Threatened by climate change, Panama Canal has big plans to deal with drought

By Marianna Parraga and Elida Moreno

TRES HERMANAS, Panama (Reuters) – The lush river valleys of El Zaino y La Arenosa in western Panama, home to hundreds of families that eke out a living farming, fishing and raising cattle, could soon be submerged by a massive man-made reservoir designed to ensure the viability of the Panama Canal in the face of a changing climate.

Tres Hermanas, with its farms, two schools, churches and a medical clinic, is one of dozens of towns that would disappear in the next six years if the state-owned Panama Canal’s ambitious $1.6 billion project goes ahead. Residents are divided: some do not want to leave, while others are focused on getting fair compensation if they are forced to move. If they are not satisfied, recent history suggests public opposition could endanger the entire project. 

While the Rio Indio dam project was first proposed two decades ago, more extreme weather in the last decade, including a severe drought in the past year that restricted vessel traffic on the canal, has lent greater urgency to the proposal. 

The canal accounts for 3.1% of the Central American country’s gross domestic product. The waterway, which allows up to 14,000 ships to cross per year, accounts for 2.5% of global seaborne trade and is critical to U.S. imports of autos and commercial goods by container ships from Asia, and for U.S exports of commodities, including liquefied natural gas (LNG).

“The Rio Indio reservoir project would be the most complete solution (to more frequent droughts) in a 50-year horizon,” the canal’s deputy administrator, Ilya Espino de Marotta, told Reuters in an interview in October.

The project still needs to pass a long approval process including a public consultation, discussion by the cabinet and the National Assembly’s final green light.

Panama’s President Jose Mulino has said the discussion will be completed next year, but the shipping industry is watching with some trepidation after delays and suspensions of major projects in recent years, including a controversial mining contract with Canada’s First Quantum Minerals (OTC:FQVLF). After broad public opposition, the Supreme Court last year declared the contract unconstitutional, and the government ordered the mine to be closed.

Although the number of people facing relocation for the dam is relatively small, they are backed by an activist group called Countrymen Coordinator for Life, which was instrumental in blocking First Quantum (NASDAQ:QMCO)’s mining contract.

Cesar Petit, senior economist at BancTrust & Co, an investment bank specializing in emerging markets, said there was political consensus in Panama behind the dam project but the government would need to establish a credible plan for compensating people who will be displaced and affected in nearby areas.

“There are significant risks that the project to build the multipurpose reservoir on the Rio Indio will be postponed or suspended indefinitely,” Petit told Reuters. “The communication strategy of the benefits of the plans and an adequate incentive and compensation program for those affected will be key to successfully implementing this plan.”

Jose Icaza, minister for Canal Affairs, told Reuters the government understands the “anxiety and concerns” of residents. “Our priority is not to impact the living conditions and the peace of the basin’s residents, and for this reason we will continue to work directly with them to meet their needs as we move forward with the construction project,” he said.

The Panama Canal Authority aims to create a massive dam 840 meters in length and 80.5 meters in height to secure freshwater for its locks. It says the reservoir’s 1.25 billion cubic meters of water would allow up to 15 additional vessel transits per day during the dry season, and help provide drinking water to Panama’s growing 4.5 million population.

Unlike the Suez Canal, which does not have locks, the Panama Canal relies on fresh water to operate three sets of locks that allow ships to cross between the Pacific and Atlantic oceans through a 50-mile artificial waterway.

If it wins approval, the dam is expected to be completed by 2030 or 2031, but the clock is ticking: Last year was the third driest in the waterway’s 110-year history. The second driest was 2015. Meteorologists forecast Panama will face more severe droughts and faster water evaporation due to higher temperatures in the future. 

A Supreme Court ruling in July returned to the canal authority a geographic area that almost doubles its territory. It  can now be used to expand business and secure water sources, including the dam.

According to an initial survey by the canal, the project would demand the relocation of some 2,260 people, and would impact at least partially an additional 2,000 people in the reservoir zone.

A census to count more accurately how many people will be affected is expected to be completed in January, Espino said, while some infrastructure work by Panama’s government, including a bridge that could accommodate heavy equipment, is visible in the Tres Hermanas area.

Panama’s ministry of Public Works said in a release the bridge is intended to be used for cars and people to cross the Rio Indio.

“There is already a start,” Espino said, referring to planning linked to the project’s technical aspects. “But of course, the most complicated part is the process of resettling people. These are conversations that have to be held individually with each family.”

STAY OR GO?     

Three lawyers and activists from community groups said the Rio Indio plan would have a “high environmental impact” due to deforestation and loss of biodiversity in regions including Capira, west of Panama City.

The project, which includes a $400 million budget for its social component, mainly relocations, has divided residents. Some are willing to sell their land and move, while others want to fight the project.

“No farmer wants to live in a slum,” said Dilubino Agraje, who represents the Rio Indio communities at Countrymen Coordinator for Life. The organization is pressing for more details about the relocation plans. 

“We were born and raised here. If we leave, it is not because we want to, but because we’ll have to,” said 60-year-old Paulino Alabarca, a rice farmer born in Tres Hermanas, while riding through the town on his horse.  

A different plan to transfer water from an existing reservoir fed by the Bayano river that could be finished sooner and would not require family relocations was analyzed and discarded by the canal’s administration years ago because of location and higher costs, Espino said. 

From an environmental damage point of view, the Rio Indio project could have a greater negative impact and few positive benefits that could not be obtained otherwise, said Professor LeRoy Poff, an expert on aquatic ecology from Colorado State University, referring to displacement of people and livelihoods, damages downstream for the fish and for the forests.

“There is a real importance, as we go forward amid climate change, in maintaining healthy rivers, because they have the greatest potential to respond to changing environments,” he added.

The Bayano alternative is gaining traction among many communities, including Tres Hermanas. “There are means for them to leave us alone,” said Alabarca referring to that project.

But it could bring different complications as it would involve negotiations with power provider AES (NYSE:AES) Panama, a company jointly owned by the state and U.S. AES Corp that owns and operates the Bayano hydroelectric infrastructure, according to lawyers studying that project.

AES Panama “is not currently in any process of selling its stakes,” it told Reuters in an email. “However, fully understanding the issue and its importance for the country, it is in the best disposition and open to talk to the state to evaluate and reach fair agreements.”

Canal minister Icaza said the Rio Indio project was imperative for the canal’s survival and “the most viable option.” 

Espino said she thinks both projects will be needed in the long run.

“Climate change has really ruined the natural navigation channels that existed,” she said. 

The recurrence of the El Niño weather phenomenon has accelerated to every three years, extending Panama’s dry season and exhausting much of the water resources in the country with the fifth most rainfall in the world.

Its next occurrence, expected in 2027, will be a challenge for the canal again since the Rio Indio project is not expected to be ready before 2030, the canal’s chief, Ricaurte Vasquez, told Reuters.    

In preparation for the next drought, the canal has changed its reservation model, is calling on shippers to consolidate cargoes and is preparing water recycling measures.

In recent years, the expansion of housing near the waterway has intensified the canal’s competition with its surrounding communities for freshwater, said Panama City-based environmentalist Raisa Banfield.

“The canal exists and the canal must operate as efficiently as possible,” Banfield said. But, she added, there needs to be a balance. “The question is… How much are we going to sacrifice to continue passing ships, and more ships and bigger ships?”