19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Regressions allow development of

compressor cost estimation models
01/09/2012

Zhenhua Rui
Paul A. Metz
Gang Chen
Xiyu Zhou
Xiaoqing Wang
University of Alaska
Fairbanks

Historical data and multiple nonlinear regressions allow the development of regional and
national compressor station construction component cost estimation models, capable of
estimating cost components with respect to both different compressor station capacities
and regions.

Results show a large cost difference between regions and how economies of
concentration play an important role in reducing unit cost. Results also indicate that all
compressor station cost components have economies of scale with respect to
compressor station capacity.

Limited literature is available on pipeline compressor station cost estimation.1 2 This

article presents 10 regression models developed to estimate pipeline construction
component costs for different compressor station capacities in different regions, based on
a data set of 220 compressor station costs. Researchers used the regression models
developed to investigate cost differences in terms of region and compressor station
capacity. Results show a large cost difference among different regions.

The unit cost of compressor station construction components has economies of scale
regarding capacity.

The article also discusses the estimation models’ limitations.

Data

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 1/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Compressor station selection is guided by data availability. The US Federal Energy

Regulatory Commission collects compression station construction cost data from gas
transmission companies each year, which are published in the Oil & Gas Journal’s annual
data book.3

The compressor station data set includes year of completion, capacity, location, and
individual cost components. Compressor stations in the data set were distributed in all
states in the US (Alaska and Hawaii excluded). The compressor stations were completed
between 1992 and 2008.

The data did not show the construction period within each year. The year of completion is
defined by the time of filling the FERC report, which ranges from July 1 of the filings year
to June 30 of the next year. For example, Year 1999 stands for projects filed as
completed between July 1, 1999, and June 30, 2000.

This article defines capacity as the horsepower of the compressor station. Cost is real,
accounted costs determined at the time of completion. All pipeline compressor station
construction cost components are in US dollars. The entire data set has 220 observations
of compressor station projects.

The five cost components are material, labor, miscellaneous, land, and total costs.
Miscellaneous cost is a composite of the costs of surveying, engineering, supervision,
interest, administration and overheads, contingencies, telecommunications equipment,
freight, taxes, allowances for funds used during construction, and regulatory filing fees.
The total cost is the sum of material cost, labor cost, miscellaneous cost, and land cost.3
This article used the Chemical Engineering Plant Cost Index—a widely used index for
adjusting process plants’ construction cost—to adjust all costs to 2008 dollars.4

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 2/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Data describing the location of US pipeline systems were in state format, with 48 states
referred to and Alaska and Hawaii excluded. The US Energy Information Administration
breaks down the US natural gas pipelines network into six regions: Northeast, Southeast,
Midwest, Southwest, Central, and Western.5 Fig. 1 shows the different regions.
Researchers used these regional definitions to analyze geographic differences in the
compressor station data.

Cost estimation
The data set collected in this study has information on compressor station capacity and
location as well as individual cost components. Researchers studied the multiple
nonlinear regression methods used to assess pipeline cost data (OGJ, July 4, 2011, p.
22).6 This study, after trying different regression models, used the general form of
multiple nonlinear regression model shown in Equation 1.

The Central region is the cost estimation base case. S denotes compressor station
capacity, αi is the coefficient of variables (i = 0,…6). Positive αi of regional variables
shows the region has a higher cost than the Central region cost, while negative αi (i = 0,
…5) of regional variables shows the region has a lower cost than the Central regional
cost.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 3/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Researchers used this approach and available data to develop five cost estimation
models. Table 1 shows coefficients of the regression models. National regression models
developed for five individual cost components assigned the coefficient of regional
variables as 0. Table 2 shows the coefficient of the regression models.

Tables 3 and 4 show the results of tests conducted before determining the validity of
regional and national regression models, respectively, examining the independent
variables for multicolinearity. Applying the variance inflation factor (VIF) as a diagnostic to
test the independent variables yielded values in the five models of between 1 and 1.7.
Rule of thumb holds a VIF value <10 as acceptable,7 8 suggesting the independent
variables do not have a multicolinearity problem.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 4/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

The corrgram test examines residual autocorrelation.7 Table 3 shows the maximum value
of autocorrelation from Lag 1 to Lag 40. Autocorrelation lies between –0.17 and 0.22.
Results show errors associated with observations as statistically independent from one
another.

Researchers used an F test and its associated p-value to test the overall model for
predictive capability. The name of the ratio of the square mean of the square for
regression and the mean square for error is F-statistics.9 Normally a large F-value
suggests the model explains a large proportion of variance. The p-value associated with
the F-statistic is significant when the p-value is less than 5%.

F-statistics of all five models are very large and associated p-values are less than 1%,
leading to the conclusion that at least one of the model’s parameters has predictive
capability. All p-values of coefficients measuring well below 5% allows the conclusion that
parameters in all 10 models are significant.

R-square and adjusted R-square help determine the model’s goodness of fit. R-square
shows the independent variables explaining the proportion of variance in the dependent
variables. One disadvantage of R-square is that its value can be artificially inflated by
putting in additional independent variables.10 Adjusted R-square, therefore, usually
accompanies R-square when determining fit.

The values of R-square for all models are greater than 0.71, and the adjusted R-square
values are almost the same as the R-square values in all models, showing that a large
proportion of variability in the model can be explained by the independent variables and
that these regression models are good models.

Various diagnostics and tests, therefore, validate these 10 regression models. The
following section uses these regression models to analyze cost differences in regions and
compressor station capacities.

Regional differences

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 5/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Regional coefficients show that all differences in compressor station construction cost
components are related to station location (Table 1). The material cost model’s
coefficients show material costs in the Northeast, Midwest, and Western regions related
and much higher than that in the Central region. The Western region has the highest
material cost among these four regions.

The labor cost model shows a relationship between the Northeast and Midwest regions
and that the labor costs in these two regions are higher than those in the Central region.
The Western region shows the highest labor cost.

The miscellaneous cost model displays a relationship to the Northeast, Southeast, and
Central regions, with all coefficients positive. The Northeast region has the highest
miscellaneous cost among these three regions.

The land cost shows a relationship to the Western and Central regions, and the
coefficient of the Western region is positive.

Total cost models show relationships to the Northeast, Western, and Central regions, and
all coefficients are positive. The Western regions have the highest costs in these three
regions.

The Southwest region is the only region that doesn’t show a relationship to any
component cost. Other regions show a relationship to at least two component costs. The
Central region appears to have the lowest cost for all construction components combined.

Table 5 provides unit costs of construction components for a 5,000-hp compressor station
in different regions with cost estimation models.

Unit total costs of compressor stations in different locations show a noticeable difference.
The unit total cost in the Central region is $2,097/hp, but unit total cost in the Western
region is $2,820/hp. Compressor station unit total costs in the Western region are 34%
higher than in the Northeast region and 20% higher than the national average. Unit land
cost in the Western region is more than three times higher than unit land cost in the
Central region and in the whole nation. The unit total cost difference for compressor
station construction component costs caused by geography can reach more than 34%.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 6/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Therefore, the geographical factor is critical in determining the compressor station

construction cost.

The values of the coefficient of the Western and Northeast regions show the Northeast’s
cost of living as slightly higher than the West. The Western region, however, has a higher
cost in material, labor, land, and total cost than the Northeast region.

This comparison shows economies of concentration plays as playing an important role in

compressor station construction cost. Economies of concentration are a type of economy
of scale, also called external economies. Economies of scale tend to arise when firms or
projects in the same industry are located close together.11

About 28% of US compressor stations are in the Northeast region, with 50.8% of these
concentrated in Pennsylvania, while only 13.3% of US compressor stations are in the
Western regions. The fact that a large number of compressor stations were built in the
Northeast region and in Pennsylvania reduces unit cost of compressor station
construction.

Major factors for cost differences in different regions include:

• Cost differences between regions, such as material and land costs.

• Geographic factors, such as terrain and population density.6

Weather conditions, soil properties, cost of living, and distance from supplies are also
variables for cost differences between regions.12 Whether the compressor station is a
Greenfield project also helps determine costs.13 Economies of concentration are also an
important factor for determining cost differences in different regions. It is impossible,
however, to conduct quantitative analysis of cost difference in different locations without
detailed information.

Capacity differences
Coefficient results show cost is also related to compressor station size. All costs show a
relationship to both compressor station capacity and compressor station capacity square
(sq hp) except land cost, which only shows relationship to compressor station capacity
square.

Figs. 2-7 show the trend of compressor station construction cost components as related
to compressor station capacity in different regions.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 7/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Fig. 2 illustrates compressor station unit total cost in the US decreasing as compressor
station capacity increases. This trend suggests the total cost has economies of scale with
respect to compressor station size. For example, the unit total cost of a 2,000-hp
compressor station is 3.2 times that of 30,000-hp compressor station. A similar trend
exists in unit costs of material, labor, miscellaneous, and land.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 8/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Figs. 2-7 show the estimated unit cost trend of cost components in the Central, Northeast,
Southeast, Midwest, and Western regions. All individual component unit costs decrease
with increasing compressor station capacities in different regions. Analysis concludes all
cost components as having economies of scale with regard to compressor station
capacity in all regions.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 9/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Economies of scale caused by growth of the project itself are called internal economies of
scale. Increasing compressor station size can produce internal economies of scale for
compressor station projects. Technical economies, managerial economies, marketing
economies, and financial economies are considered four major categories of internal
economies of scale.11

Specialized equipment or processes improve labor and capital productivity in large

pipeline projects. For example, large and efficient trenchers and trucks increase

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 10/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

productivity and reduce the cost of diesel. Small compressor station projects cannot
afford heavy equipment costs because they cannot diffuse the high fixed cost. Large
equipment and facilities are also easily operated in high capacity with less idle capacity.

Managerial economies of scale have large compressor station projects hiring more
professional and specialized managers to perform specialized tasks with skill and
productivity instead of hiring one manager in charge of everything. Marketing economies
can realize a large discount by purchasing a large amount of compressor station
promotional material. Large compressor station projects being more likely to be awarded
low interest rate loans or government subsidies is an examples of financial economies of
scale.

These factors support the idea that large compressor station projects have economies of
scale and low unit cost and match regression results showing unit costs of compressor
station construction components falling with increasing compressor station size.

Limitations, suggestion
Data used in this article included a large number of compressor stations built between
1992 and 2008. But some regions, such as the Midwest, still have relatively few pipelines.
Among all compressor stations, 57% have capacities less than 8,000 hp, and only 2.73%
are more than 40,000 hp.1 Uneven distribution and a limited number of compressor
stations with large capacities may cause estimation biases.

An unknown starting year and unknown construction period cause a biased cost by
adjusting along with the chemical plant index. US natural gas pipelines’ region definitions
are based on federal regions of the US Bureau of Labor Statistics. Other region
definitions, however, may be better for the distribution of US compressor stations.

The lack of some variables that produce cost differences, such as types of compressors
and terrain, prevents conducting certain quantitative analyses. Missing data also include
type of compressor station ownership: private or public.

Future work should collect more observations with more detailed information on the
missing variables to improve the effectiveness of the cost estimation models.

References
1. Rui, Z., Metz, A.P., Chen, G., Zhou, X., and Wang, X., "US Pipeline Compressor
Station Cost Analysis," internal report, University of Alaska Fairbanks, 2011.

2. IEA Greenhouse Gas R&D Programme, "Transmission of CO2 and Energy," Report
No. PH4/6, 2002.

3. Oil & Gas Journal Databook, Tulsa: PennWell Corp., 1992-2010.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 11/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

4. Chemical Engineering, Plant Cost Index, http://www.che.com/pci, accessed July 2010.

5. Energy Information Administration, http://www.eia.doe.gov, accessed July 2010.

6. McCoy, S.T., and Rubin, E.S., "An Engineering-Economic Model of Pipeline Transport
of CO2 with Application to Carbon Capture and Storage," International Journal of
Greenhouse Gas Control, Vol. 2, No. 2, pp. 219-29, 2008.

7. UCLA, "Regression with Stata,"

http://www.ats.ucla.edu/stat/stata/webbooks/reg/chapter2/statareg2.htm, accessed July
2010.

8. Rui, Z., Metz, A.P., Reynolds, B.D., and Chen, G., "An Analysis of Inaccuracy in
Pipeline Construction Cost Estimation," International Journal of Oil, Gas and Coal
Technology, Vo. 5, No. 1, pp. 29-46, 2012.

9. Markridakis, S.G., Wheelright, S.C., and McGee, V., "Forecasting, Methods and
Applications," New York: Wiley, 1983.

10. Neter, J., Kutner, M., and Nachtsheim, C., "Applied Linear Statistical Models," New
York: McGraw-Hill, 1996.

11. Wilkinson, N., "Managerial Economics: A Problem-solving Approach," Cambridge

University Press, 2005.

12. Bordat, C., McCullouch, B., Sinha, K., and Labi, S., "An Analysis of Cost Overruns
and Time Delays of INDOT Projects," Joint Transportation Research Program, Paper No.
11, 2004.

13. Interstate Natural Gas Association of America (INGAA), "Interstate Natural Gas
Pipeline Efficiency," 2010.

The authors
Zhenhua Rui (zhenhuarui@gmail.com) is a research analyst at Independent
Project Analysis Inc. He earned a PhD in energy engineering management,
an MBA, and an MS in petroleum engineering from the University of Alaska
Fairbanks. He also holds an MS in geophysics from China University of
Petroleum, Beijing. He is a member of the Society of Petroleum Engineers
and International Association of Energy Economics .

Paul A. Metz (pametz@alaska.edu) is a professor of geological engineering at the

department of mining and geological engineering of UAF. He received his PhD from
Imperial College of Science Technology and Medicine, London.

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 12/13
19/11/2018 Regressions allow development of compressor cost estimation models - Oil & Gas Journal

Gang Chen (gchen@alaska.edu) is a professor of mining

engineering at the department of mining and geological
engineering of the University of Alaska Fairbanks. He received
his PhD in mining engineering from Virginia Polytechnic Institute
and State University, Blacksburg, Va. He is a member of the
Society of Mining, Metallurgy & Exploration.

Xiyu Zhou (xzhou2@alaska.edu) is an associate professor of finance at the

school of management of the University of Alaska Fairbanks. He received his
PhD of business administration (finance) from the University of North
Carolina. He is a member of the American Finance Association.

Xiaoqing Wang (xwang14@alaska.edu) is an MBA candidate in

capital markets at the school of management of UAF. She holds
a BS in design from Tianjin University of Science and Technology, China.
She is a member of Students Who Enjoy Economic Thinking.

More Oil & Gas Journal Current Issue Articles

More Oil & Gas Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com

https://www.ogj.com/1/vol-110/issue-1a/transportation/regressions-allow-full.html 13/13