Expanded Panama Canal could reroute LNG

2015 completion of work will allow tankers to move more freely, could edge industry toward global pricing structure similar to oil

Bill White

Researcher/writer for the Office of the Federal Coordinator

The liquefied natural gas industry awaits with anticipation an event in 2015 that could crack the framework upon which the industry has been built.

Opening a wider Panama Canal that year could disrupt the industry’s core economic model that says LNG made in the Atlantic Basin generally gets sold to countries in the Atlantic Basin, while LNG produced in the Pacific-Australia Basin goes to buyers in that region.

If the canal widening and deepening erodes this rule of thumb, the logic of separate natural gas prices in North America, Europe and Asia could start to dissolve, edging the industry toward a more global pricing structure similar to the oil industry.

The canal could change the flow of money between LNG buyers and sellers, and that has their attention. Hardly an international gas conference goes by these days without some discussion and speculation about what the expanded canal will mean for the industry’s future.

Peruvian LNG routed to Europe? Nigerian LNG tankered to Japan? Gulf of Mexico gas shipped to South Korea? And so on. Relatively little of that cross-pollination occurs now, although some does, especially as Asian demand for LNG spiked in 2011. Almost all of the 11 liquefaction projects proposed for the U.S. Gulf Coast are bets that the canal will open Asian markets to Atlantic Basin liquefaction.

The $5.25 billion canal expansion is one of the world’s great transportation infrastructure projects now under way.

Panama is upgrading the 100-year-old canal to accommodate today’s superships that don’t fit the waterway now. A new, wider set of locks will run parallel to the old locks — sort of like the way interstate highways in the 1960s updated the old U.S. highway system, allowing more traffic and shorter transit times.

The LNG industry operates on a large scale — multibillion-dollar liquefaction plants, colossal tankers — to achieve economies of scale. The fleet’s 370 tankers are so big that only 6 percent of them can squeeze through the canal today, and none of them try, Kasper Walet with Amsterdam-based energy consultant Maycroft said at an LNG conference last year. But 80 percent will fit through the canal when the expansion is done.

“It should be a real game changer,” Walet said.

Not everyone agrees with that, noting that tanker charters can cost over $100,000 a day, and longer, two-ocean trips mean more days at sea and more money out of someone’s pocket. Further, most tankers already are locked in to fixed routes between a given liquefaction plant and given LNG buyers. Relatively few tankers are available to free-lance shipments.

But in recent years as the gas-price gaps between North America, Europe and Asia have widened, more LNG shipments are chasing price, with tankers diverted to higher-priced markets and spot sales becoming common.

Last year, the spot market comprised 25 percent of LNG transactions, up from 16 percent in 2006, according to the International Gas Union. Some see this as demonstration that in the right circumstances, the traditional industry model of Atlantic LNG for Atlantic buyers and Asian LNG for Asia isn’t as rock solid as previously believed. The Panama Canal expansion might be timed just right.

LNG’s two distinct regions

But LNG is the fastest growing sector of natural gas trade. And most forecasts predict it will remain so.

Asia is the biggest LNG market and the one holding the strongest growth prospects, as China and India continue to build their economies.

Still, Europe, South America and North America are LNG consumers as well.

Over time, the industry split itself into two distinct regions, each serving its own geographic neighborhood: Atlantic Basin LNG makers served Europe and eastern North America, and Pacific-Australia makers supplied the Far East.

Until recently, LNG prices in the two regions were similar, and due to the high expense of moving LNG long distances there was little financial advantage in shipping LNG from one basin to the other. For example, in 2009 the LNG price averaged $9.06 per million Btu in Japan compared with a German imported-gas price of $8.52, according to the BP Statistical Review.

In 2010 and 2011, 76 percent of LNG made in Atlantic Basin plants was sold to Atlantic Basin countries, according to the International Group of Liquefied Natural Gas Importers. Atlantic Basin LNG makers are Algeria, Egypt, Libya, Nigeria, Equatorial Guinea, Norway and Trinidad and Tobago.

In those same two years, 98 percent of the Pacific-Australia LNG went to Asian buyers. These LNG makers are Australia, Indonesia, Malaysia, Brunei, Russia (Sakhalin), the United States (Alaska) and Peru.

Four Middle Eastern countries are swing producers, sending their LNG both east and west. Qatar, Oman, Yemen and the United Arab Emirates are located roughly equidistant from European markets via the Suez Canal and those in the Asia’s Far East. They shipped about 60 percent of their LNG to Asia in 2010-2011.

In marketing and logistics, distance can explain a lot. The United States conducts far more international trade with Canada than with Australia — two countries of about equal population and area — because Canada is a lot closer.

So it goes with LNG.

It costs less than $1 per million Btu to ship LNG from Indonesia to Tokyo, according to recent figures from trade publication ICIS Heren. A like quantity from Australia to Tokyo costs about $1.22. (A million Btu is roughly 1,000 cubic feet after the methane is turned back into vapor.)

But shipping LNG from the Caribbean nation of Trinidad and Tobago to Tokyo costs about $4.16 per mmBtu, from Norway about $4.13, from North Africa about $3.26. The buyer, seller or broker eats the extra shipping cost when LNG travels long distances — a potent incentive to avoid that cost.

Another disadvantage of long-distance LNG travel is that more ships are needed to deliver the same amount of gas, because each tanker’s round-trip takes more time. LNG tankers aren’t cheap. They cost roughly $200 million to $250 million each.

The industry generally expects the expanded Panama Canal will shave about $1 per mmBtu off the LNG shipping cost between the Atlantic and Pacific and cut days from the transit time between the two basins.

The Panama Canal Authority is still studying what toll it might charge LNG tankers to transit the canal, so the final figure could be higher or lower. Whatever the toll, the bigger canal will improve the economics for shipping LNG very long distances, creating incentive to exploit pricing differences between the Pacific and Atlantic. If enough LNG chases the highest price and supply and demand rebalance, the price gap should narrow, some in the industry predict.

Part 2 of this story will appear in the Jan. 6 issue of Petroleum News.

Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/expanded-panama-canal-could-reroute-lng-industry.