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Panama Canal weighing additional compensation for canceled LNG bookings

Highlights

Third daily reserved transit slot eyed for 2022

Congestion has increased amid US export growth

Houston — The Panama Canal Authority is considering seeking greater compensation for canceled bookings during peak seasonal demand periods, as it works to add a third daily reserved transit slot for LNG vessels to ease congestion, Administrator Ricaurte Vásquez Morales said in an interview Feb. 23.

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When the Canal announced in June 2018 the addition of a second daily booking slot for LNG vessels, officials said a third was expected by 2022. With the process toward that goal ongoing, the operator is weighing the importance of securing revenue to enhance its flexibility in a volatile commodity environment, Vásquez told S&P Global Platts.

The delicate balancing act comes amid extended wait times at the Canal, especially for LNG vessels transiting the shortest passageway from the US Gulf Coast to East Asia. Even LNG tankers with a reservation have faced waits on occasion since the overall delays began in earnest in October 2020.

The delays have caused supply disruptions and extra shipping costs for the market, while unpredictable weather and increased spot trading of LNG cargoes can alter the destination mid-voyage and cause the Canal to lose revenue when it receives a cancellation.

"We are working to meet that schedule of having an extra slot for next year, but fully understanding what the requirements are and what the market needs," Vásquez said. "Because, if the market is not going to commit to some sort of early warning or advice or we can clear some way of a penalty if you do not use a slot, then the opportunity cost is like a hotel. The rooms you cannot rent for a night, you will not recapture it for the next day. That is what is happening."

Vásquez did not specify what a potential new penalty fee structure might look like for vessels that cancel; new booking tariffs are set to take effect in April. Cheniere Energy, the biggest US LNG exporter, declined to comment on the idea raised by the Canal. Officials with the next two biggest US LNG exporters -- Sempra Energy and Freeport LNG – did not immediately respond to requests from Platts for comment.

On other topics, Vásquez noted that plans were in the works to address possible freshwater shortages in the future. That has become a bigger issue as traffic through the Canal has increased and local rainfall patterns have become more volatile. Last year, the Panama Canal Authority put out a $2 billion call for bids on a freshwater supply project, which could help better manage water supplies while also maintain water quality as precipitation becomes more erratic.

In 2019, the Panama Canal was forced to institute draft restrictions due to low water levels in the Gatun Lake, which eventually led to lower overall daily booking slots. As of Feb. 23, the freshwater level at the Gatun Lake stood at 86.3 ft., which is roughly 1.9 ft. above the five-year average and is currently projected to remain above the five-year average through April, which is historically one of the driest months of the year, Platts Analytics data showed.

LNG transits through the Panama Canal have been steady at around two tankers per day so far in February, roughly in line with the January average, according to cFlow, Platts trade flow software. For booked LNG vessels, transit times in January ranged from 1.6 hours to 150 hours, with an average of 20 hours, Vásquez said. The average is slightly higher so far in February, he said.

Typically, LNG tankers with a reservation transit the Canal promptly. Delays for unreserved LNG tankers peaked at 275 hours at the height of the constraints, Vásquez said.

Neopanamax vessels are charged a $35,000 fee for a booking slot, with different windows for arrival based on the needs of the customer. A cruise ship might reserve a slot more than a year in advance, while an LNG vessel might book a reservation within 14 days of transit.

There are existing fees charged for cancellations within a certain timeframe and under certain conditions. But t he Canal said that outside those specific circumstances it generally eats the cost of cancellations, which were more frequent during the height of the coronavirus pandemic when some customers were declaring force majeure. Lost revenue and stranded costs if slots can't be reassigned in a timely way can exceed $400,000 when an LNG vessel cancels, Vásquez said. That can be especially costly during times of high seasonal demand when greater resources are needed to run operations.

"We do not go public on that because that is part of the business that we understand," he said. "We have to come to some sort of middle ground."

Market reaction

The Canal is looking for rules that apply to everyone, with some flexibility depending on the trade.

"If we could have on-time transits every single time because we have enough advance notice of when and how they are going to transit and everyone books every single slot of the Canal and complies with it and, if not, pays the opportunity cost of them, that would be the optimum of the relationship," the Panama Canal Authority administrator said. "But we are not here to take every single penny out of our customers."

S&P Global Platts LNG Virtual Conference | March 25, 2021

The S&P Global Platts LNG Virtual Conference is gathering the industry to discuss navigation of the global pandemic and the associated risks, the ongoing transition of the global energy economy, policy implications of the 2020 US election and more.

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