estimating the market impact of a natural gas pipeline expansion andrew kleit, chiara lo prete, seth...

Estimating the Market Impact of a Natural Gas Pipeline Expansion

Andrew Kleit, Chiara Lo Prete, Seth Blumsack, Nongchao Guo

The Pennsylvania State UniversityJohn and Willie Leone Family Department of Energy and Mineral Engineering

33rd USAEE/IAEE North American Conference, PittsburghOctober 28, 2015

Str

uctu

re

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!


Atl

anti

c S

unri

se P

roje

ct

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


Transco Main Line


Station 90

Station 195

Zone 4 Zone 5 Zone 6

Station 90 Station 195

1.7 MMBtu/day

What is the gas flow at equilibrium?



Station 90 Station 195

1.7 MMBtu/day

Gas flow example: Station 90 unconstrained, gas flows all the way to the north



Station 90(constrained)

Station 195

1.7 MMBtu/daynull point


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

Gas Flows

Station 90Constrained

Unconstrained

Station 195

Flow north

Flow south

North and south

Null point

East of Station 90

Zone 4

Zone 5

No null point

No cross border flows

Unidirectional flows

51 potential scenariosfor one day!


• If no constraint, • Relates prices in different marketsArbitrage

• If constraint, injection at Station 90 is fixed for that day• Supply = Demand

Fixed injection at Station 90

• Supply = DemandSupply & Demand

function


Flow Pattern

• 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

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.




Station 195

1.7 MMBtu/day

January 28, 2014 was a very cold day in the Northeastern U.S., because of that year’s “Polar Vortex”.

Station 165(null point)


Jan 28, 2014Price before AS

($/MMBtu)Price after AS

($/MMBtu)

ΔPrice($/MMBtu)

ΔConsumer surplus($)

ΔProducer surplus($)

Zone 4 93.13 67.55 -25.58 37,263,863 -584,042

Zone 5 93.56 67.99 -25.57 98,894,271 -23,975,155

Zone 6 79.85 67.25 -12.6 67,198,480 -60,738,840


0 5 10 15 20 25 30 35

($200,000)

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

Gains from Pipeline Expansion ($thousand)


Month

Over 60% of the gains came in January 2014.


link

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)Pipeline Unconstrained in Alabama

(before Atlantic Sunrise)

Station 195 gas flows North to Zone 6

Gas flows from Zone 5 to Zone 6

Table 1.

Table 2.No gas flows from Zone 5 to Zone 6

Table 1.

Station 195 gas flows both north to Zone 6 and south to Zone 5

Table 1.

Gas Flows from Zone 5 to Zone 4 and the null point is in Zone 4

Gas Flows from Zone 5 to Zone 4 and the null point is to the east of Station 90

No gas flows between Zone 5 and Zone 4


Station 195 gas flow south to Zone 5


Table 1.

Table 3.

No gas flows from Zone 6 to Zone 5

Table 1.

Constraint remains after the

injection at Station 195Constraint is eliminated after the

injection at Station 195


Valid Valid

Gas Flows from Zone 5 to Zone 4 and the null point is to the south of

Station 90Not Valid Valid


Valid Valid

Gas flows from Zone 4 to Zone 5 Valid Valid

Table 1.

Table 2.

Gas flows from Zone 5 to Zone 6 No gas flows from Zone 5 to Zone 6


Valid Valid


Station 90Valid Valid


Valid Valid


Table 3.

Gas flows from Zone 6 to Zone 5 No gas flows from Zone 6 to Zone 5


Valid Valid


Station 90Valid Valid


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 FlowsIn 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.



Station 195

1.7 MMBtu/day

Example of calculating prices at equilibrium on January 28, 2014

null point

1) Assume a flow distribution at equilibrium:


2) Use the assumptions to set up equations and solve for , and :


3) Use the solved prices to verify if the followings are true:

• Net demand in Zone 6 is between 0 and 1.7 MMBtu:

• Net demand in Zone 5 is greater than 0:

• Net demand in Zone 5 and Zone 6 combined is greater than 1.7 MMBtu

• Price in Zone 4 is greater than that at Station 90

estimating the market impact of a natural gas pipeline expansion andrew kleit, chiara lo prete, seth...

Documents

validvalid gas flows

validvalidno gas flows

south of station

validvalidgas flows

transco main line station

null point1

null pointjan

equilibrium prices