Energy Risk US Leaders’ Network: tackling volatility

As risks ramp up for the global energy industry, Energy Risk’s US Leaders’ Network convened in Houston on October 28 to discuss the best risk management approaches for tackling the major short- and long-term challenges facing energy firms today. 

The biggest causes of risks were identified as geopolitical shifts and policy uncertainty, supply-and-demand variables and inadequate infrastructure investment. These leave energy markets vulnerable to huge levels of volatility. On top of this, the risk manager is trying to assess the optimal use of artificial intelligence in processes while still relying in many cases on models taken from the financial industry that don’t include all the variables of energy markets.

With change happening so quickly, energy firms need to take important decisions around their long-term portfolios – the regions and fuels they need to concentrate on, for example – as well as revisiting long-term contracts and wider strategies. The Leaders’ Network looked at the importance of risk management playing a role in company strategy and building enterprise-wide risk management culture.

Geopolitical tensions, such as Russia’s invasion of Ukraine and US president Donald Trump’s energy policy and trade tariffs have had huge implications for energy firms. As many European countries scrambled to replace Russian oil from 2022 onwards, the US ramped up its liquefied natural gas (LNG) exports to Europe and Asia. The US now comprises around 20% of the export market, a figure predicted to rise to more than 30% by 2030. The Leaders’ Network discussed the implications of this. While there is an unprecedented amount of new capacity scheduled to come online between now and 2030, there will be bottlenecks, and infrastructure investment signals are very mixed, which could lead to constraints and price volatility.

“We have the reserves to drill, if prices dictate that. [The question is], can we bring on the infrastructure quickly enough?” one participant asked. “US LNG is in a very concentrated area on the Gulf Coast, [which means] a lot of players look at the same economics globally and make the same decisions domestically – for example, shutting in production due to weather issues, or global economics.”

This raises the risk of volatility. “We’re heading to higher volatility because we’re getting too constrained; higher volumes going through similar capacity,” another participant commented. “If anything goes wrong, you’re going to get higher price spikes or price collapses. I don’t see the infrastructure investment, like more storage, that’s going to stabilise this.”

Another agreed: “Infrastructure would have to overbuild for us not to see the volatility, and I don’t see that being an economic decision at this point.”

Additionally, US gas production is likely to become more expensive as the lowest cost drilling sites are already exploited. This will happen at a time when demand from the electricity industry is expected to soar due to increased data centre demand, potentially leaving a question over the scale of US exports. “Will the US continue to be a very low-cost producer [and high exporter] of gas, or will the data centres soak up all that gas [and change] the economics of exporting?” asked one attendee. Additionally, some Middle East countries are only just starting to exploit and export some of their vast reserves. “All these things need to be taken into consideration when figuring out whether the US will be the place to export gas in the future. Things will change, but these are the kind of things I would start trying to build a model around,” he added.

With change happening so quickly, energy firms need to take important decisions around their long-term portfolios – the regions and fuels they need to concentrate on, for example – as well as revisiting long-term contracts and wider strategies

The need for new infrastructure build looms equally large in US power markets where demand growth – which has been stagnant for the past five years – is forecast at 2–2.5% over the next five to 10 years, one attendee said. “We don’t have enough power plants [to meet demand from] the data centres being built and we don’t have the transmission to get power to the regions we need,” he said.

The issue of infrastructure investment is currently hugely muddied by uncertainty around US energy policy. “There’s a lot of concern that policy might change, making people less willing to invest in such a long-term horizon,” another attendee noted.

As demand growth and lack of investment look set to increase price volatility, risk managers will need to price that in, said another participant. “We cost in volatility, so it’s not the absolute wholesale market price, it’s the price of managing the risk as effectively as possible. It’s a big unknown, but it’s becoming a bigger topic for us,” she said.

Additionally, as US energy policy is now less favourable for some renewables projects, renewables may not plug the supply/demand gap as had previously been expected. There was agreement that the market will solve these issues, but that risk managers will need to make important decisions. “The only thing that’s going to solve this is higher levelized cost of electricity,” said one participant. “We need to prepare for not just higher volatility but how we help our organisations weather that storm … [by thinking about everything from] the contracts we structure to how to build in safeguards if various events take place in the market.”

More than ever, vital decisions around infrastructure build revolve around not just whether to invest, but whether to change the direction of the company by, for example, moving further into renewables or branching into alternative energies.

“Many companies will [be considering] how to restructure their business and what portfolio choices [are needed] in order to survive in the changing world,” said one contributor. “For a big integrated oil and gas company, the question is, do I concentrate on producing combustible fuels, or do I enter other businesses like renewables and generation? In the case of a more specialised company, an LNG producer for example, there are also important portfolio choices around structuring contracts.”

Some of these long-term decisions that carry high risk require risk management to become involved in the longer-term strategy of the business, several participants said.

“As an industry we need to look forward over longer time periods,” one member said.

“Most risk organisations pretty much know how to manage short-term risk – a lot of time has been spent on this over the last two decades. The next challenge is to be a part of that strategy discussion,” another member said. “Risk management needs to sit with strategy and brainstorm what our baseline view of the world is, what is our strategy in that world, what are the adjacent scenarios or stressors that could happen, and what levers and indicators would tell us if we need to pivot.”

What happens when AI starts coming up with things that you can’t understand and that no one on your team can understand? As risk managers we have to recognise that that future is out there

Another brought up the concept of ‘future think’. “As risk professionals, we’ve been taught to think about what can go wrong. But [it’s equally important] to think about what could go right as well, and assess whether it’s a trend that’s likely to continue [and how do we] benefit from it. I think risk professionals need to incorporate more of that future-think mindset when they’re thinking longer term.”

The topic of how AI can be used by risk management teams was discussed from both a short- and long-term perspective in terms of opportunity and risk. Immediate use cases include its ability to gather structured and unstructured data into data lakes and carry out analysis. “It’s like having an intern,” one participant said. She also pointed to another use case at her firm where AI has been trained to write credit documents on new counterparties, saving days of pulling a financial credit history together.

There was wide agreement that a major upside of AI is that it can take over some of the more mundane and time-consuming processes, freeing risk teams up to spend more time thinking creatively and looking further ahead. However, one member cautioned that AI is developing at such speed that at some stage it will produce models or calculations that are beyond the mathematical comprehension of even the best mathematician in the risk team. 

“What happens when AI starts coming up with things that you can’t understand and that no one on your team can understand?” he asked. “As risk managers we have to recognise that that future is out there. It could be in five, 10, 15, 20 years, but it’s definitely coming. Before it happens, we need to figure out what we do if an AI comes up with something that is incomprehensible but probably correct.”

As AI increases, model complexity, model risk and potentially governance and regulation around models will also increase, participants noted. “The subject of model risk itself is lacking in the energy industry,” said one attendee, stressing the importance of defining what a model is and keeping an inventory. “One of the simplest things could be independent validation of the model. A lot of the time we don’t even have adequate documentation for it.”

Participants talked about the limitations of some financial models for use in energy markets and acknowledged that there is still work to be done. One attendee gave a recent example that involved customising a well-known financial model. He needed to carry out some long-term – (20 years plus) portfolio analysis to understand which US power market regions would be best to locate various assets in. “We took the Markowitz modern portfolio theory model and tweaked it for energy markets,” he said. “Instead of using prices and returns, we used capture rates and we created a version of the Markowitz model that gave us the optimal concentration for each market. This is new work that hasn’t been done before.”

The final topic the group discussed was how to create the right type of risk culture in a firm.

“When you’re building a risk culture, it has to be enterprise wide. It can’t just be in the risk team,” said one participant. “We think of ourselves as the risk managers but, actually, risk managers are in the business and we’re the centre of excellence or the advisory team that’s figuring out how to manage the risk on their behalf. You need to find those other people who are just as passionate about what they’re doing and who view themselves as risk managers and tap into them.”

There was wide agreement that the risk team should be involved in defining the company’s risk culture, from financial risk appetite through to what is acceptable and what is reckless behaviour. Carrying out risk reporting at a very granular level can help with detecting reckless risk-taking, said one participant. “I find reporting risk not just at the macro level, but slicing it different ways – by team, by trader – will show up any patterns of behaviour that might be risky.”

It was also noted that having the CRO involved in structuring bonuses would also incentivise good risk behaviour.

While increased levels of risk and fast-paced change are adding to the risk manager’s workload, they also increase the need for experienced risk managers and optimally managed risk teams, the group said. “We should prepare for what to do in a world where our services are needed [more than ever],” urged one participant. 

This is taken from the Energy Risk Leaders’ Network meeting that took place in Houston in October 2025 and was sponsored by KWA Analytics and ION. Energy Risk Leaders’ Networks bring together senior risk decision-makers from across the energy industry to discuss the most pressing risk management topics and to share best practices.