Liquefied natural gas (LNG) vessels have been waiting longer to pass through the Panama Canal in recent weeks, tightening an already stretched shipping market and creating logistical issues for U.S. LNG exports at a time when global gas prices are moving higher.
“There is no doubt that this has created some headaches in LNG trade,” said Gonzalo De Arteaga, a senior LNG adviser at Norwegian shipbroker Fearnleys AS. He told NGI that wait times for LNG vessels hit their highest point ever at nearly 15 days late last month.
A variety of factors have combined to create longer lines at the canal, a vital passage for LNG and other goods to make their way to Asia. Eero Vanaale, a London-based analyst at shipbroker Braemar ACM, said the delays are primarily related to LNG vessels that don’t have a pre-booked transit slot to pass through the canal.
While overall traffic through the canal has not increased this year — due primarily to the pandemic’s impact on the global economy — LNG traffic has risen slightly. For all vessel traffic, daily transits slid to 30 per day during the canal’s fiscal year, which ended in October. That’s compared to 36 daily transits in the prior year. Annual LNG traffic was up over the same time, going from 399 to 419 transits.
While global LNG cargo loadings are still not on pace with last winter’s levels, the United States is an exception, De Arteaga said. Feed gas deliveries have been running at or near peak capacity, hitting 11.41 Bcf/d on Wednesday. Braemar data shows that year/year U.S. cargo loadings have increased by 29% through November.
Transits through the canal are booked in advance by up to a year, and LNG carriers can book only one transit per day in each direction, which are “almost always taken up on the day they are offered.” according to Richard Pratt, an LNG industry and shipping veteran who recently explored the delays in a blog post for RBN Energy LLC.
Vanaale told NGI that as spot cargoes chartered on shorter notice increase in the Atlantic Basin, they might not have a slot booked and be forced to wait longer to pass through the canal, which is reportedly considering adding more slots for LNG ships. Vessels could also take the longer route toward the Cape of Good Hope to get to Asia.
More ships are opting to take the longer route, Pratt said. He said a round-trip passage from the Gulf Coast to South Korea takes roughly 60 days via the canal, while a round-trip via the Cape of Good Hope takes up to 75, adding to voyage costs.
Vanalee also said that precautions against Covid-19 have likely worsened delays as the Panama Canal Authority (PCA) was forced to adjust staffing levels and shifts in response to the outbreak, leaving limited personnel to operate the locks.
The delays have come at a time when winter buying is accelerating and prices are reacting accordingly, which has created scarcity in the shipping market. Global loadings have been slow to react to winter demand, especially given outages that began in the fall when some U.S. terminals were knocked out amid a tumultuous hurricanes season, De Arteaga said. Supply disruptions this year in Norway, Indonesia, Malaysia, Qatar, Nigeria and Australia have also put upward pressure on prices.
U.S. LNG is back in the money, particularly in Asia, where spot prices have hit their highest point in two years by surpassing $9.00/MMBtu. Price premiums are strong down the curve as well, with spreads between the Gulf Coast and North Asia at $4.354 in January, $4.650 in February and above $3.00 for March, according to NGI data. Spreads are over $2.00 to Europe during the same time.
De Arteaga said there were no vessels available last week in the Atlantic Basin for prompt delivery, while there were only two available in the Pacific Basin. Bloomberg reported Wednesday that a broader survey of brokers and traders also found that prompt availability is currently near zero.
That could prove problematic for some U.S. offtakers looking to take advantage of price premiums. U.S. exports are considered to be more shipping intensive as the distance to key demand centers is above the global average. GasLog CEO Paul Wogan said during the shipper’s third quarter earnings call last month that it took about 2.5 ships to export every 1 million metric ton of U.S. gas during the period, or nearly twice the global average.
A lack of ships has also pushed up the rates to charter them. According to Braemar data, average charter rates for three different classes of vessels were up more than 30% each between October and November. The average cost to charter larger vessels capable of carrying 176,000 cubic meters of LNG was $111,031/day in November, compared to $84,500 in October.
Spot LNG Vessel Rates on Wednesday were at $130,000/day in the Atlantic Basin and $125,000/day in the Pacific Basin, according to NGI data provided by Fearnleys.
To be sure, the Panama Canal delays aren’t entirely without precedent and are largely expected to be temporary. De Arteaga said they’ve already begun to normalize in recent days, with the PCA “doing their best” to allow 3-4 LNG transits daily. PCA also recently said that overall daily transits have increased to 36.
“What is happening now is not entirely unheard of,” Vanaale added. “The reasons are obviously very different from whatever has happened in previous years.”
Wait times of up to 10 days can occur during the dry season when water levels recede, but that was more common with the canal’s older locks before it was expanded in 2016 to accommodate bigger vessels and increasing LNG traffic, Vanaale said.
Pratt added that it’s not uncommon for vessels to wait about two days to make sure they reach the canal in time for their transit booking or if bad weather blows in. But the recent constraints are a far cry from this summer, when more than 100 U.S. cargoes were canceled as global prices fell and it proved uneconomic to move North American natural gas overseas. The height of the pandemic’s impact on the waterway occurred between May and July, when transits declined by 20%, partly due to the drop in LNG traffic, the PCA said.
As LNG loadings have increased and put pressure on the canal, Pratt questioned the potential for future constraints as more U.S. LNG capacity comes online along the Gulf Coast.
“Given the determination of project sponsors aiming to develop a second wave of U.S. Gulf Coast LNG export schemes, what constraints and costs will the Panama Canal impose on these projects, and just as importantly, what advantage might the projects under development on the west coast of North America enjoy over their rivals?”
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