Gao and You 2017

Game Theory Approach to Optimal Design of Shale Gas
Supply Chains with Consideration of Economics and Life Cycle

Greenhouse Gas Emissions
Jiyao Gao and Fengqi You
Robert Frederick Smith School of Chemical Engineering and Biomolecular Engineering, Cornell University,
Ithaca, NY 14853
DOI 10.1002/aic.15605
Published online February 1, 2017 in Wiley Online Library (wileyonlinelibrary.com)
This article addresses the optimal design of a non-cooperative shale gas supply chain based on a game theory
approach. Instead of assuming a single stakeholder as in centralized models, we consider different stakeholders, includ-
ing the upstream shale gas producer and the midstream shale gas processor. Following the Stackelberg game, the shale
gas producer is identified as the leader, whose objectives include maximizing its net present value (NPV) and minimiz-
ing the life cycle greenhouse gas (GHG) emissions. The shale gas processor is identified as the follower that takes
actions after the leader to maximize its own NPV. The resulting problem is a multiobjective mixed-integer bilevel linear
programming problem, which cannot be solved directly using any off-the-shelf optimization solvers. Therefore, an effi-
cient projection-based reformulation and decomposition algorithm is further presented. Based on a case study of the
Marcellus shale play, the non-cooperative model not only captures the interactions between stakeholders but also pro-
C 2017 American Institute of Chemical Engineers AIChE J, 63: 2671–2693, 2017
vides more realistic solutions. V
Keywords: shale gas, non-cooperative supply chain, life cycle GHG emissions, MIBLP
Introduction maker is assumed to have full control of the entire system, and
thus all the decisions made can be implemented successfully.22
In the past decade, the application of horizontal drilling and
However, in practice the management of a shale gas supply
hydraulic fracturing technologies has led to a boom in shale
chain is normally decentralized. In other words, different stake-
gas production.1 Accompanying the rapid development and
holders are in charge of different sectors in a shale gas supply
great economic benefits in shale gas industry, concerns are
chain. Activities including well drilling and gas production,
raised regarding the resulting environmental impacts. Multiple shale gas processing, transportation and distribution, and end
metrics have been proposed to evaluate the environmental per- use of shale gas are normally carried out by different compa-
formance of a shale gas supply chain, among which the green- nies. Each of them strives to pursue their own profits instead of
house gas (GHG) emissions are of special interest to both the best overall performance. Consequently, the optimal strate-
academia and industry.2,3 There is a large body of literature gy obtained from a centralized model can be practically
focusing on evaluating the life cycle GHG emissions of shale unachievable, and deviations of corresponding results are ineva-
gas, most of which are based on life cycle assessment (LCA) sible.23–26 To address this issue, a non-cooperative shale gas
methodology.4–10 However, a major drawback of classical supply chain model is developed, where a well-to-wire three-
LCA is the lack of a decision-support tool or systematic meth- echelon structure is considered.27 The power generation sector
odology that can help discern the optimal design or operations is identified as the leader, and both the production and process-
to improve the environmental performance. ing sectors are managed by the follower. The focus is to capture
There are some publications centering on optimization of the possible reactions of the upstream shale producers and mid-
shale gas supply chains; issues such as supply chain design,11,12 stream shale processors under different preferences of the
water management,13 and uncertainties were addressed.14 Nev- downstream customers in a non-cooperative environment.
ertheless, few of them take the environmental perspective into Unique features including the carbon capture and storage tech-
account in the optimization.15,16 In recent years, life cycle opti- nology and external natural gas sources are taken into account.
mization (LCO) has emerged as a useful tool that integrates However, a major shortcoming of this model is that both the
LCA with multiobjective optimization.17–21 Notably, almost all shale gas producer and processor is considered cooperative and
of the existing literature regarding shale gas supply chain opti- managed by an aggregated stakeholder. In practice, although
mization rely on centralized models, where a single decision- producer and processor both benefit from extensive shale gas
production, they are normally managed by different companies,
Correspondence concerning this article should be addressed to F. You at fengqi. and the processing service is provided through varied con-
you@cornell.edu.
tracts.28,29 The advantage of game theory-based model has also
C 2017 American Institute of Chemical Engineers
V been verified by another application, where a mixed-integer
AIChE Journal July 2017 Vol. 63, No. 7 2671

bilevel programming model is proposed to address the optimi- The rest of this article is organized as follows. We first pre-
zation problem for a hypothetical non-cooperative integrated sent relevant background and provide a brief introduction on
forestry and biofuel supply chain system with consideration of non-cooperative shale gas supply chains. The resulting bilevel
only economic objectives.30 When both leader (forestry compa- problem is formally stated next, followed by the mathematical
ny) and follower (pulp company) strive to maximize their own model formulation and corresponding tailored solution algo-
profits, significant differences in supply chain design suggested rithm. We present a case study based on Marcellus shale play
by different approaches (game theory model and centralized to demonstrate the practical applications. Conclusions are
model) are observed. To better capture the performance of a drawn at the end.
shale gas supply chain from a sustainable, non-cooperative per-
spective, it is essential to properly address the non-cooperative Background
relationship between different stakeholders in the context of
optimizing economics and life cycle GHG emissions.
Superstructure of shale gas supply chain
To address this challenge, a novel non-cooperative modeling Figure 1 presents a typical three-echelon shale gas supply
framework is proposed, which is based on both the leader- chain superstructure. As can be seen, a shale gas supply chain
follower Stackelberg game and LCO framework. In this work, can be divided into upstream, midstream, and downstream sec-
we focus on the upstream and midstream of a non-cooperative tions based on corresponding activities involved.37 It is worth
shale gas supply chain. Both shale gas producer and processor noting that in some literature a shale gas supply chain is sim-
are treated as individual players with distinct objectives. Accord- plified into a two-echelon structure, where the upstream covers
ingly, a “cradle-to-gate” system boundary is chosen covering the all the processes before the end customer and the downstream
production phase of shale gas supply chain system from shale centers on the end use of shale gas.6,31 In this work, we focus
wells to the gate of markets.6,31 The upstream shale gas producer on the production phase of the shale gas, including the
is considered as the leader in this game, whose objective is tar- upstream and midstream of a shale gas supply chain, and the
geting on maximization of its net present value (NPV) and mini- life cycle boundary of shale gas is set to “cradle-to-gate”
mization of life cycle GHG emissions generated in the shale gas accordingly. The main difference between this superstructure
supply chain. Certainly, there are other environmental metrics, and others is that, instead of simply assuming an aggregated
especially those related to water management, that are worth stakeholder who is in charge of the entire shale gas supply
considering. Issues regarding water consumption and water con- chain, we specifically address the roles of different stakehold-
tamination are recognized as great impediment on shale gas ers based on their physical meaning. These stakeholders will
development. However, most existing publications on shale gas interact with each other as independent decision makers to
supply chain optimization solely take the water consumption or pursue their own objectives.
water treatment cost as the extra objective function.32,33 Based In this article, the upstream involves all the development
on the literature, the water management cost is much smaller activities of the shale gas wellhead, including the pre-drilling
than other costs incurred in the shale gas development.15,32 phase, the drilling phase, and the production phase. The
Moreover, compared with life cycle GHG emissions,3,6–8 the upstream is managed by shale gas producer in this supply
environmental impacts associated with water in the shale gas chain. The producers make decisions regarding pad construc-
development are still challenging to quantify and involve lots of tion, drilling schedule, pipeline installment, water manage-
uncertainty.34 A well-recognized systematic way to address this ment, etc. The midstream involves all the activities regarding
issue needs to be further developed. Therefore, we choose life shale gas gathering, processing, storage, and distribution.
cycle GHG emissions as the environmental indicator in this After pretreatment, the produced “raw shale gas” is sent to the
study. Notably, the modeling framework itself is not limited by midstream processing plants through gathering pipelines for
the choice of metrics and can be easily adapted for other envi- further processing.38 After the processing plant, impurities are
ronmental criteria. The shale gas processor is identified as the removed, and two major products known as “pipeline-quality”
follower in this game that is trying to maximize its own NPV. natural gas and natural gas liquids (NGLs) are obtained and
Both design and operational decisions are taken into consider- sold separately.39,40 NGLs are heavier hydrocarbons including
ation regarding well drilling, pad construction, pipeline install- ethane, propane, and butane. Under the current market condi-
ment, shale gas production, water management, plant tions, NGLs are traded at a premium to natural gas due to its
construction, technology selection, contract signing, shale gas higher price. The midstream is run by some midstream compa-
processing, and transmission. The resulting problem is formulat- nies that are identified as shale gas processor here. Major deci-
ed as a multiobjective mixed-integer bilevel linear programming sions for the processor include plant construction, technology
(MIBLP) problem, which is an extremely challenging problem selection, contract signing, shale gas processing, and transmis-
that cannot be solved directly using any off-the-shelf optimiza- sion. The downstream indicates the end customer of natural
tion solvers.35 Therefore, an projection-based reformulation and gas in the market. According to the U.S. EIA, there are four
decomposition algorithm is applied to tackle this computational major types of natural gas customers, including electric power
challenge.36 To summarize, the major novelties of this work and plants, industrial customers, commercial customers, and resi-
features of this model are listed below: dential customers.41 Meanwhile, NGLs are commonly sold to
This is the first work addressing the optimization of both petrochemical plants for the production of value-added chemi-
economic and life cycle GHG emissions of a shale gas sup- cals, such as olefins and gasoline blending stocks. In this
ply chain considering non-cooperative stakeholders. “cradle-to-gate” shale gas supply chain, our focus lies on the
A novel MIBLP optimization modeling framework is pro- production stages of shale gas. Therefore, major decisions
posed based on leader-follower game and LCO approach. involved in the downstream are not considered here.
A specific case study in Marcellus region is considered, Following the Stackelberg Game,23 the leader has full infor-
and the results are fully discussed and compared with the mation of the supply chain and enjoys the priority to make
centralized model. decisions first. Therefore, the upstream shale gas producer,
2672 DOI 10.1002/aic Published on behalf of the AIChE July 2017 Vol. 63, No. 7 AIChE Journal
Figure 1. Superstructure of a shale gas supply chain: upstream shale sites are managed by the producer, and mid-
stream processing plants are managed by the processor.
[Color figure can be viewed at wileyonlinelibrary.com]
who is the main player of a shale gas supply chain to drill degrade to a single level optimization problem that returns the
wells and produce raw shale gas, is considered as the lead- same solution as that from a centralized model due to lack of
er.23,24 Moreover, major decisions made by the producer will conflicts between different players.
directly affect the overall production profile of the shale gas
supply chain. Thus, the important role of producer in the shale Processing technologies
gas supply chain matches the key position of leader in the A general shale gas processing plant includes a series of
Stackelberg game. Additionally, as the leader, the shale gas sections. First, the raw shale gas pipelined from wellheads
producer has to comply with federal environmental and public goes through a gas sweetening section, where the acid gas
health laws as well as state regulations.42 Thus, the leader impurities, such as H2S and CO2, are removed. After that, the
tends to care about the life cycle environmental sustainability sweet shale gas input passes through a dehydration section to
associated with the shale gas system, in addition to its own remove the water vapor typically using the triethylene glycol-
economic performance. By contrast, the follower is expected based absorption-regeneration cycle. Next one is an NGL
to make rational decisions after the leader’s decisions being recovery section, which is designed to recover longer hydro-
made. Since the midstream processor is normally considered carbons from the shale gas. The remaining gas (mainly meth-
as the processing service provider in a shale gas supply chain, ane) is finally compressed as pipeline gas or sent to an N2
the processor is considered as the follower that takes action rejection section depending on the N2 concentration. In this
after observation of the producer’s decisions and solely aims work, we focus on the NGL recovery section and consider
to maximize its own profit. Notably, the proposed modeling three alternative process schemes that are commonly applied
framework can be easily revised to address a reverse structure, in industry43:
namely shale gas producer as the leader and processor as the Gas sub-cooled process (GSP).
follower. Nevertheless, considering the physical meaning of Recycle split-vapor (RSV) process.
both players and the aforementioned features of leader and fol- Enhanced NGL recovery process (IPSI-1).
lower, such a role-switch may not be reasonable for a shale The GSP and RSV process schemes are developed by Ortl-
gas supply chain. First, processor’s functionality is to provide off Company and the IPSI-1 process scheme belongs to IPSI
processing service to the upstream producer. Thus, processor Company. Both the GSP and RSV process schemes mainly
is unlikely to make design decisions before shale gas pro- focus on improving the reflux stream to the demethanizer col-
ducers. Second, the shale gas producer is normally market- umn, while the IPSI-1 process scheme gives process enhance-
driven. It is rare to see that a producer makes design decisions ment at the bottom of the demethanizer column by using a
following the processor’s strategies.28,37 Additionally, we do self-refrigeration system.
not consider an environmental objective for the follower due The GSP process scheme is shown in Figure 2.43 Compared
to a few reasons. First, life cycle GHG emissions, as the most with the traditional turbo-expander process scheme, the GSP
widely-used environmental metric in shale gas industry, are process scheme adds one extra flash drum V-101. Notably, the
normally evaluated for the whole system. Besides, from the amount of ethane produced in the demethanizer column T-100
industries’ perspective, producer and processor are mainly is related to the top column temperature at any given operating
driven by economics and unlikely to compete against each pressure. Therefore, when the top column temperature
other based on their GHG emissions. Last, if both players have decreases, the ethane components become less volatile, and
a common environmental objective, the resulting problem will more ethane can be recovered at the bottom of the demethanizer
AIChE Journal July 2017 Vol. 63, No. 7 Published on behalf of the AIChE DOI 10.1002/aic 2673
Figure 2. Flowsheet of the gas sub-cooled process (GSP) scheme.
column. However, the lower temperature profile at the top of The IPSI-1 process scheme is shown in Figure 4.45 As men-
demethanizer column could lead to concerns such as carbon tioned above, the IPSI-1 process scheme focuses on improve-
dioxide icing. By introducing the new flash drum V-101, the ments at the bottom of the demethanizer column (T-100) by
resulting input stream can warm up the demethanizer column using the pump-around streams and the product stream. A
T-100 sufficiently and minimize the risk of carbon dioxide pump-around stream is obtained from the demethanizer col-
freezing. More importantly, the stream coming from the bottom umn and then split into two streams. The first one goes through
of V-101 can effectively absorb ethane from the vapor and the heat exchanger E-102 and enters the flash drum V-100.
increase the recovery level in Demethanizer T-100. The second stream passes heat exchanger E-101 and combines
The RSV process scheme is given in Figure 3 that features a with the stream from the top of flash drum V-100. The stream
higher ethane recovery level than the GSP scheme.44 As can coming from the bottom of flash drum V-100 is mixed with
be seen, the RSV process scheme is capable of recycling a por- the product stream from column T-100 and composes the
tion of the demethanizer overhead steam to make a leaner top NGL product. The stripping gas stream obtained from using
tower feed (T-100) without passing through any compression the pump-around streams and the product stream can signifi-
step. This overcomes the vapor-liquid equilibrium effect that cantly reduce the overall energy requirement for the reboiler
limits the recovery potential. Moreover, since no extra com- in T-100. Due to the high concentration of ethane and propane
pression is required, the RSV process scheme shows a lower in the stripping gas stream, the temperature of the demethan-
capital investment. izer column reduces and heat integration becomes easier.
Figure 3. Flowsheet of the recycle split-vapor (RSV) process scheme.

Figure 4. Flowsheet of the enhanced NGL recovery process (IPSI-1) scheme.
Additionally, the lower temperature permits the use of more and processor share the risk and opportunity of price
feed gas to provide reboiler duties and minimizes external fluctuations.
refrigeration. Furthermore, the relative volatility of the key Under a keep-whole contract, the processor retains title to
components inside the column is also increased, which results the NGLs extracted from shale gas as compensation for the
in more efficient separation and NGL recovery. processing service. However, since NGLs have a higher unit
Although the process schemes shown for GSP, RSV, and British thermal unit (Btu) content than natural gas, the extrac-
IPSI-1 are similar, it is worth noting that the key operating tion of NGLs results in a lower average Btu content in the
conditions and parameters, including NGL recovery rate, capi- processed shale gas. To compensate the loss of energy content,
tal and operating cost, energy consumption, etc. are all differ- the processor is required to return the amount of natural gas
ent. Moreover, different shale gas feedstocks will affect with identical Btu value to the shale gas feedstock. In this
the actual economic and environmental performance of these case, processor is expected to gain more profit when the value
technologies as well.43 Therefore, we consider the processing of NGLs is greater as separated liquids. In return, uncertainties
technology option an important strategic decision for the mid- are introduced to the processor’s income due to the variant
stream processor especially in the long-term planning. market prices.
Processing contracts Problem Statement

A midstream processor links the upstream producer to the In this section, we formally state the optimization problem
downstream market with its gathering, processing, and trans- of a non-cooperative shale gas supply chain.
mission services. In practice, the corresponding profit alloca- As mentioned in the previous section, we are considering a
tion between producer and processor is determined by leader-follower Stackelberg game in this shale gas supply
processing contracts.28 There are three main types of process- chain problem, where the leader is identified as the upstream
ing contracts, namely the fee-based contracts, percentage of shale gas producer and the follower is identified as the mid-
proceeds contracts, and keep-whole contracts.29 The duration stream shale gas processor. We aim to optimize the design and
of processing contracts ranges from a few months to a couple operations decisions of both players under their own decision
of years, and the average duration is about 1 year.28 The proc- criteria. As the leader, the producer enjoys decision-making
essing company may choose different types of processing con- priority, and their decisions include:
tract to adapt to the fluctuation of market price.46 Selection of candidate shale sites.
Under a fee-based contract, processor charges a fee to the Drilling schedule at each shale site.
producer only based on the amount of shale gas that they pro- Installment of gathering pipelines.
cess, referred as “throughput volumes.” The producer either Production profile of shale gas.
retains title to or receives the value associated with the NGLs Amount of raw shale gas transported to each existing
extracted from shale gas. In this case, the processor has no processing plant.
direct sensitivity to the commodity prices since its revenue Water management strategy and planning.
only relies on the processing volume. These decisions are made based on the following
Under a percentage of proceeds contract, the producer information:
retains title to both the gas and NGL products. Meanwhile, in Potential shale wells that can be drilled at each shale site.
addition to the basic operation cost, processor is reimbursed Estimated ultimate recovery (EUR) and composition of
by the producer with an agreed on percentage of the actual each shale well.
proceeds of the sales of gas and NGLs. In this case, producer Candidate water treatment technologies to choose from.
Cost data on capital investment, operations and mainte- the Marcellus shale play to demonstrate the application of this
nance (O&M), etc. novel game-theoretic LCO framework.
Emissions data on all the operations in this supply chain.
Demand and price of final commodities at the market. Multiobjective MIBLP Model Formulation
Planning horizon of this project.
According to the problem statement in the previous section, a
The shale gas processor provides processing service to the
multiobjective MIBLP model is developed to address the opti-
producer and is identified as the follower in this game. After
mal design of non-cooperative shale gas supply chain networks.
the observation of leader’s decisions, the follower will react
Corresponding to the bilevel structure, we have an upper level
rationally and make the following decisions:
leader’s problem and a lower level follower’s problem. For the
Selection of location and capacity for each potential proc-
upper level leader’s problem, we consider both economic and
essing plant.
environmental objectives. The economic objective function is
Selection of technologies for each processing plant.
Selection of processing contracts to sign with the producer given by Eq. (1) that maximizes leader’s NPV. The environmen-
for each time period. tal objective function is to minimize the life cycle GHG emis-
Processing schedule at each processing plant. sions of shale gas, given by Eq. (12). The objective in the lower
Marketing of the final products. level follower’s problem is given by Eq. (29) maximizing the
These decisions are made according to the following follower’s NPV. Five types of constraints are included in this
information: model. They are mass balance constraints, environmental con-
Production profile of shale gas provided by the producer. straints, economic constraints, capacity constraints, and logic
Composition of the shale gas feedstock. constraints. Constraints (2)–(11) are the economic constraints
A set of candidate processing plant locations. for the leader’s problem; constraints (13)–(17) refer to the envi-
Candidate process technology options. ronmental constraints; constraints (18)–(21) determines the mass
Cost data on capital investment, operations and mainte- balance relationship in the leader’s problem; constraints (22)–
nance (O&M), etc. (24) are used to depict the capacity constraints in the leader’s
Demand and price of final commodities at the market. problem; constraints (25)–(28) are the logic constraints in the
As the initiator in the shale gas supply chain, the producer leader’s problem; constraints (30)–(32) are used to measure the
not only enjoys the leader’s priority in decision making to economic performance in the follower’s problem; constraints
maximize its own total NPV, but also takes the responsibility (33)–(34) determines the mass balance relationship in the fol-
of a leader to mitigate the life cycle GHG emission across the lower’s problem; constraints (35)–(36) describe the capacity
whole shale gas supply chain. To be more specific, the objec- constraints in the follower’s problem; and constraints (37)–(40)
tives of the power plants include: stand for the logic constraints in the flower’s problem. Detailed
Maximizing the leader’s total NPV. model formulations are provided in the following. All the
Minimizing the cradle-to-gate life cycle GHG emissions parameters are denoted with lower-case symbols, and all of the
across the shale gas supply chain. variables are denoted with upper-case symbols.
Meanwhile, due to limited information, the processor takes
Leader’s problem (upper level problem)
actions after the producer and tends to only care about its own
profit. Thus, after the realization of the producer’s decisions, The shale gas producer is identified as the leader in this
the processor will react accordingly to optimize its own objec- game. Here we present the detailed model formulation for the
tive, which is: leader’s optimization problem (i.e., upper level problem in the
Maximizing processor’s total NPV. MIBLP formulation).
The major assumptions in this work are: Leaders’ Economic Objective. The shale gas producer has
The long-term production profile, shale gas composition, two conflicting objectives. The economic objective is to maxi-
and EUR for each shale site are known information. mize its own total NPV (TPproducer), which can be calculated by,
The maximum number of shale wells that can be drilled max TPproducer 5TRproducer 2TCAPproducer
at each shale site is given. (1)
2TOPEproducer 2TAXproducer
The natural gas and NGLs price forecast throughout the
entire planning horizon is available. TRproducer is the leader’s total revenue, which captures the
The capital costs regarding well development, pipeline sales income from natural gas and NGLs as well as the salvage
installation, and construction of processing plant are subject value of shale wells at the end of planning horizon.
to economies of scale.
X pngt TNGc1 ;t 1u TNGc2 ;t 1TNGc3 ;t
Notably, the main objective of this work is to investigate the TRproducer 5
optimal design of a shale gas supply chain considering both eco- t2T ð11dr Þt
nomics and life cycle GHG emissions under a non-cooperative
X X pnlk;t TNLc1 ;k;t 1u TNLc2 ;k;t
environment. Therefore, model simplifications regarding the 1
detailed drilling patterns for each shale well and purity informa- k2K t2T ð11dr Þt
(2)
tion in the water management are made following most existing XX
shale gas supply chain models.12,15,32 Recently, a rigorous 1 psgd NNi;t euri 2SPi;t
i2I t2T
mixed-integer nonlinear programming (MINLP) model was pro-
posed by Guerra et al. integrating water management and shale X X psxi;t STPXi;t
1
gas supply chain design, where both the detailed drilling pattern i2I t2T ð11drÞt
and water purity constraints are taken into account.11
Detailed model formulation and solution algorithm are pre- where pngt indicates the average unit price of natural gas in
sented in the next section, followed by a case study based on time period t, and pnlk;t is the average unit price of NGLs
processed with process scheme k in time period t. psgd is the TCproc
t indicates the processing fee paid to the processor in
average estimated unit profit of shale gas remain to be pro- time period t, calculated by,
duced in shale wells. TNGc;t is amount of natural gas extracted XXXX
at processing plant under contract c in time period t. TNLc;k;t TCproc
t 5 vpc STPi;p;c;k;t ; 8t (8)
i2I p2P c2C k2K
stands for the amount of NGLs extracted at processing plant
under contract c with process scheme k in time period t. u is where vpc is the unit processing cost under contract c, and ST
the agreed on percentage of the actual proceeds of the sale of Pi;p;c;k;t denotes the amount of shale gas transported from shale
the dry natural gas and NGLs for producer according to the site i to processing plant p and processed under contract c with
percentage of proceeds contract. NNi;t is an integer variable process scheme k in time period t.
that indicates the number of wells drilled at shale site i in time TCtran
t is the total transportation cost in time period t, given
period t. euri is the EUR of wells at shale site i. SPi;t denotes by,
the amount of shale gas produced at shale site i in time period XXXX
t. dr is the discount rate per time period. psxi;t is the average TCtran
t 5 vtcs lspi;p STPi;p;c;k;t
i2I p2P c2C k2K
unit profit gained from shale gas from shale site i processed by
X
extra processing capacity in time period t. STPXi;t is the 1 vtcm lpd TNGc;t
amount of shale gas transported from shale site i to processing (9)
c2C
plant that exceeded the processing capacity in time period t. X
TCAPproducer is the total capital cost for the producer, which 1 vtcl lpm TNLc1 ;k;t 1TNLc2 ;k;t ; 8t
k2K
accounts for the capital investment regarding construction of
infrastructure. where tprir is the reference capital investment of pipeline
XXX
TCAPproducer 5 tprir21 XPi;r lspi;p transporting gas with capacity range r. tprcr is the reference
i2I p2P r2R capacity of pipeline transporting gas with capacity range r. X
XXX Pi;r is a binary variable that equals 1 if pipeline is installed to
1 ðTCPi;r 2tprcr21 XPi;r Þ (3) transport shale gas from shale site i to corresponding delivery
i2I p2P r2R node with capacity range r. TCPi;r is the capacity of pipeline
tprir 2tprir21 from shale site i to delivery node with capacity range r. lspi;p ,
lspi;p
tprcr 2tprcr21 lpd, and lpm are the distance from shale site i to delivery node
of processing plant p, distance from processing plant to natural
TOPEproducer is the leader’s total operating cost, which gas delivery node, and distance from processing plant to NGL
accounts for both the capital investment and operating costs market, respectively. vtcs, vtcm, and vtcl denote the unit trans-
regarding well drilling, shale gas production, water manage- portation costs through pipeline for raw shale gas, dry natural
ment, processing, transportation, and royalty payment. TOPE- gas, and NGLs, respectively.
producer
can be calculated using the following equation, TCroyal denotes the royalty payments, calculated by,
t
TOPEproducer 5 X
TCroyal
t 5 ci psgi;t SPi;t ; 8t (10)
X TCdrill 1TCprod 1TCwater 1TCproc 1TCtran royal
t t t t t 1TCt (4) i2I
t
t2T ð11dr Þ
where ci indicates the percentage of the value of extracted
where TCdrill is the total drilling cost in time period t, given shale gas paid for royalty at shale site i. psgi;t is the average
t
by, unit price of raw shale gas produced at wellhead i in time peri-
X od t.
TCdrill
t 5 sdci NNi;t ; 8t (5) TAXproducer denotes the tax payments for the producer,
i2I which should always be positive.
where sdci denotes the unit cost for shale well drilling and X x PRLt
TAXproducer 5 t (11)
t2T ð11dr Þ
completion at shale site i.
TCprod
t is the cost regarding shale gas production activities
in time period t, calculated by, where x indicates tax rate. PRLt is the profit of producer in
X time period t.
TCprod
t 5 spci SPi;t ; 8t (6) PRLt can be calculated by the following equation,
i2I
PRLt 5pngt TNGc1 ;t 1u TNGc2 ;t 1TNGc3 ;t
where spci is the unit cost for shale gas production at shale site X
i. 1 pnlk;t TNLc1 ;k;t 1u TNLc2 ;k;t
TCwater
t stands for the total water management cost in time k2K
period t, including the freshwater acquisition cost as well as X
1 psxi;t STPXi;t 2TCdrill
t 2TCprod
t 2TCwater
t
(12)
the wastewater treatment cost, given by, i2I
X XX
TCwater 5 fwc FWi;t 1 wtcw WWi;w;t ; 8t (7) 2TCproc 2TCtran royal
t 2TCt
t t
i2I i2I w2W
2dept TCAPproducer ; 8t
where fwc is the unit cost for freshwater acquisition, wtcw indi-
cates the unit wastewater treatment cost for treatment option w. where dept is the depreciation rate for investments in time
FWi;t is the amount of freshwater required at shale site i in time period t.
period t, and WWi;w;t denotes the amount of wastewater generat- Leaders’ Environmental Objective. The environmental
ed at shale site i and treated by option w in time period t. objective is to minimize the overall life cycle GHG emissions
of the shale gas supply chain, which accounts for drilling time period that a certain shale well is drilled. Therefore, t 2 t0
activities (TEdrill), shale gas production (TEprod), water man- is the age of a shale well drilled at t0 in time period t.
agement (TEwater), gas processing (TEproc), and transportation The total amount of shale gas production at each shale site
(TEtran). should equal the total amount of shale gas transported to dif-
ferent processing plants. This mass balance is given by,
min TE5TEdrill 1TEprod 1TEwater 1TEproc 1TEtran (13) XXX
SPi;t 5 STPi;p;c;k;t 1STPXi;t ; 8i; t (20)
TEdrill is the total GHG emissions from drilling activities, p2P c2C k2K
which can be calculated by,
XX where STPXi;t is the amount of shale gas transported from
TEdrill 5 esdi NNi;t (14) shale site i to processing plant that exceeded the processing
i2I t2T capacity in time period t.
The total amount of freshwater required for shale site i is
where esdi is the emissions associated with the drilling process dependent on the shale gas production rate as well as the num-
of a shale well at shale site i. ber of wells drilled,
TEprod accounts for the GHG emissions generated at shale
gas production processes, which can be calculated by, FWi;t 5wfi SPi;t 1wdi NNi;t ; 8i; t (21)
XX where wfi is the unit water usage for hydraulic fracturing and
TEprod 5 espi SPi;t (15)
i2I t2T
production at shale site i, and wdi denotes the average drilling
water usage for each well at shale site i.
where espi stands for the emissions associated with the pro- The total amount of wastewater is approximately propor-
duction process of unit shale gas at shale site i. tional to the shale gas production rate, given by,
TEwater is the GHG emissions generated in water manage- X
WWi;w;t 5wti SPi;t ; 8i; t (22)
ment activities, including the freshwater acquisition and
w2W
wastewater handling, which is calculated by the following
equation, where wti indicates the produced water generation rate associ-
XX XXX ated with unit shale gas production at shale site i.
TEwater 5 efw FWi;t 1 ewtw WWi;w;t (16)
Capacity Constraints. The total amount of shale gas pro-
i2I t2T i2I w2W t2T
duced at shale site i in time period t should not exceed the
where efw is the emissions associated with unit amount of capacity of corresponding gathering pipelines,
freshwater acquisition. ewtw stands for the emissions associat- X
SPi;t TCPi;r ; 8i; t (23)
ed with treating unit wastewater by treatment option w. r2R
TEproc stands for the GHG emissions associated with shale
gas processing, which can be calculated by, The total amount of shale gas from all the shale sites processed
XXXXX by each processing plant should not exceed its processing
TEproc 5 epck STPi;p;c;k;t (17) capacity,
i2I p2P c2C k2K t2T X XX
SPi;t PCp;k ; 8t (24)
where epck is the emissions associated with processing unit i2I p2P k2K
amount of raw shale gas in process scheme k.
TEtran indicates the GHG emissions generated in all the The total amount of shale gas from all the shale sites should
transportation activities, which is given by, be greater than the minimum demand of shale gas production
XXXXX at each time period, given by
TEtran 5 est lspi;p STPi;p;c;k;t X
i2I p2P c2C k2K t2T SPi;t dslpt ; 8t (25)
XX i2I
1 emt lpd TNGc;t (18)
c2C t2T where dslpt is the minimum demand for shale gas production
XXX at time period t.
1 elt lpm TNLc;k;t Logic Constraints. The number of wells that can be
c2C k2K t2T
drilled in each time period is constrained by the number of
where est is the emissions associated with transportation of a available drilling rigs. This relationship is given by,
X
unit quantity of shale gas by pipeline. emt indicates the emis- NNi;t mn; 8t (26)
sions associated with transportation of a unit quantity of natu- i2I
ral gas by pipeline. elt is the emissions associated with
transporting unit quantity of NGLs. where mn indicates the maximum number of wells that can be
Leader’s Constraints. Mass Balance Constraints. drilled for all shale sites in each time period.
The total shale gas production rate at a shale site equals At each shale site, there is normally a maximum number of
the sum of that of different wells, which can be calculated wells that can be drilled. In other words, the total number of
by: wells that can be drilled at shale site i over the planning hori-
zon is bounded. This relationship is given by,
X
t21
X
SPi;t 5 NNi;t’ sppi;t2t’ ; 8i; t 2 (19) NNi;t tmni ; 8i (27)
t’51 t2T
where sppi;t indicates the shale gas production amount of a where tmni denotes the maximum number of wells that can be
shale well of age t at shale site i. The subscript t0 denotes the drilled at shale site i over the planning horizon.
If a gathering pipeline is installed, its transportation capaci- plant p is constructed with process scheme k and capacity
ty should be bounded by the corresponding capacity range; range r.
otherwise, its capacity should be zero. This relationship can be TOPEprocessor stands for the processor’s total operating cost
modeled by the following inequality: regarding the processing operations and transmission activi-
tprcr21 XPi;r TCPi;r tprcr XPi;r ; 8i; r (28) ties, which is calculated by,
Only one capacity range of gathering pipeline can be chosen X X X X X vpoc;k STPi;p;c;k;t
TOPEprocessor 5
for a shale site. This constraint is modeled by, i2I p2P c2C k2K t2T ð11dr Þt
X X X vtcl lpm TNLc (33)
XPi;r 1; 8i (29) 3 ;k;t
1
r2R k2K t2T ð11dr Þt
Follower’s problem (lower level problem) where vpoc;k is the unit operating cost for processing plant
Follower’s Objectives. The shale gas processor’s objec- under contract c with process scheme k.
tive is solely maximizing its total NPV, including income TAXprocessor denotes the tax payments for the processor, cal-
from providing processing service to the producer through dif- culated by,
ferent types of contracts (TRprocessor ), capital (TCAPprocessor )
X x PRFt
and operating costs (TOPEprocessor
var ) from construction and run- TAXprocessor 5 (34)
ning of the processing plants, and tax payment (TAXprocessor ). t2T ð11dr Þt
max TPprocessor 5TRprocessor 2TCAPprocessor
(30) where x indicates tax rate. PRFt is the profit of processor in
2TOPEprocessor 2TAXprocessor
time period t.
TRprocessor indicates the total revenue obtained by the processor PRFt can be calculated by the following equation,
through providing processing service. It can be calculated by, XXXX
X X X X X vpc STPi;p;c;k;t PRFt 5 vpc STPi;p;c;k;t
TRprocessor 5 i2I p2P c2C k2K
i2I p2P c2C k2K t2T ð11dr Þt X
X X vpe STPXi;t 1 vpe STPXi;t
i2I
1
i2I t2T ð11drÞt 1pngt ð12uÞ TNGc2 ;t
X pngt ð12uÞ TNGc X
2 ;t 1 pnlk;t ð12uÞ TNLc2 ;k;t 1TNLc3 ;k;t
1
ð11dr Þt k2K
t2T (31) !
(35)
X X pnlk;t ð12uÞ TNLc2 ;k;t 1TNLc3 ;k;t XX XX
1 1 vpx PCp;k 2 STPi;p;c;k;t
k2K t2T ð11drÞt p2P k2K i2I c2C
! XXXX
XX 2 vpoc;k STPi;p;c;k;t
vpx PCp;k 2 STPi;p;c;k;t i2I p2P c2C k2K
XXX
1
i2I c2C X
p2P k2K t2T ð11dr Þt 2 vtcl lpm TNLc3 ;k;t
k2K
where vpe is the penalty cost for processing the shale gas that 2dept TCAPprocessor ; 8t
exceeds the existing processing capacity. The processor has to
process the extra shale gas through other existing facilities, Follower’s Constraints. Mass Balance Constraints. The
which will result in a higher unit processing cost. vpx denotes
total methane produced at a processing plant is determined by
the unit processing revenue from the remaining processing
the methane composition of the total shale gas transported
capacity at the processing plant. We note that the processing
from different shale sites taking into account processing effi-
plant does not necessarily receive shale gas only from the sin-
ciency. The amount of NGLs produced at a processing plant is
gle shale gas producer. Alternatively, it has the option to uti-
calculated by a similar equation.
lize its remaining processing capacity to process shale gas
from external sources. With this option, when the strategic XXX
plan offered by the producer is less attractive to the processor, TNGc;t 5 STPi;p;c;k;t pefi;c;k mci ; 8c; t (36)
i2I p2P k2K
the processor can always switch to other shale gas suppliers to
guarantee its profitability. XX
TNLc;k;t 5 STPi;p;c;k;t peflk lci ; 8c; k; t (37)
TCAPprocessor is the processor’s total capital cost that is i2I p2P
dependent on the processing capacity level as well as the pro-
cess scheme selected. We have, where pefi;c;k is the processing factor accounting for proc-
XXX essing efficiency of natural gas from shale site i with pro-
TCAPprocessor 5 prik;r YPp;k;r (32)
p2P k2K r2R
cess scheme k as well as the impact of processing contract
c. peflk denotes the processing factor accounting for
where prik;r indicates the reference capital investment NGL processing efficiency of process scheme k. mci and l
for processing plant with process scheme k and capacity ci are the composition factor for methane and NGLs,
level r. YPp;k;r is a binary variable that equals 1 if processing respectively.
Capacity Constraints. The total amount of shale gas from Economic Objective :
all the shale sites processed by each processing plant should
max TPleader 5ctR xu 1ctZ yu 1dRt xl 1dZt yl ð1Þ
not exceed its processing capacity.
Environmental Objective :
XX
STPi;p;c;k;t PCp;k ; 8p; k; t (38) min TE5etR xu 1etZ yu 1fRt xl 1fZt yl ð12Þ
i2I c2C
s:t: AR xu 1AZ yu 1BR xl 1BZ yl < r ð2Þ2ð11Þ; ð13Þ2ð28Þ
The total amount of natural gas transmitted to the market xu 2 R m u mZ
1 ; y 2 Z1
R
should be constrained by the bounds of local demand, given

by, where ðxl ; yl Þ solves :
X
dmlpt TNGc;t dmupt ; 8t (39) max TPfollower 5wtR xl 1wtZ yl ð29Þ
c2C
s:t: QR xu 1QZ yu 1PR xl 1PZ yl < s ð30Þ2ð40Þ
where dmlpt is the minimum demand of natural gas at the
delivery node in time period t, and dmupt is the corresponding xl 2 Rn1R ; yl 2 Zn1Z
maximum demand of natural gas. (P0)
Logic Constraints. The processing capacity of a process- where TPleader denotes the producer’s total NPV, TE denotes
ing plant is determined by the following equation, the total life cycle GHG emissions throughout this shale gas
supply chain, and TPfollower denotes the processor’s total NPV.
X xu and yu indicate the continuous variables and discrete varia-
PCp;k 5 prck;r YPp;k;r ; 8p; k (40) bles corresponding to the leader’s decisions in the upper-level
r2R problem, respectively. xu involves decisions including the
shale gas production rate at each shale site in each time period,
where prck;r is the reference capacity for processing plant with the amount of shale gas transported from shale sites to proc-
process scheme k and capacity level r. essing plants, capacity of gathering pipelines, amount of fresh-
If a processing contract is chosen, the amount of shale water required for each shale site, and amount of wastewater
gas processed under that contract should be constrained by treated by different technology options. yu involves discrete
the corresponding bounds; otherwise, the amount should be decisions on the number of wells drilled at certain shale site in
zero. This relationship can be modeled by the following each time period, and whether a gathering pipeline should be
inequality: installed or not. For the lower level problem, xl and yl indicate
the continuous variables and discrete variables corresponding
XX to follower’s decisions in the lower-level problem, respective-
lpc YCp;c;t STPi;p;c;k;t upc YCp;c;t ; 8p; c; t (41) ly. xl addresses decisions regarding the capacity of processing
i2I k2K
plant, processing schedule of shale gas, and amount of natural
gas and NGLs extracted from raw shale gas. yl addresses the
where lpc and upc are the minimum and maximum capacity construction decisions of processing plants, processing tech-
requirements for processing contract. YCp;c;t is a binary vari- nology option, and selection of processing contracts. These
able that equals 1 if processing contract c is chosen in time constraints can be classified into five parts.
period t at processing plant p. Mass balance constraints describe the relationship between
Considering the huge capital investment of processing the input and output streams of each unit based on mass con-
plant and its relatively large processing capacity, it servation of all the species in a supply chain network, given
is assumed that at most one processing plant is to be by Eqs. (18–21) for the leader’s problem and Eqs. (33) and
built with each process scheme and capacity range, (34) for the follower’s problem, respectively.
given as, Environmental constraints calculate the total GHG emis-
sions generated from various activities from shale wells to
XXX the gate of market, given by Eqs. (12–17).
YPp;k;r 1 (42) Economic constraints are used to measure the economic
p2P k2K r2R
performance of different players, including the producer’
total NPV and the processor’s total NPV, given by Eqs. (1–
In each time period, at most one processing contract can be 11) for the leader’s problem and Eqs. (29–32) for the fol-
selected at a processing plant, given by, lower’s problem, respectively.
Capacity constraints describe the capacity limits of different
XX activities in the shale gas supply chain, including supply avail-
YCp;c;t 1; 8t (43) ability, shale gas processing, transportation, market demand,
p2P c2C
etc., given in Eqs. (22–24) for the leader’s problem and Eqs.
(35) and (36) for the follower’s problem, respectively.
Logic constraints describe the relationship of activities
Summary of the MIBLP model and basic assumptions, especially those involving infrastruc-
The general form of the proposed MIBLP model for the ture construction and technology selection, given by Eqs.
optimization of a non-cooperative shale gas supply chain is (25–28) for the leader’s problem and Eqs. (37–40) for the
summarized below and denoted as (P0). follower’s problem.
Solution Algorithm problem using
anoptimal value transformation, where dummy
As mentioned above, the resulting model leads to a multiob- variables xl0 ; yl0 are introduced to duplicate the lower-level
jective MIBLP problem that is challenging to solve. Therefore, variables xl ; yl , given in (P1). Notably, for the convenience
a novel projection-based reformulation and decomposition of algorithm implementation, we reformulate the leader’s
algorithm is presented to solve this problem efficiently.36 First, objective function into a minimization form.
we reformulate the original MIBLP (P0) into an equivalent
min ctR xu 1ctZ yu 1dRt xl0 1dZt yl0

xu ;yu ;xl0 ;yl0
s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

AR xu 1AZ yu 1BR xl0 1BZ yl0 r (P1)
u u l0 l0
QR x 1QZ y 1PR x 1PZ y s

wtR xl0 1wtZ yl0 max xl ;yl wtR xl 1wtZ yl : QR xu 1QZ yu 1PR xl 1PZ yl s; xl 2 Rn1R ; yl 2 Zn1Z
xu 2 R m u mZ l0 nR l0 nZ
1 ; y 2 Z1 ; x 2 R1 ; y 2 Z1
R

Such a reformulation provides a convenient way to deal program at given ðxu ; yu Þ. More importantly, since xl0 ; yl0 is
with the issue of multiple optimal solutions to the lower-level controlled by the upper-level program, it is guaranteed that the
problem. Although the lower-level problem could have an infi- solution best fits the upper-level program will be selected. The
nite number of optimal solutions, it has a unique optimal problem (P1) is then further reformulated into a projection-
objective
value. The fourth constraint in problem (P1) ensures based single-level optimization problem, and the correspond-
that xl0 ; yl0 is the optimal solution to the lower-level ing formulation is given in (P2).

xu ;yu ;xl0 ;yl0

AR xu 1AZ yu 1BR xl0 1BZ yl0 r
QR xu 1QZ yu 1PR xl0 1PZ yl0 s
2 3
wtR xl0 1wtZ yl0 wtR xl;j 1wtZ yl;j
6 7
6 7 (P2)
6 PR xl;j s2QR xu 2QZ yu 2PZ yl;j 7
6 7
h i 6 7
6 7
u u
ðx ; y Þ 2 Projðxu ;yu Þ P y l;j 6
)6 t j t l;j
PR p wR ; x ? PR p 2wRt j t 7; j 2 J
7
6 7
6 7
6 pj ? s2QR xu 2QZ yu 2PR xl;j 2PZ yl;j 7
6 7
4 5
xl;j 2 Rn1R ; pj 2 Rn1L
xu 2 R m u mZ l0 nR l0 nZ
1 ; y 2 Z1 ; x 2 R1 ; y 2 Z1
R

where Projðxu ;yu Þ P yl;j is the projection of polyhedron
P yl;j a finite set of all yl values that lie in the projection of
onto the upper-level decision space (P yl;j 5 xu ; yu ; xl : MIBLP constraint region.
QR xu 1QZ yu 1PR xl s2PZ yl;j g; 8j 2 J). The indicator Next, since the expression ðxu ; yu Þ 2 Projðxu ;yu Þ P yl can-
constraint indicates that if ðxu ; yu Þ falls into the projection, not be computed directly, we employ an equivalent linear
then the constraints in the right square bracket take effect; program
to check if ðxu ; yu Þ falls within the projection of P
otherwise, these constraints are inactive. Corresponding yl;j onto the upper-level decision space. Such a linear
to any given yl;j 2 Y L , xl;j represents the lower-level contin- program is then replaced by its corresponding Karush-
uous variables, and pj represents the dual variables of the Kuhn-Tucker (KKT) conditions. The resulting formulation
lower-level constraints. Y L 5 yl;1 ; yl;2 ; . . . ; yl;k represents is given as (P3).
xu ;yu ;xl0 ;yl0

AR xu 1AZ yu 1BR xl0 1BZ yl0 r
QR xu 1QZ yu 1PR xl0 1PZ yl0 s
8 2 3 9
> PR xl;j 2Itj s2QR xu 2QZ yu 2PZ yl;j >
> >
>
> 6 7 >
>
> 6 7 >
>
>
> 6 7 >
>
>
>
> 6 PR k 0; x ?PR k ; e2k 0; t ? e2k 7 >
j l;j j j j j >
>
> 6 7 >
>
>
> 6 7 >
>
>
>
> 4 5 >
>
>
>
> >
>
>
> j u u
k ? s2QR x 2QZ y 2PZ y 2PR x 1It l;j l;j j >
>
>
> >
>
>
> >
>
>
> >
>
>
> j T j >
> (P3)
>
> e 12w e t >
>
>
> >
>
>
< >
=
2 r l0 t l0 t l;j t l;j
3
wR x 1wZ y wR x 1wZ y ;j 2 J
>
>
> 6 7 >>
>
> 6 7 >
>
> 6 7 >>
>
> 6 PR xl;j s2QR xu 2QZ yu 2PZ yl;j 7 > >
>
> 6 7 >>
>
> 6 7 >>
>
>
> w )6j
7 >>
>
> 6 7 >
>
> 6 t j
t l;j
? t j t 7 >>
>
> 6 P R p w R ; x P R p 2w R 7 >>
>
> 6 7 >>
>
>
> 4 5 >>
>
>
> >
>
>
> pj ? s2QR xu 2QZ yu 2PR xl;j 2PZ yl;j >
>
>
> >
>
>
> >
>
>
: >
;
l;j nR j nL j nL j nL j
x 2 R1 ; p 2 R1 ; t 2 R1 ; k 2 R1 ; w 2 f0; 1g
x u 2 Rm u mZ l0 nR l0 nZ
1 ; y 2 Z1 ; x 2 R 1 ; y 2 Z1 ;
R
hðxu; ; yu; Þ5 max xl ;yl wtR xl 1wtZ yl

where e is a vector with all elements equal to 1; I is the identi- s:t: PR xl 1PZ yl s2QR xu; 2QZ yu;
ty matrix; tj represents the relaxation variables for each con-
straint. The dimension of vector tj is equal to the number of xl 2 Rn1R ; yl 2 Zn1Z
lower-level constraints. e is a very small positive number (P4)
(e.g.,
1026). In this formulation, if ðxu ; yu Þ 2 Projðxu ;yu Þ P yl;j , then The second subproblem is given as (P5). Notably, the environ-
binary variable wj 51 and the constraints in the bottom square mental constraints involved in this model formulation is inher-
bracket are active; otherwise, wj 50 and the constraints in the ited from the master problem, and (P5) does not correspond to
bottom square bracket are inactive. the follower’s problem. The purpose of (P5) is to obtain a bile-
Although the single-level formulation allows us to solve the vel feasible solution or to test the bilevel feasibility at the giv-
MIBLP by using MILP methods, the size of set Y L grows en ðxu; ; yu; Þ and hðxu; ; yu; Þ obtained by solving problem
exponentially as the number of lower-level integer variables (P4).
increase. As a consequence, the resulting problem can be com-
putationally intractable due to extremely large number of Ho ðxu; ; yu; Þ5 min xl ;yl dRt xl 1dZt yl
KKT condition based constraints. To boost the computational s:t: fRt xl 1fZt yl ee 2 etR xu; 2etZ yu;
efficiency, a decomposition approach is further implemented
based on the single-level reformulation (P3), where only a BR xl 1BZ yl r2AR xu; 2AZ yu;
subset of Y L (denoted as Y L ) is considered in each iteration. wtR xl 1wtZ yl hðxu; ; yu; Þ
As the algorithm proceeds, we keep expanding the set Y L so
that a better approximation of problem (P3) can be achieved. PR xl 1PZ yl s2QR xu; 2QZ yu;
With the decomposition algorithm, a master problem and two xl 2 Rn1R ; yl 2 Zn1Z
subproblems are formulated. The master problem has the same
(P5)
formulation of (P3), but we only consider a subset j 2 L J.
Given the values of upper-level variables ðxu; ; yu; Þ, the first By iteratively solving one master problem and two subpro-
subproblem intends to find an optimal solution to the lower- blems, a KKT-condition-based cut, as shown in (P6), is gener-
level program at ðxu; ; yu; Þ, which is given as (P4). ated in each iteration and added to the master problem.
2 3
wtR xl0 1wtZ yl0 wtR xl;l11 1wtZ yl;l11
6 7
6 PR xl;l11 s2QR xu 2QZ yu 2PZ yl;l11 7
h 6 7
l;l11 i 6 7
u u
ðx ; y Þ 2 Projðxu ;yu Þ P y )6
6 P t l11
R p w t
R ; x l;l11
? P t l11
R p 2w t
R
7
7 (P6)
6 7
6 pl11 ? s2QR xu 2QZ yu 2PR xl;l11 2PZ yl;l11 7
4 5
xl;l11 2 Rn1R ; pl11 2 Rn1L
where l 1 1 is the index of the next iteration, assuming l is the decreasing approximation of the shale gas production profile
index of the current iteration. With these KKT-condition- is considered.12 The EUR of each shale well is estimated
based inequalities, we are able to guarantee non-decreasing based on existing data reported in Marcellus shale play.50,51
lower bounds in each iteration. Thus, the lower bound and The wastewater generated in the drilling and production phase
upper bound can be updated correspondingly. In each itera- of shale gas can be handled by five types of water management
tion, if none of the stopping criteria are met, a new yl would strategies, including the Class II disposal wells,52 commercial
be generated. Since a repeated yl leads to convergence of the CWT facilities,53 and three types of onsite desalination tech-
algorithm and the set Y L is finite, the algorithm will converge nologies, namely multi-stage flash (MSF), multi-effect distilla-
in jY L j iterations. This projection-based reformulation and tion (MED), and reverse osmosis (RO).54,55 There are three
decomposition algorithm is summarized in the pseudo-code potential shale gas processing plants.39 For each processing
shown in Figure 5.36 plant, we consider three candidate NGL recovery processes
that are commonly applied in industry, namely the GSP, RSV
Case Study process, and enhanced NGL recovery process (IPSI-1).43 The
capacity of a processing plant is classified into four capacity
To illustrate the application of the proposed modeling levels ranging from 10 to 100 million cubic feet of shale gas
framework and solution algorithm, we consider a case study per day (MMcfd), and 1 cubic feet equals to 0.0283 cubic
based on Marcellus shale play. meter. As introduced in the background section, three types of
In this case study, a 20 mile 3 20 mile area within Beaver processing contracts are considered, including the fee-based
County, Pennsylvania is considered as shown in Figure 6. As contract, percentage of proceeds contract, and keep-whole
part of the Marcellus shale play, there are 10 potential shale contract. In each time period, the processor needs to select one
sites in total.47 Each shale site can drill up to 4–8 shale wells processing contract to determine the profit allocation with the
at maximum.48 We consider a mixed set of dry wells and wet producer. The price data regarding natural gas and NGLs are
wells, where the mole fraction of NGLs in the raw shale gas estimated using the forecast tool in Oracle Crystal Ball soft-
ranges from 1 to 20%.49 For each shale well, an exponentially ware56 based on the historical data reported by EIA.57,58 The
total planning horizon is 10 years and further divided into 10
time periods, which is close to the real productive life of Mar-
cellus wells.12,59,60 Notably, the legislation of severance tax in
Marcellus shale play is still pending at the time of this work,
so the tax term is set to zero in this specific case study. All
detailed input data are based on existing literature, and they
are available on request. The resulting problem is a multiob-
jective MIBLP problem, where the upper-level problem has
266 integer variables, 3937 continuous variables, and 1062
constraints; and the lower-level problem has 126 integer varia-
bles, 3056 continuous variables, and 531 constraints. All of
the models and solution procedures are coded in GAMS
24.7.361 on a PC with an IntelV CoreTM i7-6700 CPU @
R
3.40GHz and 32.00 GB RAM, running a Window 10 Enter-

prise, 64-bit operating system. Furthermore, the MILP prob-
lems are solved using CPLEX 12.6.3 with the absolute
optimality tolerance as 1026. The absolute optimality toler-
ance for the projection-based reformulation and decomposi-
tion algorithm is set to 1023.
Pareto-optimal curve
The resulting multiobjective MIBLP problem is solved
using the presented optimization algorithm, and 10 Pareto
optimal solutions are obtained to form the Pareto-optimal
curve shown in Figure 7. The x-axis represents the total life
cycle GHG emissions generated in the shale gas supply chain
throughout the planning horizon. The y-axis represents the
producer’s total NPV in the planning horizon. As can be seen,
Figure 5. Pseudo-code of the novel optimization the producer’s total NPV increases as the total life cycle GHG
algorithm. emissions limit increases, which explicitly shows the trade-off
Figure 6. Reference shale well map based on Frac Focus.47
between the economic and environmental objectives in the The total life cycle GHG emissions of point B are 2.37 Mt CO2-
leader’s problem. The region below the Pareto-optimal curve eq, equivalent to 18.6 g CO2-eq/MJ. Solutions between points A
is the suboptimal region, and the region above the curve is the and B are all equivalently optimal according to the definition of
infeasible region. Pareto-optimality, and they have higher leader’s NPV than A
In Figure 7, we choose three points on the Pareto curve for and lower life cycle GHG emissions than point B. Here we take
further demonstration. Point A indicates the optimal solution point C as an example of balanced solution between point A and
with the lowest total life cycle GHG emissions of 1.03 Mt point B. The total life cycle GHG emissions of Point C are 1.47
CO2-eq, equivalent to 17.7 g CO2-eq/MJ; meanwhile, it has Mt CO2-eq, equivalent to 18.0 g CO2-eq/MJ. With 42.7% higher
the lowest leader’s NPV of $43.0 MM. Therefore, we identify GHG emissions than point A, the leader’s NPV significantly
point A as the environmentally sustainable solution. On the increases to $109.3 MM, 154.2% higher than that of point A.
contrary, point B is identified as the economics-oriented solu- We note that the actual selection of strategies depends on the
tion, which has the highest leader’s NPV known as $154.7 MM. leader’s preference toward both economic and environmental
Figure 7. Pareto-optimal curve of the case study with cost breakdowns in terms of well drilling, shale gas produc-
tion, water management, gas processing, transportation, and royalty payment as well as life cycle GHG
emission breakdowns: pie charts represent cost breakdowns; the stacked columns represent emissions
breakdowns.
Table 1. Comparison of Game Theory Model and Centralized Models
Game theory-based model

Centralized-comprehensive Centralized-leader-
Leader Follower model focused model
Economic objective max TPprducer max TPprocessor max TPtotal max TPproducer1mTPprocessor
Environmental objective min TE – min TE min TE
TP, total profit; TE, total life cycle GHG emissions.
criteria. The life cycle GHG emissions corresponding to unit NPV. The objective function is formulated as the leader’s
heating value of natural gas agrees well with existing literature.31 NPV adding the follower’s NPV multiplied by a sufficient
Apart from the Pareto-optimal curve, the detailed life cycle small factor l (e.g., 1026). This approach guarantees that the
GHG emissions breakdowns and corresponding cost break- strategy most favorable to the follower will be chosen when
downs of the three points are also provided in Figure 7. For multiple optimal strategies are available for the leader. Since
the cost breakdown, gas processing is identified as the leading the producer is acting as a leader in the game theory-based
sector that accounts for 29–39% of the total cost. The cost model to maximize its own NPV, the centralized-leader-
associated with drilling and gas production activities together focused model is expected to provide a more comprehensive
account for 31–38% of the total cost. Transportation and roy- comparison. The major difference between the three types of
alty payment normally results in 8–15% and 14–20% of total models is summarized in Table 1.
cost, respectively. Water management cost regarding freshwa- Next, we use Figure 8 to illustrate the different results
ter acquisition and wastewater treatment only takes a small obtained from the game theory-based model and centralized-
portion, about 1–2% of the total cost in the shale gas supply comprehensive model. Similar to the Pareto curve shown in
chain. Moreover, as the minimization of shale gas life cycle Figure 7, the x-axis represents the total life cycle GHG emis-
GHG emissions weighs more than the NPV maximization for sions of shale gas. However, the y-axis represents the total
the leader, we can observe the following trends: (1) the portion NPV involving both producer and processor in the shale gas
of cost directly associated with shale gas production activities supply chain. Due to the centralized feature of the centralized-
decreases; (2) the portion of cost regarding processing and comprehensive model, the blue curve is known as the Pareto
transportation activities increases. These trends not only mani- frontier by definition that perfectly shows the trade-off
fest the non-cooperative feature of the leader-follower game- between economic and environmental objectives. For the
based model, but more importantly gives insights into how the game theory-based model, since the direct trade-off originates
conflicts of interests between different stakeholders are from the producer’s conflicting objectives, the orange curve
resolved in the optimization of shale gas supply chain. Based does not necessarily follow the shape of a Pareto curve. By
on the results, we hypothesize that when the producer and pro- comparing the extreme points (the economical solutions on
cessor have conflicting objectives (e.g., GHG emissions mini- the right and environmentally sustainable solutions on the
mization and NPV maximization in this case), the producer left), we notice that the centralized-comprehensive model
will have to sacrifice part of its own economic benefits to push tends to provide more optimistic solutions than the game
forward its environmentally sustainable strategies. This theory-based model regarding both economic and environ-
hypothesis is further verified by other results in the following mental performances. The highest total NPV is improved by
case studies and analysis. Compared with the cost break- 10.2% and the lowest life cycle GHG emissions is reduced by
downs, the GHG emissions breakdowns for the three solution 3.4% in the centralized-comprehensive model. Even under the
points are very similar. Shale gas production activities account same GHG emissions limit, the centralized-comprehensive
for 62–64% of total life cycle GHG emissions; the portion of model gives a higher total NPV than the game theory-based
transportation emissions ranges from 29 to 31%; and shale gas model. However, the better performance provided by the cen-
processing accounts for 7% of the life cycle GHG emissions, tralized model is based on an ideal assumption that the entire
which are consistent with the published reports.7,31 supply chain is fully controlled by a single decision maker.
Therefore, all the decisions can be implemented without any
Comparison with centralized models obstacle to achieve the best performance. This assumption
To demonstrate the advantages of the proposed game grants the centralized-comprehensive model with a larger fea-
theory-based model, we further consider two types of central- sible region than the game theory-based model, and thus
ized models for in-depth comparison. In the first centralized, a results in a higher maximum total NPV and lower minimum
single decision-maker is assumed to be in charge of the whole GHG emissions. In other words, the optimal strategies and
supply chain, and the objectives are to optimize the overall corresponding performance are like the mirage built on opti-
economic and environmental performance. Specifically, the mistic assumptions that can be easily jeopardized by infeasi-
economic objective is defined as maximizing the total NPV of bility issues. By contrast, the game theory-based model takes
the shale gas supply chain, and the environmental objective is the impact of distinct stakeholders into consideration and leads
minimizing the total GHG emissions generated in the “cradle- to a better depiction of the actual performance of a shale gas
to-gate” life cycle of shale gas. We use “centralized- supply chain. Under a non-cooperative environmental, the
comprehensive model” to represent this type of centralized highest NPVs can be achieved for both producer and processor
model for abbreviation in the following content. In addition to are lower than those calculated from a centralized model. This
the centralized-comprehensive model, we take into account conclusion is further verified by the NPV allocation results,
another centralized model, which is named “centralized- which are given by the stacked columns. As can be seen, when
leader-focused model” here. The centralized-leader-focused the supply chain is led by the economic objective, both the
model still relies on the single decision-maker assumption, but centralized-comprehensive model and game theory-based
the economic objective is the maximization of producer’s model lead to reasonable profit allocations, where the
Figure 8. Comparison between game theory-based model (leader: maximizing/minimizing its own NPV/life cycle
GHG emissions; follower: maximizing its own NPV) and centralized-comprehensive model (maximizing/
minimizing the total NPV/life cycle GHG emissions): stacked columns depicts the profit allocations
between different stakeholders.
producer’s NPV accounts for slightly more than half of the Since in the game theory-based model, the economic objec-
total NPV, and the processor’s NPV accounts for the remain- tives for both producer and processor are maximizing their
ing half of the total NPV. However, when the leading objec- own NPV instead of the total NPV, we further present a com-
tive is to minimize the life cycle GHG emissions, the total parison between the game theory-based model and
NPV almost all comes from the producer, while the processor centralized-leader-focused model to give a full picture regard-
can barely make any profit from the optimal strategy given by ing the comparison of decentralized model and centralized
the centralized-comprehensive model. Since the processor model.
may always have the option to choose the shale gas supplier, it As can be seen in Figure 9, the green curve and orange
is possible that the processor refuses to accept this optimal curve are the Pareto frontiers obtained from the centralized-
strategy in the centralized model. Conversely, the game leader-focused model and the game theory-based model,
theory-based model still provides an optimal solution with rea- respectively. Both of them demonstrate the trade-off between
sonable NPV allocations, where the portion of producer’s NPV the producer’s NPV and the life cycle GHG emissions of shale
decreases by 17.4% to get a better environmental performance. gas. Additionally, we present the follower’s NPVs correspond-
In addition, the total NPV corresponding to the environmentally ing to some selected solutions. We use red dots for the game
sustainable solution in the game theory-based model is higher theory-based model and blue dots for the centralized-leader-
than that in the centralized-comprehensive model. focused model. NPV dots obtained in the same solution are
Figure 9. Comparison between game theory-based model (leader: maximizing/minimizing its own NPV/life cycle
GHG emissions; follower: maximizing its own NPV) and centralized-leader-focused model (maximizing/
minimizing the leader’s NPV adding the follower’s NPV multiplied by a sufficient small factor l/life cycle
GHG emissions).
Figure 10. Shale gas supply chain structure comparison between point A and point B.
linked with grey dash lines. Since the producer is the only all the decisions made by the single decision-maker will be
decision maker in the centralized-leader-focused model, it successfully implemented. Compared with the centralized
tends to choose the strategies that benefit itself the most. As a model, game theory-based model generally provides slightly
result, for the economic solution on the right of the curve, the worse overall supply chain performance, such as lower total
producer gains 54.2% more NPV in the centralized-leader- profit. However, the profit allocation between different players
focused model than that in the game theory-based model. As is better balanced, and more competitive design decisions can
to the environmentally sustainable solution on the left, the be potentially obtained.62–64 Although both the centralized-
centralized-leader-focused model returns a 100.7% higher comprehensive model and centralized-leader-focused model
NPV for the producer than that in the game theory-based mod- return better solutions if we solely focus on the given objec-
el. However, the high NPV for the producer in the centralized- tives, these solutions can be implemented successfully only
leader-focused model is obtained based on sacrificing the pro- when the single decision maker and cooperative assumptions
cessor’s profit. For all the solutions with different GHG emis- stand. In the non-cooperative environment as considered in
sions, the processor’s NPV in the centralized-leader-focused this work, they are likely to be infeasible.62,65,66 Next, we will
model remains at a very low level. Meanwhile in the game mainly focus on the results of game theory-based model, and
theory-based model, both producer and processor have decent illustrate the detailed design and operational strategies select-
NPVs. Although it is not shown in the figure, when summing ed in different solutions.
up the NPVs of producer and processor, the game theory-
based model provides a 5–15% higher total NPV than that in Design and operational results
the centralized-leader-focused model. Furthermore, the game The optimal shale gas supply chain network design is given
theory-based model performs well in capturing the interactions in Figure 10. For point A where the producer targets on mini-
between different stakeholders with conflicting objectives: mizing the life cycle GHG emissions, eight shale sites are
when the producer tries to mitigate the GHG emissions gener- developed with a total of 31 wells being drilled. For point B
ated in the shale gas supply chain while the processor only where both players are trying to maximize their NPV, 10 shale
cares about its own NPV, the processor can take advantage of sites are developed, and 53 wells are drilled in total. The
this opportunity and gain a relatively higher NPV than the pro- design decisions regarding processing plants are similar. For
ducer. This trend agrees well with the one observed in another both points A and B, processing plant 2 is constructed with a
game theory-based model of shale gas supply chains, where capacity of 100 MMcfd, and the IPSI-1 process scheme is
power generation sector is the leader and shale gas production identified as the optimal process scheme for NGL recovery.
sector is the follower.27 In that case study, when the power These results are consistent with the existing publications.43
plants target on minimizing the total life cycle GHG emissions The specific capacities of gathering pipelines are given in gray
in the supply chain, the leader’s total cost increases, and the numbers as labeled below.
levelized cost of electricity is much higher due to the applica- The detailed drilling and production strategies chosen in the
tion of CCS technologies. Meanwhile, since the follower, environmentally sustainable solution (point A) and economic
namely the shale gas producer, still targets on profit maximiza- solution (point B) are given in Figure 11. The drilling schedule
tion, it is able to gain a 15% higher total profit under this GHG at different shale sites are given in stacked columns, the total
emissions minimization scenario. shale gas production profile is given by the blue line with
From the comparison above, we come to the preliminary markers, and the processing contracts between producer and
conclusion that the proposed game theory-based model is able processor are at the top. As can be observed, with different
to better capture the actual economic and environmental per- objectives, the producer will choose completely distinctive
formances of a shale gas supply chain. The centralized mod- drilling schedules, and the processor will react accordingly
els, conversely, are limited by a fundamental assumption that following their own pursuit. In the solution of point A, the
Figure 11. Comparison of strategies selected in point A and point B: stacked columns depicts the optimal drilling
schedule; line with markers represents the natural gas production profile; processing contracts are giv-
en in separate blocks at top.
producer focuses on mitigating the life cycle GHG emissions as well as the price fluctuation of natural gas and NGLs. This
in the supply chain, and thus a slightly decreasing drilling pro- is confirmed in the solution of point A, where the percentage
file is preferred. Due to the decreasing shale gas production of proceeds contract is chosen at the sixth year. This result
profile for shale wells, such a drilling schedule results in a rel- also agrees with the actual financial data reported by mid-
atively stable production profile as shown by the blue line. stream processing companies.46
Correspondingly, all the infrastructure can be assigned with a Notably, in the centralized models, due to the lack of multi-
proper capacity, and unnecessary energy consumptions can be player perspective, the fee-based contract could be chosen
saved. In the solution of point B, both the producer and pro- simply because it incurs less processing cost for the upstream
cessor are pursuing the maximization of their NPV. Conse- producer. In Figure 12, we present the optimal strategies corre-
quently, most of the wells are drilled in the first few years. The sponding to the economic solutions obtained in the
production peak at the fourth year is caused by the price fluc- centralized-comprehensive model and the centralized-leader-
tuation. Since the price of natural gas reaches a high level after focused model. As can be seen, compared with the game
the first three years based on the price forecast model, the pro- theory-based model, the general drilling schedules are similar
ducer chooses to drill more wells to gain more profit. From the in both centralized models, but the specific wells drilled at
processor’s perspective, increasing the profitability is the only each time period are different. More importantly, in the
driving force. Under the current market prices, NGLs are still centralized-leader-focused model, the fee-based contract
more valuable products than natural gas. Therefore, the keep- becomes the dominant processing contract. Although the pro-
whole contract becomes the dominant type of contract that ducer can gain more benefit from this contract, the processor
leads to higher margins for the processor. However, the case will receive much less profit. Thus, the processor will be reluc-
may vary depending on the both the composition of shale gas tant to accept this contract. Additionally, in the centralized-
Figure 12. Comparison of strategies corresponding to economic solutions in centralized-comprehensive model

and centralized-leader-focused model: stacked columns depict the optimal drilling schedule; lines with
markers represent the natural gas production profile; processing contracts are given in separate blocks
on the top.
Figure 13. Optimal water management strategy for both point A and point B.
comprehensive model, the economic objective is maximizing wells available in Marcellus shale play and the long-distance
the total NPV in the shale gas supply chain, and the keep-whole transportation cost for out-of-state disposal wells.
contract is still the preferred one that can potentially lead to a
win–win situation. This comparison once again demonstrates Computational results
the advantage of the decentralized game theory-based model in Base on the proposed modeling framework, the resulting
providing insightful optimal strategic decisions. problem is a multiobjective MIBLP problem that cannot be
In Figure 13, we fully compared the water management solved directly using any off-the-shelf global optimizers.
strategies corresponding to the economic and environmentally Therefore, we adopt the proposed projection-based reformula-
sustainable solutions in the game theory-based model. Due to tion and decomposition algorithm to solve it efficiently. The
the motivation of reducing the GHG emissions in point A, a detailed model statistics and computational time of the result-
smaller production scale is chosen by the producer that ing master problem and subproblems are summarized in the
includes eight shale sites and a total of 2.7 million barrels following Table 2. The initial master problem has 266 integer
(MM bbl) of freshwater consumption (one barrel equals to variables, 3937 continuous variables, and 1062 constraints.
0.119 cubic meter). The producer adopts the RO technology The corresponding computational time for the first iteration is
for onsite wastewater treatment, which is more flexible, pro- 39.7 CPU seconds for point B and 3379.5 CPU seconds for
vides water reuse option to save the freshwater resource, and point A, respectively. As the iteration of solution algorithm
incurs less GHG emissions throughout the life cycle. Conse- proceeds, the KKT-condition-based cuts are added to the mas-
quently, 0.4 MM bbl of wastewater is treated by the RO tech- ter problem, resulting in a greater scale of master problem.
nology. In point B, all the 10 shale sites are fully developed, After only two iterations of the proposed solution algorithm,
and accordingly 5.4 MM bbl of freshwater is required, result- the updated master problem has 3485 integer variables, 13,533
ing in 1.0 MM bbl of wastewater to be treated. The CWT facil- continuous variables, and 10,949 constraints. The overall com-
ity turns out to be the optimal option here, which is more cost- putational time is 51.1 CPU seconds for point B and up to
effective and has a larger treatment capacity. The application 3532.8 CPU seconds (less than 1 h) for point A. For most solu-
of Class II disposal wells is limited by the number of disposal tion points on the Pareto curve, the computational time can be
Table 2. Model Statistics and Computational Time

Number of integer variables Number of continuous variables Number of constraints Computational time (CPUs)
Master problem 266–3485 3937–13,533 1062–10,949 10.4–3379.5
Subproblem 1 126 3056 531 0.5–0.9
Subproblem 2 126 3057 543 0.3–0.6
Figure 14. Converging process of point A and point B.
controlled within a few minutes. Both subproblems have simi- Conclusion

lar problem sizes that feature fewer integer variables com- An MIBLP model has been proposed to address the optimal
pared with the master problem. Correspondingly, their design of a non-cooperative shale gas supply chain consider-
computational time is shorter than 1 CPU second. The actual ing both economics and life cycle GHG emissions. Following
computational time for subproblems can be slightly different the Stackelberg game, two players are identified as the
due to different values of upper level variables. upstream shale gas producer and midstream shale gas proces-
The Pareto-optimal curve in Figure 7 is composed of 10 sor. Multiple decisions with respect to well drilling, produc-
optimal points. Hereby we present the converging processes of tion, processing, transportation, and water management are
point A and point B for demonstration in Figure 14. As can be considered. To demonstrate the complex interactions among
seen, two iterations are required for both solutions. In the different players and trade-offs between conflicting objectives,
beginning of the solution algorithm, the lower bound and
a case study based on the Marcellus shale play is presented.
upper bound are set to their initial values, which are guaran-
Through a detailed analysis and thorough comparison with the
teed to be sufficiently large. The master problem given by (P3)
traditional centralized models, we come to the conclusion that
without KKT-condition-based cut is solved first. The optimal
the non-cooperative perspective embedded in the decentral-
solutions regarding leader’s decisions ðxu; ; yu; Þ are recorded,
ized model provides more insight into the design and opera-
and the lower bound is updated based on the objective value
tions of a shale gas supply chain. Moreover, compared with
H . Next, the first subproblem given by (P4) is solved based
the centralized models, the game theory-based model normally
on the leader’s decisions ðxu; ; yu; Þ obtained from solving the
generates more realistic solutions that can potentially lead to a
master problem (P3). Similarly,
the optimal solutions regard- win-win situation regarding both economic and environmental
ing follower’s decisions x^l ; y^l and the corresponding objec-
criteria. In the current modeling framework, alternatives for
tive value hðxu; ; yu; Þ are recorded. We then solve the second
the follower are included as external shale gas suppliers. How-
subproblem (P5) to test the bilevel feasibility at ðxu; ; yu; Þ and
ever, they are not considered as individual players. A possible
hðxu; ; yu; Þ. If the second subproblem is feasible, it indicates
future research direction is extending the current modeling
that the strategic plan given by the leader is applicable for the
framework to include competitions among different shale gas
follower.
l; l; The follower’s decisions will be recorded as producers and processors. Potential approaches to be consid-
x ; y , and the upper bound will be updated based on the
ered include the integration of Nash-equilibrium24,67 and
objective value of (P5) Ho ðxu; ; yu; Þ. If the second subproblem
negotiation approaches.65,68 Additionally, uncertainty is
is infeasible, a new KKT-condition-based cut will be generat-
another important concern to be considered, attempts will be
ed based on y^l and added to the master problem to exclude this
made to integrate methodologies such as stochastic program-
strategic plan. As can be observed in Figure 14, after the first
ming and robust optimization in the current modeling frame-
iteration, both bounds in two solutions are successfully
work to address this issue.69,70 Last but not least, other
updated, indicating that optimal solution of the second sub-
environmental concerns, such as the water-related ones, can
problem is obtained. By checking the gap between lower
be incorporated in the existing modeling framework to provide
bound and upper bound, a 4% optimality gap and a 6% opti-
a more comprehensive perspective on the sustainable design
mality gap are achieved for point A and point B, respectively.
of non-cooperative shale gas supply chains.
Since the stopping criterion is not satisfied, the next iteration
starts, all the procedures remain the same, except that the mas-
ter problem is now updated with the KKT-condition-based cut
obtained from last iteration. After the second iteration, both
solutions converge to the global optimum. Notably, in the
solution process, the profit maximization problem is reformu- Acknowledgments
lated into its equivalent minimization form for convenience. We gratefully acknowledge the financial support from the
This is the reason that in the solution of point B the final opti- National Science Foundation (NSF) CAREER Award
mal solution eventually converges to a negative value. (CBET-1643244).
Notation vpc = unit processing cost under contract c
vpe = penalty cost for processing the shale gas that exceeds the proc-
Sets essing capacity
C = set of processing contracts indexed by c (c1: fee-based; c2: per- vpoc;k = unit operating cost for processing plant under contract c with
centage of proceeds; c3: keep-whole) process scheme k
I = set of shale sites indexed by i vpsc = unit extra charge for unused processing capacity under contract
K = set of process schemes for processing plant indexed by k (k1: GSP; c
k2: RSV; k3: IPSI-1) vpx = unit processing revenue from the remaining capacity at process-
P = set of candidate processing plant indexed by p ing plant
R = set of capacity levels indexed by r vtcl = unit variable transportation cost for transporting NGL
T = set of time periods indexed by t vtcm = unit variable transportation cost for transporting natural gas
W = set of water treatment options indexed by w (w1: disposal well; vtcs = unit variable transportation cost for transporting shale gas
w2: CWT; w3: onsite treatment with MSF; w4: onsite treatment wdi = average drilling water usage for each well at shale site i
with MED; w5: onsite treatment with RO) wfi = unit water usage for hydraulic fracturing and production at
shale site i
Parameters wti = wastewater generation rate associated with unit gas production
dept = depreciation rate for investment in time period t at shale site i
dmlpt = minimum demand of natural gas at delivery node in time peri- wtcw = unit wastewater treatment cost for treatment option w
od t ci = percentage of the value of extracted shale gas paid for royalty
dmupt = maximum demand of natural gas at delivery node in time peri- at shale site i
od t x = tax rate for calculating the tax payment
dr = discount rate per time period u = agreed on percentage of the actual proceeds of the sale of the
dslpt = minimum demand for shale gas production at time period t dry natural gas and NGLs for producer
efw = emissions associated with unit amount of freshwater acquisition Nonnegative continuous variables
elt = emissions associated with transporting unit amount of NGLs FWi;t = amount of freshwater required at shale site i in time period
emt = Emissions associated with transporting unit amount of natural t
gas PCp;k = total processing capacity for processing plant p with process
epck = emissions associated with processing unit amount of raw shale scheme k
gas in process scheme k SPi;t = amount of shale gas produced at shale site i in time period t
esdi = emissions associated with the drilling process of a shale well at STPi;p;c;k;t = amount of shale gas transported from shale site i to process-
shale site i ing plant p and processed under contract c with process
esg = estimated life cycle emission of unit shale gas from well to scheme k in time period t
gate STPXi;t = amount of shale gas transported from shale site i to process-
espi = emissions associated with producing unit amount of shale gas ing plant that exceeded the processing capacity in time peri-
at shale site i od t
est = emissions associated with transportation of unit amount of shale TCPi;r = capacity of pipeline from shale site i to delivery node with
gas capacity range r
euri = average EUR of shale site i TNGc;t = amount of natural gas extracted at processing plant under
ewtw = emissions associated with treating unit wastewater by treatment contract c in time period t
option w TNLc;k;t = amount of NGL extracted at processing plant under contract
fwc = unit cost for freshwater acquisition c with process scheme k in time period t
lci = NGL composition factor in shale gas at shale site i WWi;w;t = amount of wastewater generated at shale site i and treated
lpc = minimum capacity requirement for processing contract by option w in time period t
lpd = distance from processing plant to natural gas delivery node
lpm = distance from processing plant to NGL market Integer variables
lspi;p = distance from shale site i to delivery node of processing plant p NNi;t = number of wells drilled at shale site i in time period t
mci = methane composition factor in shale gas at shale site i
mn = maximum total number of wells that can be drilled for in each
Binary variables
time period XPi;r = 0-1 variable. Equal to 1 if pipeline is installed to transport
pefi;c;k = processing factor accounting for processing efficiency of natural shale gas from shale site i to delivery node with capacity range
gas from shale site i with process scheme k as well as the r
impact of processing contract c YCp;c;t = 0-1 variable. Equal to 1 if processing contract c is chosen in
peflk = processing factor accounting for NGL processing efficiency of time period t at processing plant p
process scheme k YPp;k;r = 0-1 variable. Equal to 1 if processing plant p with process
pngt = average unit price of natural gas in time period t scheme k and capacity level r is constructed
pnlk;t = average unit price of NGL processed in process scheme k in Literature Cited
time period t
prck;r = reference capacity for processing plant with scheme k and 1. EIA. Review of Emerging Resources: U.S. Shale Gas and Shale Oil
capacity level r Plays. Washington, DC: U. S. Energy Information Administration,
prik;r = reference capital investment for processing plant with process 2011.
scheme k and capacity level r 2. EPA. Methane Emissions from the Natural Gas Industry. EPA, Tri-
psgi;t = average unit price of raw shale gas produced at wellhead i in angle Park, NC: National risk management research laboratory,
time period t Research, 1996.
psxi;t = average unit profit gained from shale gas from shale site i proc- 3. Skone T, Littlefield J, Marriott J. 2011. Life cycle greenhouse gas
essed by extra processing capacity in time period t inventory of natural gas extraction, delivery and electricity produc-
psgd = average estimated unit profit of shale gas remain to be tion. DOE/NETL-2011/1522.: US Department of Energy, National
produced Energy Technology Laboratory, Pittsburgh, PA, USA.
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Game Theory Approach to Optimal Design of Shale Gas

Supply Chains with Consideration of Economics and Life Cycle

AIChE Journal July 2017 Vol. 63, No. 7 2671

Figure 3. Flowsheet of the recycle split-vapor (RSV) process scheme.

Processing contracts Problem Statement

should be constrained by the bounds of local demand, given

min ctR xu 1ctZ yu 1dRt xl0 1dZt yl0

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

min ctR xu 1ctZ yu 1dRt xl0 1dZt yl0

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

hðxu; ; yu; Þ5 max xl ;yl wtR xl 1wtZ yl

3.40GHz and 32.00 GB RAM, running a Window 10 Enter-

Game theory-based model

Figure 12. Comparison of strategies corresponding to economic solutions in centralized-comprehensive model

Table 2. Model Statistics and Computational Time

controlled within a few minutes. Both subproblems have simi- Conclusion

You might also like

Gao and You 2017

Uploaded by

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Copyright

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Gao and You 2017

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Available Formats

Game Theory Approach to Optimal Design of Shale Gas

Supply Chains with Consideration of Economics and Life Cycle

AIChE Journal July 2017 Vol. 63, No. 7 2671

Figure 3. Flowsheet of the recycle split-vapor (RSV) process scheme.

Processing contracts Problem Statement

should be constrained by the bounds of local demand, given

min ctR xu 1ctZ yu 1dRt xl0 1dZt yl0

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0  ee

min ctR xu 1ctZ yu 1dRt xl0 1dZt yl0

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0  ee

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0  ee

hðxu; ; yu; Þ5 max xl ;yl wtR xl 1wtZ yl

3.40GHz and 32.00 GB RAM, running a Window 10 Enter-

Game theory-based model

Figure 12. Comparison of strategies corresponding to economic solutions in centralized-comprehensive model

Table 2. Model Statistics and Computational Time

controlled within a few minutes. Both subproblems have simi- Conclusion

You might also like

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

s:t: etR xu 1etZ yu 1fRt xl0 1fZt yl0 ee

hðxu; ; yu; Þ5 max xl ;yl wtR xl 1wtZ yl