As recently as 2 months ago, people were still wondering if the Panama Canal expansion was ever going to be completed. With the project back on track, American LNG companies are primed for business…
It’s one of only 7 energy transit chokepoints in the entire world, and the only one representing the Americas.
Without it, ships would be forced to travel over 8,000 miles AROUND South America to get to their final destinations between Asia and eastern US ports.
So to say that the Panama Canal is an important trade route is a severe understatement.
But it wasn’t that long ago that the vital passageway began falling victim to under-usage.
When the canal was completed in 1914, the maximum length for any ship allowed to pass through was set at 950 ft. while the maximum width (known as the beam) was set at 106 ft.
These ships were called Panamax ships and anything larger was strictly prohibited from passing through the Canal’s series of lock chambers. The largest ship ever allowed to transit the Canal was the 973 ft. long and 106 ft. wide San Juan Prospector – which was an exception to the rule.
But over the last few decades, cargo ships have been getting bigger and bigger. Today, modern shipping vessels are being built that are much larger than the Prospector.
In fact, the 100 largest container ships in the world have a minimum length of 1,200 ft. and a beam of 158 ft.
Unfortunately, nearly 40% of today’s container ships are too large for the Panama Canal. What’s worse, many of these giant ships are beginning to transport one of the most promising and lucrative products in the world: US LNG Exports.
When the US government began green lighting LNG export terminals a few years back, one of the first concerns was whether or not LNG companies would even be able to get their ships through the Panama Canal.
To miss out on this terrific opportunity would be terrible for the Panamanian economy. Thankfully, the Panama Canal Authority (PCA) is finally making the necessary push to get these long awaited changes done…
Canal Expansion A No-Brainer
Back in 2006, a proposal to expand the Canal with larger lock chambers was approved.
Since its inception, the expansion project was expected to cost $5.25 billion and be operational by 2015.
But as with many projects of this magnitude, plans didn’t go smoothly and towards the end of 2013, progress hit a massive snag.
Contractors charged with expanding the canal demanded an additional $1.6 billion in overflow funds to complete the project and they blamed the PCA for flawed geographical studies during the planning stages.
In response, the PCA claimed they were being blackmailed, saying that the contractors deliberately slowed work on the project by 40%, which led to the cost overruns.
Finally, a deal was approved last week where the construction consortium will kick in an additional $200 million while being able to claim $400 million back from the project insurers.
With this major setback now resolved, the Canal’s completion date is now slated for early 2016.
Boasting larger lock chambers, the new chambers will feature sliding gates, doubled for safety, and will be 1,400 ft. long, 180 ft. wide, and 60 ft. deep. This will allow the transit of vessels with lengths of up to 1,200 ft., beams of up to 160 ft., and drafts of up to 49 ft. deep.
This is roughly equivalent to a cargo ship carrying around 12,000 full-size containers, just in time to welcome the giant wave of LNG exports soon to be leaving our shores.
Exactly what LNG export companies are looking for…
The Sabine Pass facility in Louisiana which is owned by Cheniere Energy (NYSEMKT:LNG) was one of the first terminals to be approved by President Obama and the company is anxiously awaiting the opening of the newly expanded Canal.
The PCA estimates that a standard 150,000 cubic meter tanker ship going from Sabine Pass to Fukuoka, Japan can shave more than 20 days of travel down to just 43.4 days by crossing the Canal instead of heading east across the Atlantic.
On top of that, overall transport costs would drop from $11.4 million to $8 million.
With such significant savings, LNG exporters can’t wait to get their ships in the water and Asian importers are already signing delivery agreements.
Two-thirds of ConocoPhillips’ (NYSE:COP) planned LNG output has already been snatched up by Asian customers.
And shipbuilder Teekay LNG Partners (NYSE:TGP) signed a 5-year deal last summer with Cheniere to transport LNG out of Sabine Pass and is building a number of new LNG vessels to handle the shipments.
It’s expected that other terminals will gain approval between now and 2016.
All that’s left is for the new Panama Canal to open up for business…
And when it does, business will be booming.
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