Exclusive: Shell-led LNG Canada prepares to start Train 2

Shell-led LNG Canada has commenced the startup of its second 6.5 mtpa processing unit (Train 2) in British Columbia, despite ongoing technical issues with its first unit (Train 1), which continues to operate below half capacity since its July startup. This slow ramp-up at Canada's inaugural major LNG export facility is exacerbating a Western Canadian gas glut, contributing to record-low spot prices and prompting producers to cut output, with September exports declining from August levels.

Analysis

Shell-led LNG Canada has initiated the startup of its second 6.5 mtpa processing unit, Train 2, a development that is significantly undermined by ongoing and severe technical issues at Train 1. The first unit remains offline following a "supercore" replacement, restricting the entire facility to operating at less than half its nameplate capacity since production began. This operational failure is reflected in declining export volumes, with September shipments of just under 0.3 million metric tons falling short of the 0.4 million tons exported in August. The slow ramp-up has had a direct, negative impact on the Canadian energy market, failing to absorb anticipated natural gas volumes and thereby contributing to a regional glut that pushed daily spot prices to record lows. Consequently, gas producers are cutting output as Western Canadian storage levels remain at record highs, according to Jefferies. Despite these near-term execution challenges for partners like Shell (SHEL), the project's long-term strategic value is underscored by MidOcean's recent move to acquire a portion of Petronas's (PGAS) stake, indicating underlying investor confidence in the asset's direct access to Asian markets.

Key Decisions for Investors

• Investors in Shell (SHEL) and its partners should view the persistent operational failures at Train 1 as a material execution risk that tempers the positive news of Train 2's startup, warranting close scrutiny of actual export volumes versus stated capacity.
• The facility's failure to absorb regional gas is directly depressing Western Canadian spot gas prices, suggesting a continued bearish outlook for investors in Canadian natural gas producers until LNG Canada demonstrates consistent, high-volume offtake.
• The investment by MidOcean into the project via Petronas's stake signals that strategic players may be looking past near-term operational issues, which could provide a reference point for long-term investors considering exposure to North American LNG infrastructure.
• Global LNG traders should moderate expectations for a near-term supply increase from this facility, as the net contribution to the market will remain significantly constrained and uncertain until Train 1 is fully operational and stabilized.