Estimating the Market Impact of
a Natural Gas Pipeline Expansion
Andrew Kleit, Chiara Lo Prete, Seth Blumsack, Nongchao Guo
The Pennsylvania State University
John and Willie Leone Family Department of Energy and Mineral Engineering
33rd USAEE/IAEE North American Conference, Pittsburgh
October 28, 2015
Structure
Motivation
Methodology
Data
Results
Conclusions
Motivation
Methodology
Data
Results
Conclusions
Motivation
Methodology
Data
Results
Conclusions
At 14.4 bcf/day (current output from EIA) the Marcellus play will last for 95 years!
Motivation
Methodology
Data
Results
Conclusions
Atlantic Sunrise Project
Motivation
Methodology
Data
Results
Conclusions
Build a pipeline connecting Transco Leidy line with the Transco main line near Station 195
Inject 1.7 MMBTU/day of energy to the Transco system
Enable the gas to flow southward from Station 195
Motivation
Methodology
Data
Results
Conclusions
Transco Main Line
Station 195
Station 90
Motivation
Methodology
Data
Results
1.7 MMBtu/day
Zone 4
Station 90
Zone 5
Zone 6
Station 195
What is the gas flow at equilibrium?
Conclusions
Motivation
Methodology
Data
Results
1.7 MMBtu/day
Zone 4
Station 90
Zone 5
Zone 6
Station 195
Gas flow example:
Station 90 unconstrained, gas flows all the way to the north
Conclusions
Motivation
Methodology
Data
Results
1.7 MMBtu/day
null point
Zone 4
Station 90
(constrained)
Zone 5
Zone 6
Station 195
Gas flow example:
Station 90 constrained, Station 90 gas flows north to Zone 5,
Station 195 gas flows both north and south, null point is in Zone 5
Conclusions
Motivation
Methodology
Data
Results
Conclusions
Constrained
Station 90
Unconstrained
Flow north
Station 195
Flow south
Gas Flows
North and south
51 potential scenarios
for one day!
East of Station 90
Zone 4
Null point
Zone 5
No cross border flows
No null point
Unidirectional flows
Motivation
Methodology
Arbitrage
Data
Results
Conclusions
• If no constraint, 𝑃𝐴 + 𝑇𝐴𝐵 = 𝑃𝐵
• Relates prices in different markets
Fixed injection at
Station 90
• If constraint, injection at Station 90 is fixed for that day
• Supply = Demand
Supply & Demand
function
• 𝑄 = 𝐴 × 𝑃𝛆
• Supply = Demand
Motivation
Flow
Pattern
Methodology
Data
Results
Conclusions
• Start with a flow pattern
Prices
• Build price relations & Supply demand balance
• Solve for prices
Verify
• Verify if the solved prices can yield the
chosen flow pattern
• Not all of them are valid.
Example
Motivation
Methodology
Data
Results
Conclusions
We have two sets of data (before Atlantic Sunrise project):
• The first is composed of flows, injections and withdrawals along Transco
from January 1, 2012 to June 27, 2014.
• The second set is the relevant zonal prices.
We solve for the equilibrium prices and welfare changes for each
day in the data period.
Motivation
Methodology
Data
Results
Conclusions
January 28, 2014 was a very cold day in the Northeastern U.S., because of that year’s “Polar Vortex”.
1.7 MMBtu/day
Station 165
(null point)
Zone 4
Station 90
(constrained)
Zone 5
Zone 6
Station 195
Motivation
Methodology
Data
ΔPrice
($/MMBtu)
Results
Conclusions
ΔConsumer surplus
($)
ΔProducer surplus
($)
-25.58
37,263,863
-584,042
67.99
-25.57
98,894,271
-23,975,155
67.25
-12.6
67,198,480
-60,738,840
Jan 28, 2014
Price before AS
($/MMBtu)
Price after AS
($/MMBtu)
Zone 4
93.13
67.55
Zone 5
93.56
Zone 6
79.85
Motivation
Methodology
Data
Results
Conclusions
Gains from Pipeline Expansion ($thousand)
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
0
5
10
15
20
25
30
35
($100,000)
($200,000)
Month
Zone 4
Zone 5
Zone 6
Over 60% of the gains came in January 2014.
link
Motivation
Methodology
Data
Results
Conclusions
Concluding thoughts
1) Atlantic Sunrise project can bring large amounts of consumer surplus during severe
weather periods.
2) During other periods, the gains will be small.
3) Welfare changes are not uniform over space, consumer surplus in Zone 6 could
decrease.
Thank you!
Number of Outcomes of Potential Scenarios (51)
Pipeline Constrained in Alabama
(before Atlantic Sunrise)
Gas flows from Zone
5 to Zone 6
Pipeline Unconstrained in Alabama
(before Atlantic Sunrise)
Table 1.
Station 195 gas flows North to Zone 6
Table 2.
No gas flows from
Zone 5 to Zone 6
Table 1.
Gas Flows from Zone 5 to Zone 4 and the
null point is in Zone 4
Station 195 gas flows both north to
Zone 6 and south to Zone 5
Gas Flows from Zone 5 to Zone 4 and the
null point is to the east of Station 90
Table 1.
No gas flows between Zone 5 and Zone 4
Gas flows from Zone 4 to Zone 5
Gas flows from
Zone 6 to Zone 5
Table 1.
Station 195 gas flow south to Zone 5
Table 3.
No gas flows from
Zone 6 to Zone 5
Table 1.
Table 1.
Constraint remains after the
injection at Station 195
Constraint is eliminated after the
injection at Station 195
Gas Flows from Zone 5 to Zone 4
and the null point is in Zone 4
Valid
Valid
Gas Flows from Zone 5 to Zone 4
and the null point is to the south of
Station 90
Not Valid
Valid
No gas flows between Zone 5 and
Zone 4
Valid
Valid
Gas flows from Zone 4 to Zone 5
Valid
Valid
Table 2.
Gas flows from Zone 5 to Zone 6
No gas flows from Zone 5 to Zone 6
Gas Flows from Zone 5 to Zone 4
and the null point is in Zone 4
Valid
Valid
Gas Flows from Zone 5 to Zone 4
and the null point is to the south of
Station 90
Valid
Valid
No gas flows between Zone 5 and
Zone 4
Valid
Valid
Gas flows from Zone 4 to Zone 5
Valid
Valid
Table 3.
Gas flows from Zone 6 to Zone 5
No gas flows from Zone 6 to Zone 5
Gas Flows from Zone 5 to Zone 4
and the null point is in Zone 4
Valid
Valid
Gas Flows from Zone 5 to Zone 4
and the null point is to the south of
Station 90
Valid
Valid
No gas flows between Zone 5 and
Zone 4
Valid
Valid
Gas flows from Zone 4 to Zone 5
Valid
Valid
Constraint detection at Station 90 &
Zone 4 price calculation before Atlantic Sunrise project
• We have prices data at Station 90 (“Transco-85”) in Alabama, Zone 5 (“non-WGL Transco
Z5,” near the Virginia/North Carolina border) and Zone 6 (“TETCO-M3,” near
Philadelphia).
• If the price difference between Zone 5 and Station 90 is greater than the corresponding
transportation cost, we consider that Station 90 is constrained, thus set the price in Zone 4
equal to the price in Zone 5 minus the corresponding transportation cost (thus price in Zone 4
would be greater than the price at Station 90);
• If the price difference between Zone 5 and Station 90 is less than the corresponding
transportation cost, we consider Station 90 unconstrained, thus set the price in Zone 4 equal
to the price at Station 90.
Transportation cost calculation
• Arbitrage price differences between zones are governed by interruptible (IT) rates on
the Transco.
• Between Zone 4 and Zone 5 the IT rate is 36 cents plus 1.28% of gas costs that day.
Between Zone 5 and Zone 6, the IT rate is 0.77% of gas costs plus 26 cents.
• We will assume gas costs here imply the gas costs in the originating zone. To
simplify our calculations we will assume gas costs are based on pre-Atlantic Sunrise
prices.
Decrease of consumer surplus in Zone 6
• There are some days that consumer surplus will decline in Zone 6. This is because
there are days where gas is significantly less expensive in Zone 6 than Zone 5, and,
without Atlantic Sunrise, this gas cannot flow south.
• Allowing a southward flow on Transco relieves the underlying bottleneck and allows
gas to flow from Zone 6 to Zone 5, potentially resulting in higher prices in Zone 6.
Uneconomic Flows
In the data we often observe uneconomic flows of gas between zones.
For example, on July 28, 2013, the price in Zone 4 is $3.54, the Zone 5 price is $3.61, the transportation
cost from Zone 4 to Zone 5 is $0.41, and yet there are substantial flows of gas from Zone 4 to Zone 5.
We assume that these uneconomic flows are the result of the difficulties of renegotiating long-term
contracts between parties. Our model assumes that these uneconomic flows will not continue following
the construction of Atlantic Sunrise.
In reality, these uneconomic transactions can be expected to continue.
In our calculation, the decrease of consumer surplus due to this kind of uneconomic flows before Atlantic
Sunrise will not be accounted for.
Example of calculating prices at equilibrium on January 28, 2014
1) Assume a flow distribution at equilibrium:
1.7 MMBtu/day
null point
Zone 4
Station 90
(constrained)
Zone 5
Zone 6
Station 195
Example of calculating prices at equilibrium on January 28, 2014
2) Use the assumptions to set up equations and solve for 𝑃4 , 𝑃5 and 𝑃6 :
𝑃5 − 𝑃4 = 𝑇45
𝑃5 = 𝑃6
𝐼90 + 𝐼195 + 𝐴4𝑠 𝑃4𝐸𝑆 + 𝐴5𝑠 𝑃5𝐸𝑆 + 𝐴6𝑠 𝑃6𝐸𝑆 = 𝐴4𝐷 𝑃4𝐸𝐷 + 𝐴5𝐷 𝑃5𝐸𝐷 + 𝐴6𝐷 𝑃6𝐸𝐷
Example of calculating prices at equilibrium on January 28, 2014
3) Use the solved prices to verify if the followings are true:
• Net demand in Zone 6 is between 0 and 1.7 MMBtu:
0 < 𝐴6𝐷 𝑃6𝐸𝐷 − 𝐴6𝑠 𝑃6𝐸𝑆 < 1.7𝑀𝑀𝐵𝑡𝑢
• Net demand in Zone 5 is greater than 0:
0 < 𝐴5𝐷 𝑃5𝐸𝐷 − 𝐴5𝑠 𝑃5𝐸𝑆
• Net demand in Zone 5 and Zone 6 combined is greater than 1.7 MMBtu
𝐴6𝐷 𝑃6𝐸𝐷 − 𝐴6𝑠 𝑃6𝐸𝑆 + 𝐴5𝐷 𝑃5𝐸𝐷 − 𝐴5𝑠 𝑃5𝐸𝑆 > 1.7𝑀𝑀𝐵𝑡𝑢
• Price in Zone 4 is greater than that at Station 90