The Panama Canal Needs To Be Expanded Again

Authored by Irina Slav via OilPrice.com,

When the Panama Canal was expanded, it drew a lot of enthusiasm, with many seeing U.S. oil and gas exports surging thanks to the wider waterway that cuts the journey to several key markets by between 15 and 30 days, therefore cutting the costs of this journey as well.

Besides the shorter journey times for tankers and LNG carriers, the wider Panama Canal could handle larger vessels such as the Neopanamax class, which is widely used for shipping LNG globally, and Aframax crude tankers.

Yet not all is bliss.

Forbes’ oil correspondent Gaurav Sharma wrote in a recent story that although LNG carriers passing through the expanded Panama Canal have increased significantly in numbers, they are still below what the canal can handle on a daily basis: 12 Neopanamaxes. Right now, the average daily transit of this size of vessel is five.

What’s more, not all five carry LNG. In fact, the Panama Canal Authority has reportedly only allocated one slot daily for LNG carriers, which will inevitably lead to congestion as U.S. production—and especially export-bound production—continues to boom.

At the end of last year, tensions flared between the PCA and LNG producers about whose fault it is that not enough LNG tankers are using the freshly expanded channel that saves 11 days from the journey to Asia, which has become a key market for U.S. LNG. According to the producers, the canal has expanded the access of cargo vessels at the expense of LNG tankers. According to the authority, LNG producers can’t comply with timetables.

The Oxford Institute for Energy Studies shares the concern. In a recent paper on the Panama Canal and LNG, the institute said the Panama Canal Authority was working with LNG producers to increase the allocation for LNG carriers by the fall of this year, but the problems remain. This happens after last year the Authority said it would gladly grant LNG producers another daily slot if they “proved worthy.”

So, it seems the LNG industry and the PCA have come to at least a tentative agreement that something must change, so exporters can take fuller advantage of the canal’s expansion. But some believe that a further expansion is necessary.

Right now, despite the official only slot daily for LNG carriers, two are becoming more frequently allocated, allowing for the shipping of 38.3 billion cu m of gas. U.S. energy companies, however, are pumping ever more gas and building more and more liquefaction terminals. The Oxford Institute for Energy Studies believes the Panama Canal will become congested with LNG carriers as soon as next year or, under a better-case scenario, by 2021. This will happen even if the PCA boosts the allocations for LNG to four daily.

For now, the Panama Canal is a great passage for LPG and condensate carriers. But it’s LNG that urgently needs to reach global markets. As production grows, the risk of bottlenecks in the canal will inevitably become a harsh reality. It may well be the case that the freshly expanded waterway could need another expansion. The alternative would be costlier for both buyers and sellers in the long term.