Asian premium beckons as US LNG outgrows Panama

Author Samuel Good, Senior Reporter, LNG

Higher premiums for spot LNG delivered to Asia could become more common, with growing US liquefaction having already far outstripped the capacity of the Panama Canal.

The canal is the quickest and lowest-cost route to northeast Asia for exports from the world’s largest spot supplier.

With growing Asian demand on course to exceed available supply within the region, buyers are likely to become increasingly reliant on long-range deliveries. And the need to deliver along longer routes means Asian buyers are poised to pay higher premiums for the marginal Atlantic cargo to cover additional freight costs.

The US is already capable of loading around 90 cargoes a month, following the commissioning of a third 5mn t/yr liquefaction train at Corpus Christi. This could rise to just over 100 cargoes a month by this time next year, when another 10mn t/yr of export capacity should have been added.

US exports rise (mn t of LNG)

US exports rise

But there is a limit on how many of these cargoes can take the most direct route to northeast Asia, because the Panama Canal offers only two bookable slots — one in each direction, or two northbound that are typically for empty carriers returning to the US.

This leaves the equivalent of a maximum of one bookable southbound slot for every three cargoes likely to be loaded in the US in any given month.

And the booking window for these slots favours northeast Asian buyers that intend to use their US LNG offtake as base-load gas supply, because the window opens 80 days ahead of the intended transit date — a touch too early for firms looking to sell US cargoes on the spot market.

While the canal does often accommodate additional transits — usually a daily maximum of two — these are undertaken on a prompt basis and depend on the level of other freight traffic in the canal, such as containerships and crude tankers.

This means that sailing via Panama without a booked transit slot can entail a risk of significant delay if the canal is busy. And firms seeking the marginal fob cargo from the US will probably have to price in the higher freight costs of delivery via the Cape of Good Hope or the Suez Canal.

US cargo cancellations through much of last summer, and limited inter-basin arbitrage opportunities in recent years — excluding last winter — mean the Panama Canal’s ability to meet US LNG transit demand has rarely been tested.

But as US exports grow, and as Chinese demand booms, this could change. Northeast Asia already takes about a third of US exports every year, and this share is likely to expand further as US exports continue to rise, while only limited liquefaction capacity additions are expected in Asia-Pacific.

As Asian demand for Atlantic basin cargoes grows, Panama capacity is on track to be tested more frequently.

US exports by destination (# of cargoes)

US exports by destination

And if more tankers need to be sent along longer routes to northeast Asia — through the Suez Canal, or around the Cape of Good Hope — then the additional journey times involved would tie up tankers for longer and drive up freight prices.

Sailing from the US Gulf coast to South Korea is a 52-day round trip using the Panama Canal for both legs of the journey, but this rises to 63 days if the laden leg is around the Cape of Good Hope, and 76 days if both legs pass around the cape.

A Suez Canal round trip takes 72 days, but incurs a fee — although the Suez Canal Authority offers significant discounts for carriers taking US LNG to northeast Asian markets.

Covering these higher shipping costs will require northeast Asian delivered LNG prices to rise to much larger premiums to northwest European delivered prices.

And a shallower pool of carriers available in the spot market means that swings in charter rates could also become more pronounced when greater inter-basin shipments lead to a spike in freight demand — amplifying the rise in northeast Asian prices.

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