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Panama Canal expansion dispute could alter U.S. export plans

Aereal view of the Pacific Construction Site of the Third Set of Locks of the Panama Canal (By Autoridad del Canal de Panama [Attribution], via Wikimedia Commons).

Aerial view of the Pacific Construction Site of the Third Set of Locks of the Panama Canal (By Autoridad del Canal de Panama, via Wikimedia Commons).

Seven years after Panama voted to widen its world-renowned canal, a debate over who should have to pay an additional $1.5 billion in construction costs threatens to halt its completion. The U.S., anxious to begin sending liquefied natural gas tankers through the canal, is keeping a close watch on the situation as a potential setback for new trade deals.

The expansion of the canal includes two new sets of locks—one on the Atlantic and one on the Pacific. Each new lock will have three chambers, and the canal itself will be deepened and widened. A booming natural gas industry in the U.S. sees the improved canal as a way to cut global shipping times. The canal’s expansion is predicted to cut LNG shipping time from 41 days, via a route around South America’s Cape Horn, to 25 days.

panama canal construction map

A map featuring the proposed construction of the third set of locks for the Panama Canal (By Panama Canal Authority (PanCanal.com) [see page for license], via Wikimedia Commons).

As of now, only a small amount of the global LNG tanker fleet can pass through the Panama Canal. After its expansion, 90 percent of LNG tankers should have shorter travel times.

The contractors, a European consortium of construction companies (GUPC) won the bid to expand the canal for $3.2 billion, but are now claiming overrun costs at the fault of the Panama Canal Authority (ACP). GUPC claimed the ACP provided poor geological studies beforehand, which led to a higher price tag for completion.

A spokesman for Sacyr, the lead construction company for the project, told Keith Johnson for Foreign Policy, “If the customer doesn’t provide additional funds to cover the unexpected costs, the project will soon face a cash crunch.”

The consortium earlier warned it would stop construction by Jan. 20 if a settlement were not reached. By the end of the day, GUPC activity on site fell by 75 percent, according to Panama’s government. GUPC has called for an immediate $400 million from ACP to continue work efforts.

Last Thursday, the ACP proposed to pay the GUPC $283 million towards completion of the project if the contractors guarantee $100 million themselves. If talks stall and a strike ensues, the ACP expressed confidence it can finish the expansion alone, although it would likely take longer than expected.

Questions have been raised about whether GUPC purposefully bid low on the project to secure the deal and are now seeking help for its completion, two-thirds of the way through the project.

Should an agreement be reached, the project is on pace to be completed by the summer of 2015. The improved canal is expected to redefine international trade.

U.S. LNG tankers will be some of the first to take advantage of the shorter route, particularly for LNG bound to their Asian destinations. Thanks to an increase in drilling technology, such as fracking, U.S. natural gas production has been on the upswing. The U.S. Energy Information Administration reported natural gas production increases of about 6.38 million cubic feet from 2005 to 2012. It’s predicted that by 2020, the U.S. will be a net exporter of natural gas, and some say that could happen even sooner depending on export laws and trade agreements.

Advocates for exporting the fuel cite reasons such as improving the U.S. economy, evening the trade deficit, and encouraging the adoption of clean-burning fuels around the world. There is also foreign pressure for the U.S. to open its market. A coalition from Europe, mostly eastern nations bound to Russian-produced natural gas, created a group called LNG Allies to help persuade the U.S. to open trade with them.

So far, the Energy Department has approved only five applications to export natural gas to countries that are not free-trade partners.

Still, not everyone in the U.S. is on board with immediately shipping out the resource to countries that are not free-trade partners. Those five approvals left some upset in Washington, D.C. Opponents of exporting natural gas argue that quickly pulling the trigger to sell natural gas abroad would hurt domestic prices, industries that rely heavily on the cheap fuel, and consumers.

“In a perfect world, we’d like to just see them approve all the applications that meet the requirements and let the market figure out which ones are actually going to be built,” President and CEO of America’s Natural Gas Alliance told Matthew Daly for The Associated Press.