Episode 41: Inflection Point - The Iran War and the Energy Transition

The transcript highlights below have been edited for clarity 

Mark Lee 

Hi, everyone, and welcome to this next episode of Sustainable Connections, ERM's podcast on corporate sustainability. I'm Mark Lee, the Global Director of Thought Leadership at ERM and your usual host. Today's episode is a bit different. We're turning into a kind of territory and a topic that is a bit atypical, perhaps, for this podcast and for ERM. It's one that I kind of wish we didn't have to talk about, but want to get into the implications and the consequences of the war in Iran. We're not going to talk about it from a political perspective and the decisions that led to the war and whether they are moral or just from anybody's perspective. That's somebody else's podcast. I think you know where to find all those options. But I've gathered a group of colleagues today who are expert in energy security and the environment and in energy transition. And we want to look at it from that point of view. What happens when an unexpected, unanticipated event like this happens? What does it do to energy and security, energy security and sustainability plans, investments and actions; and what might that mean for energy and climate over the short and long term.  

We've seen this kind of event cut across global thinking and decision-making before. We know that periods of conflict and instability can sometimes slow progress, but they can also turn into incredible catalysts. I think one thing about conflicts and the unexpected, those black swan events, is they really challenge thinking. They make you wonder how certain your ideas were and what you need to do to adjust. That is 100 percent true around the complexity of energy diversification, around security of supply, around when and how to invest in alternatives.  

I'm not the expert on this program today, and I'm really glad I'm joined by three ERM colleagues, Andrew Probert, Amy MacDonald, and Todd Hall. They collectively work at the intersection of geopolitics and energy systems and environmental risk and corporate strategy. We're going to pool our thinking in the course of the next half hour or so to look especially at the implications of the conflict through that lens of energy security and low carbon transition, and to ask what companies should maybe be thinking and starting to do as they try and navigate this incredibly rapidly shifting operating environment.  

Andrew Probert is a partner in Northern Europe based out of the UK. He's our Northern Europe business unit managing partner, and he has a focus on integrated strategic transformation advisory. Amy McDonald is a partner as well, based in Houston, our global industry leader for diversified energy. Todd Hall, another partner, all of us are partners here today, is an expert in capital project development and the energy sector generally. He can think through a whole bunch of aspects of this, and is also based in the U.S. So, we've got a transatlantic view as we go in. We're going to look at this situation from a number of perspectives. But before we go any further, I just want to hear from each of you. I have a lightning round opening question. What was the first thing that went through your mind when you heard about the closing of the Strait of Hormuz?  

Initial reactions to the Strait of Hormuz closure   

Andrew Probert 

Thanks, Mark, and thanks very much for inviting me on to the podcast today. Great to be here and be with my colleagues. Very candidly, the first thing I thought about was the impact on my mortgage, and I'll explain the rationale behind that. I'm in the process of remortgaging my house, and we were trying to secure a rate, and my immediate impact was, oh my gosh, does this mean that interest rates globally are going to start increasing? And then you quickly kind of rapidly come to, what impact is this going to have on us, ERM as a business and with our clients and how it is that we can support our clients through yet another big energy crisis.  

So, it quickly pivoted from the very personal, which is, I think I have a slight problem with my mortgage, and therefore that is exasperated everywhere else, to actually that problem is going to face other people. Interest rates are going to increase again. That has an impact on deal flow. The energy price increase, that's the energy constriction of volume. That means that we're going to start looking at more oil and gas exploration near shore. So, for us in the UK, does that mean we're going to have to start drilling again in the North Sea oil to meet short-term demand? These are things we're trying to avoid and trying to support our clients with the energy transition. So, a very long answer for a quick lightning round, but it quickly pivoted from the personal all the way through to the impact this is going to have on our clients and how we can support them. 

Mark Lee 

Yeah, I was thinking we're going to have to compare our definitions of lightning round after, but I do think your answer just underscores issues at every level. From your mortgage through to global consequences. Amy, I don't know if you're in the process of refinancing. Also, what went through your mind? 

Amy McDonald  

I actually just locked in my rate a few weeks before. 

Mark Lee 

This should have been the mortgage podcast.  

Amy McDonald  

Well, with that in my rear-view mirror, my immediate thought was the ripple effect. I guess you could think of it as from that strait, around the world and back, this ripple of unknown impact. So, it was this future looking view of, wow, how much is this going to impact across so many different sectors, industries, personal life, etc. Just infinite possibilities of the impact of this, which then was overwhelming. And so, I paused and thought, okay, what if we look at the past? What has history taught us about times that we've been through this level of disruption. Which is actually what I really appreciated so much about Andrew's LinkedIn post and many others that I've seen in the last couple of weeks, to see how can we take the knowledge that we have and the prior experience we had, combined with our understanding of what's going on to make the best decisions possible. Because the thing that became obvious to me when the strait closed is again, that global ripple effect, but then also the likely duration of impact, I think was a bit of a step change for me in thinking through this current situation. 

And before the Strait closed, in which we had a very kind of business reaction, when the conflict began, my first reaction was to think of the people impacted. I think it's important that we recognize that there is a real human impact happening now, playing out across millions of people and countless communities. And so, first and foremost, I would say that that is on my mind continuously. I know what we're here today to do is talk about business implications. I do look forward to that conversation. But I wanted to recognize that there is a real human impact playing out here today and we certainly don't lose sight of that. 

Mark Lee 

Yeah, so glad you paused to add that, Amy. And shame on me for not making it more explicit in the framing that I did as launching the podcast. We're, I think, steering away from some of the political elements of this because it's not quite our expertise. But that doesn't take away at all from what is happening to people on the ground, happening to people and families worldwide who are somehow connected to the region. We'll keep that in our minds as we have the rest of the conversation today. 

Todd, what about you? What was the reaction? 

Todd Hall  

I came in like Andrew's reaction from a slightly different direction, but it ended in the same place. Most of my business is supporting capital projects and the way interest rates go is the opposite direction capital project investment goes. And so, when interest rates go up, my personal business goes down. One of the first things I thought about there, having been through cycles like this before with interest rates is, are we headed into another capital project slowdown, that obviously affects consulting firms like ours in a very real way.  

But from more of a global philosophy perspective, the first thing that comes to mind for most people that are connected to the energy industry is, that's a pinch point. That's 20 plus percent of oil, 20 something percent of LNG moves through the strait. That can't happen without having a significant effect on global pricing and global supply, and all the things that come out of that. But interestingly, the other thing that maybe isn't something that comes to mind as quickly, is it's not just oil and LNG that moves through that strait. It's all of the parts and pieces that it takes to build renewable energy projects. And so their supply chain has already been the boogeyman for renewable energy development over the past two or three years. This doesn't help. There's a lot of reasons why this, as we'll get into, incentivizes renewable energy investment. But at the same time, it's yet another anchor around the ankle of that movement. 

Mark Lee 

Yeah, absolutely. Todd, a quick follow up on the capital investment side. We are recording this podcast in March. So the war has been unfolding for almost a month. How quickly in a situation like this, do you start to see an impact on capital investment decisions? Like, can you see that already? Or is everybody just sitting with their finger on the pause button waiting to hit it?  

Todd Hall  

Most of the mega projects that we deal with are many, many single digit years, sometimes more than a decade long in the making. So, I think it would be irrational to say that as soon as an interest rate spikes or a price spike in a particular direction, somebody's slamming down the button on this. But at the same time, we know that the enemy of long-term investment is volatility. And so, the introduction of something like this that we don't know the end of, similar to a COVID situation, is this six months, is this three years, who knows, is going to freeze people, right? In the same way that policy can do that if done the wrong way, right? I think the net result is, yes, you're going to see this slow down pretty quickly. It might not be in the voice of projects are canceled, this one's off, we're not doing this anymore, but you might just see that pace behind sort of closed doors, slow down a bit. 

Geopolitics, energy markets and emerging pressure points 

Mark Lee 

Yeah, nature of abhors a vacuum and investment abhors uncertainty, right?  

Amy, I know you're heading to CERA Week next week. CERA Week, for those who don't know, is one of, if not the largest energy conferences annually in the world. I'm thinking that everybody who's going, and especially everybody who's going to take a podium next week, has probably just torn up their notes and is trying to figure out how this changes the conversations they're going to have. And so, just what are you expecting in terms of how this influences the tone of things at that global energy plus finance plus technology plus power event that it has turned into? 

Amy McDonald  

Yeah, it's a really interesting gathering across industries, public private sector, and financing. So, it's always really rich conversation. Mark, I don't know that they've torn up their notes for this because, geopolitical conflict was already on the agenda. Unfortunately, there are other examples of conflict and massive geopolitical change in the energy sector. I mean, it was just January that things happened in Venezuela and we still have things ongoing in Russia, which are topics that have been part of the prior CERA Week agendas. So, geopolitics was already a strong feature and what I anticipate is that this conflict just further underscores the impact of that on the global energy supply and our ability to keep moving forward, addressing ever-increasing demand.  

So it certainly will be a feature. I've noticed the agenda has been pretty dynamic, and I think there's some additional speakers coming in with points of view and really strong knowledge when it comes to Iran and the Middle East. I think that we'll have some great insights coming next week. And then I just anticipate the dialogue over the water cooler, as they say, certainly will probably be led by comments around the impacts on the Middle East and again, those ripple effects that happen globally. But by and large, I think this is just underscoring something that we've seen impacting the world energy equation for quite a while and perhaps just a bit of a step change in the scale and the reality of what it means to have material disruption. 

Mark Lee 

I will be fascinated to hear back from you and others after next week as to what does happen at CERA Week, and of course, the conflict will probably continue to evolve even while you're there.  

You reminded us that geopolitics are always an influence in this space. Andrew, you wrote a LinkedIn article last week and said geopolitics always have an impact, but this is big. This is at a different scale, certainly. The title of the article, and we'll post it along with the podcast so people who are listening can find it easily if they want to, was “The 2026 Middle East war could accelerate the green transition, but only if we choose it”. You went into a notion that 2026 creates a decision moment here. It's not just an energy shock. It should make us think differently, maybe in more diverse ways, about forward decisions about low carbon transition.  

Instead of me describing this, I'd love to have you describe it. What's at the heart of the article and kind of what you mapped out? 

Andrew Probert 

I quickly moved off of the personal impact and wanted to look at exactly what Amy's been describing before. This isn't the first time there's been an energy crisis. It's not the first time there's been a conflict in the Middle East. I'm a big advocate, we've got to learn lessons from history. How is it we can look backwards and understand where we've seen successes as it relates to the energy transition from some of those previous events. So, whether that is from the Arab oil embargo in the early 70s, whether it is from the Arab Springs, whether it's from the more recent kind of conflict in Russia and Ukraine. There's a critical point. These are inflection points. There's obviously a bigger geopolitical situation. But as you look specifically to energy and the energy transition as it relates to it. Where are we seeing the successes of those? How can we still see the silver lining in what is otherwise quite a tragic situation? And that's when we started to want to do a bit more research into, okay, well, let's look back through all of those previous instances, those previous energy crisis, and see what really worked.  

If you go back all the way to the 1970s and you've got the Arab oil embargo, that was the biggest one there. So, there were two big policy decisions that were made at that time and they were quite different. The French government, they launched the Messmer plans. There was a big emphasis on “We need more energy resilience.” “We can't be in this situation again.” It has a big impact on our economy and all businesses within it, the real economy. What do we need to do differently? They invested heavily into nuclear to the point where by the 90s, 80 percent of all electricity came from nuclear power within France. And that was a policy decision that was made. And you think about the impact that that's had with the energy transition during that period. That's a really positive example of where there was a very specific decision at that inflection point to do it. The US on the other side, and this is not casting dispersions on the decisions made, they ripped off all the solar panels off the White House at the time. And then doubled down on domestic oil and gas production. And now we find that the situation now where actually the exposure, the actual impact on the real economy of what's happening within the Middle East, is probably slightly greater in North America than it is in parts of Europe because of some of the decisions that were made along the way. And so that was the origin of the article.  

We started to dive in a little bit deeper into what really were the driving forces for those positive changes through those conflict crisis? It really came down to policy decisions. So at that moment in time. For example, again, when the crisis started in Ukraine, the EU went on the RePowerEU, doubling down on their ambitions and acceleration of the energy transition. This instance, again, all of the European commissions, several global, climate, and governments have put themselves in positions where like, we really need to accelerate what we're doing in this space. We really need to increase energy resilience as much as the energy transition. If you're going to increase resilience, the best way to do it is with renewable energy for several reasons.  

The business case now, and this is again where I come in from my perspective, the business case for renewable energies, as Todd and Amy will be able to talk to you very clearly, it's never been stronger. Especially when there's rising energy prices from oil and gas and other kinds of fossil fuels. So not only do you have a decision to be made around policy, as the study produced, it was actually really like the business case for doing this now has never been stronger. So, it should be an easier policy to make. We have to make sure we get the policy right at this stage. 

Regional policy realities: U.S., Europe, and APAC 

Mark Lee 

Yeah, so lots there, Andrew, and we'll get into it in several different ways.  

Amy and Todd, I'm first most interested to jump across the Atlantic, where the Atlantic looks bigger today than it has at certain times in the past, in terms of policy alignment. Very different views and direction of travel, at least at a federal level, in terms of policy relating to energy and energy development. Also, this is a moment where energy demand is so astoundingly high, some of this driven by the AI boom, but also driven by population growth globally, even before the conflict, the pattern we seem to be in was folks saying low carbon energy, if I can get it, but reliable, secure, ideally not too expensive energy, I just need it. More demand than we had supply and more demand than our aging infrastructure for electricity can keep up to, even if we can bring it online. And the U.S. today, however you see it, is the world's biggest energy producer. So, part of the contrast with Europe is availability of domestic supply and production.  

How do you see the situation from where you sit? What's your reaction to Andrew's thinking about whether this might be a catalyst short term or long term?  

Todd Hall  

As Andrew said, there's no getting around the impact that the policymakers, decision makers can have on the U.S. market. And they have had that. We had an almost $400 billion U.S. energy transition investment year in 2025. There was a bit of a dip in Q4. But the 2026 outlook is rebounding. We still expect two-thirds of global energy spending to be in renewable energy. This is not changing at the macro level where the ball is moving. As Andrew said, the business case is unrecognizable compared to what it was several decades ago. It's now a head-to-head competitor from a cost of construction, cost of energy perspective.  

The challenge we have, though, is that renewable energies are very front-loaded. Renewable energy projects are very front-loaded. The fuel is free on the back end. That's the good news. But you pay for the ability to convert that fuel into energy all on day one. So, when you have a green investment project that relies on a large capital expenditure upfront in the face of a large interest rate, that creates a problem statement. So, I think, yes, there will be challenges with respect to any kind of a conflict that creates interest rate shifts upward. But, the cost of production for renewable energy coupled with this need for now, sovereignty first, energy sovereignty, national security driven goals, versus necessarily climate driven goals, is going to continue to incentivize people to focus I believe on renewable production alongside fossils. 

Mark Lee 

Yeah, so wherever Andrew's mortgage locks in, we see the same problem play out at a very magnified level for capital investment related to renewable energy, right? That cost of energy goes up, the cost of all the inputs go up, and it's harder to get those projects off the ground.  

Amy, you might want to build in a similar direction. You're also welcome to go in an entirely different direction, but your reaction to Andrew's thesis kind of in the article. 

Amy McDonald  

A phrase came to mind, necessity is the mother of invention. I think that we've been faced with this challenge of increasing demand for quite a while, which has already created some innovative policy technologies, ways of working, etc., investments. I anticipate that to only accelerate with these new challenges, the new necessary measures that are being taken to address the demand and the need for reliable demand and all of the factors that Todd and Andrew have been mentioning. I think if I'm being a little optimistic here and with the U.S. context, it's that we aren't starting flat-footed from the need to increase energy supply to address the demand. So, there's been momentum building in this regard through a variety of avenues within the energy sector. Taking some optimism there.  

Also, on Fridays, I receive a summary of some of the policy briefings with regard to energy, and I'm only halfway through today's. But even at the first half reading, there's billions of dollars that were announced of investment by DOE just this week. It looks like expansion of the Fast Track Act, which is meant to accelerate some of the federal level permitting. So just a reminder that we've been on this journey. We've known that we need to increase access to energy and reliability of energy for quite a while. Policies and such have already been in the works. So optimistic that we can ride that wave and have some good lessons learned to continue along that path. 

Mark Lee 

Amy, what's an example of a necessary measure? What might that look like as it really plays out? 

Amy McDonald  

If I look in the rear-view mirror, for example, when it comes to energy, and we'll just talk about oil and gas in the US, pipelines are a bit of a bottleneck. Accelerating the pace of pipeline development is a really key aspect to the US energy equation. What we've seen from our friends in industry is that the prior way of designing and building these pipelines isn't moving fast enough to get to where they want to be. There are different bottlenecks in the supply chain of turbines etc., steel even. Because there are other challenges within the supply chain, different decisions have to be made. Things get redesigned. We find ways to use new technologies, different technologies to accomplish that goal of getting something built. So that's what I mean by necessities and inspiring different types of innovation. 

Mark Lee 

Andrew, I want to come back to you. Another piece that was in the article and you said in there, this could be a catalyst, maybe this forces different decisions around policy and investment. You also said that policy tends to lock in really fast and that regardless how long this conflict lasts, well, one, the results of the conflict will not end on the day the war itself ends. It will take a while to fix infrastructure in the Middle East that's been damaged. It'll take a while for shipping to flow. There'll be a longer-term effect regardless. But you sort of pointed at the next maybe 12 to 18 months as the policy period in which we'll see things play out. Can you explain that a bit more? 

Andrew Probert 

The context of that is if there's too much of a time distance between the event itself and how policy changes, people have lost the rationale as to why it's the case. You look at the Russian invasion of Ukraine by close analogy. So, the EU launched the RePowerEU within 90 days. So, it's possible. And the impact of that was it raised its 2030 renewable targets from 32 to 42.5 percent. And then it invested 110 billion euros within 2023 alone. So that was 10 times the amount that was invested into fossil fuel investment in that year. We can see that it is possible and that time window is fairly time bound, but you have to lock it in quite quickly. Otherwise, the rationale behind doing it can drift away and we can come back into a BAU (business as usual) position.  

But it's widely acknowledged that these types of conflicts, these aren't once in a lifetime conflicts. We can look at that like these energy shocks, this energy crisis, if anything, are only increasing over time as the demand for energy and as the geopolitical station continues to destabilize. So, the importance is around trying to be positive, trying to react quickly, trying to lock in that now and getting agreement on it, supporting. And this isn't just around, investment into renewables is one thing, but for example, we also need to go, can we fast track permitting and permissioning for renewables? Can we start to drive, all the energy-efficiency work that we're doing? Because that also kind of lowers energy consumption as well. So there's lots of different policies and levers that can be pulled. And now is the point where the inflection point is only saying, well, we can see the impact of not acting quickly. It's very evident in the real economy almost immediately. We do come back to it. But like my mortgage rate did go up quite dramatically because what was available changed quite quickly. But that that's felt by all of our clients, right?  

So interest rates increasing, it does impact on the ability to invest into, you know, big capital projects, but it also impacts all decision making within a business. Your discretionary spend suddenly goes down. Your energy prices goes up. Energy intensive companies, all companies have energy bills to pay. That suddenly starts eroding your margin, your ability to make other investment decisions. So yeah, the timing is really critical, Mark. We've got to get it done quickly so that we can respond in a more positive way when future shocks happen. I’m no soothsayer, but I can imagine there will be plenty more global conflicts will have an impact on energy during our lifetimes. 

Mark Lee 

Okay, and you said you’re no soothsayer, but I am going to ask you to predict the future a tiny bit, which if policy locks in that fast, in this complex landscape that you're describing, who's going to lock in what policy? What do you think might be the differences in terms of this serving as a catalyst for clean energy and green transition from Europe to Asia to North America to Latin America? Where are you anticipating the most potential action? 

Andrew Probert 

The EU is an obvious one. I'm not saying that because I sit within Europe, even if we in the UK don't sit in the EU anymore. But Europe, there's already strong institutional framework. There's already high support for the energy transition. We do also have quite a high dependency on LNG imports at the moment, and therefore these sorts of policies will impact it quite quickly. And we've already got a template. We did it in 2022. This is about reinforcing what already exists. We're already starting to see that there's already noises coming through during the meetings of energy and climate councils over the course of the last couple of weeks.  

Next big one would be APAC, quite heavily impacted as well. Japan and South Korea, anywhere between 70 and 95 percent of their oil arrives through the strait. The South Korean prime minister and the energy advisors that have already come out and said, we need to accelerate our onshore renewable energy program in a meaningful way quite quickly. I can see a big impact there. Similarly in India. I don't necessarily think that there's a going to be a dramatic change in the United States, but I'd love to hear the perspective of my colleagues on the other side of the pond about where they see that kind of moving as well. But I can comment on the rest of it. And the biggest other piece, Mark, is probably, it's probably a bigger impact, but the actual policy regime isn't necessarily as mature. So, if you look in developing countries, this sort of crisis has a massive impact on their balance of payment, right? So there's a need for policy change there. There's a massive impact on it. But do I see it as accelerating as quickly? Possibly not. But the need for that change is probably higher there than anywhere else. 

Mark Lee 

And that's especially where they're import dependent, right? 

Andrew Probert 

Exactly. 

Mark Lee 

Widely variable. Yeah, because the costs have gone up. There's so much opportunity cost in that, especially for lower income countries.  

Amy, I do want to jump across the pond and get you to respond on the US side. I’m going to frame this in a couple of ways. It's very clear where US federal policy is right now, strongly fossil, not much on most of the rest, but the U.S. is incredibly diverse and the states are not all aligned on their position on this. We've definitely seen in past circumstances where U.S. federal policy or commitment or investment on renewables and climate has lagged, that states and regions have actually made-up a shocking amount of the difference. Again, we're in just this crazy demand context where there's so much hunger for power of all kinds. How do you think it's going to play out over the next couple of years, given all those factors and layering on what's happening in Iran? 

Amy McDonald  

I should have brought my crystal ball to the podcast today. Mark, I wish it was a clear, straightforward answer. So you're right, at the federal level, some signals are clear, and much of what we were really excited about in the energy transition has changed significantly, as the administration changed. However, you're right, there are other avenues of policy and incentives at state and local levels that we do continue to see mature. The other thing is, as underscored by this conflict, is that it's a global market. While, yes, policies are jurisdiction dependent, the fact is that these products move all over the world. Continued methane reduction requirements in places like the EU and different requirements in Asia are things that US-based companies are going to have to face to be able to access those markets. So we still see, despite there being local policy to either accelerate or decelerate certain elements of the energy transition, the fact that there is a global marketplace here, I think continues to incentivize different types of investments here in the U.S., despite maybe policy not being there locally. I think we need to continue looking out for that. 

Mark Lee 

Todd, you've kind of touched a little bit of this already in terms of impacts on costs of capital investment in a rising interest rate environment. Andrew was beside you making the case that the business case for clean energy is never better. Those two things are obviously kind of in tension, that even though energy security might warrant more locally controllable energy supply, which renewables can represent, if the costs of building them are high, then low carbon transition acceleration is not automatic. How do you see these various tensions playing out? Infrastructure, policy, costs, supply chain stresses and asking you to be a soothsayer. Which of those pressures might win out? 

Todd Hall  

I think that that's not even the full list of challenges with renewable energy investment, right? We talked about interest rates. We talked a little bit about supply chain, I guess, fragility, if you will. The land use concerns related to renewables have surprised a few people with respect to that experiencing the same sort of challenges that maybe somebody would have expected only from a coal mine or a refinery. You know, “I don't want this next to me”. Renewable energy uses by megawatt a lot more land than a fossil heavy project does. And so those challenges are still there as well. Policy uncertainty, the storage gap. And then probably the one that dominates the challenge is grid. Amy talked about pipeline limitations for fossils. It's only worse for electricity in Europe, in the U.S., you could pretty much pick a country, projects are held up because they can't move the electrons quick enough, right? They're stranded. You can build them faster than you can get them to the user.  

So that was a whole bunch of negative stuff. But again, renewable energy is a hedge against fossil fuel vulnerability in situations like this, right? I think Daniel Yergin said it really well in his book. I remember I wrote this quote down because I thought it was nice. “The New Map” book. You know, COVID did this, it basically demonstrated that digitalization has essentially become a competitor to transportation. So, you can now use electrons to connect people and make the world work and make business work versus needing to use molecules to move people to get them together to do that. So I think that that case is made. I don't think there's anything that's going to turn back the investment in renewable energy writ large. I'm still positive that we're going to see an all of the above investment situation, right? We will see a banner year in gas production in the U.S. The U.S. is poised to fill a significant part of this gap right now. From Texas and Louisiana, Canada and Mexico are right behind them with significant projects that came on last year or will come on this year. But at the same time, we're still seeing massive investment in renewables.  

How lenders and corporate leaders are responding  

Mark Lee 

Renewables investment in 2025 wildly outpaced overall fossil investment globally. I think we can predict that again in 2026. I'm conscious, and we've talked about it several times on the podcast, though, that in terms of energy transition and low carbon transition, there is so much energy hunger globally that all of that newer renewable energy supply isn't actually displacing existing fossil supply. It's additive. And until we start to see the one push the other out, the carbon part of this thing doesn't really turn.  

Todd, one little follow up and it's back to the cost of capital. I wonder if you can get in lenders’ heads at all. Whether it's forward fossil or whether it's forward renewables. How do these kinds of conflicts get into lenders’ heads in terms of pricing risk and thinking where to put the money that's required? 

Todd Hall  

I think it requires them to start to think about factors that they probably had in the equation, but maybe didn't have a weighting factor as high, basically vulnerability risk factors, supply chain vulnerability, in particular. Maybe a decision as to whether or not they can handle a longer carry on the investment given the front-end loading on renewable energy projects that's implicit. They know that that will ultimately pay itself back, but the question is can you carry it in an accelerated way with an increased interest. So, I think you're going to see people do sort of an audit and re-rank their projects in a risk-based way with maybe a heavier emphasis on vulnerability to supply chain and interest rate spikes. 

Mark Lee 

Amy, you look like you want to lean in on that one.  

Amy McDonald  

Yeah, so interestingly, we already were embarking upon gathering insights and information from lenders with regard to global LNG. And the precursor to that was recognizing that as the LNG market is growing, and there are larger and larger mega projects requiring a tremendous amount of capital, the pull on the banks is increasing. I'm working with the lenders and seeing a trend of increasing expectations from lenders around many different aspects of pre-investment decision making. We wanted to understand more of what that looks like and ask them for a little bit of a crystal ball into the future. Now, that was before this conflict began. We’ve revised our approach to now include this. And so again, this idea that there was already momentum in this space around increasing expectations when it comes to capital of these large projects. And this only, I think, further emphasizes the need for well-assessed risks and strong, resilient mitigation measures across the board throughout the value chain in advance of this entire energy supply. So, a bit of a plug for some thought leadership that's to come, Mark, in collaboration with your team as well. So, looking forward to what that lender LNG insight piece is looking like in hopefully a few weeks. 

Mark Lee 

The two comments there, Todd and Amy, from both of you, makes me think we should be digging into the whole financing side of this more deeply, perhaps in a full separate podcast conversation that would warrant it.  

I'd love to ask each of you just one more question. Amy, I think I'm going to stick with you for the moment. In boardrooms right now, if people are saying, “How exposed are we?” to the risk that has been revealed and imposed by the conflict in Iran, what's the most useful way they can at least start to assess that risk and position themselves to endure however long this might last? 

Amy McDonald  

I think the boards are probably pretty sophisticated and have been working on lots of different scenario analysis. As I was reflecting on that point, something close to ERM is around climate resiliency, which has been a big topic of ours, both for operating assets and future planned assets and capital allocation. So, this idea of running through scenarios for future state is something I know that all of these boards are well versed in. I'm sure that conflict in the Middle East is something that has already been considered.  

I think the difference now is the reality of it and what's playing out and how that's happening and the pace of it. I can imagine that those scenarios are being rerun now with the new reality that's emerging. I wish I had better advice at the fourth level, but I can only imagine that this is just furthering their scenario planning. If I look at the overall and the oil and gas sector in particular, there has been a portfolio rationalization that's been happening. We've seen a lot of M&A in some places around consolidation, especially like in different U.S. shale markets. We've seen a tremendous number of transactions in the last 12 months there. We've also seen the super-majors be more pointed with their strategies, some pivots within strategies and looking at jurisdictions where they're choosing to place bets. All of that to say that these boards have been looking at their portfolios of existing assets and where they want to go as corporations based on many different economic, geopolitical, climate factors for quite a while. We've seen those strategies unfold. I think now it's how resilient was that strategy to conflict in the Middle East is really the question that's being asked. 

Mark Lee 

Yeah, and however well our listeners know the energy industry, one thing that's hopefully obvious to everyone is that for all types of energy, the investments and, in effect, the bets are so big and are so long-term that these companies do everything possible to think through the associated risks, and it's still incredibly difficult to get right.  

Todd, similar question to you. If you're talking to a corporate leadership team next week and they say, what's the one thing we should do first? Where should we start? What would you say? 

Todd Hall  

I'd probably give them three, first of all. At a high level, I think, first of all, I think a stress test on their contracts is probably in order. Where do you have force majeure clauses? Where do you have volatility-driven renegotiation, in particular, energy-intensive inputs like steel, aluminum, concrete, that sort of thing. What are your triggers for business interruption, insurance, etc.? I think understanding where you're exposed and what your opportunities are to deal with volatility and spikes like we're seeing now.  

I think secondly, diversifying certainly and ideally localizing your supply chains. What can you do to figure out where the choke points are in your system to buy closer to home, to have multiple directions by which you can get the things you need to make your business work? Do you have temporary staging areas where you can safe harbor things, if you will, and outlast the storm? Can you shift your sourcing from a long-term basis to areas like North America or Australia where there might be a little bit less conflict?  

And then thirdly, I think we touched on this earlier, re-ranking your project pipeline. You've got a sequence for how you're going to develop your projects, where you're going to put your capital investments. It's got whatever variables went into it. There might be some new variables now. There may be some security index variables that need to be moved up in the ranking or increased in weight. You might want to prioritize speed now, so that you've got stuff that can get to production and first gas, first oil, first electron quicker. You might need to put a windfall factor in because we don't know where the windfall taxes are going to come. And these enormous dollars that are rolling in for the oil companies right now, I can guarantee you they're holding contingencies right now because they're not sure how much of that they're going to need to give back through an as of yet unconcluded windfall decision in the US and in other countries. 

Mark Lee 

Yeah, I'm glad you gave us more than one. The three I sense probably could have been ten, but a rich three to start with.  

Andrew, slightly different closing question for you. Let's go back a little bit closer to the premise of your article and think about what will happen over the next course of years, maybe to 2030. What will we look back at and use to assess whether this particular crisis accelerated the low carbon energy transition rather than delaying it? 

Andrew Probert 

Great question. For me, we said the term a few times, this is an inflection point. We have the ability, and we can look back to history to similar examples, again using the example, France made an example 50 years ago that dramatically changed the course of the energy transition within an economy. We can do the same thing here on a much more global scale. So, the real key decision now is not just with governments around making policy, it's around companies and influencing through advocacy the policy-making regime, through individuals impacting on companies as well in their ecosystem. This is the really critical point now for policymakers, but also as Amy and Todd have said, within corporates and the companies themselves, the key decision makers, how are we supporting this transition towards being much more energy resilient and ensuring that the business case for that transition to renewables remains robust and we have the opportunity to make a meaningful change in the overall transition towards a green economy.  

Mark Lee 

Great, thank you Andrew, to you, to Todd, and to Amy for joining today and sharing all these insights. It's not a topic that is necessarily fun to cover, given the very human impacts that this conflict is having, as well as those relating to energy and sustainability, but glad we could cover the terrain in the way that we did, and perhaps something that we can revisit down the line to see how our thinking actually played out in relation to this.