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Shell-chartered Maran Gas Apollonia became the first-ever liquefied natural gas (LNG) carrier to transit through the Panama Canal's new expanded locks in July. (Photo: Panama Canal Authority)
Monday, October 31, 2016

Expanded Panama Canal Benefits LNG Shipping

Expanded Panama Canal can handle 90% of global LNG tankers.

Inter-American Dialogue

Two liquefied natural gas tankers passed through the newly expanded Panama Canal in July, marking a shift in global LNG shipping patterns from the Atlantic to Asian markets. The expansion of the canal will allow large LNG tankers to pass through, significantly reducing the cost of transporting LNG, which previously had to be shipped traveling around South America to reach Asian markets. Also in July, a Chinese container ship hit the wall of the canal, highlighting concerns that the renovated canal has less space and could be unsafe. How will the reduced cost and transport time, as well as the increased access to Asian markets, affect LNG markets in the Western Hemisphere? What should be done to mitigate concerns about the safety of large vessels traveling through the canal?

Carlos Boj, energy consultant at the Central American Bank for Economic Integration: Between the boom in natural gas production in the United States and the new maritime route, we can expect to see a readjustment in transport costs for this hydrocarbon, as well as an increased efficiency in delivery times, from which the Asian market is likely to benefit the most. In addition, Latin American producers like Trinidad and Tobago, and other Western Hemisphere producers will also benefit from these changes, the United States being the greatest beneficiary of these due to its Atlantic routes and proximity to the Panama Canal. The new route will also bring environmental benefits, since cargo ships will no longer need to travel around South America. This will lead to a considerable reduction in emissions given that there will be a lower amount of fuel needed for transport, which will positively impact the environment. The company that operates the Panama Canal already has experience in safety and operation protocols, so the widening of the canal will only require improving and expanding said procedures and protocols in order to avoid any operational issues like the most recent one, or any other human catastrophe in the future.

Jeremy M. Martin, director of the Energy Program at the Institute of the Americas: In late July, the Maran Gas Apollonia transited the newly expanded Panama Canal with a cargo of LNG from the United States’ Gulf Coast. Two more LNG tankers followed close behind with one cargo confirmed for Mexico and the other for Asia. Opened on June 26, the expanded canal now makes it possible for 90 percent of global LNG tankers to pass through the isthmus, up from only 6 percent for the canal’s existing lock system. The U.S. Energy Information Administration estimates that as many as 550 tankers will traverse the canal by 2021.That the first LNG cargo passage through the expanded canal was from the United States should not be surprising. Indeed, the debut of U.S. LNG export capacity along the Gulf Coast was in almost perfect alignment with the long-awaited canal expansion and its impact on shipping times from the United States to the Pacific Coast of Latin America, considerably reducing costs for LNG exporters from the U.S. Gulf Coast to reach Asian buyers. But after almost 10 years and more than $5 billion spent, there is ample room for criticism, and bets against the success of the expansion are to be expected, given the sturm und drang of bringing the project to fruition. Moreover, the canal has historically been a magnet for controversy and dire predictions, particularly since the Carter-Torrijos accord in the late 1970s and the handover to Panamanian stewardship in 2000. But returning to the energy element, the question is: has the combination of U.S. LNG export capacity and canal expansion come too late to truly disrupt global LNG trade patterns? Some experts point to the waning price differential between the U.S. and Asian markets as having altered the upside that the canal expansion was thought to offer LNG. Demand in Asia for natural gas has tailed off, and prices remain persistently low on a global scale, while the once highly sought-after Japanese market has seen natural gas prices more than halved in the last year or so.

Mark Konold, senior fellow in the Climate and Energy Program at the Worldwatch Institute: Expansion of the Panama Canal could eventually prove to be of great benefit to LNG producers in the Western Hemisphere. In particular, U.S. suppliers can expect to reduce shipping costs dramatically with shorter routes and delivery times. However, given the currently over-supplied market and historically low prices, it may be a while before those competitive advantages take hold. Compounding the issue is the recent decrease in Asian demand, an unforeseen factor when many of these export projects began. Were demand to grow substantially in Chile, or an import facility be installed near the canal for distribution throughout Central America, the outlook might be rosier, but as it is, the expanded canal simply makes it faster for supply tankers to hurry up and wait. Regarding the safety issue, there is talk of ships lightening their load before traversing the canal, though this could lead to increased time and cost. LNG terminals could be built at either end to move the commodity without endangering the vessel, but these options would defeat the whole purpose of expansion. Given the expanded canal only recently opened, it may take some time to determine the severity of the issue, though it is concerning, given the need for ships to maneuver in such tight places. Just like the canal itself back in the late 19th century, it appears there is a significant challenge in search of a solution.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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