A System Dynamics Model for Analyzing Future Natural Gas Supply

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Process Systems Engineering

A System Dynamics Model for Analyzing Future Natural Gas Supply and Demand Farzaneh Daneshzand, Mohammad Reza Amin-Naseri, Ali Elkamel, and Michael W. Fowler Ind. Eng. Chem. Res., Just Accepted Manuscript • DOI: 10.1021/acs.iecr.8b00709 • Publication Date (Web): 18 Jul 2018 Downloaded from http://pubs.acs.org on July 25, 2018

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Industrial & Engineering Chemistry Research

A System Dynamics Model for Analyzing Future Natural Gas Supply and Demand Farzaneh Daneshzanda,b, Mohammad Reza Amin-Naseria*, Ali Elkamelb,c*, Michael Fowlerb a

Department of Industrial and Systems Engineering, Tarbiat Modares University, Tehran, Iran Department of Chemical Engineering, University of Waterloo, Waterloo, Ontario, Canada c Department of Chemical Engineering, The Petroleum Institute, Khalifa University of Science & Technology, Abu Dhabi, UAE b

Abstract This paper models natural gas supply and demand system using a system dynamics approach to determine whether current policies for a given country will sustain its long term natural gas demand. The dynamic effects of natural gas supply and demand, as well as the relationships between the oil and gas sectors are modeled. Of particular interest is to investigate whether the natural gas supply and demand system in a country can provide sufficient capital for future natural gas resource development. The model is illustrated on the case study of Iran, and it is shown that continuing the current trends will result in a gap between natural gas domestic demand and supply, with no natural gas remaining for export. Some policies regarding the increase in domestic natural gas price and more natural gas export are proposed, and their effectiveness in filling the supply and demand gap is examined in three scenarios. Keywords: Natural gas future, Policy analysis, System dynamics, Energy systems planning, Process systems engineering

Corresponding authors and their emails: Mohammad Reza Amin-Naseri, [email protected] and Ali Elkamel, [email protected]

1. Introduction Natural gas is an important primary energy resource in different countries, and among fossil fuels, it has the best prospects for growth until 2035, especially due to its low carbon intensity. It is predicted that between 2012 and 2035, natural gas demand will increase 1.9% on average per year at a growth rate greater than other energy resources1. Natural gas in many regions of the world will keep its role as a choice for power plants and industries, especially because its carbon intensity is much less than that of coal and oil. This property makes natural gas a suitable energy resource, particularly in countries with strict environmental laws or greenhouse gas (GHG) mitigation targets2. For example, in growing economies like China’s, the plans are to change the energy mix toward more natural gas and less coal consumption in order to reduce urban air pollution(3). Furthermore, natural gas for new power plants is an attractive fuel because of its lower investment cost and desirable heat rates(4). Based on the latest energy outlooks, natural gas is entering a period of increased market demand over the next three decades, and will play an important role in the world’s energy supply, providing a quarter of global energy demand by 2040 and growing faster than any other fuel5.(5) With the increase in share of natural gas in energy supply mix of many countries, models that provide a better understanding of the natural gas supply and demand system in relation to other energy resources are very helpful for energy planners in national and international levels. In this paper, we use a system dynamics method for analyzing the future behavior of a natural gas system and examining different policies. System dynamics models simulate the behavior of complex systems by identifying the causal structure of a system. They are widely used for forecasting the future behavior of a system and analyzing policy options for improving its behavior. The idea of using system dynamics in energy planning dates back to 1973 when Naill developed a model for America’s natural gas industry(6). Since then, different energy models have been developed using the system dynamics method. Researchers have applied this method for energy systems planning in different levels of geographical and spatial areas like urban areas or local levels inside a country(7), national levels(8),(9) international ones(10) or for a special

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industry(11). Different types of energy have also been modeled using this method including electricity(12),(13), renewable energy(14)(15),(16) and oil and natural gas(17),(18). Among system dynamics models developed for energy planning, some have been developed to examine specific aspects of natural gas systems. Li et al. developed a system dynamics model for forecasting the growth of China’s natural gas consumption in response to its strategic plans to reduce coal consumption and replace it with natural gas19. They present an outlook for energy consumption in different sectors including the chemical industry, power generation, industrial fuel, tertiary industry and residential sector. The variables affecting consumption are considered to be the gross domestic product (GDP) growth, rate of urbanization, population and investment proportion of industries. Yunna et al. develop a system dynamics model for shale gas in China to analyze the future of the shale gas competitive market20. They investigate the role of technology, production cost, government subsidies and other policy factors on the peak of the competitors in this industry. They suggest that the Chinese government establish a perfect market in the shale gas industry. This market will result in technology improvement and production cost reduction. Chi et al. present a dynamic model for the natural gas domestic industry in England. Factors that affect investment in natural gas exploration in private companies are modeled, and the effects of changes in natural gas and oil prices, different tax policies and technology development are investigated21. They conclude that, basically, supply side policies alone cannot move exploration, production, and consumption peak. Their long-term model shows that despite the expectation that decreasing taxes on natural gas consumption will increase consumption and consequently increase exploration and production motivation, in long-term periods, there is no specific causality relation. This study presents a system dynamics model of natural gas supply and demand system to help in forecasting the future of natural gas supply for domestic consumption. The model sets up a platform that can be used for simulating possible outcomes of the system under various scenarios and for studying the effectiveness of current policies so as to investigate whether they will be suitable for the country’s future. The differentiations between this study and similar ones in the literature are in its purpose, and in the distinct specifications of the energy industry structure, both influencing how the problem is modeled. This model’s aim is to show how end user energy prices in a highly centralized energy industry in which free-market rules do not necessarily operate and governmental companies undertake operational activities for supplying natural gas demand, affects long term energy supply. The other specification of this study compared to similar system dynamics models is juxtaposing natural gas and its substitute in a single model, which enables studying the effects of energy substitution in demand side as well as supply side.

2. System Dynamic Modeling This section first explains the natural gas management modeling structure, main variables and causal loops. Then based on the model assumptions, the stock and flow diagram and model formulation are presented.

2.1 Model Structure System Dynamics is a useful method for simulating complicated systems in which modeling the interactions between systems entities is important. The method concentrates on modeling endogenous interaction between variables to organize the dynamic behavior of systems(22). In this section, the main entities of a natural gas supply and demand system and the interactions between entities will be introduced. The proposed model consists of five main parts: Demand, Supply, Costs, Income, and Allocation (Figure 1). Price has a direct effect on demand, because increasing the price will reduce the demand, and on the other side, it causes more income. The income is formulated as the quantity multiplied by price. The allocation process that allocates the produced natural gas to the domestic and export markets, determines the quantity in the income formula. The amount of demand and supplied natural gas has an effect on the amount of such allocation. The natural gas production on the supply side causes operational costs. This cost together with investment costs in each year reduce the available financial resources that will be needed for future natural gas infrastructure development and supply. The variables in each box and the relationships between them is explained in more details in the next sections.

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Gas Production

Domestic Gas Demand

Gas Allocated to Domestic

Operational Cost Gas Import Investment Costs Oil Production

Costs

Gas Allocated to Export

Domestic Oil Demand

Allocation

Domestic Demand

Supply

Direct Gas Income Price

Indirect Gas Income

Income Figure 1. Overview of the natural gas management model, main parts and their interaction

2.2 Causal Loop Diagrams One of the main properties of using the systems approach in modeling is the causal loop diagrams, which allows one to understand the structure of a problem through the causal effect of variables and feedback loops. A causal loop diagram is a useful tool for clarifying the relationships between sub-systems and their interactions. Figure 2 shows the causality loop diagram of the model of interest. The reinforcing and balancing loops in this diagram are shown separately in Figure 3. Also, in the next section, the causal relationships in each entity will be described in detail. Developed Reserves + +

Financial Resources Needed for Opex Costs +

Available Financial Financial Resources + Resources for Development + +

Domestic Oil Price

+

Total Oil Income

+

Unit Capex Cost Shortage

+ Gas Export Price

Unit Opex Cost

Total Gas Income Gas Allocated to Domestic

+

+

+ Total Annual Income

+

Capacity Increase Needed

+ +

+

+

Gas Allocated to Export - +

Gas Export + Income

+

Oil Export Income + +

Oil Export Price

+

Elasticity of Oil Demand to Price

+

+ Oil Export +

Gas Export Demand +

Domestic Oil Income

Domestic Oil Demand - +

GDP + Population

Oil Production

Domestic Gas Income +

GDP/C

+ Domestic Gas Price

Total Gas Demand +

+

Substitution Ratio

Domestic Energy Demand +

+

+ Urban Percentage

Domestic Gas + + Demand +

Gas Production Rate

Elasticity of Gas Demand to Price

Figure 2. The Whole Causal Loop Diagram for Natural Gas Management system

One of the loops studied in this model is the reinforcing loop of natural gas resource development when the natural gas provider’s income increases through more natural gas sales. The natural gas sales to both domestic and export 3



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sectors increase the income. The two reinforcing loops in Figure 3.a) demonstrate this process, indicating how natural gas income from export or domestic consumption influences natural gas production and allocation. The greater the income, the greater the natural gas development and production. The balancing loop in this figure shows the reduction in natural gas allocated to export when natural gas allocated to domestic use increases. As mentioned, natural gas allocation to the domestic sector has priority over other kinds of consumption. Figure 3.b) illustrates the effects of operational or variable costs on natural gas development. Operational costs point to costs that vary according to the amount of production. They include fuel consumption, human resource wages, the maintenance cost of utilities and networks, etc. When natural gas production increases, the operational costs increase proportionally. The increase in operational costs cause a decrease in available financial resources. With this decrease in the level of financial resources, less investment can be made in and for future for natural gas development. Less investment decreases developed reserves, and consequently, a decreases natural gas production in upcoming years. Available Financial Resources + + Developed Reserves

Total Annual Income

Available Financial Resources

+ + Gas Production Rate

Total Gas Income ++

+ Developed Reserves

+ + Gas Allocated to Domestic

Gas Allocated to Export -

+

Financial Resources Needed for Operational Costs

Gas Export Income

+ +

Domestic Gas Income

Gas Production Rate

a)

b)

Figure 3.a) Reinforcing loops indicating how natural gas allocation to export or domestic sectors influences natural gas production. The balancing loop indicating the effect of natural gas allocated to domestic on natural gas allocated to export, b) The balancing loop indicating the effect of natural gas allocated to domestic use on natural gas production rate

2.3 Formulation of the Natural Gas Management Model This section demonstrates the details of the internal relationships in each subsystem of the natural gas management model. The internal relationships in subsystems and the relationships between subsystems build up the complete model. Table 1 explains all variables and parameters and their notations. Based on the relationships, formulation in each subsystem is presented. Total Gas Demand + + Gas Export Demand

Elasticity of Demand to Price + Domestic Gas - Demand Domestic Gas Price

+

GDP/C +

+

Population

+ Domestic Energy Demand +

Substitution Ratio

-

GDP +

+

Urban Percentage

Domestic Oil Demand

Figure 4. Demand Sub-system

4


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Figure 4 shows the variables and their relationships in the demand sub-system. The energy demand is usually affected by different factors like Gross Domestic Product (GDP), population, urban percentage, temperature, price …. The relationship between these variables can be discovered by a regression model: DD = f (GDP, Ur_Perc, Price, …) = C + α1×GDP_Cap + α2×Ur_Perc + …

Eqn. 1

GDP_Cap = GDP/Pop

Eqn. 2

One of the main factors affecting demand is the price. The responsiveness of demand to price is measured by “elasticity”, defined as the percentage of change in the quantity of demand to the percentage of change in price (Eqn. 3). Because of the inverse relationship between price and demand, ep is usually a negative value. ⁄ Eqn. 3 = ⁄ When |ep| = 0, the demand is perfectly inelastic to its own price; when 0 < |ep| < 1, demand is inelastic; when |ep|=1, demand is unit elastic and when |ep| >1, demand is elastic to its own price. The energy demand is usually inelastic to its own price, meaning that the change in price has only a small effect on the quantity of demand. The energy demand elasticity to price and income has been studied in different papers since the 1970s, generally showing insignificant short-run price elasticity of energy demand and also natural gas(23),(24),(25).

DGD = Subs × DD × (1 – Els × DGPGrth)

Eqn. 4

DGPGrth = (DGPGrth2 – DGPGrth1) / DGPGrth1

Eqn. 5

DOD = (1 – Subs) × DD

Eqn. 6

TGD = DGD + GED

Eqn. 7

The substitution ratio is calculated by the amount of natural gas demand divided by total oil and natural gas demand. This ratio determines the amount of energy demand that is supplied by natural gas and by oil. Therefore, domestic natural gas demand is equal to the energy demand multiplied by the substitution ratio. When the domestic natural gas price increases, the domestic natural gas consumption decreases proportional to the elasticity and the reduction percentage (Eqn.4, 5). The domestic oil demand has a negative relationship with substitution ratio (Eqn.6). Total natural gas demand is the sum of domestic and export demand (Eqn.7). The income and allocation sub-system is shown in Figure 5. The total annual income is the sum of direct and indirect income (Eqn.8). The direct income is the income gained by selling natural gas and the indirect income is the income gained by other financial resources that is used as a capital for developing natural gas in the natural gas system. As mentioned, the indirect income considered in this model is specifically the oil income that has been attained because of substituting natural gas for oil in the domestic sector. Eqn.9 shows that the indirect income is the amount of oil allocated to export multiplied by oil export price, multiplied by the portion of indirect income that is used for natural gas investment. Natural gas income is composed of domestic and export income (Eqn.10). Each kind of income is dependent on its amount and its price (Eqn.11, Eqn.12). The amount of oil export is dependent on domestic energy demand and substitution ratio (Eqns.13, 14). Natural gas allocated to domestic is the minimum of natural gas production and domestic natural gas demand (Eqn.15). The produced natural gas that is not allocated to the domestic sector is allocated to export, since usually provision of domestic energy demand has a priority compared to export (Eqn.16). TI = DrI + IdrI

Eqn. 8

IdrI = ShOEIItoGas × OAE × OEP

Eqn. 9

DrI = DGI + EGI – IGC

Eqn. 10

DGI = GAD × DGP

Eqn. 11

EGI = GEP × GAE

Eqn. 12

OAE = OPrd – OAD

Eqn. 13

OAD = (1−Subs) × DD

Eqn. 14

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GAD = min ( GPrdRt, DGD)

Eqn. 15

GAE = min (0, GPrdRt − GAD)

Eqn. 16 Total Annual Income

Direct Income

Indirect Income

Oil Export Price

Oil Allocated to Export

Share of Oil Export Income Allocated to Gas Sector

Gas Export Price

Oil Production

Oil Allocated to Domestic

Domestic Gas Income

Gas Export Income

Gas Export Demand

Domestic Gas Prie


Gas Allocated to export

Gas Production

Domestic Gas Demand

Total Gas Demand

Figure 5. Income and allocation relationships for the natural gas management system

The supply side has been modeled in different ways depending on the objective of the model. Olaya, Dyner 2008(26), Dyner et al. 1998(27), Chi et al. 2009(21), which are originated from Naill, 1973(6) and Sterman & Richardson, 1983(28) are some of them. Figure 6 depicts the structure of model in supply side and its relationship with income variables. Total income increases the available financial resources used for natural gas development and production. On the other hand, investment costs that are needed for natural gas reserves’ development and operational costs (opex) that are needed for daily natural gas production and transportation, reduce the available financial resources. Investment in natural gas reserves’ development happens when it is predicted that there is a shortage in providing natural gas demand. This is done by comparing the capacity of current developed reserves that can be used for yearly production and the total natural gas demand that is predicted for future. According to the predicted future gap between natural gas supply and demand, the capacity increase needed is calculated. The amount of capacity increase and the unit cost of natural gas development specify the financial resources needed for development. Total Gas Demand

Production Rate +

+ Shortage

-

Developed Reserves

Total Annual Income

+ + Capacity Increase Needed

+ Available Finantial Resources -


+

+

Finantial Resources for Development +

Finantial Resources Needed for Opex Costs +

Unit Investment Cost

Unit Operating Cost

Figure 6. Relationships in supply sub-system for the natural gas management system

Figure 7 shows the stock and flow diagram of supply subsystem. Proven Natural gas Reserves is a level variable that is decreased by Natural gas Development Rate. Proven reserves are the natural gas resources that can be developed for production with a certain possibility. Developed Natural gas Reserves are the reserves that can be 6


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used for production when needed. It increases by development rate and decreases by production rate (Eqn.17). Natural gas proven reserves are reduced by natural gas development rate (Eqn.18). Proven Gas Reserves

Gas Development Rate

Developed Reserves

Gas Production Rate

Figure 7. The stock and flow diagram for natural gas production in supply module

GDvR = INTEGRAL (GDvRt − GPrdRt, GDvR (t0))

(Eqn. 17)

GPR = INTEGRAL (− GDvRt, GPR (t0))

(Eqn. 18)

GPrdRt = MIN (GDvR / GWL, TGD)

(Eqn. 19)

Chi et al. consider two factors that affect production rate, the willingness of industry to invest in production, and the consumption rate(21), while Eker considers demand and production profile(29). In the model of interest, total demand and production profile, that is, the division of developed resources divided by the field’s life cycle, decide about the production rate, and according to the structure of natural gas industry under study, willingness of industry to invest in production is not modeled (Eqn.19). In this way, developed reserves are assumed to produce natural gas consistently equally over their life span by year. The cumulative income is a stock variable that increases by income increase rate and decreases by operating costs and development investment (Eqn.20). The Financial Resources Needed as OP Costs is calculated by multiplication of Production Rate and Unit Operating Cost (Eqn.21). The Unit Operating Cost is the cost of producing and transmitting one unit of produced natural gas to be available for the usage at the customer’s location (Figure 8). CI = INTEGRAL (IIn − FOC−FDC, CI (t0))

(Eqn. 20)

FOC = GPrdRt × UOC

(Eqn. 21)

Financial Resources for Development

Cum. Income Income Increase

Financial Resources Needed for Operating Costs

Figure 8. The stock and flow diagram of income for the natural gas management system

The decision about investment in development of proven reserves depends on the forecast of shortage in providing natural gas demand, which happens when it is predicted that according the available developed reserves, natural gas production would be less than natural gas demand in future years. Therefore, an investment for development of proven reserves should be made such that GPrdRtt+d > DGDt+d, In which, d is the delay time for converting proven reserves into developed reserves, GPrdRtt+d and DGDt+d are natural gas production rate and domestic natural gas demand d periods later. If we assume domestic natural gas demand in the next d period the same as the current demand, the following relationship is developed:

GPrdRtt +d ≥ DGDt +d ⇒ DGDt +d = DGDt ⇒

GDvRt +d ≥ DGDt ⇒ GWL

GDvRt − (GPrdRt t +1 + GPrdRt t +2 + K + G Pr dRt t +d ) ≥ TGDt +d GW L

if

TGDt +1 = TGDt +2 = K = TGDt +d = TGD ⇒

⇒

GDvR t TGDt +1 +TGDt +2 + K +TGDt +d − ≥ TGDt +d GW L GW L

GDvR t d ×TGD GDvR t − ≥ TGD ⇒ ≥ GW L + d GW L GW L TGD

7


⇒

(Eqn. 22)


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Table 1. Exogenous and endogenous variables with mathematical notations, “Endo” stands for endogenous and “Exo” stands for exogenous Variable Name Cumulative Income Income Increase Financial Resources Needed as Operating Costs Financial Resources Needed as Development Costs Total Financial Resources Needed for Development Financial Resources Allocated for Development Total Annual Income Oil Export Income Increase Share of Oil Income for Natural gas Direct Income Indirect Income Natural gas Export Income Domestic Natural gas Income Natural gas Import Cost Oil Allocated to Domestic Oil Allocated to Export Natural gas Export Price Oil Export Price Domestic Natural gas Price Domestic Natural gas Price Growth Elasticity of Demand to Price Domestic Energy Demand Domestic Oil Demand Domestic Natural gas Demand Natural gas Export Demand (Business As Usual Gas Export Obligation) Natural gas Allocated to Domestic Natural gas Allocated to Export Oil to Natural gas Ratio Total Natural gas Demand Urban Percentage Gross Domestic Product Gross Domestic Product per Capital Population Proven Natural gas Reserves Developed Natural gas Reserves Natural gas Development Rate Natural gas Production Rate Unit Investment Costs Unit Operating Costs Natural gas Well Lifecycle Natural gas Import Shortage in Natural gas Developed Reserves Capacity Increase Needed Oil Production Substitution Ratio

Notation CI IIn FOC FDC TFD FD TI OEII ShOEIItoGas DrI IdrI EGI DGI IGC OAD OAE GEP OEP DGP DGPGrth Els DD DOD DGD GED GAD GAE OtG TGD Ur_Perc GDP GDP_Cap Pop GPR GDvR GDvRt GPrdRt UDC UOC GWL GIm ShGDvR CIN OPrd Subs

Endo/Exo* Endo Endo Endo Endo Endo Endo Endo Endo Exo Endo Endo Endo Endo Endo Endo Endo Exo Exo Exo Exo Exo Endo Endo Endo Exo Endo Endo Exo Endo Exo Exo Exo Exo Endo Endo Endo Endo Exo Exo Exo Endo Endo Endo Exo Exo

If this condition terminates, a shortage will happen and the developed reserves will not be sufficient for providing natural gas demand (Eqn.23). In this situation, the capacity increase needed is the multiplication of total natural gas demand and well lifecycle (Eqn.24). ShGDvR = IF THEN ELSE (GDvR /TGDFDC, CIN, CIN × FD/FDC)

(Eqn. 27)

Total financial resources needed for development is the multiplication of capacity increase needed and unit investment costs (Eqn.25). The financial resources allocated for development is the minimum of total financial resources needed and cumulative income (Eqn.26). Eqn.27 indicates that, if there are not enough financial resources for natural gas development, the natural gas development rate will be less than the calculated amount and is proportional to the financial resources available divided by total financial resources needed (Figure 9). 8


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Capacity Increase Needed

Total Gas Demand

Proven Gas Reserves Unit Capex Costs

Gas Development Rate

Developed Gas Reserves

Shortage in Gas Developed Reserves

Gas Well Life Cycle

Gas Production Rate

Total Financial Resources Needed for Development Adequacy of Financial Resources

Financial Resources Allocated for Development

Unit Opex Cost

Cumulative Income Income Increase

Financial Resources Needed as Opex Costs

Income Ratio Available for Gas Sector Total Annual Income

Figure 9. The stock and flow diagram in supply sector for the natural gas management system

3. Case Study In this section, the presented model is applied to a real world case in Iran to see how the model can be used to analyze the future of a system and to study different policies.

3.1 Background Iran’s extensive natural gas resources currently supply about 60% of primary energy, and the primary energy is heavily dependent on natural gas (Figure 10.a). Figure10.b illustrates the distribution of Iran’s natural gas consumption in 2012. It is notable that more than 50 percent of natural gas is consumed in residential and commercial applications and small industries, followed by 24% for power plants, 18% industries and finally a mere 6 percent for exports. others, [VALU export, E] [VALU industr E]

[CATEGOR Y NAME], 38% [CATEGOR Y NAME], 60%

y, [VALU E]

[CATEGOR [CATEGOR Y NAME], Y NAME], 1%

A System Dynamics Model for Analyzing Future Natural Gas Supply

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