MAR
13

Will Panama Canal Delays Throw a Wrench in LNG Exports to Asia?

 
Last week, we wrote about how American natural gas won’t be finding its way to Europe any time soon, and is far from a total antidote to the threat of Russia shutting  down natural gas supplies. The key reasons essentially boil down to the following. First, it will be nearly impossible for U.S. gas, after the costs of LNG shipping is added in, to compete with Russia’s two competitive advantages: cheap reserves and existing pipeline infrastructure. Second, LNG exports from the United States are currently almost nonexistent. LNG export terminals have not been completed, and very little exports will occur before 2020. Finally, energy export decisions are made by companies and the free market, not the U.S. government, and will be motivated more by prices than geopolitics. Asian LNG import prices are significantly higher than Europe’s, incentivizing U.S. companies to ship to ship east instead of west. Let’s zoom in on that last issue: higher LNG import prices in Asia. As we noted last week, average LNG import prices for Japan have hovered just above $16 per million BTU. In contrast, European LNG import prices have hovered around $11 per mBTU, and their five year peak was $13 per mBTU.

The table above, from the report by NERA commissioned by the Department of Energy to examine the international economic impacts of U.S. LNG exports, expects that at the greatest point of discrepancy, it will cost an extra $2 per mBTU to transport LNG from the U.S. to China or India compared to Europe, and less than a dollar more to transport to Korea or Japan. When it comes to shipment specifically (since total transport costs include other costs listed in the table above) shipping to Europe only saves $1.30-1.50 per MBTU—not enough to offset the $5 price premium in Asia. However, some of the assumptions underpinning NERA’s report could fail to come to fruition. First, there’s the possible issue of the Panama Canal.

Right now, no LNG shipments transit through the Panama Canal due to size restrictions. The Isthmus can only currently accommodate vessels less than 39.5 feet, known as Panamax vessels. After the expansion, approximately 80 percent of the world’s current LNG tanker fleet will be permitted to traverse the strait. Many have said the planned expansion is imperative for the success of LNG trade to Asia—without it, shipments from the U.S. would be forced to reroute around Africa’s Cape of Good Hope.

The expansion is tentatively scheduled for completion in 2015. However, construction sat at a standstill last month for a number of weeks due to disagreements about cost overruns between the Panamanian government and the consortium of construction companies completing the work. Projected costs have already risen from $5.2 billion to $7 billion, and the expansion is only half completed. The current dispute is only the most recent. According to Foreign Policy, the project thus far has been plagued by construction problems, fatal accidents, record rainfall, and other setbacks. Given the enormous strategic and financial implications of the canal, most analysts argue it’s unlikely that the disagreements won’t be resolved, but even delays into 2016 would hurt the first U.S. LNG shipments. Were United States companies the only entities vying for a share of the Asian natural gas market, it would be one thing. The cost of a trade route to Asia that couldn’t utilize the Panama Canal shortcut would be significant, but probably wouldn’t be enough to derail LNG trade altogether. However, LNG exporters must also contend with increasing competition from Australia, Malaysia, and Qatar, making marginal transportation costs even more important. Being required to circumvent the horn of Africa will add thousands of miles and increase fuel costs by more than 25 percent. Furthermore, there are reports that Asian buyers, eyeing relatively inexpensive U.S. supplies, are beginning to haggle over prices. News outlets aren’t reporting specific numbers, but it’s safe to assume that natural gas companies in Korea, Japan, and China would like to pay closer to U.S. prices of $3-6 per mBTU, relative to their $14-16. Of course, for companies such as Chevron, which has sought to avoid the Panama Canal issue altogether by building an LNG export terminal on the West coast of Canada, that’s a tough bargain. LNG export terminals cost billions, and that’s before the costs of powering the liquefaction plant, and shipping costs themselves. While Asian natural gas consumers are motivated by price, European nations are incentivized by much more. The Crimean invasion has laid their energy insecurity bare, and a number of central European nations are urging the United States to boost natural gas exports to Europe. Several signed a letter asking Congress to support speedier approval of natural gas exports, noting that the "presence of U.S. natural gas would be much welcome in Central and Eastern Europe." Poland is attempting to stimulate its long-stalled shale gas development with tax incentives for producers. Are these countries willing to pay a premium for stable long-term contracts for American gas? Another unanswered question is why they haven’t looked to their nearer Middle Eastern neighbors for supplies, but that’s a question for another day. All that said, for potential European gas buyers, the Panama Canal delays and stubborn Asian buyers could be a blessing in disguise.