Evaluating the impacts of the external supply risk in a natural gas supply chain: the case of the Italian market

Abstract

A large part of the European natural gas imports originates from unstable regions exposed to the risk of supply failure due to economical and political reasons. This has increased the concerns on the security of supply in the European natural gas market. In this paper, we analyze the security of external supply of the Italian gas market that mainly relies on natural gas imports to cover its internal demand. To this aim, we develop an optimization problem that describes the equilibrium state of a gas supply chain where producers, mid-streamers, and final consumers exchange natural gas and liquefied natural gas. Both long-term contracts (LTCs) and spot pricing systems are considered. Mid-streamers are assumed to be exposed to the external supply risk, which is estimated with indicators that we develop starting from those already existing in the literature. In addition, we investigate different degrees of mid-streamers’ flexibility by comparing a situation where mid-streamers fully satisfy the LTC volume clause (“No FLEX” assumption) to a case where the fulfillment of this volume clause is not compulsory (“FLEX” assumption). Our analysis shows that, in the “No FLEX” case, mid-streamers do not significantly change their supplying choices even when the external supply risk is considered. Under this assumption, they face significant profit losses that, instead, disappear in the “FLEX” case when mid-streamers are more flexible and can modify their supply mix. However, the “FLEX” strategy limits the gas availability in the supply chain leading to a curtailment of the social welfare.