Jamille Matt headed wide on the half-hour mark and sent another finish inches off target after the break in a game of few chances.
Chelsea threatened a winner late on when substitute Kaiden Wilson glanced a header wide and then forced a smart save from Sam Hornby late on.
Albert Adomah blazed the first penalty over, but Courtney Clarke, Stan Straw, Jamie Jellis and Jid Okeke converted as the Saddlers emerged 4-2 victors in the shoot-out.
Shrewsbury will need to beat Northampton in their final group game on November 11, otherwise Walsall will be safely through to the next round.
Mat Sadler made nine changes from the 1-0 defeat at Cheltenham Town on Saturday, as only Rico Browne and Jid Okeke kept their places.
Matt planted a header wide from close-range after meeting Vincent Harper's cross, and saw another chance deflected wide earlier in the first half.
Jamille Matt came close twice for Walsall in either half.
Harper drew the only serious save from Gaga Slonina in the first period, but he fired a tame effort straight down the throat of the Chelsea goalkeeper with his weaker foot.
Matt came close again for Walsall after the break when his sweeping finish from Okeke's low feed whistled inches wide.
Ryan Finnigan curled a speculative effort off target, before Dujuan Richards threatened at the other end when he blazed wide from just outside the box.
Sadler handed a senior debut to academy scholar Paul Makavore during the closing stages, and also introduced fellow academy stars Stan Straw and McLloyd Oben for their third outing in the competition.
Vincent Harper takes aim from the edge of the box for Walsall.
Chelsea looked likeliest to find a winner and Dujuan Richards brought the best out of Hornby when he cut inside and forced him into action from distance.
Wilson was inches away from giving Chelsea the lead after glancing header just wide of Hornby's right-hand post after an excellent free-kick delivery by Best.
Hornby preserved his clean sheet at the death when he bravely dived at the feet to keep out Wilson after Richards delivered low into the six-yard box.
Next, Walsall travel to National League side Eastleigh in the FA Cup first round on Sunday.
**Teams**
Chelsea U21s (4-3-3): Slonina; L Richards (Sambou 85), Wilson, Osagie, Best; Rak-Sakyi, Harrison (Walsh 62), Runham (Silva 72); Barbour (Pennie 85), Washington (Gordon 62), D Richards.
Not used: Merrick, Murray-Campbell.
Walsall (3-1-4-2): Hornby; Browne (Straw 74), Farquharson, Cox; Finnigan (Jellis 62); Okeke, Richards (Clarke 62), Lakin (Oben 74), Harper; Adomah, Matt (Makavore 74).
Not used: Kilroy, Thomas.
**Other details**
Referee: Elliott Swallow
Attendance: 1,608 (47)