LNG Market Dynamics and Project Execution Risks at LNG Canada

The LNG Canada project, a $40 billion joint venture led by Shell and supported by Petronas, PetroChina, Mitsubishi, and KOGAS, has emerged as a cornerstone of Canada's ambitions to become a global LNG exporter. However, operational delays, cost overruns, and shifting market dynamics are testing the project's economic viability and scalability. For investors, the interplay between technical challenges, policy shifts, and global energy transitions underscores the need for a nuanced assessment of risks and returns.

Operational Delays and Technical Challenges

LNG Canada's first production train, designed to process 2 billion cubic feet of gas per day, has operated at less than 50% capacity since its July 2025 startup due to gas turbine and refrigerant production unit (RPU) issues, according to an Invezz report. These technical setbacks have forced the diversion of at least one LNG tanker, the Ferrol Knutsen, to Peru without cargo, a Reuters report said. Compounding these problems, the Coastal GasLink (CGL) pipeline-critical for transporting feedgas to the terminal-has faced a 70% cost increase since 2020, driven by permit delays, pandemic-related disruptions, and scope changes, according to an IEEFA review. TC Energy, the pipeline's operator, has proposed passing these costs to LNG Canada's joint-venture partners, sparking disputes over cost allocation, according to S&P Global.

Financial Impacts on Investor Returns

The project's delayed ramp-up has exacerbated oversupply in Western Canadian gas markets, keeping AECO spot prices near $0.22 per mmBtu-far below the U.S. Henry Hub benchmark of $3.12 per mmBtu, a TD Securities analysis found. This price depression has forced producers like Advantage Energy to curtail output to avoid losses, Reuters reported on producer actions. For LNG Canada's partners, the slow revenue generation from Phase 1 (14 million metric tonnes per annum) has strained net present value (NPV) and return on investment (ROI) projections. A 2025 IEEFA report warns that the project's economic viability hinges on achieving full operational capacity by May 2026 and securing favorable market conditions for future expansions.

Cost overruns further amplify financial risks. The CGL pipeline's budget has ballooned from $6.6 billion to over $10 billion, with TC Energy committing $3.3 billion in temporary financing to cover incremental costs, The Energy Mix reported. These pressures could deter investment in Phase 2, which aims to double capacity to 28 million metric tonnes per annum. Shell's CEO has indicated that the decision to proceed with Phase 2 will depend on broader market opportunities and negotiations with the Canadian government for greener incentives, Reuters reported.

Scalability Challenges and Market Competition

LNG Canada's long-term scalability faces headwinds from both economic and environmental factors. Canadian LNG projects, including LNG Canada, are at a cost disadvantage compared to global benchmarks, with production costs at $24 per tonne versus a global average of $15 per tonne, an IISD press release found. Additionally, the global shift toward decarbonization has dampened demand growth in advanced economies, where LNG consumption is expected to peak, according to an IISD analysis. While future projects like Woodfibre LNG and Cedar LNG aim to expand Canada's liquefaction capacity to 6.1 billion cubic feet per day by the mid-2030s, their economic viability remains uncertain in an oversupplied market, as OilPrice noted.

Strategic Implications for Investors

For investors, LNG Canada's trajectory highlights the importance of monitoring both operational milestones and macroeconomic trends. The project's ability to stabilize production, reduce costs, and align with decarbonization goals will determine its long-term profitability. TD Cowen analysts suggest that producer supply restraint and sustained demand growth could bolster gas prices by 2026, improving equity returns. However, the risk of stranded assets looms large if global LNG demand stagnates or if renewable energy transitions accelerate, the IEEFA review warned.

Conclusion

LNG Canada represents a high-stakes bet on the future of LNG in a rapidly evolving energy landscape. While the project has achieved its first cargo shipment, operational delays, cost overruns, and market volatility underscore the need for cautious optimism. Investors must weigh the potential for long-term returns against the risks of execution challenges and shifting demand dynamics. As the project navigates these hurdles, its success will hinge on its ability to adapt to a world increasingly defined by sustainability and technological disruption.