The Fuse

LNG and Propane Trade to Gain from Panama Canal Expansion, Crude Not So Much

by Matt Piotrowski | June 24, 2016

This weekend, the Panama Canal’s expansion will open, taking about twice as much cargo as before and bringing about opportunities for more exports of U.S. crude oil, refined products, and LNG to the Pacific. The Panama Canal, completed a little more than 100 years ago, has been beneficial in accelerating trade from the Atlantic to the Pacific. Now with the U.S. an energy superpower and laws favorable for the export of crude oil and gas, the expansion, which has been nine years in the making and cost more than $5 billion, comes at a good time for the industry.

With the U.S. an energy superpower and laws favorable for the export of crude oil and gas, the Panama Canal expansion, which has been nine years in the making and cost more than $5 billion, comes at a good time for the industry.

But tempered demand growth in Latin America and Asia, along with fluctuations in shipping economics, will likely keep oil flows through the canal in check. Furthermore, the fact that very large crude carriers (VLCCs), which carry 2 million barrels of oil, are still too wide to use the canal means impacts to the crude market will be mild. Natural gas and propane, meanwhile, will benefit greatly from the expansion given that LNG tankers will now be able to fit in the canal, while exports of propane don’t have to deal with ship-to-ship transfers.

Last year, according to the Energy Information Administration (EIA), most of the traffic through the canal for crude and refined products moved from the Atlantic to the Pacific, with diesel and gasoline accounting for the largest volumes. As a result of the shale boom—which allowed U.S. refiners to buy and run discounted crude—and growing demand in Latin America and Asia, product exports increased drastically this decade and trade picked up through the canal. Traffic for crude oil has been much smaller because of size constraints for ships, and included mostly volumes from the Caribbean.

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Last year, some 360,000 barrels per day of refined products were exported from the U.S. to Chile, Peru, and Ecuador, the three markets on the Pacific side of South America. Most of the volumes came from Gulf Coast refiners, who will benefit from the wider canal in further penetrating the Asian market, but only when arbitrage economics allow. Export volumes of refined products to China, India, South Korea, Japan, and Singapore averaged 626,000 b/d last year, more than double at the beginning of the decade.

“In the short term, the impact on global oil flows appears limited.”

“In the short term, the impact on global oil flows appears limited,” the International Energy Agency (IEA) said in its latest monthly Oil Market Report. “The biggest impact will be on American flows, chiefly US product exports headed to Pacific Latin America and the Far East.”

With regards to crude oil, although the width of the expansion isn’t large enough for VLCCs, other tankers such as Suezmaxes, which can hold some 1 million barrels, can now move through the canal. There is scope to increase flows, but only by so much. A modest amount of crude has been exported from the U.S. to Japan and China so far this year following the lifting of the ban in December. A bigger impact may occur for Caribbean crudes from Latin American producers such as Venezuela, but some cargoes, as the IEA points out, would have to be partially unloaded onto the Trans Panama Pipeline and then reloaded onto ships. This process could be costly and logistically strenuous. Besides freight rates, tariffs and pipeline utilization will affect how much Caribbean crudes will flow through the expanded canal.

Gas and propane to benefit the most

While crude and products will see only modest changes, the effects for LNG and propane will be much greater. The U.S. LNG industry will now have access to a transit route that can accommodate larger tankers at a time the industry is primed to export volumes to the world’s top market, Asia.

The U.S. LNG industry will now have access to a transit route that can accommodate larger tankers at a time the industry is primed to export volumes to the world’s top market, Asia.

“The expanded canal will be transformational for U.S. LNG exports,” said Jackie Forrest of ARC Energy Ideas in a report. “Before the Panama expansion, LNG tankers leaving Sabine Pass could not squeeze through the canal to reach Asia. Instead, they would have had to travel through Egypt’s Suez Canal or around Africa’s Cape of Good Hope. Using the new shorter route, the trip to Japan from the Gulf of Mexico is reduced by more than one-third.”

In February, the country’s first LNG tanker shipped fuel from the Sabine Pass facility in Texas, and the industry is poised to penetrate Asian, Latin American, and European markets, where prices are higher than the U.S. Besides Cheniere’s Sabine Pass, there are five other LNG export projects under construction, including Sabine Pass’s next phase. Some of the terminals now under construction have 20-year contracts with buyers in Japan and Korea. Experts have said that the U.S. could become the third largest LNG exporter, behind Qatar and Australia.

The effects on the propane market should be similar. The U.S., as a result of high shale output, has seen propane exports to Asia boom, reaching more than 200,000 b/d in March. This trend should continue, and the widening of the canal will help. The EIA notes: “The canal’s size restrictions required ship-to-ship transfers, which created bottlenecks for U.S. propane exports to Asian markets.” It adds that the expanded canal “will allow a majority of very large gas carriers (VLGC), the type of ship that carries propane and other hydrocarbon gas liquids (HGL), to transit, likely reducing or perhaps eliminating the need for ship-to-ship transfers.”

In all, the canal’s expansion is good news for the U.S. oil and gas industry, particularly since it coincides with refined product demand growth—albeit a tad slower than before—in Asia-Pacific countries and Latin America, as well as the easing of export restrictions for crude and LNG. It’s also good for U.S. trade partners, particularly in the Asia-Pacific region, as it now gives them access to increased diversity of supply.

 

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