This dissertation consists of three chapters; each models competition in natural gas markets. These models provide insight into interactions between changes in market conditions/policies and market players’ strategic behavior. In all three chapters, we apply our models to a natural gas trade network formed by using BP’s Statistical Review of World Energy 2010 major trade flows. In the first chapter, we develop a model for the world natural gas market where buyers and sellers are connected by a trading network. Each natural gas producer is a Cournot player with a fixed supply capacity. Each of them is also connected to a unique set of importing markets. We show that this constrained noncooperative Cournot game is a potential game and its potential function has a unique maximizer. In the scenario analysis, we find that any exogenous change affecting Europe also has an effect in the Asia Pacific. The reason is that two big producers, Russia and the Middle East, are connected to both markets. We also find that a collusive agreement between Russia and the Middle East leads them to specialize in supply to markets based on their marginal costs of exporting natural gas. The second chapter is devoted to analyzing the impacts of North American shale gas on the world natural gas market. To better represent the North American natural gas market, this chapter also allows for perfect competition in that market. We find that North America exports natural gas when its supply curve is highly elastic and hence the domestic price impact of its exports is very small. Even so, the price impacts on the importing markets are substantial. We also find that shale gas development in North America decreases dominant producers’ market power elsewhere in the world and hence decreases the incentive of any parties to form a natural gas cartel. In the third chapter, we relax the assumption of fixed supply capacities and allow for natural gas producers to invest in their supply capacities. We assume a two period model with no uncertainty and show that there is a unique Cournot-Nash equilibrium and the open-loop Cournot-Nash equilibrium and closed-loop Cournot-Nash equilibrium investments coincide.

The dynamics of the U.S. and Canada natural gas spot markets are evolving through deregulation policies and technological advances. Economic theory suggests that these markets will be integrated. The key question is the extent of integration among the markets. This thesis characterizes the degree of dynamic integration among 11 major natural gas markets, six from the U.S. and five from Canada, and determines each individual markets’ role in price discovery. This is the first study to include numerous Canadian markets in a North American natural gas market study. Causal flows modeling using directed acyclic graphs in conjunction with time series analysis are used to explain the relationships among the markets. Daily gas price data from 1994 to 2009 are used. The 11 natural gas market prices are tied together with nine long-run co-integrating relationships. All markets are included in the co-integration space, providing evidence the markets are integrated. Results show the degree of integration varies by region. Further results indicate no clear price leader exists among the 11 markets. Dawn market is exogenous in contemporaneous time, while Sumas market is an information sink. Henry Hub plays a significant role in the price discovery of markets in the U.S. Midwest and Northeast, but little to markets in the west. The uncertainty of a markets’ price depends primarily on markets located in nearby regions. Policy makers may use information on market integration for important policy matters in efforts of attaining efficiency. Gas traders benefit from knowing the price discovery relationships.

The thesis evaluates and quantifies the residual shape risk on the Czech nat- ural gas market. The risk stems from insufficient liquidity of forward mar- ket, when energy supplier has to hedge his short shaped sales by standard baseload products available at wholesale market. Hence, energy supplier is always left with residual position, which has to be closed at spot market. We model the residual shape risk as a difference between spot and forward prices weighted by residual position, which is derived from the shape of innogy En- ergie, s.r.o. household portfolio. In order to do so we develop model for a spot price dynamics based on the daily index OTE. We price forward contracts as expected spot price at delivery. The spot price dynamics is modelled as a mean-reverting Ornstein-Uhlenbeck process, while assuming two different driving stochastic processes for innovations. First, we model them as a mixed jump diffusion process. Second, we estimate control model assuming innova- tions to come from the normal inverse Gaussian distribution. The residual shape risk is then evaluated by Monte Carlo simulation of spot price paths, which we use for hedging the portfolio shape. Five percent Value-at-Risk and the Expected Shortfall measures for the jump mixed diffusion process yield costs of 0.013 and 0.016 EUR/MWh,...