The long-term expectation of reduced rainfall is forcing the Panama Canal Authority to take drastic short- and medium-term actions to ensure ocean-going ships, including container ships, have enough draft to traverse the waterway, highlighting the economic calculations climate change will impose on the shipping industry.
Following the forced imposition of draft restrictions in four of the last six years due to an inadequate supply of the fresh water needed to operate the locks, Panama Canal administrator Ricaurte Vásquez says a new approach is needed because the value of the larger locks, completed at a cost of $5.25 billion in 2016, is for naught if the full water draft can’t be guaranteed. Lower drafts force container lines to load lighter, reducing the economies of scale larger vessels bring and leading carriers to consider alternatives, such as Suez routings.
“Draft, at least to me personally, is the product. With the new locks, we gave length and gave beam, but we have never assured the draft,” he said.
While the authority determines the best way to increase water availability to ensure full drafts nearly all the time, at a multibillion dollar cost, it’s imposing higher fees and changing its booking system to nudge carriers to make better use of limited lockage water by sailing fewer, larger vessels through the canal.
“The only way of being proactive — that doesn't mean that you will not impose draft restrictions — to save the water is to reduce the amount of lockages, and economics here plays again. You increase the price and you would expect demand to fall. The fees and new cost structure is [doing] just that, constraining demand,” Vásquez said. He added that Panamanian law and treaties prevent the authority from discriminating on the basis of which types of carriers and vessel types can transit, leaving the so-called lever of supply as the only one that the authority can pull.
Starting Feb. 15, the port authority began charging a “freshwater” fee to vessels over 125 feet that traverse the waterway. The fixed fee per transit is $10,000, and there’s also a variable fee ranging from 1 percent to up to 10 percent of a vessel’s toll that will be applied depending on water levels on the Gatun Lake.
Each vessel will be required to pay a booking fee at least 48 hours before it moves through the canal. Slots for super-Panamax and so-called regular vessels, or those with up to 90.99-foot beams, are awarded through auction three days before transits, although the authority will work to provide transit capacity for ships on a first-come, first-serve basis. Lastly, a handling service fee applies to transits, with operators of vessels with beams of 91 feet charged $5,000, and operators of ships with lengths over 125 feet and beams less than 91 feet charged $1,500. Money collected in tolls will go toward water conservation.
“What this does is that it gives an economic signal to the market, and the rate that has variable portion is inversely related to the lake level,” Vásquez, who took office in September, said in a Feb. 4 interview. “We are providing a 60-day forecast on rollover basis, which is a combination of expected rain and expected transits/lockage, so we can make a better scheduling of vessels.”
Less rainfall demands new approach
Over the last decade, total annual rainfall has fallen while also becoming less consistent. This results in droughts and then intense rainfalls from which water can’t completely be stored due to the storage limits of the basin, forcing discharges into the ocean, Vásquez said. Last year’s rainfall in Panama fell 20 percent below the historical average, making 2019 the fifth-driest year in seven decades. At the same time, the water temperature of canal-supporting lakes has risen, increasing the rate of evaporation.
Further complicating the authority’s effort to ensure draft levels, Panama’s water needs for commerce must be balanced with its need for potable water. Saline intrusion in the Gatun Lake, the main source for water for the canal locks, is requiring the flushing out of water so salinity levels fall to the point which processing plants can produce drinkable water. When building the larger locks, the authority opted for a water processing system rather than secure reservoirs because it was politically easier, Vásquez said. “But in economics there is no free lunch,” he quipped.
He warns that the cost to ensure full drafts 90 percent annually within four years could be upwards of $2 billion. While efforts continue to secure more water from Bayano Lake via the help of the Panamanian government, the authority is also considering four other options and aims to make a decision in April, Vásquez said. Those include ramping up desalination, which comes with its own pipeline transportation and energy costs, and dusting off a plan considered by American engineers during a drought in the early 1960s.
“If you segment the lake into parts, then the parts can be managed at different operational levels than the navigational channel. If you make the navigational channel smaller, then you will require less water to replenish the navigational channel lake,” said Vásquez, adding that such an approach wouldn’t require the authority to expand the canal’s footprint, making it more politically feasible.
Until a new strategy is finalized, the canal authority is working to better conserve energy. Power generation at the Gatun Hydroelectric Plant has been suspended, as has hydraulic assistance at Panamax locks. The canal authority is also coordinating transits so two ships can pass through the locks at the same time and building water-saving basins at the neo-Panamax locks.
In addition, the authority is cross-filling lockages, saving enough water normally used in six lockages by sending water between the two lanes at the Panama locks during transits. But even that, Vásquez admits, only mitigates the water scarcity, thus requiring a far more robust approach to the new environmental reality. “Rain is not an unlimited resource, so we have to deal with it in terms of scarcity.”