This paper introduces modeling and simulation results for pipeline inspection gauge (PIG) with bypass flow control in natural gas pipeline. The dynamic behaviour of the PIG depends on the different pressure across its body and the bypass flow through it. The system dynamics includes: dynamics of driving gas flow behind the PIG, dynamics of expelled gas in front of the PIG, dynamics of bypass flow, and dynamics of the PIG. The bypass flow across the PIG is treated as incompressible flow with the assumption of its Mach number smaller than 0.45. The governing nonlinear hyperbolic partial differential equations for unsteady gas flows are solved by method of characteristics (MOC) with the regular rectangular grid under appropriate initial and boundary conditions. The Runge-Kuta method is used for solving the steady flow equations to get initial flow values and the dynamic equation of the PIG. The sampling time and distance are chosen under Courant-Friedrich-Lewy (CFL) restriction. The simulation is performed with a pipeline segment in the Korea Gas Corporation (KOGAS) low pressure system, Ueijungboo-Sangye line. Simulation results show us that the derived mathematical model and the proposed computational scheme are effective for estimating the position and velocity of the PIG with bypass flow under given operational conditions of pipeline.