Panama Canal Expansion Delay Unlikely to Affect U.S. LNG Export Flows

Dec 13, 2015

Liquefied natural gas (LNG) exports from the Lower-48 United States are expected to commence in January 2016, from the Sabine Pass facility in Louisiana.  This terminal will be the first of five facilities currently under construction in the U.S. to enter service.  A great deal of U.S. LNG export capacity is being built in expectation of tapping lucrative markets East of Suez via an expanded Panama Canal.  Although completion of the Panama Canal expansion is facing delays, Nexant believes that short-term U.S. LNG flows will be largely unaffected.  Given shifting market conditions which do not currently favor U.S. LNG sales to Asia, and the staggered timing of the other U.S. plants currently under construction, Nexant believes that initial U.S. LNG output will travel to Europe.  

The Panama Canal’s expansion was an integral part of U.S. LNG exporters’ plans to tap premium markets East of Suez.  The expansion will allow 89 percent of the LNG fleet to transit the canal, compared to just 7 percent today.  A return voyage from a U.S. Gulf Coast terminal to Japan via the expanded Panama Canal will take around 49 days, which is 26 days less than a return voyage via the Suez Canal.  However, reports have emerged that the expansion – which entails the construction of two new sets of locks on the Pacific and Atlantic sides of the Canal – will be further delayed due to leaks detected in the locks themselves.  It is thought that the expansion will be ready in the spring of 2016, although pessimists are bracing themselves for yet more delays. 

On paper, only sales from Trains 1 and 2 of the 27 million tons per annum (mmtpa) Sabine Pass LNG terminal will be immediately affected by the delay.  Sabine Pass is the only U.S. liquefaction facility that is expected to enter service over the next calendar year, and only the first two of the five trains currently under construction there are scheduled to enter service in 2016.  The rest of its trains, together with the four other liquefaction facilities under construction in the U.S., will enter service between 2017 and 2019.  LNG from Trains 1 and 2 has been contracted to BG (5.5 mmtpa) and Spain’s Gas Natural Fenosa (3.5 mmtpa). 

Due to a combination of slower economic growth, indifferent gas demand, and the reactivation of nuclear power plants in Japan, markets East of Suez are oversupplied for the time being.  Consequently, all U.S. LNG sellers and buyers are seeking alternatives to markets East of Suez, at least until conditions improve.  Thus BG, which has a commitment to sell 8.6 mmtpa from its global portfolio to China’s CNOOC, likely will face requests from CNOOC to reduce its annual contract quantity.    

Nexant believes Europe is an attractive alternative destination for many reasons:

  • The comparatively short voyage and attendant low transportation costs relative to Asia
  • The relatively liquid and transparent state of the northwest European gas markets
  • The availability of terminal capacity, much of which has sat idle in recent years
  • Falling European indigenous supply due to the maturity of producing fields in the United Kingdom and yet more caps on Groningen gas production in the Netherlands

Given the prevailing low Henry Hub environment (currently just over $2/MMBtu) and today’s very low shipping costs, U.S. LNG buyers can land volumes in Europe for less than $6.50/MMBtu (not taking into account terminalling costs or the seller’s margin).  Although northwest European hub prices are currently fairly low at about $5.30-5.50/MMBtu, the region’s winter conditions are expected to stimulate Europe’s gas consumption and help strengthen prices.  Moreover, renewed concerns about overdependence on Russian natural gas, especially going into winter, renders the U.S. an attractive source of alternative supply, even though Russia has the wherewithal to land gas extremely competitively in Western Europe.  Rumblings of yet another gas supply dispute with the Ukraine, and concerns about the knock-on effects on supply to Western Europe, is undoubtedly a mark in U.S. suppliers’ favor.