilities are viewing growth up. synergies in renewables today when governments started to introduce incense, for people to build renewable energy. A number of people were sceptical. There were a few missionaries that actually said this future other people were very reluctant, in some cases, even forty to say non on I live in a world where always gonna burn gas or oil call on it to them a while to get commit. Today,.
I don't think, there's anybody that doesn't think of renewable as an important growth sector that is gradually going to replace the fossil fuel generation fleets and in fact, most people today are going a step further, but tickling Europe and they're getting rid of the fossil fuel generation. It's because they just don't see this bother. Copiousness animal may, when you think about it this company and made a good business out of building this big fossil fuel plans for hundred years and suddenly the hearsay. Ok, that's not the future anymore. We got a switch mentality. We gotta, learn how to bail and develop This new renewable generation facilities very big shift in business right and an opportunity.
Obviously, the debate on climate change and global warming has been going on amongst policymakers for decades, but when was it that your clients in what was very traditional conservative space first started treating this as a business decision and something they needed to think about it and integrate into their planning. This is something that people been debate for quite a long time- and although my clients and seals and boys always kept an interesting daisies, Dolly became real lesson a decade ago, when politicians unregulated put in place very specific incentives to go on bill wind farms or build smaller farms, undistorted, penalizing fossil fuel generation to fall for carbon tax So it became a business issue because, whether we like it or not, those incentives where there they could I
ignore them. They could fight them or they could take advantage of them and there was a multiple of reactions to those. But I think if you look the history of that as a good lesson, also for other geography. Certainly in Europe, the early adopted the people than embrace a change were big beneficial to change because they jump to a growing trend very early on, they acquire expertise, that now the leading players in the sector, those set forth in the first place until the view we been produce electricity from I call for the last hundred years, not he's gonna change will still be burning coal hundred years from now. Those people have to change their position and then
building wind farms, but there are five ten years late in doing so. So it was a very serious debate. Certainly Europe, where this all thought it best scale for a couple of years of the boar level, because we want to make decisions about where to invest to a bill. Another call planned or do I believe, ass, planned or going to renewable energy and do add the right people to do that. Other people that Bill Michael possessing eyes on a need to grow and develop wind farms and smaller farms and There is no, I mean the over some exceptions, but by large this has meant completely rethinking the way the generation business looked like
one of the challenges that renewables faces, that their intermittent by nature, and on top of that events like natural disasters, can make it difficult to keep the lights on, how your clients, responding to the need for power resilience the two aspects to it. First, one is the intimate nature of some of these renewable duration. Wind farms is the best example right, because windows and blow they dont produce anything. We talk about how smart grids help with the issue and they somehow an alternative way of finding other ways of producing electricity. When the wind is blowing a certain part of the grid ass. We increase the mt or power that comes from this intimate resources, divinity of the great to react and adapt eyes. Gonna become more and more important. Eyed. The bigger issue is what happens when they're, just not enough of that renew we'll energy. So what happens in a scenario where.
say the normal day. Hundred percent of electricity is produced by this intimate and sources, and suddenly the win just ass a blow that what do you do? Then? I know to solutions. The short term solution, a side. You have some old fashioned plants that arms done by just switch them off when there's no way- and this is why most people think about gas as a gap feel because you're going Those gas plans for a while, just in case a win, does not lie in the long term. Solution is probably gonna, be around technology, developing to a point that makes a storage efficient and commercial, which is not the case today. Large scale, storage for electricity is still very expensive and bulky so is on a practical solution to this issue. One of the key regulations- catalyzing changes in the powering utilities, landscape, probably the most important initiative- and it was driven by sentiment coming
when the population around global warming and what would do into environmental of carbon emissions so that in turn got translate into political will to actually do something about it and, I think, probably the most important foresight there was to subsidize the development of some of these renewable energy. Initially hoping that human, creativity and entrepreneurship was gonna, drive the costs down to a point where the subsidy we're not gonna, be necessary anymore. Today, subsidies are rarely necessary, so most These renewable wind farms or solar funds can be built without any need for subsidies. That was in the case of phthalates. That was a very bottom area, where government intervention actually was a good thing, I know, is a controversial- think
say: look I gotta divergence between the USA and Europe, but I do think that this is one of those cases where burning fossil field creates a big negative externalities, so poorly makes sense for governments to promote change away from that but then I was you have that in place their number of implications for the way the markets are regulated and regulators. Frankly, at a bit catch up with us, so go back. To example, a mention before you need a bunch of gas plans to build stunned by just in case it winners, no blight well nobody's gonna, be like ASP, just to be used, maybe when the wagons employer as a backup. So you need to pay those guys in a different way: you're, no pain them to produce electricity, you paying them just to be available, that's something that requires a change in the way. People are compensated today in those markets away from the pure tariff system, so
a little bit about the divergent approach between the: U S under the trumpet Ministration in Europe, that changing the way ceos reviewing their energy needs and planning for the future. I don't think I have a good answer for that, because if you talk to the seals of some of his global bunnies that got into the renewal train early and they saw it as an opportunity on the roll out the resources on their expertise and put capital to work done very well in the very happy with that. Those same people are now saying the: U S is the biggest electricity market in the well? The? U S consumes for some matters about twenty five percent of the electricity generation. Taiwan is big market way beyond the right size of the population saw a lot of those companies Hossain, you know what the U S is gonna have to do this
whether they like it or not. So they are getting into the U S market and growing their presence in this market, because the same we cannot miss being in the big market in the world have a number of the european firms that have made big inroads into the EU s market, and they will continue to do so. At the same time, you will hear that all the chief executive complain about the fact that the USA have mixed feelings about it, but I think the speed of the change could be accelerated by providing more certainty around the future, which is what we found in the other markets around the world the european market are a good example in light of all those industry dynamics this year, twenty eight is expected to be a record for both oil and natural gas production in the EU. S tell us: why does a very different reasons,
that I think, the. U S discover the ability to extract shale gas and shale oil at a reasonable cost that gas and oil always been there by the way was not suddenly people This oil and gas was trapped in this rock formation. They always Genji was an economic. It wasn't economic to take it out, so technology developed the reason why the U S is producing so much is because they can produce at a cost that is below the global cost of development It's a simple as that. Also the nature of this oil and gas development is different from the map developments that you see in other parts of the world where you need to put billions of dollars on the ground before you get it back. Oh boy loud, and then you committed for the next ten twenty years to our motivation. investments in the. U S, the uproar, expense that is required to drill one jail well and the life of that work is very, very short. Seeing get your money back
you get your money back faster. So if you see a good market out there, you produce- and you just sell it, you locking the margin, so it somewhat apart from all these big trends that we ve been talk, I think so I think so. Switch gears little bit talk about another part of your job, Haired Goldman, which is you're focused on identifying growth opportunities and Latin America. Yossi can't talk about Latin America without talking about Brazil, the rings major economy and one that's just starting to emerge from pre deep recession, our clients viewing Brazil right now being put to it. Brazil is big economy. Your ride is coming out of a couple of years of deep recession and also the downturn, the commodity markets, so that also had an impact in Brazil. Brazil relies heavily on commodities. Last year was better seem the Genie be, was marginally positive, but big difference compared to the negative GDP girls. We haven't the previous two years and this year we
back to the economy to start growing again. At the same time, we seem very big political developments in Brazil has been well publicize. There's been some big corruption scandals in Brazil that tainted business as politicians. So there's the need for rent nation arise than a lot of time in the region there talking to a number of people idling anybody disagrees with the need for a change in the way business is thine way. Politics is done under everything that the changes on the way with those two things in mine, I think people are now look in on Brazil. saying who pay? What is the right moment to go back in the real task is when the hard investment comes in foreign direct investment comes in major corporate major corporate, exactly everybody's interests, it nobody's, watching I think this year we may see a big change embrace. Also
watching the results of the presidential elections that are gonna take place later this year. I suspect some people do not want to wait until that before making big decisions, but is in everybody's radar screen, so natural resources are big part, not just in the brazilian economy but to some extent Chalais Argentina Lot of Latin America. So one of the big opportunities that people are seeing in the latin American Energy Space right now a lot just to give you a sense of how relevant natural resources are. You think about our investment banking business around forty percent of investment, banking business. We do in Latin America. Its natural resources relate to a big but of a business. And what you desire, multiple countries and multiple sub sectors within natural Sources, obviously, mining is always mean very relevant There are a number of good deposits in places like Peru in places like Brazil, Argentina, business.
Perhaps they haven't been developed at the speed that there would have been develop. Had the political situation me more stable, so he's expect to see. A lot of money coming in and taken an interest in developing those deposits, Energy is another good example to talk about shale gas and shall oil in the? U S before well. Argentina, by symmetric. Has the third largest also of shale oil and gas in the well. After the U S and China that are largely unexploited up until now. Why? Because the infrastructure, the? U required to explore them, is actually pretty significant. You need to get that oil and gas markets, and that takes pipelines and on all of those things that already exists in the USA bonuses in Argentina.
requires a big up front investment so again with the new political stability, knowledge and Tina, and a more business friendly government, I think, is quite like you were gonna see that into should take off. Those are just to examine their plenty of other examples who thinks that we begin to see a lot of interest in the region. Common hasn't been historically. As big a player in that region in the world. You took over the leadership in the business last year. Talk about the strategy year pursuing to build up our presence in Latin America is a tough market for us for a couple of reasons: one the couple of r: U S, competitors the have alone history in the region: they ve been there for a century and the been there in a big way, so they have big local, presses, good knowledge of them,
companies and good understanding on the risk and ball I'd away their brand names and some of his mark, as in the way that perhaps we haven't been. We have been having a story- clay, perhaps more put to MR about the kind of business that we want to change. We done well with our strategy, but the effect of that is that goal must not see it in the same way. The goal must have seen in the: U S wasting your ended, develop mark as well. We ve been operating for a long time like in the? U S, com has a franchise com has a brand. The bran stands for somebody that provides advise us of trust to long term companion into providing financial services to their clients. I don't think that's the view that more,
people have a Goldman Sachs in Latin America. Given my background investment banking, I'm a big believer in building franchise because I think he has a value so that, for my first job, taking on this assignment was to rebound pack line cover strategy, and why would the team a circuit who are the people that we actually want to get close to which of the companies that we want to develop a relationship with and then focus on that and focus on that note, because we see any meat it opportunity, but because we thing longer term, these other companies that are gonna replied the type of services that we provide and we want to be in a position when they decide to do something they think of Goldman Sachs with a natural place to go to would begin in the journey. The hat I was very easy. The execution is not as if it is not that easy. Maybe that leads into my final question: what's been the biggest professional challenge,
you faced as you expand your role from natural resources into Latin America. That's a good one, because. I have to say: go in, although, however, see some visibility over latin american business, because over the years given on Chilean and always have strong links with, region, I've always kept an interest and always flying and out and every now and then people will ask me to do more. Latin America and I'll come do a little bit and helping a transaction here and there but never in the way that I've been doing for the last year, they perhaps the biggest surprise enhances shouldn't been a big surprise is bitter what I was saying before, how different the culture and the DNA of Goldman Sachs in the region is from the DNA and Cultural Goldman Sachs.
Worker a lump sum of other. We must make a start up their order at. I guess he's why Satan has against should have surprised me because you get a budget more people and we have some very good people in the region, and you tell him to make money and you give them some rules follow the rules, but they also develop their own way of making money and No reason: why needs to look like the way we do it in the EU over the way. We do it in London, but I'm a big believe that as a reason why we have the position that we have in the mock is where we operate and it comes down to the culture of the way we interact with our clients. The way we interact with each other the way we think of our commitments, what we do and what we don T do procedures. So do you name it I couldn't really be more specific, but after eighteen years the firm. I guess I know what the Goldman Sachs Ways and I'll be here if, at the end of my ten in Latin America, Goldman Sachs Latin America looks more like Goldman Sachs, New York, Goldman Sachs, London
because I'm sure longer term is gonna, guarantee that we're gonna be able to get to the position we want to get too and stay. There are icons all. Thank you very much for joining us today. Pressure. Thank you haven't me. That concludes this episode of exchange Goldman Sachs, I'm Jake Seaward. We hope you join us again. Next time this broadcast was recorded on January. Seventy two thousand eighteen, the information contained in this recording, was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty
to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.
Transcript generated on 2021-10-12.