Managing Price Risk for an Oil and Gas Company

António Quintino, João Carlos Lourenço, Margarida Catalão-Lopes


Oil and gas companies’ earnings are heavily affected by fuels price fluctuations. The use of hedging tactics independently by each of their business units (e.g. crude oil production, oil refining and natural gas) is widespread to diminish their exposure to prices volatility. How much should be hedged and which derivatives should be selected according to the company risk profile are the main questions this paper intends to answer. The present research formulates an oil and gas company’s integrated earnings structure and evaluates the company’s risk tolerance with four approaches: Howard’s, Delquie’s, CAPM and a risk assessment questionnaire. Stochastic optimization and Monte Carlo simulation with a Copula-GARCH modelling of crude oil, distillates and natural gas prices is used to find the derivatives portfolios according to company risk tolerance hypothesis. The hedging results are then evaluated with a multi-criteria model built in accordance with the expressed company’s representatives preferences upon four criteria: payout exposure; downside gains; upside gains; and risk premium. The multi-criteria analysis revealed a decisive role in the final hedging decision.


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Paper Citation

in Harvard Style

Quintino A., Lourenço J. and Catalão-Lopes M. (2014). Managing Price Risk for an Oil and Gas Company . In Proceedings of the 3rd International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES, ISBN 978-989-758-017-8, pages 127-138. DOI: 10.5220/0004856901270138

in Bibtex Style

author={António Quintino and João Carlos Lourenço and Margarida Catalão-Lopes},
title={Managing Price Risk for an Oil and Gas Company},
booktitle={Proceedings of the 3rd International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,},

in EndNote Style

JO - Proceedings of the 3rd International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,
TI - Managing Price Risk for an Oil and Gas Company
SN - 978-989-758-017-8
AU - Quintino A.
AU - Lourenço J.
AU - Catalão-Lopes M.
PY - 2014
SP - 127
EP - 138
DO - 10.5220/0004856901270138