Risk management in natural gas supply chain

ABSTRACT

Based on fundamental economic principles, we develop a discrete time, infinite horizon and equilibrium-based model for a typical natural gas supply chain where there is a perfect market, a market with a small number of producers and a pipeline connecting them.We extend the available literature by first developing a stationary rational expectations equilibrium (SREE) model for the market with a small number of firms. We show that the value of incorporating entry and exit is significant. A general SREE model is then developed for the entire supply chain. An optimal delivery and storage solution is presented for the pipeline based on the equilibrium values. The features of spot and forward prices in both markets are compared and analyzed. We compare a common approximation with the exact solution and identify the risks of using it.

REFERENCES

• 1: Angus Deaton and Guy Laroque, On the Behavior of Commodity Prices, The Review of Economic Studies, 59, (1992), 1--23.
• 2: Bryan R. Routledge, Duane J. Seppi and Chester S. Spatt, Equilibrium Forward Curves for Commodities, The Journal of Finance, Vol.55, No.3, (2000.6), 1297-1338.
• 3: Wei Yang and Katia Sycara, Equilibrium Analysis of a Natural Gas Supply Chain, Working Paper, Carnegie Mellon University, 2001.

INDEX TERMS

Primary Classification:
  G. Mathematics of Computing
  G.1 NUMERICAL ANALYSIS

Additional Classification:
  H. Information Systems
  H.4 INFORMATION SYSTEMS APPLICATIONS
      H.4.m Miscellaneous

General Terms:
Economics, Management