Panama Canal Seeks to Boost LNG Traffic to Asia

By Marianna Parraga, Elida Moreno and Curtis Williams

PANAMA CITY/HOUSTON (Reuters) – The Panama Canal aims to regain vessel traffic carrying U.S. liquefied natural gas (LNG) to Asia as demand in that market rises and a new reservation system allows shippers to lock in slots, following a 65% decline in the transit of this critical traffic, according to the Panama Canal Authority.

A shift by U.S. LNG exports to Europe, prompted by Russia's invasion of Ukraine, along with long wait times and high fees due to severe drought, has kept many LNG ships from using the canal. Instead, many gas exporters are opting for longer routes around South America, a situation that persists even after the canal authority lifted certain restrictions.

The Panama Canal is the shortest route to Asia for U.S. gas exporters, whose sales to Japan, China, South Korea, and India have significantly increased over the last decade. Ricaurte Vazquez, the Canal's administrator, noted, "In the case of LNG, we lost 65% (of traffic), which is traffic now going through Cape Horn, compared to what we had last year or two years ago."

Europe's demand for U.S. LNG and delays in sanctioning new LNG projects in the U.S. are major factors driving this shift. The drought's impact on canal operations also played a significant role, according to shippers.

Anatol Feygin, an executive vice president at Cheniere Energy, remarked, "The challenges of the last drought were very visible for everybody."

Because the Panama Canal Authority imposes a set passage fee, U.S. producers find it more economically viable to choose longer routes to Asia, depending on global LNG prices and demand fluctuations. Feygin commented, "Sometimes people forget that going through the canal … is not a free shortcut."

However, recovery in Asian LNG demand, anticipated to continue next year, may necessitate increased shipments through the canal. Feygin emphasized, "We do think that growth in LNG demand will be driven by Asia."

More Passages Needed

Despite the drought, a new reservation system and reduced costs enabled the canal's net income to rise by 9.5%, reaching $3.45 billion in the previous fiscal year. Commodity producers believe the canal's administration can optimize transits of LNG and liquefied petroleum gas (LPG).

Currently, Panama offers two daily transit slots for LNG ships, but a new long-term reservation system launching in January will allow producers to reserve slots up to a year ahead. The first auction raised $394 million and will account for 40% of all transits through its largest locks in 2025.

Shorter waiting times and reserved slots for vessels arriving without prior reservations will help the canal manage arrivals better. Discussions for further improvements are taking place, anticipating future dry years.

Feygin added, "It still has some constraints that we are working through, like the fact that LNG carriers do not have night-time transit capabilities through the new locks."

The canal is closely monitoring the global LNG fleet expansion and the status of new U.S. projects, expecting larger LNG vessels, including those for floating storage, to increasingly pass through its largest locks in the next 18 months.