**1. Introduction**

The main determinants of the structure of Central European markets were formed in the first 10–15 years after the collapse of the Socialist system [1]. Then an intensive reorganization of economic-commercial relations based on central planning into a multi-level, free, dynamic, supply-demand mechanism-driven platform for satisfying social, economic and cultural needs was ongoing. Formation of market relations requires innovative transformation of the economic structure associated to the comprehensive reorganization of economic mechanisms, commercial ideology and economic relations. Unfortunately, the energy sector was lagging behind these structural changes and remained largely intact in its primary monopolized form till the new European Union (EU) Third Legislative package was implemented. The electricity market was the first to be liberalized with the gas sector in some New EU Member Countries remaining in a shadow of ongoing liberalization processes [2]. The opening of markets not only creates possibilities for business development, but also leads to the emergence of new sorts of risks, with which market players do not always have the experience to deal with. They were distinguished in the scientific literature, which analyzed business risks in Western energy markets. A focus on price di fferences has been highlighted by Dahlgren et al. [3] when assessing business risks of energy trading companies. Al-Awami and Sortomme [4] put emphasis on the capacity of the energy transmission grid as a physical bottleneck for providing energy commodities. Wang et al. [5] deeply analyzed the possibility of lowering the operational amount of business risks of energy trading companies by precisely forecasting the consumption timing, thus once again stressing the importance of this business risk in energy trading companies risk portfolios. Implementing smart grids as a solution for operational amounts of risk managemen<sup>t</sup> was analyzed by Tushar et al. [6], although stressing possible negative consequences of this decision, such as price discrimination. The proper price risk managemen<sup>t</sup> is a focal point in James' study [7], who argues that it is the most important business

risk of energy trading companies, which may determine the whole existence of such business entities. Although there are attempts to classify energy trading companies in the same group as ones dealing with financial derivatives trading [8], and proposing to analyze them in one group, Parashchiv [9] documents a fundamental di fferences in risk portfolios of these business entities (mainly associated with energy production, storage and transmission processes), proving unsoundness of this scientific approach. A blockchain technology is proposed as a solution for precise forecasting of energy demand by Mengelkamp et al. [10], also this technology displays drawbacks then facing hardly predictable consumer behavior [11]. This obstacle for precise forecasting of energy demand has been researched by Haas et al. [12] and Dianshu et al. [13]. The very low margin, which is acceptable in di fferences in price for energy commodities provided by di fferent suppliers, was documented by Bohi [14], who stresses the homogeneity of this product, the fact which determines that di fference in prices of di fferent providers can be no bigger than costs associated with the change of the supplier, which in liberalized markets are very low. New arising energy trading companies risks, associated with peer-to-peer energy trading, stimulated by the growth of alternative energy production, are mentioned by Li et al. [15].

These business risks are a particularly new reality to states, which have only recently opened their energy markets shifting from monopolized and regulated to free supply-demand mechanism-driven market structure and are in the future for Eastern Europe [16]. Here, due to the need of significant input of primary investments and long capital's payback period, the economic experts assumed the energy sector as a natural monopoly to be regulated, in which competitiveness and the entrepreneurial activity and e fficiency it stimulates, as well as pressure for the final price of the product and openness of the market, seemed impossible [17,18]. However, lately this attitude is shifting rapidly. This is due to the implementation of the EU Third Energy legislative Package (Directive EC 2009/73), which is aimed at creating a secure, transparent, market-oriented common European energy market without energy islands [19,20]. The Directive divided the previously-existing natural monopoly into separate owners of natural gas supply and distribution infrastructures independent of one another and natural gas supply (trade) companies, and created a transparent, competitive natural gas trade market controlled by demand-supply balance. The implementation of these legal requirements start showing positive results in formerly monopolized markets. In Lithuania, which started to implement the requirements of this document in 2014 and finished in 2016, it allowed to introduce new suppliers to the market (through LNG terminal which became rational and viable only after implementation of core principles of the Third Energy legislative Package), made a negotiating position of Lithuanian energy suppliers more firm, and created conditions for emergence of gas trading companies, which, in sum, allowed for the reduction of the final price of natural gas for the consumers of Lithuania by 30 percent. However, markets and market players, used to operating in regulated and predictable monopolized markets, faced the new reality of liberalized markets and are prone to various challenges and risks. New market regulation mechanisms must be created; new ways of conducting business appear [21]. One such phenomena is the emergence of particularly new business entities, such as gas trading companies. In this article we examine the business risks faced by gas trading companies in a newly liberalized energy market. The aim of this study is to distinguish business risks that a ffect natural gas trading companies operating in the liberalized natural gas market and to assess them according to the potential impact on the aforementioned gas trading companies. The empirical base is a first energy market in the Baltic States: GET Baltic and the companies operating there. We employed expert interviews and an Analytical Hierarchy Process method with adaptive, balanced and Koczkodaj scales in order to ge<sup>t</sup> the results.

The study complements the existing stream of scientific literature aimed at evaluating business risks in immature markets [22–24], liberalization of energy markets [25–27] and energy trading [28–30].

#### **2. The Concept of Business Risk**

The scientific approach to risk is being reflected in two di fferent ways: risk is understood as a threat or indefiniteness. Risk as a threat is perceived as a possibility for "the unpredicted events to happen, and the likely events not, if in any mentioned case an unfavorable result is being conditioned" [31,32]. Risk expresses a threat to business goals by a constantly changing environment [33]; it can also be defined as a positive or negative variable's deviation from its plausible value [34,35] and often, in practice, it is a negative result. The research on business risks highlight immeasurability, which can influence the agen<sup>t</sup> during part of or the entire period of its activity [36]. Business risk is also viewed as "a problem that has not ye<sup>t</sup> occurred" [37]. Similarly, it can be assessed as a certain situation when a possibility for an unfavorable deviation from a preconceived goal appears [38]. Another way to study business risks is from a prism of possibilities [39]. Under this perspective, a risk is perceived as an obligatory activity in undefined circumstances, during which the probability arises for not achieving the expected result, or a likelihood for failure or deviation from the goal, and the comprehension of which highly depends on circumstances; nevertheless, a risk could also manifest as an unpredicted benefit. Therefore, a risk involves a chance of a particular winning, as it can be "a possibility of danger, losses or income" [40]. Almost all definitions of risk in scientific literature distinguish two elements: uncertainty (or probability of coincidence) and losses (negative outcome), which are related with an unpredicted event. However, the risk itself consists of three main components: events that the company sought to avoid, but which nevertheless occurred, the likelihood of those events and the assessment of awaited causal actions. The scientific literature suggests that there is a link between indefiniteness and risk [41,42], since risk itself is indefiniteness [43]. However, there is also some criticism regarding this approach, because risks are both known and unknown (undefined), while indefiniteness is a wider concept [44]. Additionally, a risk can be viewed as uncertainty and unwanted difficulties that arise due to the operated activity [45]. Therefore, business risk is an opportunity for inaccuracy, meaning that the achieved results shall deviate from the pursued goal [17]. In fact, both internal and external environments of the business enterprise are prompting the risk, and the entire activity of the organization is related to risk and its manifestation [43]. Nevertheless, one feature of business risk is evident in the definitions given by the majority of scholars; therefore, a generalization emerges which claims a risk to be the future result of present actions [46].

#### **3. Business Risks in the Natural Gas Trade**

Natural gas trading companies are subject to a wide variety of business risks. Some scholars sugges<sup>t</sup> considering energy commodities trader business risks as starting from product competition risk [47–49]. Natural gas as an energy commodity in the retail consumption market competes with fuel oil and biofuel (in manufacturing and heat production) [50], electricity, liquefied petroleum gas, diesel fuel (in industry), firewood, coal, peat, geothermal energy (in household heat production) and the like. Therefore, with the increase in the demand of one of the competing commodities, the decrease in natural gas demand is probable. This could happen if competitive energy commodities grow significantly cheaper. It is worth mentioning that in order to shift to a different type of fuel, a sustained essential change in the price of the energy commodity is necessary, as it is necessary to make certain capital investments (replacing devices, furnaces and the like). The competitiveness of natural gas can be affected by a significant increase in prices, change in environmental standards or development of an alternative energy [51,52]. The latter two factors could be induced by certain state actions in the pursuance of energy security [53], shift in industry structure, or state prestige on the international level. The risk of over-regulation can also manifest itself through the shifting of market conjuncture. Personnel risk (encompassing the incompetency or negligence of personnel, dishonest and unlawful acts and similar issues related to human resources) [45] is a characteristic of all companies without exception, given there is more than one employee in the organization. As a result, manifestation of the mentioned risk and the hazard it causes is also plausible in natural gas trading companies, which in turn conditions three more risks to natural gas trading activities. Technological risk (or risk for technical breakdowns) is one of them [54]. Even though natural gas trading companies do not exploit the main or distribution gas pipes and do not have the right to control them (this is prohibited by the EU Third Energy Legislative Package), any defect of gas supply infrastructure reduces the

physical possibility of accessing the commodity [55]. Moreover, the employees of a natural gas trading company indirectly (due to false balancing data) can influence the trustworthiness of physical natural gas trade infrastructure. As a result, any type of technical breakdown can cause detriment to the property, health or even lives of the third parties [56]. This can lead to litigation risk [56,57], the consequences of which cannot be precisely foreseen, because there is no legal practice for investigating such detriments established so far. Therefore, it can be stated that a probability to incur extremely significant financial losses exists. Dishonest personnel actions can directly cause risks of legal actions regarding unfulfilled contract clauses or unfair speculative trade. Incompetency of personnel also can condition volume risk [58–60], which is one of the essentials in the natural gas trading activity. Briefly, it can be described as potential financial losses, which are caused by the imprecise calculation of natural gas demand. If, under a long-term contract, a company purchases an insu fficient amount of natural gas than is necessary for the satisfaction of customer needs, to meet the demand it has to purchase a certain additional amount of gas in the spot market, i.e., at a higher cost [61]. Unwilling to lose it clients, the company has to sell the gas at an agreed (or established on the market) price, i.e., at a lower profit margin. If the amount purchased in the spot market is significant, the company might become detrimental to trade it or fall short in working capital for purchasing it. If a company purchases too much natural gas under a long-term contract and has nowhere to realize it, it has to follow the provision "take-or-pay" and pay the provider forfeit, and as a result, experience financial losses [62]. Reputation risk is rather widely studied in scientific literature [63–65]; therefore, it shall not be elaborated. Risk of customers' default [44] may cause the volume risk, because upon the bankruptcy (or failure to fulfil one's contract obligations) of several larger clients, the company might face the aforementioned situation. Besides, it would also condition credit risk, since in order to continue one's activity the working capital would have to be borrowed. Credit risk [66–68] also emerges due to the intensifying competition between the companies. In order to maintain and attract customers, they not only have to reduce the sale prices, but also extend the term for paymen<sup>t</sup> deferral; this can lead to the situation where a company has to pay for the purchased production prior to its receiving the money for the volume sold [69]. This risk assumes the greater likelihood of the event, the greater the quantity of natural gas is being purchased in the spot market. Risk of supplier default [70] is essential because given a gas trading company, being in a long-term contract, fails to receive the commodity due to some reasons (technical, political, economic, etc.), all of the production would have to be purchased in the spot market. Obviously, this would not allow trading at the agreed-upon (or established) price on the internal state's market; the company would lose its customers, which, ultimately, would lead the company to bankruptcy [71,72]. As any other company that has economic interests in more than one country which is not a monetary union ally, natural gas trading companies face monetary risk, i.e., natural gas is purchased in international paymen<sup>t</sup> currency (USA dollar), but sold in the country's local currency: Euros [73,74]. It is noteworthy to mention that this is more of a theoretical risk because none of the natural gas supplying companies operating in the GET Baltic market take the risk directly on themselves, but rather impose it to the insurance companies. Purchase price risk is directly a ffecting the commodity price risk, since the profit margin of a gas trading company basically amounts to the di fference between production selling and purchase prices. Systematized business risks a ffecting the natural gas trading companies are presented in Table 1.


**Table 1.** Business risks affecting natural gas trading companies.

The whole risk portfolio of gas trading companies operating in liberalized markets is reflected in Figure 1:

**Figure 1.** The risk map of gas trading companies. Source: own work.

As can be seen from the table and figure above, the majority of researched risks a ffecting natural gas trading companies are interrelated and can cause a chain reaction of the risks. This makes the evaluation of risks rather complicated and raises additional challenges in selecting research methods [75]. Nevertheless, it is necessary to choose the methods that would also allow assessing the hierarchical dependency of the risks that a ffect natural gas trading companies. The solution for this challenge is presented in the methodological section of this research paper.
