How extreme weather is impacting LNG, and challenging the Panama Canal

Panama Canal: pivotal link

On the other hand, the Panama Canal is an important link for maritime transport and energy trade, especially for Northeast Asian countries and the United States’ East Coast and Gulf of Mexico, where more than 98% of the existing liquefaction and export capacity of North American LNG is found. The transport of LNG from the Gulf of Mexico to Asia through the Panama Canal takes approximately 24 days, including a typical transit time of 24 hours, while through the Suez Canal it would take approximately 32 days and 35 days around the Cape of Good Hope. As a result, the Panama Canal has a competitive advantage of approximately eight days for the outbound leg and two weeks for the round trip with respect to alternate routes.

“The Panama Canal has a competitive advantage of approximately eight days”

Parallel to the turbulence experienced in the energy markets, the Panama Canal has also registered a significant rebound in traffic in recent months, which coincides with the peak season for container ships, LNG, and liquefied petroleum gas (LPG) segments. Therefore, to adapt to the increase in demand, the waterway has made operational adjustments, increasing the number of crews while maintaining its security protocols, to allow more daily transits for vessels that arrive, especially without reservations.

To address the increase in arrivals and transit waiting times, the Canal also implemented a series of measures that modify the reservation system for Neopanamax vessels as of 4 January 2021. These changes allow LNG vessels to have more availability to reserve a transit space within the 80 to 15 days prior to navigating through the waterway. Before this modification, only one of the two slots offered during the period could be assigned to an LNG vessel.

Additionally, any space for Neopanamax vessels that becomes available within the two to three days prior to transit can now be offered through an auction process. Since the modifications on 28 January, the Canal has conducted 18 auctions, of which eight have been awarded to LNG vessels.

Recent estimates suggest the high demand for LNG could extend to March 2021, when winter ends in the northern hemisphere. This means the situation of increased arrivals at the Canal, especially of energy-related products, could continue in the short term. Consequently, LNG prices are beginning to stabilise, with spot futures in Asia for deliveries in March at US$9.47/mmbtu, as published by Drewry on 18 January 2021. Additionally, in the coming months LNG supply in the Asia-Pacific region is expected to restart, which would add more gas supply.

This situation of current LNG spot prices being higher than future prices is known as ‘backwardation’ and is one of the reasons why many LNG carriers are trying to take advantage of the boom in prices as they rush to place their cargoes in Asia. Even though 2021 has already presented great challenges for the Panama Canal, our ability to be resilient in the face of these situations will prevail, the way it did as we ensured the continuity of our transit service through the Covid-19 pandemic.