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Panama Canal to become Major LNG Thoroughfare?

By John Daly | Thu, 14 February 2013 20:28 | 0

One of the most beloved terms of wargamers is “sea lines of communication,” or SLOCs.

For the past several years the Pentagon has been preoccupied in planning for possible conflict over the Persian Gulf SLOC and, further east, the Malacca Strait SLOC.

But in the Western Hemisphere, the preeminent SLOC remains the Panama Canal.

Ninety-eight years after its construction, the 50-mile long Panama Canal remains the Western Hemisphere's most vital waterway, shaving nearly 8,000 miles off ships' Pacific-Atlantic transit, allowing them to avoid the storm-laden Straits of Magellan and the Drake Passage off Argentina's southern coast. Long a dream, the Panama Canal represents the culmination of centuries-old ambitions, having first been suggested in 1523 by Holy Roman Emperor Charles V.

More than 14,000 ships annually, or about 40 per day, now transit the Panama Canal, connecting 160 countries and 1,700 ports, according to its website. Since 2007 the waterway has been undergoing a major $5.25 billion expansion with 9,000 workmen overseen by the Sacyr consortium, who are constructing a third lane of locks to augment the current two sets, that will double the capacity of channel to handle 600 million tons annually.

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So, what’s going to be transiting the waterway? Back when the expansion project began, the press was full of alarmist stories that the widened channel would become yet another portal for Chinese goods to swamp the U.S. market.

Now?

According to Panama Canal administrator Jorge Luis Quijano, the channel’s hottest commodity is likely to be U.S. liquefied natural gas shipments, along with rising commodity cargoes connecting the U.S., Latin America and Asia when the project is complete in two years’ time. According to Quijano, shipping containerized goods levels, which used to generate most business for the channel, has yet to return to 2007 level, the year the global recession began.

And what is pushing this projected LNG boom are the increasing amounts of natural gas generated by the U.S. hydraulic fracturing industry.

Quijano said, "This could be a significant boon to our business. There's been a lot of interest in going through the expanded Panama Canal with LNG cargo from the Atlantic going to Asia. Shipments of fuel, coupled with an increased number of shipments of commodities and energy between the United States, Latin America and Asia, could amount to the largest sources of demand growth when the project ends in June 2015. There has been much interest in using the Panama Canal for expanded cargo trade of LNG from the Atlantic to Asia, so this could represent a significant help to our business."

Quijano added that in 2007 canal administrators didn't foresee the expansion of U.S. shale gas production, which has boosted U.S. natural gas output by 30 percent since then, while boosting  “tight- oil” production by 20 percent, according to BP Plc's Energy Outlook 2020, released earlier this month.

Since 2000 the Panama Canal has been completely under Panamanian sovereignty. Ironically, during the 1970s the greatest threats to the canal's security came from the Panamanian government. During the 1960s and 1970s, Panamanians demonstrated in protests over U.S. sovereignty, while then-Panamanian president Omar Torrijos, stymied during the initial negotiations, threatened to blow up the canal if the U.S. did not leave.

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On 7 September 1977, Torrijos and then-U.S. president Jimmy Carter signed treaties beginning the process of a 20-year phase-out of US military forces and the transfer of all U.S. military bases and the Panama Canal to Panama by 31 December 1999.

So, for the wargamers, what does this mean?

China.

About two-thirds of the cargo transiting the channel is headed to or from the U.S., with China Panama Canal's second-largest user. The Panama Canal Authority borrowed $2.3 billion between 2009 and 2011 to help finance the project, while also increasing transit tolls an average of 3.5 percent a year.

The stark reality for officials in Panama City is that, without improvements made to the waterway, the canal risked steadily losing business to other maritime alternatives. The Panama Canal is currently restricted to ships of up to 65,000 tons, known as “Panamax.” Passage restrictions now frequently produce lengthy queues of up to 100 merchantmen outside the canal's Atlantic and Pacific entrances waiting to make the nine-hour passage. Since 1995 the volume of container shipping has tripled and since 2001 risen more than 50 percent. Maritime analysts now estimate that containerized cargo accounts for over 70 percent of international maritime trade, producing in 2006 almost 346,000 container shipments daily, a figure estimated by 2014 to exceed 600,000.

The rising maritime traffic will increasingly focus the security attention of both the U.S. and China, currently the two largest users of the canal, on the vital waterway.

The reality is that the US has an overwhelming preponderance of military and naval power in the region and still maintains the ability to intervene if it feels its interests are threatened, a fact emphasized in 1989, when Washington sent 27,000 troops into Panama to arrest president General Manuel Noriega after two U.S. grand juries indicted him for racketeering, drug trafficking and money-laundering.

Last but hardly least, U.S. warships have retained their historic right of precedence of passage in time of war.

So, will China and the U.S. clash over the canal?

With possible U.S. Asian bound LNG cargoes at risk, it will eventually become a question of whether U.S. economic interests will trump military concerns. What is certain, with 60 percent of U.S. military forces due to be deployed to the western Pacific over the next several years, the questions raised above will increasingly preoccupy Pentagon strategists.

By. John C.K. Daly of Oilprice.com

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