What went wrong for Zachry Holdings and Golden Pass LNG? - San Antonio Business Journal (2024)

In the months leading up to May, Zachry Holdings says it was hemorrhaging money on the Gulf Coast.

The lead contractor building the Golden Pass LNG export terminal alleges it was losing about $30 million to $40 million every week on the project while only being paid $70 million a month.

Facing an untenable situation, Zachry Holdings chose to bite the bullet and file for Chapter 11 bankruptcy, outlining hundreds of millions in dollars in unsecured claims. At the time, Zachry Holdings Chairman and CEO John Zachry said the firm would pursue a "structured exit" from the project, blaming the overall economic climate and pandemic-related disruptions for their financial difficulties.

The $10 billion Golden Pass project is a little more complicated than just dropping your tools and walking off the site. The ownership is a 70/30 split between ExxonMobil and QatarEnergy. The contractor team is also a joint venture, with Zachry Holdings splitting duties with McDermott International Inc. and Chiyoda International Corp. The Sabine Pass, Texas, project would have an export capacity of approximately 18 million tons of LNG per year, with the ownership claiming it would generate billions of dollars in economic growth and millions in tax revenue for local, state and federal entities.

Change order disorder

After the initial Chapter 11 filing, a picture of what happened behind the scenes started to become clearer, outlining a complicated set of circ*mstances that outgrew any explanation that put the blame squarely on macroeconomic headwinds.

Shortly after the filing was made in the U.S. Southern District of Texas, a separate case was filed by Zachry Industrial Inc., one of the 20 affiliates listed in the original case.

Zachry Industrial alleges the project began to exceed its projected costs not long after kicking off in 2019. As those costs shot past $1 billion over the lump sum budget, the firm had to submit numerous change order requests to compensate for inflating construction costs. But ExxonMobil and QatarEnergy weren't cooperative to those requests, the company alleges, submitting any change order to numerous reviews. Zachry says that after repeated meetings and negotiations, the owners made promises to pay the overruns if the project was kept on track for a 2024 finish. For Zachry, that led to a precarious financial position.

The project was already in danger of getting behind schedule. To get ahead of the potential problem, Golden Pass received approval from the Federal Energy Regulatory Commission (FERC) in 2022 to switch to a 24-hour, seven-days-a-week work schedule to catch up.

In late 2022 and through 2023, the parties negotiated over recouping the overruns and making changes to the original contract. Zachry claims that it received a fraction of the more than $1 billion it was owed and was forced to agree to waive most of the change orders. In separate talks over its original 2019 contract, the amended version included a change in the definition of "force majeure," a clause that waives a party from liability over performance issues due to events beyond its control. The new version excluded the Covid-19 pandemic and the war in Ukraine, the company wrote in a court filing.

"Zachry did not have the resources of companies like ExxonMobil or QatarEnergy and was working under a 'lump sum' contract," Zachry Industrial wrote in its adversary case. "But Zachry had little choice but to comply. Plus, it had assurances from two of the wealthiest companies in the world that it would be made whole. But, by complying, Zachry depleted its financial reserves and incurred hundreds of millions of dollars in obligations on the project."

By 2022, Zachry says the cost overruns reached about $2.4 billion.

Zachry claimed that Golden Pass LNG started paying subcontractors, suppliers and vendors directly in March as Zachry was not being paid enough to compensate those parties themselves. That gave Golden Pass LNG pretext to declare Zachry in default.

The path forward

Zachry has already started to unwind itself from the Golden Pass LNG project. An agreement reached in early June allows the two remaining contractors to continue work in a number of different fields, like site maintenance, environmental management, security and hurricane preparedness. They've also worked out a process for equipment transfers, sales and leases.

Zachry "shall use best efforts to assist and facilitate the assignment and transition of any project data, subcontractors, suppliers, or other vendors with which (Zachry) currently contracts in connection" with the work being done on Golden Pass.

An ExxonMobil spokesperson told the Business Journal in May that the remaining team is "considering all available options to implement a smooth transition" to see the project through to completion.

But the same day it filed for bankruptcy, Zachry notified the Texas Workforce Commission of thousands of layoffs connected to the project. More than 4,000 carpenters, concrete workers, electricians and workers of all stripes were let go. As of this writing, there has been no mention of the Zachry bankruptcy and layoffs in public versions of Golden Pass's bi-weekly construction updates it files with the FERC.

A fluke, or part of a larger trend?

Though Zachry's exit from the Golden Pass LNG export project may appear as an isolated incident, some energy experts are warning of an "oversupply" of LNG that could make those export projects unprofitable.

A surge of LNG export projects coming online next year is set to add 250 billion cubic meters per year of liquefaction capacity by 2030 – equivalent to nearly half of today's total global LNG supply, according to the International Energy Association's new 2023 World Energy Outlook report.

While acknowledging the rise in capacity will drive down prices and ease supply concerns, the report stresses that the wave of LNG projects could create a supply glut amid changing global gas demand growth, which has slowed "considerably" since its golden age in 2010s.

Global Energy Monitor, an open-access data platform that provides information on energy infrastructure, issued a similar warning in its December 2023 briefing on LNG.

"The ensuing supply glut could render some projects unprofitable and leave governments and investors with costly stranded assets," GEM wrote. "If governments meet their stated climate goals, export projects under construction today worth an estimated U.S. $118 billion could fail to recover their initial investments."

Charlie Riedl, executive director of the Center for LNG, said he believes the forecasts are "grossly underestimating" the future demand for natural gas. While noting that the early stages of the Covid-19 pandemic created a slowdown in demand, he said contracting activity has picked back up over the last two years, adding that LNG facilities are oversubscribed and new deals continue to be signed.

"There is no shortage of capital available for LNG projects," he said.

Federal crackdown

LNG export projects also face potential cost-related headwinds from the federal crackdown on LNG exports.

In January, the Biden Administration announced a temporary pause on new approvals of LNG exports to non-Free Trade Agreement Countries. The move drew sharp criticism from Texas legislators, who argued that the pause would negatively impact Texas producers and global LNG markets.

On May 2, Texas Oil and Gas Association Chief Economist Dean Foreman testified before the House Select Committee on Protecting Texas LNG Exports that the federal pause on LNG export permit approvals risks hundreds of billions of dollars in potential investments across the LNG lifecycle.

"Texas and Louisiana bear the brunt of short-sighted federal policies that jeopardize LNG export projects, representing potential investments of $200 billion across the value chain, including a projected 20% increase in Texas' dry natural gas production," he said.

LNG facilities require a large amount of financing and debt equity in order to build, according to Riedl, running into the billions, like the Golden Pass project.

Costs for LNG export projects are escalating "without a doubt," he added. Rates, materials and labor are all up, and LNG export projects are facing a shortage of skilled labor.

"And then you add the pause and the uncertainty on some of these projects, the cost per tonne calculation is without question going to have to change," he added.

Data from GEM's Global Gas Infrastructure Tracker suggests that LNG export projects are extremely volatile. Of the 384 LNG export projects under proposed or in development worldwide, 186 of those projects been canceled, according to the GGIT's February 2024 release on LNG Terminals data.

Next steps

Golden Paas partner ExxonMobil expressed confidence that it would meet its LNG goals tied to the project.

"We have a robust LNG portfolio that continues to deliver for our customers. We are on track with our announced objective to double our LNG supply by 2030," said Nicole Morales, spokesperson for ExxonMobil's office of government and public affairs.

In bankruptcy court in June, Zachry Holding got clearance to maintain operations, manage its cash flow and pay vendors as they work through the Chapter 11 process. Zachry was also hit with a class action lawsuit from a former Golden Pass employee, who claims workers were not given sufficient notice of their terminations, allegedly violating the WARN Act.