After a historic drought that paralyzed vessel transits through the Panama Canal, the Panama Canal Authority is moving ahead with major investments in new infrastructure to mitigate future droughts and the risk of low water levels that in recent years plagued the key global trade gateway.
The Panama Canal depends on fresh water for its operations and is rainfall dependent.
“We use about two and a half times the amount of water a city of the size of New York uses for the canal operation,” Ricaurte Vásquez, Administrator of the Panama Canal Authority, told CNBC.
In a good year of rain, that means over 50 vessel transits through the canal’s locks a day, but in recent years, weather has not cooperated. Severe drought conditions hit the region from late 2022 to 2024, forcing the canal to reduce transits and put in place vessel weight restrictions in an effort to conserve water.
The canal is critical to the U.S. economy and trade. The U.S. is the largest user of the Panama Canal, with total U.S. commodity export and import containers representing about 73% of Panama Canal traffic, and 40% of all U.S. container traffic traveling through the Panama Canal every year. In all, roughly $270 billion in cargo is handled annually.
In April, Canal administration began the pre-qualification and selection process for concessionaires to build a land bridge, including what it describes as a flagship natural gas pipeline line to move natural gas liquids (NGLs) without relying on the canal itself. A road connecting both Atlantic and Pacific coasts, as well as port terminals built on either coast, would also be constructed, with the terminals also able to accommodate containers and roll-on and roll-off cargo.
The pipeline would allow for the transport of liquified petroleum gas, ethane, butane, and propane from the Atlantic side to a Pacific-side terminal, where another vessel would be loaded and carry the product to Asia. Canal officials hope this will attract more LNG transits through the canal.
The Panama Canal Authority reported a 29% drop in vessel transits during fiscal year 2024, with the biggest hits in LNG and dry bulk transits. LNG transits were down 66 percent, while dry bulk transits were down 107 percent.
Even though water levels are back to regular operating conditions, LNG traffic has not returned to pre-drought transit activity, with carriers continuing to choose the longer route around Africa’s Cape of Good Hope, according to S&P Global data.
Vasquez tells CNBC that U.S. energy companies are “drooling at the possibilities” of this alternative way to move the commodity. Transit time-wise, Vasquez said the pipeline would be competitive versus traversing the canal, and reliability would be higher because it is now water-dependent. “This is important because with many of these products, reliability and delivering on time are critical,” he said.
“We decided to do a land bridge to complement the waterway,” Vásquez said. “We are aware that these are high-value products that have a destination in Asia,” he said, noting the project was announced in Tokyo, which is the largest buyer of these energy products.
A container ship navigates through the Miraflores locks of the Panama Canal near Panama City, Panama, on Friday, Nov. 3, 2023, during a period when the canal water levels led to quotas being imposed on how many ships could use the key global trade artery. Photographer: Walter Hurtado/Bloomberg via Getty Images
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Another project approved is the building of the Rio Indo dam. The dam and tunnel project would add supplemental water for Lake Gatun, which feeds fresh water to the Panama Canal in order to operate. The older Panamax locks lose approximately 50-52 million gallons of fresh water per vessel transit. The newer, Neo-Panamax locks reclaim approximately 60% of the water per transit.
Construction for the dam is expected to begin in 2027 and would not be completed until 2032, with a cost estimated at $1.6 billion. Included in that cost is $400 million allocated for compensating and relocating about 2,500 residents from various communities whose villages would be flooded to create the dam.
CNBC was the first television crew to go to one of the villages that would be impacted by the project, and villagers who spoke with CNBC said they did not want to leave.
Neither project will be finished by the time the next El Niño weather phenomenon is expected, in 2027. Vasquez tells CNBC that some of the elements of the land bridge will be completed, but the pipeline is not expected to be completed until 2030-2031.
Watch the video above to learn more about how the Panama Canal is planning to out-engineer a future of severe drought and climate impacts, and the consequences for the U.S. economy, global trade, and local communities.
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