War in Ukraine is reshaping the global energy landscape 🌎

[Goldman Sachs]( [BRIEFINGS] March 31, 2022 The Russia–Ukraine War Is Reshaping Energy Markets From skyrocketing gas bills to surging prices at the pump, Europe is facing one of its most intense energy crises in recent years amid the war in Ukraine. That’s because about 40% of Europe’s natural gas and oil consumption relies on supply from Russia, and it's difficult for the region to find alternatives. In the latest episode of Exchanges at Goldman Sachs, Goldman Sachs Research’s Samantha Dart, senior energy strategist on the commodities team, Alberto Gandolfi, head of the European utilities research team, and Michele Della Vigna, head of natural resources research in EMEA, speak with host Allison Nathan on how the war is reshaping the global energy landscape. Replacing Russian gas and oil will take time. “It's such a difficult thing to accomplish in the near term because again it's the scale of that exposure to Russian oil and gas,” says Samantha Dart. “This is a situation where we think this high-price environment is unlikely to go away anytime soon. I mean we're really talking a few years here before we can see additional supply globally to replace that exposure.” The conflict is likely to reverse a multiyear decline in energy capex. “This war is that catalyst that I think completely changes the perception of the importance of energy availability and diversification of sources, and underpins the structural change in investment in a way we've last seen in the early 2000s,” says Michele Della Vigna. Renewables have a key role to play. “Renewables have been a very important factor in achieving climate goals over the past 20 years in the European Union and now they're becoming probably even more central,” explains Alberto Gandolfi. “Essentially, every megawatt hour of electricity that you generate from wind and solar is a molecule that you don't have to import from Russia.” Subscribe wherever you get your podcasts. [Spotify]( | [Apple]( | [Google]( | [Stitcher]( [Listen to podcast]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=How%20the%20Russia-Ukraine%20Crisis%20is%20Reshaping%20the%20Global%20Energy%20Landscape&body=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3D7leaYGmRn-4) After Long Drop, Energy Investments Set to Rise Capital expenditures in the energy industry are expected to climb as the war in Ukraine causes a global reset in how the world produces energy. While investment in the sector has dropped in recent years, Goldman Sachs Research expects capex in primary energy (hydrocarbon, nuclear and renewable power) to grow 60% by 2025. “We believe that the recent focus on energy security, resilience and diversification will drive a new era for energy investments,” the Carbonomics team in Goldman Sachs Research says. • Investment in primary energy is forecast to rise to $1.4 trillion in the next three years. • U.S. shale and offshore oil projects are likely to see increased funding, but the drive for decarbonization will endure, pushing investment in liquefied natural gas, renewables, bio-energy and hydrogen to new highs. • To meet the world’s rising energy needs, capital expenditures are expected to rise to about $2 trillion annually by 2024. [Here's more on the future of energy capital expenditures.]( [Read more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Is%20this%20a%20New%20Era%20for%20Energy%20Investments%3F&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fpages%2Fhow-ukraine-changes-the-future-of-energy-investing.html) Are U.S. Companies Actually Reshoring Their Supply Chains? Supply chains have become a top concern for U.S. executives. The pandemic resulted in shipping gridlock and the worst supply chain disruptions in decades. The war in Ukraine has caused ruptures in trade relations and losses of foreign assets, reminding corporations of their exposure to geopolitical risks. Companies are focused on strengthening their supply chains, but some of the efforts to make those links more resilient are more underway than others, according to economists at Goldman Sachs. Reshoring appears to be limited so far, as construction of new manufacturing facilities has mostly gone sideways and imports are still growing faster than domestic manufacturing output. Diversification of supply chains appears to be further along, and inventory overstocking is the strategy that’s most clearly underway, says Goldman Sachs Research. Earnings call transcripts show a jump in the number of companies that plan to permanently increase inventories to protect against production disruptions, particularly for durable goods. [Learn more about changes to global supply chains here.]( [Read more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Are%20U.S.%20Companies%20Actually%20Reshoring%20Their%20Supply%20Chains%3F&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Ftopics%2Findex.html) Europe’s Digital Startups are Closing the Gap with Tech Companies in the U.S. Europe’s tech entrepreneurs have arrived. The ecosystem of digital companies has grown twice as fast as in the U.S. during the past seven years, and funding in Europe’s private companies eclipsed $100 billion for the first time in 2021. We spoke with Clif Marriott, co-head of the technology, media and telecom group in EMEA at Goldman Sachs, about the growth in European startups following our Disruptive Technology Symposium last week. The event hosted nearly quarter of the region’s 220 unicorns — a metric that highlights how much the sector has grown: Europe had fewer than 20 private tech companies backed by venture capital that were valued at $1 billion or more when the symposium first took place in 2016. Marriott says one of the biggest topics of discussion at this year’s conference was the differential between valuations in public and private markets. While financing has slowed for now, he says Europe’s unicorns have raised immense amounts of capital that will eventually result in large, well-funded companies going public. The growth in European tech has been a major topic at Goldman Sachs events in recent weeks. What is your outlook for that sector? Clif Marriott: In 2021, we executed more than $150 billion of M&A and financing transactions for tech and tech-enabled companies in Europe, which is an absolute record in terms of activity. This year, and especially the first half, we would expect to be much slower in terms of the activity levels and that’s really driven by volatility in the markets and lower overall valuations. That has slowed IPO activity to basically zero during the first half of this year. That said, one of the key metrics, that $100 billion of capital that has gone into European companies in 2021, means two things. First, companies are getting bigger and they’re very well funded. Many of these private companies took capital last year when the market was really good. They’re using that capital to grow their business and to invest. So that’s a positive thing. Secondly, that there are 220 unicorns means there are a ton of private, very large companies that will eventually list, transact, conduct M&A, conduct financing, go public, direct list — all kinds of interesting things. From my standpoint, while the first half of 2022 will be definitely slower than 2021, I would expect that over the next two to five years we will see very, very strong activity from that collection of unicorns and the continued funding that goes into Europe. Has the market turmoil impacted private markets differently than the way it impacted public markets? Clif Marriott: This is probably the biggest theme that came out of the conference and also some of the networking activities that we held. The dislocation between the private and public is definitely here. I had one very large tech investor who said he’s never in his career seen private and public valuations be so unlocked or separated. I think there’s three things driving that. The public investors, and let’s say hedge funds in particular, but institutional investors generally have become much more negative around the impact of inflation, and therefore the impact on asset values that have a long duration — meaning the more the valuation of a company is dictated by its terminal value a long time out, the more that higher rates impede that valuation. The second thing is that volatility has meant that there has been a lot of forced selling within technology, which means valuation levels have been impacted by that volatility. The third thing is that private markets haven’t adjusted as much. Very few, if any, of the tech companies are seeing any impact to their business from inflation, nor from the geopolitical situation, yet, and a lot of them have raised capital in the last two years and they don’t see why their valuation should be impacted as much as the valuations have been impacted in the public markets. This valuation differential will have to narrow one way or another. The bigger issue is really seen at the late stage, the companies that are raising one or two rounds before they go public, and therefore those valuations are much more driven by a time-value discount to what they could go public at in a couple of years. And if the effective IPO valuation is lower because multiples for their comps are lower, then that has an impact on their valuation. We’ve seen a lot less impact on valuations in the seed, series A, series B rounds where those companies are really investing over a 10-year period and multiples up, multiples down, isn’t really going to drive an investment decision — it’s much more about the long-term market potential of these businesses. That part of the market hasn’t been impacted as much. You’ve also seen some of the large, let’s say crossover institutions, mostly hedge funds, who have invested in very large private tech in the last two to three years, and they have moved down from doing crossover, late-stage pre-IPO investing to much more series A, series B, series C. So they’ve moved earlier in the stack, and therefore that market continues to be relatively healthy. To learn about how startups look at the timing for going public, Web 3.0 and hiring tech talent, [read the full interview](. [Read more]( [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Europe%E2%80%99s%20Digital%20Startups%20are%20Closing%20the%20Gap%20with%20Tech%20Companies%20in%20the%20U.S.&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2F) BRIEFINGS Brainteaser: When the Suez Was Blocked Just over a year ago, the Ever Given — a 400-meter long container ship — was dislodged after being wedged in the Suez Canal. The blockage of the vital trade artery caused massive disruption to the global shipping industry. In this week’s BRIEFINGS brainteaser, can you tell us how many days it took to initially unblock the canal? [C]( your answer here.]( A) 4 B) 6 C) 8 D) 10 [Take the quiz]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=BRIEFINGS%20Brainteaser%3A%20One%20Year%20on%20from%20the%20Suez%20Canal%20Blockage&body=https%3A%2F%2Fonegs.iad1.qualtrics.com%2Fjfe%2Fform%2FSV_eKE1ZVhKkYm8W6G) Goldman Sachs Media Highlights CNBC - March 29 Sachs is Buying Corporate Retirement Plan Robo-Advisor NextCapital]( CNBC - March 29 ['Vast Majority' of People Will Probably Want to Buy an Electric Vehicle in 2040, Says Goldman Sachs]( (2:15) CNBC - March 25 [Gas Remains Essential for Energy Security Today, Says Goldman Sachs’ Damien Courvalin]( (2:14) [Subscribe]( [Unsubscribe]( Some of the images used in this newsletter are sourced via Getty Images. 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