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Risk aversion in imperfect natural gas markets

Rudolf Egging, Alois Pichler, Øyvind Iversen Kalvø and Walle–Hansen, Thomas Meyer

European Journal of Operational Research, 2017, vol. 259, issue 1, 367-383

Abstract: This paper presents a natural gas market equilibrium model that considers uncertainty in shale gas reserve exploration. Risk aversion is modeled using a risk measure known as the Average Value-at-Risk (also referred to as the Conditional Value-at-Risk). In the context of the European natural gas market, we show how risk aversion affects investment behavior of a Polish and a Ukrainian natural gas supplier. As expected, increased risk aversion leads generally to lower investment, and a larger share of investments in the form of lower risk alternatives, i.e., conventional resources. However, in our market setting where multiple risk-averse agents each maximize their own profits we do observe some counter-intuitive, non-monotonic results. It is noteworthy that in a competitive market, risk aversion leads to significantly lower reserve exploration, which may be interpreted as a credible threat by a large dominating supplier (such as Russia). A threat to flood natural gas markets could deter importing countries from extending their own reserve bases.

Keywords: Stochastic equilibrium; Nonlinear programming; Risk measures; Natural gas markets (search for similar items in EconPapers)
Date: 2017
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