Mirage Energy Corp (MRGE)

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Important for both our storage and isthmus projects. Any news about Mexico LNG projects advancing is good because storage will be needed if Mexico is selling gas to other countries. Weakening of the Panama Canal is good because Mexico's isthmus will be a competitor.

Drought Impacting Panama Canal LNG Transit as Mexico Liquefaction Projects Advance

BY JAMISON COCKLIN
July 18, 2023
More U.S. LNG cargoes are taking longer and costlier routes to reach consumers in Asia as a drought impacting levels at the Panama Canal has increased wait times to transit the waterway.



“The Panama Canal remains a primary route for U.S. LNG to access Asian markets, though an increased volume of trade is utilizing other routes, especially from the Cheniere-operated terminals,” said Kpler analyst Adam Bennett.

Cheniere Energy Inc. is the leading U.S. LNG exporter. Bennett told NGI that there’s been a “pronounced drop” in the usage of the canal among vessels leaving the company’s Sabine Pass and Corpus Christi terminals. Cheniere’s management has said it is shunning the waterway for now because it’s uneconomical to use it.

Without delays, the canal provides the fastest roundtrip voyage from the Gulf Coast to Japan at roughly 49 days. Over the last four weeks, roughly half of all U.S. LNG cargo volumes have passed through the canal, Bennett said, on par with the same time last year. But U.S. cargoes taking other routes, such as the Cape of Good Hope or Suez Canal, are on the rise too.

Developers such as Sempra and Mexico Pacific Limited LLC (MPL), meanwhile, plan to bypass the Panama Canal by exporting U.S. sourced gas from liquefaction terminals on Mexico’s Pacific Coast.

MPL’s Ana Procuna, director of gas transportation and marketing, said last month that re-exporting U.S. gas to Asia-Pacific markets via Mexico would save around 16 days of shipping time versus the canal route. She also noted that offtakers would have the option to index their contracts to pricing at the Waha hub in West Texas, which historically has traded at a discount to the U.S. benchmark Henry Hub.

Mexico’s state power utility Comisión Federal de Electricidad (CFE), which also is the country’s largest natural gas marketer, on Thursday (July 13) touted a strategic alliance with MPL that could see the firms jointly bring 400-600 MMcf/d of Permian Basin gas via pipeline to MPL’s proposed Saguaro Energía liquefaction project in Puerto Libertad, Sonora.

Meanwhile, world events — namely Russia’s invasion of Ukraine – shifted the LNG market’s attention to Europe last year.

“The rise in U.S. LNG exports to Europe has reduced the pressure on the Panama Canal with transits declining through 2022,” said Aman Sud, senior lead analyst at Drewry Shipping Consultants Ltd. Kpler data shows that trend has continued this year, with 65% of all U.S. LNG exports going to Europe so far.

However, Sud told NGI that shipments to Asia have increased in recent weeks as spot demand has accelerated amid a heat wave in the region. The spread between the Title Transfer Facility (TTF) and the Japan-Korea Marker (JKM) has widened as more Asian offtakers buy cargoes, demand falls in Europe and storage inventories on the continent are filling fast.

NGI data shows that netbacks from Asia to the Gulf Coast for September were $8.622/MMBtu on Monday, or nearly 70 cents higher than netbacks from Europe.

While the arbitrage has opened to Asia this summer, wait times to transit the Panama Canal have grown to 10 or more days for both southbound and northbound voyages.

[Mexico Making Moves: NGI sits down with Mexico’s CNH Commissioner Moreira to discuss rising natural gas production in the country coupled with promising new natural gas discoveries, which could help to offset steadily climbing demand from increased nearshoring. Currently importing more than half of their natural gas from the U.S., Moreira also underlines the importance of creating a natural gas price index in Mexico. Tune into the Hub & Flow podcast.]

Lower than average water levels have forced canal officials to impose draft restrictions on larger vessels like container ships. While LNG tankers haven’t been impacted by those measures, the canal has also limited the number of vessels transiting the route on a daily basis to conserve water.

The disruptions are boosting the cost of roundtrip voyages to move U.S. LNG to Asia, Sud said, particularly as the spread between TTF and JKM narrows through the remainder of the year and into winter. It takes 68 days for U.S. cargoes to reach Asia via the Suez Canal and 74 days around the Cape of Good Hope. Drewry estimates that taking the Suez Canal increases shipping costs by 24%, while taking the Cape of Good Hope increases costs by 36%.

But ongoing delays at the Panama Canal that have at times well exceeded 10 days and the increasing costs of transiting the waterway have made alternate routes more attractive.

Spark Commodities CEO Tim Mendelssohn said last week that congestion is adding about 80 cents for vessels passing through the canal without bookings to do so. That’s boosting the freight spot voyage from the Gulf Coast to Asia to $2.99/MMBtu. By comparison, a route via the Cape of Good Hope stands at $2.75.

In June, 50% of U.S. cargoes sailing to Asia went via the Cape of Good Hope, Fearnleys AS LNG analyst Ina Bjørkum Arneson told NGI. That’s up from around 20% most of this year.

The trend could prove to be a lasting one as more U.S. LNG projects are being constructed and offtakers will increasingly rely on the Panama Canal to move cargoes to Asia.

“As congestion grows at the Panama Canal, and costs rise, it’s clear that other options are also becoming more attractive,” Bennett said.

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