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Panama Canal expansion could be watershed for LPG, but future not assured

Theopening of the widened Panama Canal has finally arrived and U.S. energyproducers are breathing a sigh of relief as consumers of natural gas liquids inAsia can more easily be reached. The future is not certain, however, as aleveling of global prices and competition from producers in the region willreduce the U.S. price advantage.

Long awaited Panama Canalexpansion complete

ThePanama Canal Authority, or ACP, held an inauguration ceremony on June 26 tomark the first transit through the canal's new wider lock system. The ship wasa Neopanamax container vessel.

Thefirst ship carrying liquefied petroleum gas transited the widened canal on June27, according to a June 28 announcement from the ACP. The vessel was roughly741 feet long and 121 feet wide.

The$5.25 billion project began in 2007 and created a new set of locks on theAtlantic and Pacific sides of the waterway. The new locks will allow ships withwidths of 160 feet and lengths of 1,200 feet to transit, and compares to 106feet and 965 feet respectively with the original locks. Allowable draft is alsohigher, at 50 feet compared to 39.5 feet previously.

Theoriginal set of locks will continue to operate and transit Panamax-sizedvessels or smaller.

"The[Very Large Gas Carrier] (which can carry between 375 Mbbl and 550 Mbbl,depending on the model) is the LPG-mover of choice, especially for servingmega-markets like Japan," RBN Energy analyst Housley Carr, said in a noteon June 21. "Only one-fifth of the 200 or so VLGCs now afloat could fitthrough the old Panama Canal, but now every VLGC on the planet … can fitthrough the expanded waterway."

Carrsaid that more than a half-dozen VLGCs hold reservations to use the expandedcanal during its first few weeks of operation, and compared that to the shipscarrying liquefied natural gas which he said hold no reservations throughoutthis summer.

Previously,the size limitations on LPG ships meant that propane exports to Asia typicallyhad to undergo ship-to-ship transfers at the Canal.

"Thisis the first such expansion since the canal was completed in 1914," theU.S. Energy Information Administration said in a "Today in Energy"column on June 23. "With the exception of U.S. propane exports, theexpansion of the Panama Canal is not likely to drastically affect crude oil andpetroleum product flows."

U.S. LPG prices could beboosted

Theresult of the Panama Canal expansion on prices is likely to be positive,according to analysts.

"Theimproved economics of moving petroleum products to Asia/Pacific markets willlikely improve margins for Gulf Coast refineries, and as a consequence supportU.S. crude oil prices," Rusty Braziel, president and CEO of RBN Energy,said in a note on April 12. "Bottom line — the Panama Canal expansionshould provide a boost to natural gas, [natural gas liquid] and crude prices."

Aslong as prices overseas are high enough to cover the freight and terminalingfees, LPG should continue to migrate from the U.S. to overseas consumers.

Theproblem, though, is that supplies exported overseas after new U.S. exportterminals have been deployed have already started to level the playing field.

Inmid-April, presentationsgiven at the National Propane Gas Association Expo suggested that after freightand terminaling fees are added to the cost for Asian and European consumers,they would take a loss on additional shipments of propane.

Sourcestell S&P Global Market Intelligence that some shipments to Asian customersfrom the Gulf Coast have recently been canceled, postponed or renegotiated, butthat it hasn't yet become widespread.

Anotherissue for the expanded canal could come from competing exports originating inthe Middle East or Australia since those sources can be closer to Asiandestinations. The same issue is taking place with liquefied natural gas now,although the use of larger vessels through the canal could reduce the shippingcost.

Alast concern will come from the impact of new ethylene crackers beingconstructed in the U.S. As their demand for ethane grows and causes prices forthat commodity to rise, other NGLs could be consumed in their place.

"Whileit may take some time for U.S. hydrocarbon exporters to take full advantage ofthe now bigger-and-better Panama Canal, the good news is that the expansion isfinally done, and that the canal holds the promise of lower shipping costs fromthe Gulf Coast to Asia, which can only help U.S. exports in the long run,"Carr said.