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Weather or not? Welfare impacts of natural gas pipeline expansion in the northeastern U.S.

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Abstract

With the rapid development of new natural gas resources in the United States has come a number of proposals for new natural gas transmission infrastructure. We use a unique and fine-grained data set on natural gas spot pricing and gas transmission operations to model how a local pipeline expansion connecting a Marcellus Shale producing area to the main Transco pipeline system would affect flow patterns and zonal gas pricing across the Transco. Our modeling approach is based on arbitrage cost models for constrained energy networks, accounting for the effects of zonal gas transmission rates as mandated by the U.S. Federal Energy Regulatory Commission. Application of our model to a data set of daily gas market outcomes and operating conditions on the Transco between 2012 and mid 2014 suggests that the modeled pipeline expansion would increase overall economic welfare in the spot market for Transco deliveries by $1.7 billion and have positive net social benefits of about $0.4 billion. However, more than 80% of this estimated welfare gain occurs in one season (winter 2014) featuring high gas demand due to colder weather. Thus, the spot market efficiency gains associated with pipeline projects in the Marcellus region may be limited by the frequency of extreme cold weather conditions. To examine the sensitivity of our estimates of welfare gains to different weather conditions, we calculate the expected benefits of the pipeline expansion in terms of historical temperatures from 1992 to 2011, and find that Atlantic Sunrise would have increased welfare by approximately $1.8 billion over a two and half year period, on average.

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Fig. 1

Source: Williams [29], http://www.1line.williams.com/

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Notes

  1. See, for example, Energy Information Administration, “Some Appalachian natural gas spot prices are well below the Henry Hub national benchmark,” October 15, 2014, http://www.eia.gov/todayinenergy/detail.cfm?id=18391 (Accessed October 30, 2017).

  2. For instance, data indicates that on January 22, 2014 the natural gas price at the Dominion South hub in Pennsylvania was $5.03/MMBtu, while the price at the Transco-Z6 hub (New York) was $120.70/MMBtu.

  3. Of the 17,306 horizontal wells permitted in PA, only 10,855 are currently being drilled or under development (http://www.marcellusgas.org; Accessed October 30, 2017.

  4. http://atlanticsunriseexpansion.com/about-the-project/project-timeline/.

  5. Other recently proposed pipeline expansions in the Mid-Atlantic region are discussed in the Appendix of Kleit et al. [21].

  6. Daily historic data on operating capacity and available capacity on the Transco system can be found at: http://www.1line.williams.com/Transco/index.html, selecting “Capacity\(\rightarrow \) Operationally available”. The Transco 1Line portal only retains the prior 3 years of historic information for viewing. Generally, available capacity represented a very small amount (less than 1%) of total capacity.

  7. There are a number of discussions available on this issue. See, for example, Energy Information Administration, “Spot natural gas prices at Marcellus trading point reflect pipeline constraints”, July 23, 2012, http://www.eia.gov/todayinenergy/detail.cfm?id=7210 (Accessed October 30, 2017); David Conti, “Shale Gas Production in Retreat Amid Low Prices, Shortage of Pipelines”, Pittsburgh Tribune, September 10, 2015, http://triblive.com/business/headlines/9009333-74/gas-production-shale (Accessed October 30, 2017).

  8. See Carolyn Davis, Transco Secures Full Capacity for Atlantic Sunrise Expansion from Marcellus to Eastern Seaboard, NGI Shale Daily, February 20, 2014, http://www.naturalgasintel.com/articles/97473-transco-secures-full-capacity-for-atlantic-sunrise-expansion-from-marcellus-to-eastern-seaboard (Accessed October 1, 2017).

  9. http://atlanticsunriseexpansion.com/williams-partners-receives-ferc-certificate-authorizing-atlantic-sunrise-project/.

  10. https://stateimpact.npr.org/pennsylvania/2017/09/19/construction-begins-on-atlantic-sunrise-pipeline/.

  11. This assumption is reasonable, given that gas sent through Transco at Station 90 represents a relatively small amount of gas production in the states that are in the southwestern portion of the Transco System. According to the EIA [12], gas flows through Station 90 represented about 10% of natural gas marketed production in Texas and Louisiana in 2012-2014.

  12. “Other Industry” includes the following consumer categories: industrial, liquids plant, municipality, pipeline interconnect, processing plant and storage.

  13. http://www.1line.williams.com/Transco/files/Tariff/TranscoTariff.pdf (FERC Gas Tariff of Transcontinental Gas Pipeline Company, LLC).

  14. Currently, there is no charge based on the cost of gas from Zones 6 to 5, as such flows do not occur. However, we expect that one will be imposed by FERC, should gas start flowing south on Transco: we assume here it will also be 0.77% of gas costs.

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Correspondence to Andrew Kleit.

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Williams Partners L.P. provided financial support for the analysis contained herein.

Appendix

Appendix

In this appendix, we describe the algorithm used to obtain the daily natural gas flows and zonal prices at equilibrium, assuming the completion of Atlantic Sunrise Expansion project. The algorithm consists of three steps:

  • Choose a scenario that identifies a unique equilibrium pattern of natural gas flows;

  • Apply scenario-specific arbitrage, autarky and capacity-constrained conditions, as well as supply demand balance conditions to define a system of equations. This system is solved for the natural gas prices in Zones 4, 5 and 6;

  • Verify if the prices from the second step can yield withdrawals and injections in each zone that satisfy the scenario we designated. Note that the prices obtained from the scenario-specific conditions and supply demand balance conditions do not necessarily satisfy that scenario. This is because these conditions and supply demand balance conditions are only a subset of all the conditions that a specific pattern should meet. If the solved prices do satisfy all the conditions of the scenario specified in the first step, we claim that this is the new equilibrium after Atlantic Sunrise.

We notice that it is theoretically possible to have more than one equilibrium on a particular day after Atlantic Sunrise. For this reason, we repeat the three steps described above for all the potential scenarios we identified. In practice, however, we find only one equilibrium for each day after Atlantic Sunrise in our sample of data. Below is a detailed description of each step.

1.1 1: Scenarios

Figures 2, 3 and 4 below present the 55 potential scenarios we identified. Each scenario identifies a unique equilibrium pattern of gas flows at the following key points along the Transco:

  • East of Station 90: capacity along the Transco east of Station 90 could be unconstrained or constrained before the Atlantic Sunrise expansion. After Atlantic Sunrise, the constraint could remain or be eliminated;

  • Zones 4 and 5: gas could flow from Zones 4 to 5, from Zones 5 to 4 or there could be no gas flowing between Zones 4 and 5 (autarky). When gas flows from Zones 5 to 4, the null point may be either in Zone 4 or to the west of Station 90. However, if Station 90 is constrained after Atlantic Sunrise, the null point can not be west of Station 90. This is because a null point west of Station 90 would imply that gas flows from east to west across that station, but that cannot be possible if the station remains constrained after the expansion;

  • Station 195 between Zones 5 and 6: new supply from the Marcellus play injected at Station 195 can flow only north to Zone 6, both south and north, or only south to Zone 5. When Station 195 gas only flows north, there could be additional gas flowing from Zones 5 to 6, or no gas flowing from Zones 5 to 6. Similarly, when Station 195 gas only flows south, there could be additional gas flowing from Zones 6 to 5, or no gas flowing from Zones 6 to 5.

Fig. 2
figure 2

Possible equilibria after the Atlantic Sunrise expansion, when Station 90 is unconstrained before Atlantic Sunrise (hashtag refers to the scenarios)

Fig. 3
figure 3

Possible equilibria after the Atlantic Sunrise expansion, when Station 90 is constrained before Atlantic Sunrise and the constraint is eliminated after the expansion (hashtag refers to the scenarios)

Fig. 4
figure 4

Possible equilibria after the Atlantic Sunrise expansion, when Station 90 is constrained before and after the Atlantic Sunrise expansion (hashtag refers to the scenarios)

1.2 2: Price relations and supply demand balance conditions

Based on the flow pattern, we define price relations among the three Transco rate zones from arbitrage, autarky and capacity-constrained conditions, and supply demand balance conditions. These are discussed below. The system of equations we solve for each of the 55 scenarios are detailed in Tables 12, 1314 part (a). Note that all natural gas zonal prices here refer to prices after beginning the operation of Atlantic Sunrise.

Table 12 Possible equilibria after the Atlantic Sunrise expansion, when Station 90 is unconstrained before Atlantic Sunrise
Table 13 Possible equilibria after the Atlantic Sunrise expansion, when Station 90 is constrained before Atlantic Sunrise and the constraint is eliminated after the expansion
Table 14 Possible equilibria after the Atlantic Sunrise expansion, when Station 90 is constrained before and after the Atlantic Sunrise expansion

1.2.1 East of Station 90

  • Station 90 is unconstrained before Atlantic Sunrise

If pipeline capacity east of Station 90 is unconstrained before Atlantic Sunrise, as shown in Fig. 2, the natural gas price in Zone 4 is assumed to be equal to that at Station 90, or:

$$\begin{aligned} P_{4} = P_{90} \end{aligned}$$
(A.1)
  • Station 90 is constrained before Atlantic Sunrise, and the constraint is eliminated after the expansion

If Station 90 is constrained before the Atlantic Sunrise expansion, but that constraint is eliminated after the Atlantic Sunrise project, as shown in Fig. 3, Eq. (A.1) still holds: that is, we assume prices across Zone 4 are equal to those at Station 90.

  • Station 90 is constrained before and after Atlantic Sunrise

If the flow east of Station 90 is constrained after the Atlantic Sunrise project, as shown in Fig. 4, we assume that the flow at Station 90 remains fixed:

$$\begin{aligned} I_{90,before} = I_{90,after} \end{aligned}$$
(A.2)

where \(I_{90,before} \) represents the flow at Station 90 before Atlantic Sunrise, and \(I_{90,after} \) represents the flow at Station 90 after Atlantic Sunrise. In this appendix, we denote a northbound (i.e. west to east) flow with positive values and a southbound (i.e. east to west) flow with negative values.

A flow constraint at Station 90 after Atlantic Sunrise also imposes the supply-demand balance condition that the total net withdrawals in the three zones must be equal to the sum of injections at Station 90 and at Station 195:

$$\begin{aligned} \sum _{i\in 4,5,6}NW_{i} = I_{90} + I_{195} \end{aligned}$$
(A.3)

where \( NW_{i} \) represents the net withdrawal in Zone \( i \), \(I_{90} \) and \( I_{195} \) represent the injections at Station 90 and Station 195, respectively.

1.2.2 Zones 4 and 5

  • Gas flows from Zones 4 to 5

As in scenario 1, where gas flows north and east from Zone 4 to Zone 5, so that owners of gas will be indifferent between selling their gas in Zone 4 and selling it in Zone 5. This implies:

$$\begin{aligned} P_{4} + T_{45} = P_{5} \end{aligned}$$
(A.4)

where \( T_{45} \) is the cost of gas transportation from Zones 4 to 5. For example, assume that the price of gas in Zone 4 is $5.70/MMBtu and the cost of transportation of gas from Zone 4 to 5 is $0.30/MMBtu, and that gas flows from Zones 4 to 5. This implies that the price of gas in Zone 5 will be \( \$5.70 + \$0.30 = \$6.00 \)/MMBtu.

  • Gas flows from Zones 5 to 4

As in scenario 6 and 11, where gas flows south and west across the Zones 4–5 border. This implies gas owners in Zone 5 are indifferent between selling in Zone 5, or paying the transport cost and selling in Zone 4, or:

$$\begin{aligned} P_{5} + T_{54} = P_{4} \end{aligned}$$
(A.5)
  • No gas flows between Zones 4 and 5

If there are gas flows between Zones 5 and 6 (like scenario 16), or Station 195 flows both north and south (like scenario 18), no gas flows between Zones 4 and 5 as in both scenario 16 and 18 indicate that the total net withdrawals in Zones 5 and 6 must be equal to the injection at Station 195 from the Marcellus region, 1,700,000 MMBtu/day:

$$\begin{aligned} \sum _{i\in 5,6}NW_{i} = I_{195} \end{aligned}$$
(A.6)

1.2.3 Station 195 between Zones 5 and 6

  • Gas injected at Station 195 flows north, and additional gas flows from Zones 5 to 6

As in scenario 1, gas flowing north from Zones 5 to 6 implies that owners of gas in Zone 5 are indifferent between selling in Zone 5, or paying the transport cost and selling in Zone 6, or:

$$\begin{aligned} P_{5} + T_{56} = P_{6} \end{aligned}$$
(A.7)
  • Gas injected at Station 195 flows north, but no additional gas flows from Zones 5 to 6

As in scenario 2, this implies that the net withdrawal in Zone 6 must be equal to the injection at Station 195 from the Marcellus region:

$$\begin{aligned} NW_{6} = I_{195} \end{aligned}$$
(A.8)
  • Gas injected at Station 195 flows both north and south

If gas injected at Station 195 flows both north and south as in scenario 3, under the theory of arbitrage, owners of natural gas injected at Station 195 should be indifferent between their gas going north or south. This implies that the net return from a northbound gas flow must be equal to the net return from a southbound flow.

$$\begin{aligned} P_{6} - T_{195,6} = P_{5} - T_{195,5} \end{aligned}$$
(A.9)

where \( T_{195,5} \) is the cost of gas transportation from Station 195 to Zone 5, and \( T_{195,6} \) is the cost of gas transportation from Station 195 to Zone 6. For instance, assume the price in Zone 5 is $6.00/MMBtu, the cost of transporting gas from Station 195 to Zone 5 is $0.20/MMBtu, while the cost of transporting cost from Station 195 to Zone 6 is $0.15/MMBtu. Further, assume that injected gas at Station 195 goes both north and south. Under the arbitrage assumption, gas owners at Station 195 are indifferent between sending their gas north to Zone 6, or south to Zone 5. Thus, the prevailing prices in Zones 5 and 6 would need to satisfy (A.9) above, or \( P_{6} - \$0.15 = \$6.00 - \$0.20 \), implying that the price of gas in Zone 6 was $5.95/MMBtu.

  • Gas injected at Station 195 flows south, and additional gas flows from Zones 6 to 5

Given that all the injected gas flows south, it is also possible that Zone 6 gas would also flow south as in scenario 4. In this circumstance:

$$\begin{aligned} P_{6} + T_{65} = P_{5} \end{aligned}$$
(A.10)
  • Gas injected at Station 195 flows south, but no additional gas flows from Zones 6 to 5

As in scenario 5, this implies that supply must equal demand in Zone 6, which is in autarky state:

$$\begin{aligned} NW_{6} = 0 \end{aligned}$$
(A.11)

1.3 3: Verification conditions

After obtaining the natural gas prices in each of the three zones by solving the scenario-specific system of equations in Tables 12, 13 and 14 part (a), we have to verify if the calculated prices will yield injections and withdrawals in each zone that satisfy the same flow pattern specified at step 1. Below is a discussion of the conditions that need to be satisfied under each scenario. These conditions are listed for each of the 55 scenarios in Tables 12, 13 and 14 part (b).

1.3.1 East of Station 90

  • Station 90 is unconstrained before Atlantic Sunrise

In this case, we have assigned the price in Zone 4 equal to that at Station 90. No additional verification conditions are needed.

  • Station 90 is constrained before Atlantic Sunrise, and the constraint is eliminated after the expansion

As shown in Fig. 3, if Station 90 is constrained before the Atlantic Sunrise expansion, but that constraint is eliminated after the Atlantic Sunrise project, the following condition has to be true:

$$\begin{aligned} I_{90,before} > I_{90,after} \end{aligned}$$
(A.12)
  • Station 90 is constrained before and after Atlantic Sunrise

In the case of constrained flow east of station 90 as shown in Fig. 4, we must verify that the following relationship between prices at station 90 and in Zone 4 holds:

$$\begin{aligned} P_{90} < P_{4} \end{aligned}$$
(A.13)

Because of the constraint east of Station 90, arbitrage is not possible between Station 90 and the rest of Zone 4, and prices in the rest of Zone 4 must be higher than at Station 90.

1.3.2 Zones 4 and 5

  • Gas flows from Zones 4 to 5

In this case, gas flows north and east from Zones 4 to 5, implying that the sum of local supply in Zones 5 and 6, and injections at Station 195 is not enough to meet the demand in Zones 5 and 6. Therefore, the net withdrawal in Zones 5 and 6 must be greater than the injection at Station 195:

$$\begin{aligned} \sum _{i\in 5,6}NW_{i} > I_{195} \end{aligned}$$
(A.14)
  • Gas flows from Zones 5 to 4

In this case, the sum of supply in Zones 5 and 6, and injections at Station 195 is more than enough to meet the demand in Zones 5 and 6. Therefore, we should verify that the above condition is reversed:

$$\begin{aligned} \sum _{i\in 5,6}NW_{i} < I_{195} \end{aligned}$$
(A.15)

Moreover, if the null point in this case is in Zone 4 as in scenario 6, the total net withdrawal in the three zones must be greater than the injection at Station 195, so that additional gas supply from east of Station 90 is needed. In this case:

$$\begin{aligned} \sum _{i\in 4,5,6}NW_{i} > I_{195} \end{aligned}$$
(A.16)

Otherwise, if the null point is to the southwest of Station 90 as in scenario 11, we must verify that the above condition is reversed:

$$\begin{aligned} \sum _{i\in 4,5,6}NW_{i} < I_{195} \end{aligned}$$
(A.17)
  • No gas flows between Zones 4 and 5

Owners of gas in Zone 4 would prefer to sell it in Zone 4, while owners of gas in Zone 5 would prefer to sell the gas in Zone 5. Here, the transportation costs between two zones are greater than their price difference, and arbitrage is not profitable. From Sect. 3 we have that \( P_{4} - P_{5} < T_{54} \) and \( P_{5} - P_{4} < T_{45} \) when we have autarky. This can be combined as:

$$\begin{aligned} P_{4} - T_{54}< P_{5} < P_{4} + T_{45} \end{aligned}$$
(A.18)

For example, assume that the price in Zone 4 is $4.00/MMBtu, the price in Zone 5 is $4.10/MMBtu, and the transportation costs from Zones 4 to 5 and Zones 5 to 4 are both $0.30/MMBtu. In this case, gas owners prefer not to ship gas between the two zones, and autarky exists between the zones.

1.3.3 Station 195 between Zones 5 and 6

  • Gas injected at Station 195 flows northbound, and additional gas flows from Zones 5 to 6

Owners of gas at Station 195 prefer selling gas in Zone 6 more than in Zone 5. Thus the following must be true:

$$\begin{aligned} P_{6} - T_{195,6} > P_{5} - T_{195,5} \end{aligned}$$
(A.19)

For example, if the price in Zone 6 is $5/MMBtu, and the two transport costs both equal $0.25/MMBtu, this implies that the price in Zone 5 is less than $5/MMBtu.

Furthermore, gas flowing from Zones 5 to 6 implies that the net withdrawal in Zone 6 is greater than the total injection at Station 195:

$$\begin{aligned} NW_{6} > I_{195} \end{aligned}$$
(A.20)
  • Gas injected at Station 195 flows north, but no additional gas flows from Zones 5 to 6

In this case, condition (A.19) still applies. In addition, Zone 5 gas owners prefer not to send their gas to Zone 6, or:

$$\begin{aligned} P_{5} + T_{56} > P_{6} \end{aligned}$$
(A.21)

and Zone 6 gas owners prefer not to send their gas to Zone 5, or:

$$\begin{aligned} P_{6} + T_{65} > P_{5} \end{aligned}$$
(A.22)

Combining the two, we have:

$$\begin{aligned} P_{6} - T_{56}< P_{5} < P_{6} + T_{65} \end{aligned}$$
(A.23)

In this case, we say that Zone 6 is in autarky with respect to Zone 5.

  • Gas injected at Station 195 flows both north and south

If gas injected at Station 195 goes both north and south, this implies that the net withdrawal in Zone 6 should be greater than zero but less than the total injection at Station 195:

$$\begin{aligned} 0< NW_{6} < I_{195} \end{aligned}$$
(A.24)
  • Gas injected at Station 195 flows south, and additional gas flows from Zones 6 to 5

Assume that all of the gas injected at Station 195 goes south. This implies

$$\begin{aligned} P_{6} - T_{195,6} < P_{5} - T_{195,5} \end{aligned}$$
(A.25)

and that the payoff to sending gas south is greater than the payoff to sending gas north.

Given that all the injected gas flows south, it is also possible that Zone 6 gas would also flow south. In this circumstance, Zone 6 must have a net injection so that additional gas can be used for export:

$$\begin{aligned} NW_{6} < 0 \end{aligned}$$
(A.26)
  • Gas injected at Station 195 flows south, but no additional gas flows from Zones 6 to 5

Condition (A.25) would still apply. In addition, autarky between Zones 5 and 6 implies that condition (A.23) must hold as well.

1.4 4: Scenario results

Below are the complete results for the equilibria found during our study period (Tables 15, 16, 17).

Table 15 Number of types of equilibrium flows on the Transco system for the 724 days when the Transco is unconstrained east of Station 90, and Station 195 injections flow both north and south, or only north to Zone 6
Table 16 Number of types of equilibrium flows on the Transco system for the 74 days when the Transco is unconstrained east of Station 90, and Station 195 injections flow only in the southbound direction
Table 17 Number of types of equilibrium flows on the Transco system for the 110 days when the Transco is constrained east of Station 90 prior to Atlantic Sunrise

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Kleit, A., Lo Prete, C., Blumsack, S. et al. Weather or not? Welfare impacts of natural gas pipeline expansion in the northeastern U.S.. Energy Syst 10, 593–633 (2019). https://doi.org/10.1007/s12667-018-0292-x

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