A New (Common) Sight On The Waterway · The Petronas floating liquefied natural gas (PFLNG) Satu vessel also started producing LNG from Malaysia s gas reserves on Dec. 5, 2016. Based

14 JULY 2018 COMPRESSORtech2

BY DJ SLATER

The Panama Canal Authority didn’t have the United States on its radar 17 years ago when

it began researching the feasibility of LNG tankers passing through its future expanded waterway.

LNG and the United States weren’t commonly used together back in 2001. At the time, the United States imported the liquefied resource from Qatar and other middle eastern countries. Trinidad and Tobago, as well as Peru, were potential users, but the volumes weren’t large enough to warrant much

discussion, said Silvia de Marucci, the executive manager, economic analysis and market research division, Panama Canal Authority.

“We decided to delete LNG from the forecast,” she said. “We didn’t include it because we thought that traffic wouldn’t come. Maybe 10 transits a year. We decided to have a conservative forecast for LNG through the new canal.”

The LNG community knows what happened next. The United States unlocked its natural gas flow, which in turn allowed the country to consider dabbling in the LNG trade. Now, 17 years later, the United States has two operational LNG terminals – Sabine

Pass in Louisiana and Cove Point in Maryland – with several more on the horizon.

What once seemed like an unexpected scenario has now become the reality. The United States is primed to be an energy exporter, with LNG as one of its primary resources and the Panama Canal as its gateway to several energy hungry nations.

“I remember going to conferences and people would laugh at the engineers and CEOs whenever they had a presentation about an LNG terminal (out of the U.S.) that they were converting,” de Marucci said. “It was so nice when they finally got their permits and they moved forward with their project.

“Nobody saw this coming,” she said. “I belong to a very very large group of people who did not see the U.S. becoming a net exporter of gas until recently.”

A New (Common) Sight On The Waterway

■ Panama Canal Authority associates pose with the LNG Sakura tanker as it passes through the new locks. The authority has had as many as three LNG vessels transit the locks in a day.

■ As of March 2018, 134 LNG vessels have used the Panama Canal in fiscal year 2018. The prior fiscal year

saw 163 LNG tankers pass through the locks.

LNG Technology

Expanded Panama Canal accommodating increasing LNG vessel traffic

DJ_CT2 07-2018 Panama Canal LNG.indd 14 14/06/2018 09:54:02

Importer to exporterThe United States’ shift from LNG importer to exporter didn’t happen instantaneously. In fact, a common fear in the early 2000s was a natural gas shortfall, a move that lead to the construction of several LNG import terminals, said Andres Rojas, a director with IHS Markit, an analytics company that serves multiple industries.

“The view was the U.S. would be short on domestic gas and prices would skyrocket,” Rojas said.

But the answer to the United States’

■ The United States’ shift from LNG importer to exporter is aided by the expanded Panama Canal.

■ The new expanded Panama Canal locks can

accommodate much larger vessels (Neopanamax), including LNG tankers.

Photos by The Panama Canal Authority.

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DJ_CT2 07-2018 Panama Canal LNG.indd 15 14/06/2018 09:54:44

looming energy problem was beneath everyone’s feet the entire time. The issue was extracting it, a problem that was soon solved by “The Father of Fracking” George Mitchell. To access the natural gas in the continent’s shale formations, Mitchell merged horizontal drilling and fracking, a combination that shifted the conversation from energy crisis to energy boom.

“In the mid-2000s, increasing shale gas production eventually caused prices to drop,” Rojas said. “LNG imports weren’t needed anymore outside of New England, but a few people had the idea to start exporting LNG.”

The shift had begun, one that put the United States on a firm path to LNG exporter. Jumping to 2017, global

LNG trade has increased to 38.2 Bcfd (1.08 X 109 m3/d), a 10% increase from 2016 numbers, with the United States and Australia accounting for three-quarters (2.7 Bcfd [76.4 X 106 m3/d]) of that increased supply, according to the U.S. Energy Information Administration (EIA).

Collectively, the United States, Australia and Russia added five new liquefaction trains (combined 3.4 Bcfd [96.2 X 106 m3/d]). The Petronas floating liquefied natural gas (PFLNG) Satu vessel also started producing LNG from Malaysia’s gas reserves on Dec. 5, 2016. Based on last year’s data, there are 19 LNG-exporting countries and 40 LNG-importing countries, the EIA said.

Asia was the top LNG importer in 2017, accounting for 74% or 2.6 Bcfd (73.6 X 106 m3/d) of the increase. The largest import market for LNG is Japan, but China had the largest growth in LNG imports globally, increasing its intake by 1.5 Bcfd (42.5 X 106 m3/d) or 46% from 2016 to 2017, according to the EIA. China also overtook South Korea as the world’s second largest LNG importer in 2017. Most of that can be attributed to China’s government’s initiatives to switch from coal to natural gas.

“In China, we saw significant coal to gas switching in the industrial and heating sectors because local governments were under pressure to meet environmental targets by the end of 2017,” said Matthew Shruhan, a senior LNG analyst at IHS Markit.

16 JULY 2018 COMPRESSORtech2

LNG Technology

■ Container vessels make up 48% of the expanded Panama Canal’s traffic, with LNG traffic accounting for 11% based on 2018 figures.Photo by Jason Anderson.

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DJ_CT2 07-2018 Panama Canal LNG.indd 16 14/06/2018 09:55:23

Increasing LNG trafficThe surge of LNG imports in Asian markets coupled with the United States’ newfound export capabilities worked out well for the Panama Canal Authority, which opened the new locks on June 26, 2016.

The first LNG vessel, the Maran Gas Apollonia chartered by Shell, passed through the expanded waterway nearly a month later on July 25, 2016. It was the first of 17 LNG tankers, which totaled 550,000 tons, to make the trek in the fiscal year of 2016. The Panama Canal Authority compiles its transit data in fiscal years, which run from October 1 to September 30. For example, fiscal year 2016 starts on Oct. 1, 2015 and ends on Sept. 30, 2016.

LNG transits jumped to 163 in fiscal year 2017, totaling 6.3 million tons. Fiscal year 2018 is already on pace to top those figures, with 134 LNG vessels navigating the expanded canal from October 2017 to March 2018, according to the Panama Canal Authority.

The United States hasn’t been shy about using the expanded canal for its LNG exports. In 2017, the United States exported 14.7 million tons of LNG. Of that amount, 6.9 million tons passed through the Panama Canal, with 4.7 million tons going to Asia, according to IHS Markit.

“The Panama Canal (with the expansion) opens up the whole market for U.S. LNG,” Rojas said.

While LNG tankers have been

transiting the expanded canal for almost two years, the Panama Canal Authority is still getting comfortable processing these vessels through the locks. The authority has several restrictions in place for LNG tankers, which include only allowing day time transits and having a tugboat escort. LNG tankers also can’t pass other vessels in the Culebra Cut or dock in

Gatun Lake.These restrictions, however, were

imposed for LNG vessels when the new locks opened in 2016, de Marucci said, adding that they will likely be eased as the Panama Canal Authority becomes more familiar with this type of traffic.

That comfort level seems to be improving. At first, the Panama Canal

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continued on page 18

DJ_CT2 07-2018 Panama Canal LNG.indd 17 14/06/2018 09:55:44

Authority only allowed one LNG vessel per day but have authorized as many as three in a day since that time, Rojas said. The expanded Panama Canal averages 6.4 vessels per day, according to the Panama Canal Authority.

“This is still a new type of tanker for them,” Rojas said. “They are handling this as carefully as they can.”

LNG’s place amongst the transitsDespite LNG vessels gaining a spot in the Panama Canal Authority’s transit logs, they only take up a small portion of the canal’s traffic. Container ships are the primary users of the expanded Panama Canal, making up 48% of the transits, de Marucci said. LPG vessels follow with 25%, while LNG tankers account for 11%.

That’s only the vessels passing through the new locks. When factoring in the original and expanded Panama Canal locks, LNG transits make up an even smaller amount. In fiscal

year 2017, 11,992 vessels used the Panama Canal. Of that amount, 163 were LNG tankers or about 1.4% of the total traffic.

But LNG seems to be vying for its share of the transit pie. Based on the most current fiscal year 2018 numbers, LNG makes up 11% of the vessels that have used the expanded locks from October 2017 to March 2018. When factoring in all of the transits through the Panama Canal in the same time period (7101), LNG traffic makes up 1.9%.

While those percentages are small now, there is an abundance of liquefaction capacity coming online in the United States in the next few years, Shruhan said. Additionally, the EIA forecasts that six countries are expected to start importing LNG in the next two years, a move that would add 2.1 Bcfd (59.4 X 106

m3/d) of new regasification import capacity to the marketplace. Those six countries are Panama, Russia,

Gibraltar, Philippines, Ghana and Bahrain. Bangladesh already joined the importing pool in April 2018.

“Beyond what’s already existing and under construction in the U.S., there are a lot of proposals vying to be part of the second wave of U.S. LNG,” Shruhan said. “It’s likely that their customers will want to use the canal for a portion of their sales, but how much at this point is uncertain.”

LNG Technology

DJ_CT2 07-2018 Panama Canal LNG.indd 18 14/06/2018 09:56:19

Another expansion?With an LNG-hungry world, especially in Asia, the big mystery is where will the United States’ LNG go. Logically, it would appear to be headed to Asia and other soon-to-be LNG importers. But it’s not that simple, Shruhan said.

“That’s the billion-dollar question,” Shruhan said. “U.S. projects are competing with others around the world, some of which are much closer to Asia.”

The top four importers of LNG in 2017 were Japan, China, South Korea and India. Of those four, their top suppliers west of the Panama Canal included Australia, Malaysia, Qatar, Nigeria and Oman, according to data from IHS Markit. Several other areas, such as Canada, Russia and East Africa, are also seeking to become major LNG suppliers.

“U.S. LNG exports to Asia will increase as more projects come online, but the amount will depend on prices, who the customers are and how many new projects move forward,” Shruhan said. “U.S. LNG is destination-flexible, so companies can optimize their portfolios and send cargoes to where margins are highest.”

Competing with others suppliers isn’t the only challenge for the United States, however. The second comes in the form of how many LNG vessels can the Panama Canal accommodate amongst its more popular cargo carriers.

So far, the Panama Canal Authority has found a way to process as many

as three LNG vessels a day, but that might not cut it in the future, Rojas said.

“There’s a limited number of slots per day right now,” he said. “LNG is competing against other tankers … and there’s a lot of LNG coming.

“If those future volumes are heading to Northeast Asia, more LNG transits will need to be accommodated,” Rojas said.

de Marucci expects that the Panama Canal will see three to five LNG transits per day in the coming years, possibly as early as 2020 or 2021. Currently, about 90% of LNG transits come out of the United States to the Asian markets, she said, with the other 10% going from Peru to Europe or Trinidad and Tobago to Chile.

The might work in the short term, but de Marucci and the Panama Canal Authority are already looking well into the future – in the form of another expansion.

“We are studying the possibility,” she said. “We have requested a long-term advance study and have been working with a consultant for six months.

“We are looking at the opinion of the market from an independent consultant,” de Marucci said. “We want to know if there will be demand in the long term for a new set of locks.”

The decision won’t take long if the demand is there for another expansion. de Marucci, however, didn’t want to put an exact timetable on it as multiple factors, not just market considerations, must be reviewed before authorizing another set of locks.

While nothing is official yet, the Panama Canal Authority left plenty of room on the west side of the Pacific locks and on the east side of the Atlantic locks for the expansion.

LNG traffic, however, continues to increase, which could force the Panama Canal Authority to add more LNG slots.

One certainty, though, is the Panama Canal Authority won’t let the opportunity of accommodating increasing traffic pass by. The authority saw the need for an expansion in the early 2000s and it appears to be in a similar spot nearly two years into the opening of its new locks.

“We don’t rule out anything,” de Marucci said. “We are always looking at ways to keep our position as a preferred transit route and we always look to strengthen that position.” CT2

COMPRESSORtech2 JULY 2018 19

LNG Technology

■ Panama Canal Authority associates review the Panama Canal’s lock and water-saving basin operations.

■ With more LNG operations coming online, LNG traffic is expected to

increase, especially through the expanded Panama Canal.

Photo by Jason Anderson.

DJ_CT2 07-2018 Panama Canal LNG.indd 19 14/06/2018 09:56:35