ECONOMICS OF THE PANAMA CANAL EXPANSION

This coming Sunday, June 26, 2016 the Panama Canal Authority that operates the Panama Canal, will inaugurate the first expansion of the Panama Canal made by Panama without the assistance of foreign Government since 1914, year of the Opening. Over 70 Head of States have been invited to this grandiose Opening. A third set of locks that will allow for the transit of larger ships. With the exception of U.S. propane exports, the expansion of the Panama Canal is not likely to drastically affect crude oil and petroleum product flows.

Entrances to the Panama Canal are near Colon, Panama, on the Atlantic Ocean (Caribbean Sea) side, and near Panama City on the Pacific Ocean side. The canal expansion involved deepening and widening certain portions of the canal and constructing an additional, larger set of locks. Unlike the old lock system, which has two lanes of side-by-side traffic, the new set of locks will be one large lane and allow four transits per day, supplementing the 25 daily transits using the older lock system.

The wider and deeper navigation channels and larger locks allow for the transit of larger vessels through the canal. The maximum vessel dimensions in the old lock system, known as Panamax vessels, limited tankers to those of approximately 300,000 to 500,000 barrels of capacity of petroleum products like gasoline and diesel fuel. The newer lock systems allow for the transit of larger Neo-Panamax vessels, with estimated petroleum product capacities of 400,000 to 600,000 barrels.

The economics of shipping crude oil and petroleum products improve as the size of the ship increases along with distance traveled. Crude oil typically is loaded on vessels classified as Very Large Crude Carriers (VLCC) or Ultra-Large Crude Carriers (ULCC).

The problem however is that both VLCC and ULCC are too large to transit the Panama Canal fully loaded through the new locks. Petroleum products are typically loaded on several smaller vessels, some of which can transit the existing and new canal dimensions, depending on a ship's hull design and restrictions on depth in water (draft). This means that most of the petroleum-related traffic through the canal will be petroleum products rather than crude oil. There is clearly a misconception from the start if the Panama Canal Authority was expecting to change the economics of the Petroleum Logistics around the world.

In 2015, most of the petroleum-related traffic on the canal moved southbound, from the Atlantic to the Pacific. Diesel fuel and gasoline made up the largest share of southbound traffic, totaling 9.5 million long tons (a unit of measure for cargo volume) and 9.1 million long tons, respectively. Largely because of ship size restrictions, crude oil traffic was significantly smaller, and fairly equal in direction, with 3.0 million long tons going southbound and 2.6 million long tons going northbound (from the Pacific to the Atlantic).

Previously, the size limitations of the canal created logistical bottlenecks for U.S. propane exports to reach markets in Asia, forcing shippers to perform ship-to-ship transfers. The new, larger Panama Canal locks will allow most Very Large Gas Carriers (VLGC), the type of ship that carries propane and other hydrocarbon gas liquids (HGL), to transit, likely reducing or even ending the practice of ship-to-ship transfers. So for gas transports it is good news but for Petroleum and other Hydrocarbons the inauguration will not affect the Logistics. Until now, less than 10% of the world’s 400-ship fleet of LNG carriers can use the canal, but starting on Sunday more than 90% will be able to. In fact, the only LNG carriers that will not be able to use the canal because of their width are the Q-Flex (164 feet wide) and Q-Max (180 feet wide), vessels whose use was pioneered by Qatar Gas to move staggering volumes of LNG.

The first “New Panamax” vessel scheduled to pass through the canal’s new, longer, wider locks will be the Lycate Peace, a Very Large Gas Carrier (VLGC) that is transporting propane from Enterprise Products Partners’ Houston Ship Channel export terminal to Tokyo Bay in Japan. However, it will take time for the industry to adapt to this new reality. The expansion took 7 years and came after so many years of procrastination that the industry adapted to the old way and explored new routes. How long will it take for this new reality to be seized by the industry is to be seen.

In addition, the Panama Canal Authority is facing an array of skepticism from several participants starting with the canal tugboat union that has expressed doubts on the strength and solidity of the construction, its earthquake resistant, etc.

The good news is that the expansion is finally done and the industry needs now to adapt to this new reality.