Congestion at the Panama Canal, which has been hampering US LNG deliveries to Asia in recent months, may be a recurring feature in the LNG market in the coming years.
With the third train of the 15mn t/yr Corpus Christi facility still in the commissioning phase, the US is already producing about three LNG cargoes daily (see graph). But no more than one LNG carrier a day can take the quickest route through the Panama Canal to typical global premium markets in northeast Asia. The Canal Authority normally allows no more than two LNG carriers a day to transit the waterway, either both heading to the Gulf of Mexico or one in each direction, although it has occasionally allowed some extra crossings. When Asian prices are high enough to attract Atlantic basin cargoes, LNG tankers coming from the US may also have to compete with Trinidadian cargoes to secure the limited number of Panama slots on offer.
Asia taking a portion of US exports in line with the historical average would already be sufficient to create congestion at Panama. Since the US began exporting LNG, eastern Asia has received on average 35pc of total US production, against 30pc that instead found a buyer in Europe or the Middle East. That said, while eastern Asian markets absorbed the largest share of US cargoes in 2017-18, a tighter arbitrage between the two main markets led to Europe taking a larger share in the past two years (see graph). But LNG demand in the two regions is of a fundamentally different nature — with the largest Asian economies relying heavily on seaborne imports, while most European markets only buy LNG when prices are competitive with other supply sources.
The limited Panama capacity has already forced a large share of US cargoes to take a longer route to Asia in recent months, either through the Suez Canal or the Cape of Good Hope. The US sent a total of 265 cargoes to northeast and southeast Asia last year, but only 219 laden vessels from the US crossed Panama, suggesting at least 21pc of US flows to Asia had to take a longer and more expensive route. US deliveries to eastern Asia were 152 in 2019, accounting for 85pc of the 178 Panama crossings by US cargoes. That said, Asian demand for US cargoes was particularly strong in the fourth quarter of 2020, which was likely to have exacerbated congestions and bolstered use of alternative routes (see graph).
A sharp increase in northeast Asian demand coupled with slower regional production, particularly from Australia, resulted in LNG prices reaching an all-time high in recent weeks. Regional demand continuing to rise at the pace seen in recent years may increasingly require brisk imports from outside the basin. Northeast Asian demand grew at an average of nearly 7pc/yr over the past five years and the region absorbed about 8.2mn t more than a year earlier in 2020. The third 3.8mn t/yr train at the Tangguh facility in Indonesia, expected to start in September this year, is the only new liquefaction facility under construction in the Asia-Pacific basin at present. The addition of the 3.4mn t/yr Coral South FLNG in Mozambique may also be insufficient to dent the regional imbalance, suggesting Asian markets may continue to absorb the vast majority of Qatari supplies, while needing to open an ample premium to European markets to cover the additional costs of US deliveries through Suez or the Cape of Good Hope.
The 5.4mn t/yr Papua LNG project and the planned 2.7mn t/yr third liquefaction train of PNG LNG have yet to reach a final investment decision and are not expected to come on stream before 2024. The 13.1mn t/yr Mozambique LNG project, Mexico's 2.5mn t/yr Energia Costa Azul — which is located on the country's Pacific coast — and the first new train of Qatar's planned Ras Laffan expansion are not expected to be completed before 2024-25.
