Work has formally begun on the controversial $50-billion Nicaragua Canal, which will be 172 miles when complete. This canal will actually serve as an alternative to the Panama Canal, and will be three times longer.
It’s being built by the Hong Kong Nicaragua Development Group (HKND Group), which is headed by Chinese telecom billionaire Wang Jing.
Most observers, especially here in the United States, think the new canal is a fool’s project, and that it isn’t really needed. Indeed, the project has already been beset by problems.
But why would the Chinese waste so much money and time on such a massive engineering project if there is no advantage? The answer can be found if you examine China’s energy needs.
Nicaragua Canal Problems
The Chinese will have to hurdle some major barriers before they’re able to complete this project.
First of all, there are environmental concerns. Nicaragua’s Grand Interoceanic Canal will have no choice but to run through the once-pristine waters of Lake Nicaragua. It also will pass through several protected nature reserve areas.
HKND Group is considering six different routes through the country. But every proposed route has been met with protests from locals about the negative effects it’ll have. They’ve already eliminated using the natural waterway that is the San Juan River, a key part of the country’s national identity.
Despite the protests, the company seems to have solidified a route, although the exact path could change still.
The company says an environmental impact study for the canal will be completed by April at the latest… after construction has already started.
Then there’s the project financing, which is also very murky. Mr. Wang has invested $200 million of his own money so far. But where will the rest come from?
HKND Group says much of the money will be raised by a stock exchange listing of the company. An iffy plan for a project that many say is doomed to fail.
The company has also confidentially stated that it expects payback on the canal within 12 years. But most shipping experts disagree, saying the canal may never be profitable.
So what’s the deal? One word… energy.
China’s Hunger for Energy
The key difference between the Nicaragua Canal and the Panama’s Canal is that it’ll be almost twice as deep as Panama’s, even after its upgrade – which it’s currently undergoing – is completed next year.
That means it’ll be deep enough for the world’s largest vessels, carrying much-needed energy to China, to pass through. These vessels – very large crude carriers, ultra-large crude carriers, and very large gas carriers – cannot pass through even the new Panama Canal and must take longer routes, adding travel time and cost for the Chinese.
Not to mention liquid natural gas (LNG) carriers…
Just think about all the LNG export projects along the U.S. Gulf Coast, such as the Sabine Pass Project from Cheniere Energy (LNG). LNG exports from the United States will begin in a few years, and China wants to have the ability to take advantage of the excess natural gas we’re producing.
This canal is really just another example of how China thinks long term. The country isn’t concerned that the price of oil is down now. It knows that it’ll rebound eventually and wants to be ready to keep costs as low as possible for its energy imports.
Thus, I wouldn’t be surprised if the Chinese push through all barriers and succeed in building the canal across Nicaragua.
And the chase continues,