Open AccessAn Integrated Risk Management Model for an Oil and Gas Company
Author(s) -
António Quintino,
João Carlos Lourenço,
Margarida CatalãoLopes
Publication year - 2022
Publication title -
international journal of economics and statistics
Language(s) - English
Resource type - Journals
ISSN - 2309-0685
DOI - 10.46300/9103.2022.10.13
Subject(s) - fossil fuel , petroleum industry , risk management , scale (ratio) , production (economics) , natural gas , business , oil price , economics , finance , industrial organization , environmental science , monetary economics , microeconomics , engineering , waste management , environmental engineering , physics , quantum mechanics
Oil and gas companies’ returns are heavily affected by price fluctuations. In financial terms, the “price in—price out” dynamics influence companies’ gross margins and impact to a high extent on their multiyear budgets and accomplishment of goals. Due to world scale size and geographically scattered organizations oil and gas companies use separate hedging tactics to protect each of their business units (e.g. crude oil production, oil refining and natural gas) from the risk associated with the fluctuation of prices. The present research compares, for an oil and gas company, the results of using a “hedging at business unit level” approach with the results of employing a “hedging at company level” approach, by finding the best derivatives portfolios through coherent risk measures and stochastic optimization. The analysis is subsequently extended to a utility based approach, where the company’s risk tolerance is included.