Stochastic Modeling of Natural Gas Infrastructure Development in Europe under Demand Uncertainty

We present an analysis of the optimal development of natural gas infrastructure in Europe based on the scenario studies of Holz and von Hirschhausen (2013). We use a stochastic mixed integer quadratic model to analyze the impact of uncertainty about future natural gas consumption in Europe on optimal investments in pipelines. Our data is based on results from the PRIMES model of natural gas demand and technology scenarios discussed in Knopf et al. (2013). We present a comparison between the results from the stochastic model and the expected value model, as well as an analysis of the individual scenarios. We also performed sensitivity analyses on the probabilities of the future scenarios. Comparison of the results from the stochastic model to those of a deterministic expected value model reveals a negligible Value of the Stochastic Solution. We do, however, find structurally different infrastructure solutions in the stochastic and the deterministic models. Regarding infrastructure expansions, we find that 1) the largest pipeline investments will be towards Asia, 2) there is a trend towards a larger gas supply from Africa to Europe, and 3) within Europe, eastward connections will be strengthened. Our main finding using the stochastic approach is that there is limited option value in delaying investments in natural gas infrastructure, until more information is available regarding policy and technology in 2020, due to the low costs of overcapacity.

[1]  R. Larson,et al.  Optimization of natural-gas pipeline systems via dynamic programming , 1968 .

[2]  Steven A. Gabriel,et al.  Cartelization in gas markets: Studying the potential for a “Gas OPEC” , 2012 .

[3]  Panos M. Pardalos,et al.  Stochastic and Risk Management Models and Solution Algorithm for Natural Gas Transmission Network Expansion and LNG Terminal Location Planning , 2010, J. Optim. Theory Appl..

[4]  C. Gollier.  The economics of risk and time , 2001 .

[5]  Benjamin F. Hobbs,et al.  Trading in the Downstream European Gas Market: A Successive Oligopoly Approach , 2004 .

[6]  P. I. Barton,et al.  Stochastic pooling problem for natural gas production network design and operation under uncertainty , 2011 .

[7]  Hong K. Lo,et al.  Doubly uncertain transportation network: Degradable capacity and stochastic demand , 2008, Eur. J. Oper. Res..

[8]  Christian von Hirschhausen,et al.  A strategic model of European gas supply (GASMOD) , 2008 .

[9]  Steven A. Gabriel,et al.  Investigating the potential effects of U.S. LNG exports on global natural gas markets , 2014 .

[10]  J. Frédéric Bonnans,et al.  Optimization of capacity expansion planning for gas transportation networks , 2009, Eur. J. Oper. Res..

[11]  Satish V. Ukkusuri,et al.  System-Optimal Stochastic Transportation Network Design , 2007 .

[12]  Ignacio E. Grossmann,et al.  A stochastic programming approach to planning of offshore gas field developments under uncertainty in reserves , 2004, Comput. Chem. Eng..

[13]  Asgeir Tomasgard,et al.  Natural Gas Infrastructure Design with an Operational Perspective , 2012 .

[14]  Detlef P. van Vuuren,et al.  BEYOND 2020 — STRATEGIES AND COSTS FOR TRANSFORMING THE EUROPEAN ENERGY SYSTEM , 2013 .

[15]  Steven A. Gabriel,et al.  A complementarity model for solving stochastic natural gas market equilibria , 2008 .

[16]  Ruud Egging,et al.  Benders Decomposition for multi-stage stochastic mixed complementarity problems - Applied to a global natural gas market model , 2013, Eur. J. Oper. Res..

[18]  Abraham Charnes,et al.  A Model for Programming and Sensitivity Analysis in an Integrated Oil Company , 1954 .

[19]  Benjamin F. Hobbs,et al.  Natural gas corridors between the EU and its main suppliers: Simulation results with the dynamic GASTALE model , 2008 .

[20]  Steven A. Gabriel,et al.  A rolling horizon approach for stochastic mixed complementarity problems with endogenous learning: Application to natural gas markets , 2016, Comput. Oper. Res..

[21]  Satish V. Ukkusuri,et al.  Multi-period transportation network design under demand uncertainty , 2009 .

[22]  John R. Birge,et al.  Introduction to Stochastic Programming , 1997 .

[23]  S. Gabriel,et al.  An SOS1-Based Approach for Solving MPECs with a Natural Gas Market Application , 2013 .

[24]  Philipp M. Richter,et al.  The Role of Natural Gas in a Low-Carbon Europe: Infrastructure and Regional Supply Security in the Global Gas Model , 2013 .

[25]  Steven A. Gabriel,et al.  A Complementarity Model for the European Natural Gas Market , 2007 .

[26]  Zachary A. Collier,et al.  Value of information analysis: the state of application , 2014, Environment Systems and Decisions.

[27]  E. L. Dougherty,et al.  A Computerized System for Planning Major Investment Decisions in Oil , 1969 .

[28]  Steven A. Gabriel,et al.  Examining market power in the European natural gas market , 2006 .

[29]  Franziska Holz,et al.  Risks in global natural gas markets: Investment, hedging and trade , 2016 .

[30]  Marielle Christiansen,et al.  Modeling Norwegian petroleum productionand transportation , 1998, Ann. Oper. Res..

[31]  D. Huppmann,et al.  Investigating a CO2 tax and a nuclear phase out with a multi-fuel market equilibrium model , 2012, 2012 9th International Conference on the European Energy Market.

[32]  Asgeir Tomasgard,et al.  Modeling Optimal Economic Dispatch and System Effects in Natural Gas Networks , 2009 .