LNG’s canal conundrum
DEEP DIVE: Without Suez and Panama transits, shipping costs could spike – or collapse
Transit constraints have arisen simultaneously on both the Suez and Panama Canals. This unlikely situation is forcing liquefied natural gas exporters to take much longer journeys to reach markets on the other side of the world. Freight rates are currently low but set to rise later this year, raising the question: if both canals remain inaccessible for months on end, will long-distance LNG trade be rendered economically unviable?
In an attempt to answer this question, Energy Flux modelled the higher costs of shipping US and Qatari LNG around Africa’s Cape of Good Hope to Europe and Asia, respectively, in various scenarios. The main conclusion is that, while canal impacts are currently manageable, inter-basin shipping costs could easily triple or quadruple if canal trade routes remain off-limits until the second half of the year – when futures markets anticipate a tightening in the LNG shipping market.
If inter-basin trade continues in spite of higher shipping costs, this could exert a multiplier effect on delivered prices — to the detriment of consumers and exporters alike. Equally, the situation could ‘kettle’ cargoes within the basin of origin, shortening journeys and depressing costs — meaning lower prices and fewer emissions.
The latter is more likely than the former, but LNG trade is not as flexible or efficient as other commodities. The ability of market players to optimise in the face of sudden new obstacles is limited by contractual (and other) limitations.
As explored in recent posts, the de-facto closure of the Suez Canal is hurting the profitability of Qatari LNG in Europe. At the same time, Panama Canal restrictions could put Asian markets out of reach of American LNG exporters in the coming months. Today’s post analyses how this situation is affecting the main cost factors of LNG shipping.
Modelling by Energy Flux shows that shipping costs increase in a non-linear fashion when LNG is traded over longer distances (i.e. between oceanic basins) and vessels speed up to minimise delays. Conversely, the localisation (or ‘basinisation’) of trade would keep costs low, while decoupling European gas and Asian LNG benchmarks – introducing an entirely new set of trade, price and arbitrage dynamics.
This deep-dive breaks down the main cost components of shipping LNG to Europe and Asia from the US and Qatar under various scenarios, while contemplating the different ways that this situation might evolve – and the implications for gas consumers in major LNG importing regions.
All of this is supported by a new set of bespoke charts and graphs designed help to decipher the complex inter-related factors at play, in the hope of improving understanding of how the global LNG market is being contorted and what might happen over the coming months.
Setting the scene
The three largest cost components of LNG shipping are: i) charter rates ii) fuel costs and iii) canal fees. In Europe, there’s a fourth dimension: carbon liabilities (more on this below). Other costs, such as brokerage fees, insurance and port costs don’t really move the needle so are excluded from this analysis.1
The modelling focusses on supplying LNG to Europe and Asia via different canal- and non-canal routes. Five scenarios (Europe #1-5 and Asia #1-5) were created for each region, based on LNG supply originating from the US Gulf Coast and from Qatar. The scenarios vary by route, speed, charter rate and carbon price. For full disclosure, the data inputs and assumptions are all listed out in this table (click to enlarge, or squint):
And here are a couple of maps showing each route/scenario modelled for supplying LNG to Europe and Asia:
Now, let’s visualise how each of those cost variables changes under each scenario, and then stack them all together to get a holistic view of non-canal LNG shipping costs. Spoiler alert: the delta between #1 and #5 is huge, but the probability of occurrence diminishes the further you move up the cost curve.