In this latest episode Marcus Hand Editor of Seatrade Maritime is in conversation with Panama Canal Authority Administrator Ricaurte Vásquez Morales.
The impact of Panama’s drought on the Canal is a story that has gone well beyond the shipping press and has captured global media attention. Such is the importance of the waterway on global trade.
You will hear from Ricaurte Vásquez about the measures the Panama Canal Authority has taken to keep the Canal operating in the face of freshwater shortages. As he explains about the impact on different vessel types, the solutions available, and the information shipowners can use to make decisions on transits.
Listen now in the player above or the app of your choice to learn how the Panama Canal is tackling water issues in the near and over the longer term.
Marcus Hand 00:09
Panama Canal, one of the world's most strategic waterways connecting Asia with the East coast of the Americas. But the impact of climate change has seen a cut in the number of daily transits allowed and draft restrictions. Marcus Hand, editor of Seatrade Maritime News here, and today on the Seatrade Maritime Podcast, we'll be talking with Panama Canal administrator Ricaurte Vásquez Morales.
The impact of the Panama drought on the canal is a story that has gone well beyond the shipping press and has captured global media attention, such as the importance of the waterway to global trade. In this episode of the Seatrade Maritime Podcast, you will hear from Ricaurte Vásquez, about the measures the Panama Canal Authority has taken to keep the Canal operating in the face of freshwater shortages. He explains about the impact on different vessel types, the solutions available and the information shipowners can use to make decisions on transits. Later in the episode, we will delve into how the administration is looking to use technology and the potential new water sources to address the impact of climate change over the longer term.
Ricaurte Vásquez Morales 01:27
Hello, how are you? Thank you for the invitation.
Marcus Hand 01:30
Now the Panama Canal. Many of the listeners to the Seatrade Maritime Podcast will be familiar with the importance of the Canal, but some may not be quite so. So, to start off, could you set into context the importance of the Canal to shipping and trade and the volumes that transit the waterway annually?
Ricaurte Vásquez Morales 01:49
Yeah, in general, we handle on a very good year, about 14,000 transits per year. About 45% of them are container rise cargo type of vessels, we serve about 50% of the trades that go from Asia to the east coast of the United States and the globe. We handle the value of commodities and merchandise and moves to the Panama Canal is about $500 billion ($0.5 trillion). And about two-thirds of that either comes or goes to the US somehow.
About 35% of the cargoes are energy products, LNG and LPG - Liquefied Petroleum Gases. We handle container vessels up to about 17,000 TEUs, it is not the norm, it is the exception. But we have seen since the Panama Canal expansion, that the size of container vessels has increased gradually and we expect the average size to continue to increase to about somewhere between 14,000 and 15,000 TEUs per ship.
In general, the Canal has done very well. We are an operation that relies on freshwater and freshwater is rain-dependent. And we have had severe cases of drought in the last 10 years. And being this one the most severe in two ways. One, because the amount of water that is actually generated in order to upgrade our lakes and navigational channels, which is freshwater, which has a disadvantage compared to other maritime routes, declined significantly at something in the neighbourhood of about 30%. And with a 30% reduction, which is equivalent to about 16 transits per day, we have to reduce operations dramatically. And for the very first time, we have seen a situation where not only we have reduced draft in order to keep the operation going with the existing water volumes. But now we have entered a situation where we are reducing the number of transits that come to the Panama Canal and making sure that essentially most of the vessels that have a user reservation system will be serviced relatively with very little disruption, and other vessels that come on a first in first out basis have been waiting for extended period of time so we are moving our booking system or reservations into a system that allows for most vessels to book if they want to transit.
We experimented 163 vessels in the queue back in August, that number has declined to a more steady number in the neighbourhood about somewhere between 95 and 105 vessels waiting and the waiting times have declined. So this week is about seven days, eight days. The one who's waiting the longest down from about 14 days that was the maximum waiting time say by mid August.
Customers are informed about water conditions of the Panama Canal. We have kept them informed about the length of queues and the number of vessels in waiting. And with all that information, what we are trying to provide is total information, completely transparent in order for shipping companies to make their decisions before they sail. This is a situation that we suspect to be temporary in nature. We are working on finding solutions to provide the Panama Canal and Panamanians with enough fresh water in order to use for domestic consumption as well as for Panama Canal operations. And we have improved water efficiencies dramatically because the water we are using for our operation is being stretched out in order to max out the number of transits that we can accommodate every single day.
Marcus Hand 01:49
Quite a lot of different areas that you covered within that, and I'd like to probably sort of drill down on some of those. Now, you mentioned in terms of reducing a number of transits and the draft, does that impact also the amount of cargo that ships can carry through the canal? And how do owners manage that?
Ricaurte Vásquez Morales 06:04
Well, we have moved draft down to 44 feet. And that accommodates about 70% of the transit that we service. There have been exceptions and some of the vessels that carry heavier cargoes, particularly those who are bulk carriers that are in spite of the fact that they do have the Panamax dimensions because they come with a higher payload than they have to use the neo-panamax locks. That neo-panamax locks are operated about eight to 10 times a day. The difference is being operated at the Panamax locks.
Usually for bulk carriers, it becomes very cumbersome for them to really book a slot and the cargos will take the option of going into the long haul, assuring this arrival unclaimed other destination port compared to waiting in line through the Panama Canal. Most of the bulk cargo carriers usually do not book, and most of the liners which are on a scale, those are the vessels that book. As far as payload is concerned, every feet of draft is equivalent to about somewhere between 300 and 350 TEUs of cargo. So what vessels are doing right now is to unload at the entrance of the Panama Canal, transfer some of the boxes through a surface system, either rail or road and then pick them up on the other end of the Canal. So as far as Panama is concerned, especially for containerised cargo, the service has been rendered marginally more expensive, because it's cumbersome to unload, reload the vessel, and you have to make two ports of call while transit in the Panama Canal. But Glen Bridge that operates here in Panama has provided relief for those cargoes, especially containers. And only containers can benefit from that there are no other options, for example, dry bulk or any other commodities to be transferred unsurfaced through the back to the Isthmus of Panama.
So for 45% of our customers, and as far as transits are concerned, they represent about 50% of the total number of transits, container vessel services have been marginally affected and there is a way of moving the cargo through Panama. And that option is not necessarily available for other types of vessels and by doing so, then they have to come lighter and because they come lighter then probably the payload factor is diminished which automatically has an implicit increase in the actual cause of transit in the Panama Canal.
Marcus Hand 08:52
Just in terms of those where the container vessels are using the land bridge type option, what sort of percentage of container ships are you doing that?
Ricaurte Vásquez Morales 09:10
We are servicing about five transits a day and container vessels in the neo-panamax locks and there is a smaller number going through the old panamax locks. What we have seen this year, two years ago, we saw a significant increase in neo-panamax container vessels and then the situation and destination ports of having congestions and fuse lot. Some of the shipping lines consider the possibility of having a destination port, a smaller port either in the Gulf of Mexico or in the Eastern seaboard. So, there was a movement towards Panamax vessels in order to address congestions at the destination ports.
Nowadays, what's happening is that we are moving back into neo-panamax vessels. And because they want to move as much as cargo as possible into neo-panamax locks to assure that they satisfy, you know, their existing contracts. So what we are seeing now, as far as containers are concerned, most of them are using the neo-panamax locks which released some capacity in the panamax locks to service other services or segments.
Marcus Hand 10:21
You touched earlier on, I think, making some changes to the reservation system. And you mentioned that mainly, I think it's mainly container ships that currently use that. What changes are you looking to make?
Ricaurte Vásquez Morales 10:34
Actually the situation is that some shipping lines do come and wait. And that's part of the programme because they have a very high probability that the waiting times do not exceed what they can handle. So, in the past, when we had an operation somewhere between 36 and 38 transits per day, waiting times were relatively acceptable, especially for tramps, which are non scheduled not liner services.
Now, with longer waiting times, as I mentioned, we have peak about 14 days of waiting. Some of these vessels are taking the alternative route in going all seaborne and not going through the Panama Canal. That's one option. Some of them are consolidating cargoes like containers, some of them are booking or if they do not have a booking, by the time they arrive to the Panama Canal, they go into the auction system.
Auctioning has different value to different services and different segments. There are some penalties in some services that demand just on-time deliveries within once they reach the Panama Canal. So within a number of days, they have to transit. So we had extreme cases where a vessel has paid in excess of $2 million just to get a slot to transit. But that's an added layer because most of the vessels go to auctions and the price they pay in order to assure a slot once they are close to Panama or they're waiting in the queue is significantly less than that. On the average, a vessel waiting for a neo-panamax lockage probably is going to base somewhere between $500,000 and $600,000 just to get a slot. And in the panamax locks, that number is probably less than half of that.
So now, I think that as far as reservations and making sure that you have a slot to transit, shipping companies must make a decision when they sail that they will have to book or ensure booking in the future. We have windows in order to do these reservations. And these windows are essentially a year for vessels that are in the liner service. Now we have to make an amendment to the reservation system so it's more transparent and available to all non-liner vessels that have an opportunity to book say, 90 days in advance. So sailing decisions in some of the other services are not necessarily so well planned with that many months in advance. So we have also to accommodate servicing origins that are closer to Panama, or services that are not necessarily on the line or working on schedule. And we have to provide service to everyone that comes to transit the Panama Canal with the best reliability and meeting the expectations they have in order to go through the Panama Canal.
Marcus Hand 13:45
Okay. What's been the reaction from users, the customers of the Canal? And have you seen many actually diverting to go all the way around the Cape, for example?
Ricaurte Vásquez Morales 13:58
We have seen some diversions, yes. We had a call coming from Colombia going for example to Chile so he's a long haul, he is a bulk carrier, cargo values are relatively low compared to say containerised cargo. So they have taken the long haul in order to service Chile. That has happened. There have been other examples from Chile going to Europe, they do the long haul and avoid the Panama Canal.
Most of the traffic that comes from Asia, to the destination, the Gulf of Mexico and the Eastern seaboard of the United States, usually scale way ahead. And you know, we make our advisories 20 days in advance, 21 days in advance. Usually, the farthest away port of origin is about 28 days of sailing away. So we make the announcement with enough lead time in order to make sure that they can make a rational decision of which way to go. And that's when we believe, that we are by providing the information allowing our customers to make the best decision possible, given the circumstances.
Marcus Hand 15:15
So essentially, your advice to these customers is that they should plan ahead based on the information.
Ricaurte Vásquez Morales 15:21
Yeah, because it is a new reality. And this is a new reality that is not unique to the Panama Canal, it is something that you're seeing in some of the rivers in Europe, it's something you're seeing in the Mississippi. We have information that even in Manaus in Brazil, there is a situation that is happening. So, climate change is essentially the reason why all this has happened. And that is a slow process that has picked this year, and to call our attention to the things that we have to do in order to modify our consumption patterns and everything else transportation and the like. So, we can probably reduce the adverse impact of climate change than it's having on the economy as a whole.
Marcus Hand 16:09
Yeah, obviously, this is caused by that much wider issue of climate change. And I'll come back in a little bit to do that in a few minutes. Now, just looking at the measures you've taken, and I think you've announced last week, you're going to reduce the number of transits to 31 from 32. Is that correct?
Ricaurte Vásquez Morales 16:28
Yeah, we first came down to 32. Well, now we are going to reduce one transit. One reason for that is that we need to save water in order to overcome the normal dry season. And the emphasis is on normal because this is a very abnormal and lengthy, dry season. So, we are aiming to have our navigational lake at a specific level, say by late November, when it's officially the dry season begins so that we can overcome the dry season in Panama and wait for the rainy season that should start in a normal year, probably by the month of April.
Marcus Hand 17:12
So this is like sort of forward planning, essentially. Now, when it comes to this decision between draft and the number of transit, is this made because there's like a maximum amount of water and therefore it's a choice between those two, or how was this decision made?
Ricaurte Vásquez Morales 17:29
Actually, we know, especially for the neo-panamax locks, what should be the minimum draft required. We can go an inch or two below that, but not much more than that. It is a decision of whether you provide the opportunity to transit even with a smaller payload or you don't transit at all. Because if we go further down as far as draft is concerned and draft possibility, then the option will be not to come through the Panama Canal at all.
Now, what we are looking at is that for the Panama Canal 70% of the vessels cannot breadth at 44 feet of draft and we are addressing that. And for vessels that need larger draft, then there is the option, especially with containers, there is the option of using the surface system. That being said, essentially, Panama remains the service provider for these cargoes and not only the Panama Canal, but the ancillary services that surround the Panama Canal. So, there is an option so there is latitude for them to allocate cargo and make a decision. Probably the easiest one will be “I would like to sail with those stops at either port”. Fine, but if you have to do that, the trade-off is that you have to come lighter. If your cargo load is higher then you have to do the transshipment and then take the additional containers again, and the ones you transit the Panama Canal. But the options are open the information is available. So, what we are providing is relevant information for decisions to be made for those services that can use the intermodal service in Panama.
Marcus Hand 19:24
Now we're also seeing some companies seeing this as an opportunity to offer alternatives to Panama Canal. We've done a story on like a rail line from across Mexico to the US East Coast, for example, as an alternative to the Panama Canal. Do you have a concern that people will try out other options and then maybe decide we prefer this to using the Panama Canal?
Ricaurte Vásquez Morales 19:48
We are always aware that there are options or could be options. You know if you take the long haul through Suez, that's an option. And we are aware you know we save about 30 days in sailings to any other alternative or any other option, probably 25 if you go through Suez, or 20 depending on vessel speed. We do not consider ourselves to be a monopoly, we serve specific market, we are better positioned to serve specific market. Destinations to the Gulf Coast of Gulf of Mexico, Texas, Louisiana and the like, are the sweet spot for transit that go through the Panama Canal. It becomes more competitive, the further north you move and the East Coast. So we are aware of that.
We are aware that we are the shortest route to take energy products from the Gulf to Asia. And we tried to create space for this cargo to move through the Panama Canal. Otherwise, they will take the long haul through either Suez or Cape. And that has its disadvantages. But we are very aware of consumer needs. And we continue our conversation with our customers. They appreciate the efforts that the Panama Canal has undertaken over the last few months in order to ensure some reliable services that meet their expectations. And they also acknowledge the efforts that we're making moving forward in order to ensure that we have increased water reliability. And consequently, we can normalise transits back to the traditional levels between 36 and 38.
Marcus Hand 21:37
Now, you know, as you said earlier that this all comes down to climate changes and longer-term issue. And you touched a little bit there about taking measures to ensure water in the future from the Canal. Could you explain to our listeners a bit about what you've got planned to ensure that the Panama Canal can operate at that level of 36 to 38 transits per day in future?
Ricaurte Vásquez Morales 22:01
In the future, we'll take that we have identified a source of fresh water that can compensate the number of transits we have missed because of drought. We believe this is going to be an issue that is going to be with us, the Panama Canal is climate dependent. So even if we have additional reservoirs, or we try to use different technologies in order to save water in the operation and making more water efficient, there is always a risk of climate. And what we're trying to understand is weather patterns and behaviours in order to make sure that we can anticipate with proper information, Hydromat information, the conditions that will prevail, probably six months down the road. On a regular basis. Not necessarily just in the crisis that we're facing right now, but that becomes standard for the industry to see the information with X number of months in advance.
If we can do that, and that is a matter of technology and AI, the reliability of the Panamanian route will be enhanced and these are technical solutions that are essentially based on new technology and analytics that will provide that extra edge to push one to three vessels per day. So, we are entertaining those elements and we are working very hard on that. And as far as the operation is concerned, we will be using the water-saving basins to the fullest, in the months to come, that will be a standard. We are using cross-fillings at the Panamax locks. And that saves about three to four transits, maybe five transits per day, it would do it. It slows down the process but gets a throughput. So, it will be a new definition of what will be normal capacity. So, what will see in the future, and depending on when a new water source is engaged and comes to play in operations, we will really do an adaptive management in order to push water utilisation to a limit.
Marcus Hand 24:17
There are two parts to that - there's the technology part and also then the new water source. So what sort of timeframes are we looking at for those?
Ricaurte Vásquez Morales 24:26
If we weren't to start building new reservoirs that will take probably five years, six years, it depends on rainfall as well because you have to fill it. So, depending on the rain patterns, then you have to do it. You have to take that long. The Civil Engineering Construction doesn't take that much time but then you have to fill the reservoir. That's one option that has been entertained in the past. That requires certain legislative approvals, because as a consequence of the Panama Canal referendum, Panama Canal has a limitation on building new reservoirs for Canal operations. So that is sort of a national issue that we have to discuss.
Now, everything else that we can do within Panama Canal property, we can do differently and immediately, but that relies on new technologies and new ways of managing water. And that's what we are doing right now. Have you considered the possibility of us having 3-4 months working at the lake levels that we have? Say 20 years ago that would be unthinkable. Even when we began operations of the neo-panamax locks, that was unthinkable. But having the information relying more on weather information or making sure that you have real-time data, as far as rainfall, precipitation, lake levels, and the like, provides tools in order to gauge by the hour, by days, you know, the way we operate the Panama Canal. We do not want to be overly optimistic, I think there is a limit, as I mentioned, we have to preserve water in order to overcome the dry season when it continues.
Marcus Hand 26:12
Obviously, there's a lot of work to be done. And we'll be following that with great interest. What would you advise users of the Panama Canal to do in the coming months and into next year?
Ricaurte Vásquez Morales 26:23
You know, if you have questions, reach us. there is no doubt that we will be here, not necessarily will be a situation where we can satisfy demands. Once again, that Canal is climate-dependent. But I think with proper information and checking on our website, there is a lot of information that is available for shippers to make sure that if their cargoes have to be at a specific destination on a specific date, they do have the information. And they can make it in on time through the Panama Canal, if they make the reservation we serve our booked vessels within 18 hours, for example. So that is a service quality element that they know and they are aware and they appreciate. So, there are many elements that the traditional Panama Canal service has provided our customers, and we will continue to do so. And the best way to do that is essentially to provide the information for everyone to make the best decision possible.
Marcus Hand 27:28
So always check the information and ask yourselves what the situation is.
Ricaurte Vásquez Morales 27:32
Marcus Hand 27:33
Okay. Great. Thank you so much for taking the time to talk to our listeners today.
Ricaurte Vásquez Morales 27:37
Thank you so much for the invitation.
Marcus Hand 27:39
Thank you, Ricardo Vasquez, for your time and insights today. That is all we have time for on this episode of the Seatrade Maritime Podcast. And we look forward to joining you on the next episode.