PANAMA CITY (Reuters) - The Panama Canal is exploring the construction of a pipeline to move liquefied petroleum gas (LPG) across the trade passage, canal administrator Ricuarte Vasquez said on Monday, with Japan seen as a top potential client for gas coming from the U.S.

WHY IT'S IMPORTANT

The canal, one of the world's busiest maritime trade passages, is looking to diversify its operations after getting the greenlight in a court ruling last year. A drought limited crossings and canal officials are planning to build a reservoir nearby.

Japan is one of the world's largest LPG customers, using the fuel for domestic and industrial use.

KEY QUOTE

"We're exploring the possibility of rolling out infrastructure with the capacity to move up to a million barrels per day (bpd), but the market is much larger," Vasquez told Reuters following a press conference.

"Meeting the needs for growing volumes (of gas) through Panama is of the highest priority, but also of the highest complexity," Vasquez said.

CONTEXT

The move comes amid a backdrop of escalating tensions between the U.S. and Panama, sparked by U.S. President Donald Trump's claims about reclaiming the Panama Canal.

Despite pushback from Panamanian President Jose Raul Mulino against Trump's claims, the U.S. leader and officials have hailed a recent deal led by U.S. firm BlackRock ( BLK ) to buy most of the ports business of Hong Kong conglomerate CK Hutchison ( CKHUF ), including its assets near the Panama Canal.

BY THE NUMBERS

Initial studies show that "possible traffic capacity through the Panama Canal could reach 2 million bpd (of LPG) in a decade," Vasquez added.

WHAT'S NEXT

The canal expects to make a decision about the pipeline in the next 12 months, Vasquez said.

Investments of $8 billion in infrastructure and sustainability projects are already earmarked for the canal, spread out over the next decade.

(Reporting by Elida Moreno; Writing by Kylie Madry; Editing by Lincoln Feast.)