Panama green lights reservoir project in bid to combat drought restrictions

The Panama Canal board of directors has approved a $1.2 billion project to construct a new reservoir in the Indio River watershed. This initiative aims to enhance the waterway’s ability to manage drought conditions, which have severely impacted operations in recent years. The project comes in response to the worst drought on record in Panama, which forced the canal to limit transits and maximum drafts, disrupting global shipping patterns.

Project Details and Timeline

Construction of the new reservoir is set to begin in 2027 and will take approximately four years to complete. The project includes building a large dam and a reservoir with a capacity of 1.5 billion cubic meters in the Indio River basin. Additionally, an 8.7-kilometer transfer tunnel will connect this reservoir to the Panama Canal basin. This infrastructure aims to bolster the freshwater supply for the two artificial lakes that feed the canal: Gatún and Alajuela.

A Supply Chain Issue: Panama Canal and Its Fight Against Climate Change

In 2023, the Panama Canal faced significant operational challenges due to low water levels in Gatún Lake. From June 2023 to September 2024, transit restrictions were implemented, limiting both the number of vessels and their maximum draft. As a result, ships competed for a limited number of transit slots, causing delays and disruptions in shipping schedules. Although operations returned to normal by the fourth quarter of 2023, shipping volumes have not fully recovered. Analysis by BIMCO indicates that between September 2024 and January 2025, ship capacity in deadweight tonnes transiting through the canal was 10% lower than the average from 2019 to 2022.

Filipe Gouveia, shipping analysis manager at BIMCO, noted that despite the absence of transit restrictions during this period, the recovery of dry bulk, LNG, and tanker ship transits has been sluggish. Factors such as transit fees, shifts in trade patterns, and the establishment of a new normal may be contributing to the slow return of shipping activity through the canal.