IEA: Panama Canal congestion to slow US-Asia LNG trade

Feb. 13, 2024

In 2023, the number of US LNG cargoes passing through the Panama Canal declined sharply, particularly in the second quarter (down 16% year-on-year), in favor of alternative routes via the Suez Canal or the Cape of Good Hope, according to the International Energy Agency (IEA). Persistent congestion and diversions could lead to longer journeys, a shortage of available vessels and, consequently, higher shipping rates. This situation could be exacerbated in 2024 as LNG ships face security risks in the Middle East.

As a result of a severe drought, the Panama Canal Authority (PCA) implemented drought restrictions multiple times throughout 2023, particularly impacting vessels like LNG carriers. These measures are part of a broader initiative to conserve water resources. The Gatun Lake reservoir, which supplies water to the canal, has been experiencing a rapid decline in its water level and reached a record low last summer. Drought is expected to worsen due to the influence of the El Niño weather pattern until at least spring 2024.

While these restrictions do not directly impede LNG trade, they can contribute to heightened traffic congestion and potential delays, according to IEA. Under normal circumstances, LNG tankers anticipate a 2 to 3-day waiting period when transiting through the Panama Canal. However, in 2023, waiting times increased significantly, averaging around 15 days as of mid-December for unreserved slots.

LNG tanker operators can secure a transit slot through the Panama Canal’s Transit Reservation Booking System, either through advance bookings or participation in slot auctions. For those who booked in advance, the estimated transit fee for an LNG carrier with a cargo capacity of 170,000 cubic meters (cu m) was $600,000-700,000. For shippers who participated in slot auctions, they face risks of increased costs and unpredictability.

“In principle, alternative routes, while longer, provide certainty in scheduling and avoid delays due to congestion on the Panama Canal. For instance, from the US Gulf of Mexico, the journey to Japan via the Suez Canal takes a little over a month, and Africa’s Cape of Good Hope route is about 40 days, compared to just over 20 days via the Panama Canal,” IEA said.

Based on shipping data, LNG shipments traveling eastbound through the Suez Canal constituted about 4% (equivalent to 21 billion cu m) of the global LNG trade in 2023. A significant portion of these eastward-bound shipments, exceeding 50%, comprised deliveries from the US destined for markets in Asia and the Middle East.

In October 2023, to encourage shippers to use its route rather than the Panama Canal, the Suez Canal Authority (SCA) implemented a staggered discount system for LNG tankers sailing from the US Gulf of Mexico to ports east of Egypt, with reductions on canal tolls ranging from 30% for destinations west of Kochi in India, to 70% for Singapore and beyond. However, Suez Canal transit fees for LNG carriers will be subject to a 15% increase in 2024.

More importantly, LNG ships now face security risks in the Middle East. The rising number of attacks in the Red Sea have heightened maritime security risks and driven up regional insurance costs. An increasing number of LNG ships are altering their Middle East transit routes. Should transit through the Suez Canal become unavailable, it would result in longer shipping distances and exert upward pressure on spot LNG charter rates, IEA said.