Panama Canal expansion will not redefine global LNG trade
The project has been overhyped, and though the wider canal may cut some costs for future US LNG deliveries to Asia, the impact will be limited
The Panama Canal expansion, one of the largest infrastructure projects in the world, has been touted as a development that will redefine the liquefied natural gas (LNG) trade, linking emerging US exporters and eager Asian buyers. But the benefits for LNG players will likely be limited by relatively high transit costs and restricted capacity.
At first glance, the expanded canal looks very promising for the LNG industry. To date, no LNG has been shipped via the canal. But that will change when the expansion is completed in late 2015. The enlarged waterway will connect the Pacific and Atlantic basins and will be able to handle more than 80% of the world’s 370 LNG ships, up from just 6% now.
The US Energy Information Administration (EIA) expects LNG trade between countries in the Americas to increase through the wider canal. It also expects a new trade route to take hold from the Americas, especially from the Gulf Coast and Caribbean, to Asia – the world’s largest LNG import market – as the US starts to ramp up exports. The EIA also expects oil tanker traffic through the canal to increase.
Today, Peru and Trinidad and Tobago operate the only two major LNG export plants in the Americas, between them producing 2.6 billion cubic feet per day (cf/d). By 2019, liquefaction capacity is expected to increase eightfold, says the EIA. Most of that increased export capacity will come from proposed export schemes on the US Gulf Coast and will be targeting high-margin Asian markets.
Figure 1: Estimated shipping cost
An expanded Panama Canal will help facilitate some of that increased trade, and will deliver a competitive advantage to some shippers. But notions that the project will redefine the global LNG trade may be wrong. “Maybe 5%-10% of global LNG production will be shipped through the canal,” said Tony Regan, an LNG-specialist at Singapore-based consultancy Tri-Zen. “Some US and Peruvian LNG will pass through, but there will be no dramatic new flows,” he tells Petroleum Economist.
There could be some savings, both in costs and time. Paul Thorsen, a shipping specialist at BG Group, put this into context at the recent Gastech conference in Seoul. Shipping LNG from a proposed US export terminal at Lake Charles on the US Gulf Coast, where BG is a partner, via the improved waterway would cut the round-trip voyage to Tokyo to 51 days from 78 days, he says. That could cut shipping costs for the journey to between $2.16-2.46 per million British thermal units (Btu), though this does not include canal transit fees, which are not yet known. A trip that avoids the canal costs $2.91-3.90/m Btu. This would be enough to improve the economics for most Asian destinations east of Singapore, which would otherwise import the same gas through the Suez Canal. Thorsen estimated it would take 65 days to ship LNG from Lake Charles via the expanded waterway to Singapore, compared with 63 days via the Suez Canal.
UK-based consultancy Timera Energy estimated the cost saving of transit through the Panama Canal from the US Gulf Coast to Japan at roughly $0.80/m Btu for a one-way spot charter, assuming transit costs to be the same as the Suez – around $400,000. But major cost overruns on the Panama expansion have contributed to concerns that the transit tariff might be significantly higher than the Suez equivalent. Analysts have estimated a round trip through the canal could cost up to $2m. The Panama Canal Authority expects to publish its tariffs by mid-2014. However, the canal transit costs are only a relatively small portion of the actual shipping costs. As a rule of thumb, each $100,000 of transit cost will increase the cost of shipping Gulf Coast LNG to Asia by around $0.03/m Btu, estimates Timera. While a high transit fee would cut the Panama Canal versus Suez cost differential, it would not erode it altogether, says the consultancy.
The project to widen the 80 km transoceanic cargo route was originally expected to cost about $5.25bn, but the final cost will likely be around $7bn. Work on the canal was halted early this year after negotiations between the Panama Canal Authority and the consortium carrying out the expansion failed to agree on who would pay for the additional costs. Work has since resumed after a revised deal was struck. Under the new agreement, the expansion must be complete by December 2015. At the time, consultancy Wood Mackenzie cautioned that longer delays would affect US LNG producers and create a tighter LNG shipping market. “If the delays last 6-12 months, it will have limited impact, as trade will carry on much as it does now,” Andrew Buckland, senior LNG shipping analyst at Wood Mackenzie, said in a research note. “But further delays threaten the investments of a significant number of groups that are set to benefit from expanded capacity on the waterway.”
The US’ first LNG shipments are expected from Cheniere Energy’s Sabine Pass project in early 2016. But the benefits of the revamped century-old waterway are likely to be offset by limits on the number of ships it can handle. Size restrictions pose another problem: not all LNG carriers will be able to fit through the widened canal, Julie Nelson, a shipping specialist at BG told Petroleum Economist. The industry’s largest vessels – Qatar-Max and Qatar-Flex sized ships – will still not be able to pass through the canal. “Basically anything wider than 49 metres will be tough,” Nelson said. A wider Panama Canal will increase demand from all types of ships, not just LNG carriers, so delays as ships wait for open slots could add time to journeys, too, cautioned Nelson.
The new locks will only be capable of handling six ships in each direction per day, Nelson said, although the Panama Canal Authority had signalled this may rise to nine per day. The narrower canal could handle 18 ships each direction per day, so it’s not a huge increase in capacity, adds Nelson.
Nelson also noted that the Panama Canal’s slot reservation system regime is oriented toward other forms of cargo, so it might need modifying to meet the needs of LNG shippers.
Clearly the wider canal offers the potential to improve the relative economics of shipping US gas to Asia. But five Gulf Coast projects are under way, each aiming to begin LNG exports within the next few years. They will not all be able to use the new route, given its limited capacity. Competition for the cheaper Panama Canal slots among these shippers will be stiff.
The Panama Canal expansion will likely bring down the price of spot deliveries to the Latin American Pacific coast. But perhaps most importantly, lower shipping costs will boost the competitiveness of two very flexible sources of LNG supply, exports from the US and Trinidad and Tobago, says Timera.
Figure 2: Comparison of shipping