The expansion of the Panama Canal is on hold -- and so is the U.S. dream of sending energy to Asia.
- By Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
The biggest construction project in the world is on the rocks. And that could have big negative implications for the United States as it tries to turn its natural-gas bonanza into an engine of export earnings and geopolitical influence.
The project is the expansion of the Panama Canal to allow more and bigger ships to pass through — for instance, the large tankers that carry liquefied natural gas (LNG). Today, only about 6 percent of the global LNG tanker fleet can pass through the canal; after the expansion, about 90 percent of tankers will be able to use it, according to a U.S. government study. The bigger canal would provide a quicker and cheaper way to ship natural gas from the U.S. Gulf Coast and East Coast to markets in Asia that are desperate to secure supplies of natural gas.
But those plans now could be jeopardized because of a dispute over cost overruns — which means America’s gas export dreams could be in jeopardy, too.
The consortium building the third set of locks on the canal, which is the biggest part of the $5 billion canal expansion, said it can’t continue work unless the Panama Canal Authority picks up the tab for about $1.6 billion in cost overruns. The construction of the new locks is a $3 billion contract, won by an international consortium with firms from Spain, Italy, Belgium, and Panama.
"If the customer doesn’t provide additional funds to cover the unexpected costs, the project will soon face a cash crunch," a spokesman for Sacyr, the Spanish firm in the consortium, told Foreign Policy. Sacyr reportedly told the canal authority it must provide the funds within three weeks, or work will come to a halt.
The canal authority says the consortium has to complete the work, which has already fallen behind schedule and been plagued with a spate of construction problems, including fatal accidents and costly delays due to record rainfall.
The dispute could carry important consequences because the canal expansion has special importance for the United States, which hopes to start exporting natural gas, and Asia, which is desperate to buy it.
Japan, in particular, is eager to tap into the U.S. natural-gas boom: Since the 2011 accident at the Fukushima nuclear power plant, Japan has been importing energy at high prices. Japanese shipbuilders plan to spend about $18 billion on new LNG tankers through the end of the decade, which, needless to say, would require the expanded canal to shave shipping times.
Without the expansion, LNG tankers largely have to pass around the southern tip of South America, adding thousands of miles and extra costs to the journey. Cost matters, because U.S. gas is cheap at home, but has to be frozen to a liquid, then packed on the tankers and sent across the ocean — all of which costs more than the gas itself does. In order to compete effectively with LNG from Australia, Malaysia, and Qatar, U.S. exporters need to ship their gas on big tankers taking the shortest possible route.
The Panama Canal’s importance to the energy trade isn’t limited to natural gas. Between 2011 and 2013, energy products, including oil, petroleum products, and coal, jumped from about 28 percent of the volume of southbound shipments to 38 percent. But the canal’s expansion isn’t as crucial for those other energy products. Very large crude carriers will still be too big for the canal. And the economics of shipping U.S. coal from the center of the country via the Gulf Coast and through the canal to Asia don’t add up (though exporting coal to Europe does, for now).
Clouds over the canal expansion aren’t the only concerns about U.S. gas exports. There are also already worries about the slow pace of government approvals for new natural-gas export terminals, the multi-billion dollar projects that freeze gas to a liquid suitable for transport by ship. The Energy Department has received almost 30 applications to ship gas to countries with which the U.S. does not have a free-trade agreement; only five of those applications have been conditionally approved, and none will be operational until 2017 at the earliest. For projects further down the line, there is the very real worry that government approval won’t come until the LNG market is already well supplied by rival countries.
Sen. Lisa Murkowski of Alaska, the ranking Republican on the Senate energy committee, recently warned of a "narrowing window" for U.S. LNG exports. "If we don’t move quickly, we may miss that window, and it may be a long time before it opens up again," she said.
LNG boosters, including Murkowski, may get extra help from across the aisle, if musical chairs in the Senate propel pro-export Louisiana Democrat Mary Landrieu to the top of the energy panel.
But worries about the U.S. ability to capitalize on LNG exports won’t be put to rest completely until the delays and disputes that have dogged the Panama Canal expansion are resolved.