The Panama Canal is leaking!? Eh…who cares, LNG trade seems to say

During routine testing of the expanded Panama Canal, engineers recently discovered some alarmingly large leaks in the new Cocoli Locks on the Pacific side, separating the middle and lower chambers. Despite the startling volume of water that can be seen cascading through what appears to be several meters of solid concrete, news of this development seems to have remained a secret. Alternatively, perhaps it’s just that no one actually cares.

According to the Panama Canal Authority, LNG tanker traffic is expected to reach 25 million metric tons per year upon completion of the expansion project. In recent years, LNG export project developers along the US Gulf Coast have been banking on an expanded canal for sales to Asia. Indeed, according to some estimates, the transit distance from the US Gulf Coast to Japan can be reduced to around 9,215 nautical miles, compared with 14,570 nautical miles through the Suez Canal.

Currently, the Panama Canal accommodates just 23 LNG vessels out of a total fleet size of 421. Once completed, the expanded canal will allow some 89% of all LNG tankers to transit the waterway, further facilitating inter-basin trade between the Atlantic and Pacific.

In 2015, the slowdown in inter-basin LNG trade has largely been blamed on weak prices in the global gas market. It’s undeniable that the lack of arbitrage opportunities has impacted trade patterns. Fewer cargoes originating in the East Atlantic are arriving in the Far East and the global swing producer Qatar has been opting to send additional volumes to Europe instead of Asia.

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How has this pattern impacted producers and re-exporters in the West Atlantic, though? Taking a look at exports from Trinidad and Tobago and the US over the last five months, it would seem at first glance that low prices are also curtailing inter-basin trade by regional exporters. Of the approximately 12.8 million cubic meters exported from the West Atlantic in the May to mid-September period, more than 50% has arrived at nearby shores in Chile, Argentina, the Dominican Republic and Brazil, while not a single cargo has arrived in Japan, South Korea, China or Taiwan.

Given the wide spread in inter-basin gas prices seen during 2014, it would be reasonable to expect that at least some LNG cargoes of West Atlantic origin would have arrived in the Far East last year. Indeed, during the same May to mid-September period in 2014, the Asia-Pacific premium over Atlantic Basin prices averaged $4.83/MMBtu, as measured by the differential between the Platts JKM and the UK National Balancing Point.

A look at the data, however, is revealing. From May to mid-September 2014, just 722,424 cubic meters — the equivalent of approximately five cargoes — were shipped from the West Atlantic to the Far East.

With global LNG supply currently around 250 million metric tons per year and an additional 140 million metric tons now under construction, it’s widely expected that LNG prices will remain low, at least through the end of the decade.

If last year’s historically-high LNG prices — which climbed above $20/MMBtu — were insufficient to stimulate more inter-basin trade between the West Atlantic and the Far East, is it possible that most US-produced LNG will simply be sold-off in the Atlantic Basin?

Of course, the cost-savings created by the Panama Canal will change the equation, but with LNG prices hovering between $6.00-$7.00/MMBtu, or possibly lower, will it be enough to make a difference?

If the industry’s reaction, or rather non-reaction, to the Panama Canal leak is any indication, it looks like the answer is a resounding "no."