Exclusive: Shell-led LNG Canada faces problems as it ramps up production, sources say

Shell-led LNG Canada, the first major LNG export facility on North America's west coast, is facing significant technical problems during its ramp-up, with its first train operating at less than half capacity due to issues with a gas turbine and Refrigerant Production Unit. This has resulted in at least one LNG tanker diverting away without cargo, impeding the facility's expected role in alleviating the persistent supply glut depressing Western Canadian natural gas prices, which remain at $0.22/mmBtu at AECO compared to Henry Hub's $3.12. An LNG Canada spokesperson confirmed that new-build facilities of this scale may encounter operational setbacks during stabilization.

Analysis

The Shell-led LNG Canada facility is experiencing significant operational challenges during its initial ramp-up, undermining its anticipated role in alleviating the regional natural gas supply glut. The facility, North America's first west coast LNG plant, is reportedly operating at less than half the capacity of its first train due to technical issues with a gas turbine and a Refrigerant Production Unit. This operational shortfall is having a tangible impact on logistics, evidenced by at least one LNG tanker diverting from the Kitimat port without cargo. Consequently, the project has not yet provided the expected demand uplift for Western Canadian natural gas, with the AECO spot price languishing at $0.22 per mmBtu, a stark contrast to the U.S. Henry Hub benchmark of $3.12. While a company spokesperson framed these issues as potential setbacks common for a new facility of this scale, the immediate effect is a delay in reaching the projected 2 billion cubic feet per day of gas consumption and a slower pace of achieving the target export cadence of one cargo every two days.

Key Decisions for Investors

• Investors in the joint venture partners, including Shell, Petronas, and PetroChina, should revise near-term cash flow expectations from this project downwards and monitor for specific timelines on the resolution of the stated technical issues.
• The delay in absorbing the regional supply glut creates continued headwinds for Canadian natural gas producers; positions predicated on a rapid price recovery at the AECO hub due to LNG Canada's startup may need to be re-evaluated.
• Global LNG traders should note the slower-than-expected supply ramp-up from this facility, which could provide marginal short-term support for spot prices in the Asian market until a steady shipping cadence is established.