The Panama Canal Expansion

The expansion of the Panama Canal which began on September 3rd, 2007 and is scheduled to be completed in 2014 with an expenditure of $5.2 billion is not a new idea. Even when the canal was under construction in the early years of the last century, the chief engineer, John Frank Stevens, displayed rare vision by recommending wider locks for the mega ships which he must have realized would be needed for the growth of sea trade.

Then in 1937 US Congress authorized an expansion of the dual-lock Canal and its conversion into a ‘three lane canal’. The decision was a response to military needs and although the works began in 1940, the project was abandoned in 1945, at the end of WWII. The need to enlarge the waterway remained but it was not until the mid-1990s that Panama Canal officials started to commission studies – this time for commercial purposes – to prepare the canal for the 21st century and investigate the viability of building a third set of locks to serve the new generation of vessels with the denomination “Post Panamax” – in other words wider and of deeper draft than the maximum allowed by the existing locks. A Master Plan, that included the construction of new locks, was drawn up by the Panamanian administration after the transfer of the waterway to Panama at the end of 1999.

The Panama Canal expansion projected price was $5.25 billion.

The decision to engage in such a venture was not to be taken by the Panama Canal Authority (ACP) alone but "only by the people of Panama with ample discussion and in a referendum" said President Martin Torrijos in his inaugural address on September 1, 2004. So, on April 24, 2006, the ACP unveiled the expansion plan and embarked on a nationwide presentation of the project which went to referendum on October 22, 2006. In a decision that could prove historic for world trade, the Panamanian people approved by the ‘overwhelming majority’ of 78% the $5.25 billion project to expand the canal.

The expansion plan
The expansion of the canal, which already carries 5% of the world's trade, will let the largest post-Panamax vessels sail directly from Asia to the US East coast and will double the canal's capacity when the third set of larger locks will be open for business in 2014.

The canal is operating close to full capacity which despite ongoing improvements to bring its capability up to 330 million PC/UMS might be reached as soon as 2012.

The projected price tag of $5.25 billion includes 28% contingency and 2% for inflation during the period of construction. The cost of building two new locks totals $2,730 million. The water basins will cost $620 million, the new navigation channels $820 million, increased water supply $260 million, and $530 million has been allowed for inflation.

The benefits of the expansion will extend to Panama’s maritime clusters and to the economy in general, and will result in the creation of thousands of jobs in all the sectors of the economy, in addition to the estimated 7,000 positions for the expansion construction itself.

Financing of the project will come from the ACP internal funding, higher tolls and external financing from international capital markets for a $2.3 billion facility. Canal officials say that half of the $2.3 billion will be financed through multilateral agencies and the rest by commercial banks.

Physical features
The new locks will be built on the location chosen in 1937 by the US Army Corps of Engineers, which had originally planned to construct a larger version of the existing system on both the Pacific and Atlantic sides. The Corps abandoned the project, which was the same locks design of 1914 but larger, leaving only a partially excavated channel on the Atlantic side.

The expansion project will make some improvements to the existing locks, including water-saving basins on one side of the locks (three for each chamber) that will allow storage and re-use of a portion of the drained water. This will require 7% less water per lockage than the present system, postponing the need to build additional reservoirs beyond the existing Gatun Lake and Madden Lake sites as was originally planned. The water saving basins on the new, much larger locks will reduce water consumption by 60% through recycling in the locks equalization process. Another innovation: the new locks' chambers won’t be closed using ‘mitre gates,’ as in the existing locks, but sliding gates, which will facilitate maintenance. Yet another proposed change is the absence of locomotives to position vessels in the lock chambers. The historic ‘mules’ – a classic feature of the Panama waterway – will be replaced by tugs, which have now become a more standard approach to positioning vessels.

The new locks, of 427m in length, 55m in width and 18.3m in depth, will accommodate vessels up to 12,000 teu that are currently considered ‘post-Panamax’.
On the Atlantic side, the new locks’ navigation channel will be 3.2 km long from the north of Gatun Lake to the junction with the existing navigation channel.
On the Pacific side, the new locks’ navigation channel connecting with Gaillard Cut will be 6.3 km long and another channel connecting with the existing channel will be 1.8 km long.
The new navigation channels will be 218m wide, allowing one-at-a-time transits of vessels currently considered ‘post-Panamax’ in one direction. Other channel segments will be wider to allow two vessels to pass.
Both Gaillard Cut and Gatun Lake channels will be deepened by 1.2m to 9.2m, giving the canal a variable draught of 13m to 15.2m in tropical fresh water. The Gatun Lake channel will be widened to no less than 280m in straights and no less than 366m in the curves.
Both Atlantic and Pacific entrances will be widened and deepened to 225m in width and 15.5m in depth.
The level of Gatun Lake will be raised 0.45m to 27.1m to provide 660 million more liters of water capacity, allowing 1,100 additional lockages per year.

The bidding process
Since the approval by referendum of the expansion plan, the ACP has opened a series of international tenders for the selection of the companies that will advise the Authority during the time of the construction and for the contracts awarded to the companies that will participate in the dry excavations for the new navigation channels, the deepening of the entrances and the future construction of the locks.

On the advisory side, the financial advisor contract and first contract to be awarded in February 2007 went to Mizuho Corporate Bank Ltd Services. The Japanese bank will advise the entity during the whole expansion process, review the financial aspects of the plan and provide strategic counsel on financing structures and strategies. Some 15 international firms participated in the tender, mostly from Europe, the US and Japan.

Two other contracts came successively and were awarded in March of the same year to Mayer, Brown, Rowe & Maw LLP which will act as legal counsel to the ACP and assist in procurement processes for the expansion program. Seven of the best international law firms competed in the tender. In another bidding process that attracted several international law firms specializing in financing international infrastructure projects, the international legal advisor contract was awarded in April 2007 to Shearman & Sterling LLP who will advise the ACP on its expansion financial needs.

Later, the Panama Canal Authority awarded to the Denver-based CH2M Hill, a world-wide engineering construction and operations firm, the program management contract for the expansion project.

Sub-contractors include the DHV Group, Grupo TYPSA, CSA Group and Earth Consultants International. The US firm will assist the ACP in the management of numerous contracts including those for design and construction of the two post-Panamax lock structures. The key to this program’s success will be the effective co-ordination of a world-class multidisciplinary team, said Jhan Schmitz, CH2M Hill’s Program Manager for the Canal expansion. Two other US firms participated in the bidding. The winning proposal was selected based on the best value and not the lowest price, according to Canal officials. CH2M Hill focuses on transport, water, energy, environment, and industrial facilities.

Expansion breaking ground
The first contract of dry excavation was awarded in July 2007 to Panama’s Constructora Urbana S.A. (CUSA) to create a portion of the access channel that will connect the new Pacific locks to Gaillard Cut. This contract, which marked the breaking ground of the expansion, of 7.5 million cubic meters of dry excavation, represents approximately 16% of the excavations of the Pacific channel. The scope of the work for the dry excavation includes the removal of non-classified material, the disposal of excavated material and the construction of new gravel roads and ditches. CUSA took charge of cleaning 146 hectares of weapon firing ranges used by the US military prior to their departure in 1999. Removing the cleanup of contaminated sites and removal of all non exploded ordnances was carried out by the Panamanian company Isthmian Explosive Disposal in charge of the project for CUSA, at a cost of roughly $5 million. Among the materials Isthmian Explosive found during its cleanup were old U.S. mortar shells, which were removed and buried.

Another milestone was the award of the second dry excavation contract in November 2007 to the Mexican-Panamanian Consorcio, Cilsa Minera Maria, for the removal of 7.5 million cubic meters in a stretch of approximately 2.4 km, just north of where the new Pacific locks will be built. A joint venture, Consorcio Cilsa Minera María, comprises two companies – Mexico’s Cilsa and Panama-based Minera María. Both offer resources and expertise within the engineering, transportation, construction, water and energy sectors. Works for the second dry excavation project also include the construction of a new section of road and a new crossing over the Cocoli River, in addition to the removal and/or relocation of electrical utilities, telecommunication lines, water lines, sanitation lines, ducts and sewers.

Paving the way for construction, the ACP awarded the third and largest expansion contract in April 2008 to dredge the Pacific sea entrance. The ACP kicked off this next phase of expansion by awarding the contract to Belgium’s Dredging International, one of the most important dredging companies in the world. Three international bidders submitted proposals and the ACP awarded the contract based on the lowest priced proposal.

When expansion concludes, the dredging project will widen the Canal’s approximate 14km-long (9 miles) navigation channels to a minimum of 218 meters (715 feet) and deepen them to a maximum level of 15.5 meters (51 feet).

Another important contract is that for the dredging of the Atlantic entrance of the Canal for 14million cubic meters. Tenders for the third and fourth dry excavations, the largest of all, are expected to be called in 2009 and 2010.

Looking ahead
The Panama Canal expansion aims at doubling the waterway capacity by providing a new lane that will allow the transit of the new generation of larger and longer container vessels that are being built and which will represent at the time of the inauguration of the new locks, nearly half of the future merchant fleet. The dimensions of the existing locks have defined a whole breed and successive generations of ship designs under the name “Panamax” and the future larger locks will define the second generation of “post-Panamax” or, as some industry players call them, the ‘new Panamax”. The new chambers will allow transits by ships with a beam of up to 49 m, an overall length of 366 m and maximum draught of 15.2 m. These increased dimensions have fostered new ship designs that will fit in the expanded waterway locks.

At the moment, container vessels generate more than 50% of the ACP’s income and accounted for 27% of all transits in 2006 and the sector is growing rapidly since most maritime cargo is now transported in containers. The dimensions of the new locks have been calculated to accommodate most existing and future newbuild containerships.

Although it is unlikely that the expansion plans will be compatible with the largest containerships of around 14,000 teu expected to be in service by 2014, and which are mainly targeted at the Asia-Europe trades, it is likely that vessels in the 12,000 teu-13,000 teu band will assume the post-Panamax or new Panamax designation.

So the question is, will the expanded canal be sufficient to absorb the growing maritime trade? Experts answer bluntly: yes. Because the "mega container vessels" over 13,000-14,000teu will remain a rarity confined to the Asia-Europe or Asia-West coast of the United States routes. However, Canal officials say that the waterway will still have room to expand if necessary by 2050 and beyond, leaving open the possibility of building a fourth lane if markets trends go in that direction. But with a capacity approaching 600 million PC/UMS tons by 2014, double the 2008 capacity, the Panama Canal will have a long life well into the end of the 21st century. By that time, the $ 5.25 billion cost of the expansion will be completely amortized.