Obviously, there is some threshold or setting that needs to be adjusted, as when you go back to full hot it kicks back on. You need to adjust it so that full hot is not required to keep it on. All this you already know. Not being familiar with your particular unit, I don't know exactly what adjustments are available.
As I understand it, when you are on full hot, the water flow through the unit is greater, and the water does not get as hot (maybe, because the flow is greater), but you get more of it. The incoming water supply is cold, and it supplies both the heater and the cold water line, so when you start using both, the flow through the heater decreases. This would be the case even if you still had the shower set for all hot, but the cold water was turned on at the sink (try this - does the heater turn off, as it has before, mid shower?).
Then when you start mixing the hot and cold in the shower to get a pleasant temperature the flow through the heater is reduced again, because you are requiring less hot water. This may result in the heater turning off because the flow is less, or maybe it is turning off because the water is getting too hot. So either there is a low-flow sensor that needs to be adjusted to a much lower setting, or maybe there is an overheating cut off switch that is faulty or needs to be set higher.
You might try your shower again, as normal, but with the hot water on at the sink. Does this make your hot water stay on, as you want it? (Of course this is not a solution, but it might help you find the source of the problem).
Hope this helps.
You have used the wrong type of teflon tape - for gas the thicker yellow teflon tape should be used. Another option which many prefer is to use a pipe sealant like RectorSeal.
If after replacing the white teflon the smell persists I would check the other end of the gas line. It's possible that when removing the old gas line an existing fitting was loosened and is now leaking slightly.
Best Answer
According to the manufacturer's installation instructions, Rheem gas water heaters with FVIR can be installed directly on a garage floor, without the normal 18" stand. This allowance is only if local codes do not contradict: