In the first of a three-part series, FreightWaves examines prospects for liquid bulk transiting the Panama Canal. Part Two will feature the outlook for container shipping, and Part Three will focus on dry bulk commodities, led by grains and coal.
As tens of billions of dollars are spent building liquefied natural gas (LNG) export facilities along America’s coastline, the importance of the Panama Canal is coming into sharper focus.
Many of the cargoes from these terminals will be destined for Asia and must pass through the larger ‘Neopanamax’ locks. These locks – which opened for business in June 2016 which recently celebrated their one-thousandth day in service – allow passage of larger vessel types; LNG ships are too large to fit through the original ‘Panamax’ locks.
As U.S. LNG exports surge in the years ahead, will there be enough canal transit slots to handle the load?
“We are not worried, and the LNG industry should feel assured that there is nothing to worry about,” emphasized José Ramón Arango, liquid bulk specialist and executive vice president of planning and commercial development at the Panama Canal Authority (ACP).
“The Panama Canal is not static. It’s a dynamic entity. If more capacity is needed, we’ll do what’s required to improve capacity,” he told FreightWaves.
A total of 23.3 million tons per annum (mtpa) of capacity of ‘first wave’ LNG export facilities is already online in Louisiana (Sabine Pass) and Maryland (Cove Point). During the remainder of this year, another 19.5 mtpa of capacity is expected to debut in Louisiana (Cameron LNG, Sabine Pass), Texas (Freeport LNG, Corpus Christi) and Georgia (Elba Island).
Beyond that, ‘second wave’ project approvals have begun, including a green light for the massive 15.6 mtpa Golden Pass facility in Texas. Other final investment decisions are believed imminent.
According to ACP data, 6.36 million long tons (1 long ton = 2,240 pounds) of LNG transited the Neopanamax locks during FY2017 (October 1, 2016-September 30, 2017). The volume rose 81 percent to 11.5 million long tons in FY2018.
Arango said that the ACP predicts LNG volumes will reach 15 million long tons in FY2019 and jump to 28 million by FY2021. None of this was expected when the ACP first embarked on its plan to build the new locks.
“It’s worth remembering that when we first started the expansion project back in 2007, it was just the beginning of the shale revolution,” he noted. LNG ships were too large to transit the original ‘Panamax’ locks, and at the time the plan for the new locks was approved, U.S. exports were not on the table (the first export project, Sabine Pass, did not file its initial permit until 2010).
Because it had never handled LNG transits before, the ACP began slowly, with one LNG transit slot per day, and nighttime transits prohibited. A second LNG transit slot was added in October 2018, out of a total of eight slots for all ship types using the Neopanamax locks, and LNG ships were allowed to enter the canal at night if they exited in daylight.
Arango said that there is now an average of 1.2 LNG ships transiting the canal per day, and at one point, four such vessels transited simultaneously, two in each direction. He also disclosed that talks are underway with pilots on the idea of removing the daylight-exit requirement.
The ACP modified the reservation system for LNG bookings in October 2018, allowing reservations within 21-80 days of transit, instead of the previous 365 days. Arango explained, “When it was 365 days, only 50 percent of the slots that were booked were used.” LNG shippers paid cancellation fees for the rest, causing scheduling complications for the ACP.
The new system allows LNG shippers to better match transits with their needs, as they determine whether to send U.S. Gulf-sourced LNG to Asia or Europe. When Asia LNG spot prices are too low, cargoes flow across the Atlantic instead.
This is exactly what transpired in recent months, when Asian LNG spot prices sank to multi-year lows. “In December and January, we saw the arbitrage to Asia close, and we saw more cargoes going to Europe and not using the canal,” Arango confirmed.
For all the attention on the canal’s LNG handling ability, LNG is not the highest-volume liquefied cargo trade for the waterway – that crown goes to liquefied petroleum gas (LPG) – another positive surprise for ACP planners.
Long-haul U.S. LPG exports to Asia are carried aboard very large gas carriers (VLGCs), which have a carrying capacity of around 84,000 cubic meters. Only a handful of VLGCs had been able to transit the original Panamax locks.
When the expanded waterway opened, the majority of VLGCs that had previously sailed to Asia around the Cape of Good Hope immediately switched to the Neopanamax locks. This shortened the voyage distance by around 40 percent, which effectively increased the supply of available VLGCs, putting further pressure on freight rates.
By FY2018, LPG carriers accounted for 25 percent of transits through the Neopanamax locks, second only to container ships, which accounted for 46 percent; LNG ships logged the third most transits, representing 12 percent of the total. Arango said that the ACP expects VLGC transits to rise even further this year.
LPG that had previously gone to China was rerouted to other buyers in Asia starting in mid-2018 due to Chinese tariffs on U.S. propane, with China switching its propane sourcing to the Middle East. VLGC transits through the canal were largely unaffected. According to Arango, “Increased LPG imports to Japan and [South] Korea offset the imports to China, and there was basically no effect in terms of [canal] traffic.”
Crude averts canal
Ironically, as America’s oil production reaches new heights, the vessel classes that are most affected by that surge – crude oil and product tankers – are the least important of the liquid bulk businesses for the canal.
U.S. crude exports to Asia are shipped aboard very large crude carriers (VLCCs) that can load 2 million barrels of cargo. Because of the lack of VLCC-capable loading facilities on the U.S. Gulf coast, crude is first loaded aboard 750,000-barrel Aframax-class tankers at the pier, then transferred to VLCCs offshore. This so-called ‘reverse lightering’ process is likely to wane over the next few years, as at least 10 VLCC-capable loading facilities are under development.
“The big new driver has been U.S. tight [shale] oil, but VLCCs are being used for crude, and that is not a ship size that can transit the Panama Canal,” said Arango, who conceded that crude would likely remain only a small slice of the waterway’s business going forward.
Crude and product tankers face two other constraints. First, the Neopanamax locks use tugs, not locomotives; for safety reasons, most tankers require equipment retrofits to use the new tug-based system. Second, drought conditions have lowered the water levels in Gatun Lake, restricting the loads tankers are able to carry. The latest restriction, to a maximum draft of 45 feet, went into effect on April 10.
Tankers that are transiting the canal are primarily refined-product carriers sailing from the U.S. Gulf to the west coast of South America, and to a lesser extent, tankers carrying Colombian crude to the West Coast of the United States and Ecuadorian crude to the U.S. Gulf. Crude and product tankers combined accounted for only 1 percent of transits through the Neopanamax locks in FY2018, and 6 percent of transits via the Panamax locks.