Can the Panama Canal Mitigate Endless Drought?

By Joanna Marsh

With the Panama Canal facing severe water management challenges, authorities are racing to secure its future as a global trade artery – raising the question: what solutions could keep this vital waterway flowing? 

From Issue 6, 2024 of Breakbulk Magazine.

(5-minute read)


The Panama Canal may be well over a hundred years old, but it’s still pulsing with activity as vessels ferrying energy, agricultural and containerized cargoes cross its locks daily.

To keep the canal humming, canal authorities are grappling over how to overcome water resource management concerns and other issues, particularly in light of last year’s drought - the most severe since the canal’s expansion in 2016. However they and other stakeholders are finding that the solutions are just as complex as the challenges.

According to the Panama Canal Authority (ACP), the canal handled 179.7 million long tons of southbound volumes and 106 million long tons of northbound volumes in 2023. Of the southbound volumes, the largest share, 46%, came from petroleum and petroleum products. Of the northbound volumes, container cargo held the largest share, at 41%.

As demonstrated by these numbers, the canal handles plenty of traffic throughout the year, and it has a key role in facilitating world trade. Yet several factors beyond the canal’s control influence how much vessel traffic can actually pass through. One major factor is the weather. Last year’s drought, which led to low water levels, seems to be part of a cyclical pattern, meaning that canal users should expect and prepare for another disruption down the road.

The drought “highlighted the significance of having a sizable fleet to maintain operational flexibility and schedule integrity in the face of unforeseen circumstances,” Felix Schoeller, director at AAL Shipping, told Breakbulk. “AAL is one of the few heavy-lift carriers with a fleet large enough to buffer these delays and continue to offer regular reliable sailings, with our owned fleet of 29 vessels totaling 831,800 dwt. Our fleet management meant we could in part offset delays brought on by the longer voyages and maintain the timely delivery of cargoes for our customers.”

To accommodate the low water levels seen on the Panama Canal, AAL had to alter some routes and schedules, according to Schoeller. But AAL also frequently communicated with various stakeholders to help mitigate costs. Last year’s experience also enabled AAL to develop a blueprint that it can deploy for any future disruptions.


Longer Transit Times

Forwarder DHL also found itself adjusting operations during the drought, which caused transit times to lengthen from eight hours to two or three weeks, according to Yaneth Castaneda, head of industrial products for Central America and the Caribbean at DHL Global Forwarding Panama.

One of the modifications DHL made was collecting containers from the Atlantic or Pacific coast and then transporting them by land to “avoid disruptions as much as possible for our customers,” Castaneda said. If the cargo was bound for the Central American market, DHL conducted cross docking and it arranged road transport to Central American markets in Costa Rica, Nicaragua and Guatemala. Cargo was even shipped by air to some customers.

“We offered different types of solutions to our customers according to their needs, according to their sector, and also according to their budget,” said Castaneda. “We had to adapt our services.”

But in addition to the cyclical droughts, weather disruptions caused by climate change might also come into play. These disruptions, in the form of severe droughts or typhoons, have the potential to be more intense or frequent, thus threatening operations or overwhelming infrastructure.

Last year’s drought was “just one of the several ‘wake-up calls’ to remind not only the operators but all stakeholders of the vulnerabilities of key global infrastructure in the face of climate change. We must continuously build resilience into our operations by preparing for potential disruptions. Our fleet strategy and operational expertise put us in good stead to weather these challenges,” Schoeller said.

Macroeconomics at both the regional and global level is another big factor affecting how much traffic goes through the Panama Canal. “You know, the canal didn’t stop operating” when it experienced low water levels during last year’s drought, said Andrew Thomas, associate professor of international business at the University of Akron in Ohio. Thomas published the book The Canal of Panama and Globalization: Growth and Challenges in the 21st Century in May 2022.

“The route was still very well used. It was just more expensive. One thing I think we’ve learned is that the Americans [who operated the canal in the 20th century before it was handed over to Panama in 1999] never really did much in terms of trying to manage it like a business. It was a government operation. But the Panamanians are running it for a profit,” Thomas said.


Problems Equal Profits

“So if you look at it from an operational perspective, from the point of view of the Panama Canal and its customer, which is the Panamanian people, it was a good year. They had fewer transits because of the drought. They were able to charge a lot more money.”

While it might have been harder for some shippers, such as those in the breakbulk business, to get a slot during 2023, some still decided to use the canal because it was a more reliable and stable option, according to Thomas.

“In a global setting, you have the Suez Canal, which is its major competitor. But Suez has been facing a lot of challenges as well, and those are not quality issues as much as operational issues or geopolitical and security issues,” Thomas said.

“Panama last year could have been in a really bad place with some potential shippers looking at Suez as a way to move cargo around Europe. But the shippers didn’t. They bit the bullet. They paid the extra freight costs simply because Panama has a more secure, safe environment and therefore was more predictable than even Suez was.”

Regardless of companies’ business decisions over choosing the Panama Canal or the Suez Canal, lingering port congestion globally is still causing current canal users to modify operations, even though the canal’s water levels haven’t been an issue for this year.

“The problem now is that many ports around the world are congested,” Castaneda said. If ports in other parts of the world are experiencing delays in loading and unloading containers, that affects container traffic on the Panama Canal and also causes delays.

Given the popularity of the Panama Canal as well as its contribution to the Panamanian economy, the ACP is keen to ensure the canal’s health and longevity. Last August, as the ACP commemorated the 110th anniversary of the Panama Canal, the agency also laid out plans to ensure the preservation of the canal.


Multipurpose Reservoir Proposed

Its plans include a focus on water resource management so that Panama can not only safeguard its water supply for area residents but also ensure that water levels are sufficient enough to handle growing ocean vessel traffic.

As part of this plan, the ACP announced that it was considering the construction of a multipurpose reservoir on the Indio River that would serve both purposes.

“In Panama, we have a high dependence on rainfall, and it is necessary to increase storage capacity to ensure drinking water and transit water. In the operation of the canal, including the third set of locks, we use the volume of water that was forecast for that purpose, whereas the consumption of the population increases permanently,” Panama Canal administrator Ricaurte Vásquez Morales said in a statement.

Sources differ on whether Panama will actually follow through on its plans to construct a reservoir, however all agree that the maintenance is key to the canal’s growth.

“It is important that measures are put in place to future-proof this vital shipping artery. This is especially the case considering the increasing frequency and strength of climate-related issues. We therefore welcome the development of a new reservoir along the Indio River — to ensure the Panama Canal can remain an effective route for our services and our project cargo customers,” AAL’s Schoeller said.

The US$1.2 billion reservoir, slated for completion in six years, would ensure more consistent operations during fluctuating weather conditions, but it is only part of a long-term solution to the canal’s existing water dependency, Schoeller continued.

Desalination plants could be another viable alternative to reduce dependency on rainfall-fed reservoirs, with one such plant already installed in Escobal to assess the feasibility of a desalination procedure, he said. “The disadvantages of these initiatives, however, are the significant costs involved, and the huge amount of energy required to remove salt from seawater.”

Part of the problem with effective water resource management in Panama is the local culture, adds Thomas. “Outside of the canal, the locals have taken for granted that “the cost of water is almost free.”


Political Pledges

There is some hope. Panamanian president José Raúl Mulino, elected in May 2024, indicated that it’s a priority of his government to shore up water resources to bring about the long-term sustainability of the canal. According to news reports, Mulino has pledged to back infrastructure efforts to ensure water availability or bolster the canal’s operations.

Such infrastructure work might not only be costly, but the government will also have to ensure that the projects won’t cause environmental harm. This concern is on the ACP’s radar.

“The question is, can they maintain the infrastructure? Maintenance isn’t sexy in a lot of circles, but in an environment like the tropics, maintenance is everything,” Thomas said. “Are they able to make the adaptations and flexibility? Can they bob and weave with it? They’ve shown that they can, and whether it was the water shortage last year or ships moving from containerization to energy, they’ve done a really good job; I think they’ll continue to do so.”

Ultimately, the health of global trade is the key factor influencing the economic viability of the canal, Thomas said. “The canal is, like Panama itself, shaped by what happens in the global economy. The continued rise of Asia, the continued rise of the U.S., the marginal decline of Europe — those will do more for the future of the canal than other particular issues.”

Castaneda concluded: “In our industry, logistics, what is for sure is that something will change. That’s what makes logistics fascinating, right? For us at DHL, it’s crucial to be quick, and to adapt to those changes.”


TOP PHOTO: After passing through the Panama Canal, AAL Gibraltar discharges cargo for an liquified natural gas (LNG) project in Beaumont, Texas. CREDIT: AAL
SECOND: Felix Schoeller, AAL Shipping. CREDIT: AAL
THIRD: Yaneth Castaneda, DHL Global Forwarding Panama. CREDIT: DHL