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Legal Framework for LNG in PANAMA


The Panama Canal expansion was completed and opened on June 26, 2016. On October 1, 2018, a new milestone was reached with the crossing of four LNG ships in the same day through the Panama Canal. With the modifications to the operations of the canal from that date, the Panama Canal has become prepared to cope with the increasing demand of LNG ships coming from the United States. According to Jorge Luis Quijano, the general administrator of the Panama Canal Authority, almost 50 percent of LNG exports from the United States are shipped to Asia and cross the Panama Canal, with more LNG ship transit expected in the coming years.

China has a great interest in the region and an expansion of the canal’s capacity, as China is highly dependent on import and export through the canal. The state-owned China Harbour Engineering Company (CHEC) has expressed interest in building and financing a further expansion. It announced this interest during an informal meeting with the Panama Canal Authority in 2014.

In 2013, Wang Jing a Chinese billionaire, won a contract to build a parallel canal though Nicaragua, which would cost around $50 billion according to current estimates. However, apart from some feasibility studies that have not been published, the project has not moved forward significantly. Other projects that china has been involved in Panama include the construction of a fourth car bridge over the canal that will be carried out by China Communications Construction Co Ltd (CCCC) and CHEC. In addition, CCCC has built around 30 percent of the new Panama Colón Container Port, which will be capable of handling larger vessels and includes a station for the reception of LNG. Panama and China are also currently negotiating a free trade agreement that would further intensify their relationship.

It is important to mention that, in addition to LNG, China is making moves in the oil business. For example, Russian oil exports to China increased 58 percent by October 2018, compared to the same month in 2017. If this trend continues, China will aggressively continue to diversify its supply mix of LNG imports and increase imports from competitors of the American LNG players. This combination of factors in the LNG business may be a direct threat to an expansion of the Panama Canal. However, as mentioned above, the Chinese have shown their interest in financing the fourth set of locks, which may be a part of the Chinese strategy to diversify and control its risk exposure to American imports of LNG.

But one thing is certain: as China become the world’s largest consumer of LNG, it will continue to diversify its mix of LNG suppliers and reduce its risk exposure to the United States by increasing its imports from other countries in Asia, the Middle East, and especially from Russia. Where the Panama Canal fits in the larger geopolitical outlook could be greatly determined by is future expansion, how such an additional expansion is financed and if LNG continues to grow in important for the canal’s operations and financial well-being.

Because of the Panama Canal, Panama performs mainly a downstream operation similar a huge marine gas station where ships download and upload different oil and gas products in multiple tank farms and other facilities located both in the Atlantic and Pacific ends of the Panama Canal with one exception the Trans-Panama Pipeline (TPP) which is situated near the Costa Rican border, is another oil transit route that reduces transportation times and costs between the Atlantic and Pacific basins.

Most LNG investments, installations and operations in Panama are conducted by foreign companies.

New LNG and Energy Investments in Panama

With the arrival of LNG ships crossing the Canal, Panama is quickly becoming an LNG hub in the region. In other words, ships from global oil and trading companies are not only uploading and downloading products from the tank farms, but rather new tank farms are being built coupled with sizeable LNG power generating facilities.

At this date, there are several projects –

  1. AES built a 681MW gas powered plant and a tank farm.
  2. Vopak is operating Chevron´s terminal.
  3. Shanghai Gorgeous is building an LNG terminal.
  4. NG Power LNG terminal including a 670MW plant is in the works.
  5. And there are others in planning.

Regulatory Framework

For a summary overview, we should review the following.

1. International Treaties and Bilateral Agreements

Panama has entered into bilateral treaties with multiple countries. The following treaties are relevant to any analysis of the legal entity that will conduct the proposed LNG operations in Panama. As we are not aware of the appropriate entity’s parent country, we cannot analyze any specifics and thus we are listing the applicable treaties.

  • Free Trade Agreements with USA, Canada, Singapore, EU, Peru
  • Each treaty is different, but they generally ensure that companies from these countries doing business in Panama are protected against discriminatory or unlawful treatment, and they provide a neutral and transparent mechanism for settlement of investment disputes.
  • Bilateral Investment Treaties (BITs) with multiple countries
  • Bilateral Double Taxation Agreements with multiple countries.

2. National Laws

A new draft legislation that proposes to create a legal framework for natural gas including LNG is under consideration. This proposed legislation will cover all downstream operations involving natural gas, including LNG. There are 4 main activities being regulated in this bill - Storage, Gasification, Transport and Distribution.

The Constitution of Panama and the legislation of the oil and gas sector provide the legal framework.

  • Law No. 8 of 1987, as amended, regulates the exploration and development in the oil and gas sector within Panamanian territory. Although, this law makes no reference directly to LNG Bunkering, its relevancy relies on the fact that it acknowledges Natural Gas under the scope.
  • Cabinet Decree 36 of 2003, as amended, creates the legal framework for investment opportunities by domestic and foreign companies in the oil and gas sector seeking to take advantage of Panama's strategic geographical position, the installed storage capacity for petroleum by-products, and Panama’s human resources.  It supports creation of international processing, distribution and redistribution centers for hydrocarbons and their by-products in Panama.

Actually, these laws establish the basic regulations for natural gas including LNG.

Regulatory Entities

  • Secretary of Energy

The Secretary of Energy is the governing entity of the energy sector (including oil and gas) in charge of promoting and elaborating Panama´s National Energy Policy to guarantee the efficient, profitable, competitive and safe use of energy resources. The Secretary’s scope of work includes regulating the permitting and operations of the oil and gas sector pursuant to Cabinet Decree 36 of 2003.

  • Maritime Authority of Panama

This authority and its specialized, appointed departments are responsible for organizing and regulating maritime operations and related activities, such as: water concessions, navigation permits, and land concession, among others.

AMP’s regulations follow the IMO guidelines and international treaties to which Panama is a signatory.

  • Panama Canal Authority (PCA)

The Panama Canal Authority has full authority over the jurisdictional waters of the Canal, within demarcated areas (oceans, rivers, land, others). Any LNG activities within these jurisdictional waters will require approval from the PCA.

Foreign Investment Regulations

For investment purposes, hierarchically, international treaties followed by the Panama Constitution guarantee equality between Panamanians and foreigners. Panama does not have a general foreign investment law. However, there are laws regulating foreign investments within specific economic sectors providing the framework and tax incentives to activities such as oil and gas, mining, maritime, ports, hotels, tourism, etc.  In general, Panama’s oil and gas sector is open to 100% foreign owned investments.

Petroleum Free Zones

The Petroleum zone concept is inherent to Panama's historical condition as an international commercial, maritime and trade center due to its strategic geographical position. The free zone is mainly an area within which all transactions are tax free. 

Panama has the potential to become a major oil and downstream products redistribution center. There are 10 petroleum free zones including companies such as Repsol, Exxon/Mobil, BP, Chevron/Texaco, Glencore, Trafigura, BP, Total and others.

Within any Petroleum Free Zone, national or foreign corporations can perform multiple operations under a special tax regime, as follows:

  • Introduce, storage, refine, transform, manufacture, mix, purify, bottle, market, transport, transfer, pump, sell for the domestic market, export, reexport, and, in general, manage and supply crude oil, semi processed or any of its by-products; Petroleum Free Zone
  • Build, install and operate petroleum refineries and other transformation or processing means of crude oil or semi-processed, storage tanks, oil pipelines, gas pipelines and poly-pipelines, pumping installations and pipes, buildings for offices, warehouses, or workshops and any other installations; introduce machinery, equipment, spare parts, containers, bottles, vehicles, furniture, equipment for fire or spill prevention, construct buildings for offices, warehouses, workshops for the use of the beneficiaries of the contracts to operate in the Petroleum Free Zones in any of the activities mentioned in subsection (a) hereinbefore.
  • Lease, acquire or in any other manner use lands, easements, right of way and other real estate located in the areas designated as Petroleum Free Zones.
  • Establish water services, electrical power, gas, energy, heat, refrigeration or any other kind of services, upon previous coordination and approval with the respective public entities.
  • Build ports, piers, dry docks, shipping and unloading places for ship and airplanes, railroad stations for loading and unloading on land or granting contracts for the construction and exploitation of such works.
  • In general, all kinds of operations or activities proper or incidental to the establishment and operation of the Petroleum Free Zones for the introduction, storage, pumping, transference, distribution, marketing and/or crude refining and petroleum by-products including LNG.


There are 10 petroleum free zones between the Atlantic and Pacific oceans granted with the following benefits:

  • Total exemption from income taxes on profits derived from such activities, during the first five years of production or until the initial investment is recovered; whichever comes first.
  • Total exemption from import duties on machinery, equipment, parts, and any other items, necessary for the execution of the activities under the contract.
  • Special carry-over provisions for income tax purposes.
  • Special depreciation schedules for machinery and equipment.

LNG is a new business not only for the Panama Canal but to attract new foreign investments to Panama.



Juan F. Pardini


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