Panama Canal Expansion’s Timing Off as Propane Profits Vanish

  • Tankers move through expanded canal even with arbitrage shut
  • Asian ‘markets are saturated’ by growing global supplies

The long-awaited expansion of the Panama Canal that will make it easier to ship U.S. propane to Asia comes as the region’s need for the fuel has diminished.

The world’s largest propane tankers, which increasingly transport the fuel used for cooking, heating and plastics-making from the Texas Gulf Coast, can now sail to Asia in about 25 days using the canal instead of the 45 needed to go around Africa or South America. The expanded canal opened Sunday, and on Monday, the Lycaste Peace became the first neo-Panamax tanker to move from Houston to Asia through the canal for Japan’s Astomos Energy Corp.

But much has changed in the decade since the Panama Canal Authority announced the expansion, said Peter Fasullo, principal and co-founder at energy consultant En*Vantage in Houston. The shale revolution has come and gone, as have the profits made from shipping U.S. propane to Far East destinations that appear to be saturated, he said.

“It’s nowhere near the same economics to export to Asia or Europe like it used to be,” Fasullo said by phone. “Even though we open the canal and it’s going to cut the transit time quite a bit, if we bring more cargoes through much faster, can the Asian markets soak it all up?”

Troubled Buyers

Fasullo said he is hearing about cancellations, and one indication of trouble came to light this month. Targa Liquids Marketing and Trade LLC, a unit of Targa Resources Corp., filed suit against its counterparty China Soft Packaging Group Holdings Limited for failing to pay for propane loaded at Galena Park, Texas, according to the court document obtained by Bloomberg.

"If buyers over there are having problems, it doesn’t speak well about the viability of the market over there overall -- at least in the short run," Fasullo said.

Current market conditions mean trading companies are taking losses as they send tankers through the expanded waterway, according to Scott Gray, senior director of waterborne LPG at IHS Energy. The cargoes are being sent to fulfill long-term contracts.

"The product flows anyway," Gray said by phone from near Austin. "There’s also some level of pride in being the first one to pass through the Panama Canal."

Expansion Craze

U.S. propane exports have grown eightfold in five years, according to the U.S. Energy Information Administration. Propane output from natural gas plant fields exceeded 1 million barrels a day in 2015, almost double 2010 levels.

As output grew, midstream companies like Enterprise Products Partners LP, Targa and Sunoco Logistics LP built out infrastructure to load the natural gas liquid that is produced in tandem with crude and gas in shale basins.

Independent refiner Phillips 66 will also get in on the propane export action this year as it opens a facility outside its refinery in Sweeny, Texas, at the Port of Freeport. Iran has joined the competition with its own propane exports, Fasullo said.

"You’ve got a lot of propane on the water” at a time when the markets are saturated, he said.

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