Dive Brief:
- Work to complete the stalled $11.6 billion Golden Pass liquefied natural gas export terminal in Port Arthur, Texas, can move ahead after the lead contractor, San Antonio-based Zachry Holdings, came to an agreement with the project owners that allows it to exit the project.
- Zachry Holdings filed for Chapter 11 bankruptcy protection in May, saying the megaproject was at least $2.4 billion over the original budget, causing it to hemorrhage money. The contractor has had years of disputes over costs, payments, layoffs and project delays with developer Golden Pass LNG Terminal LLC.
- On Wednesday, the U.S. Bankruptcy Court for the Southern District of Texas approved Zachry’s settlement agreement with the developers and joint venture partners CB&I and Chiyoda International Corp., according to a news release from Zachry Group. The ruling fully resolves all financial and legal disputes among the parties.
Dive Insight:
Golden Pass LNG is made up of joint developers Qatar Energy and ExxonMobil, which respectively own a 70% and 30% stake in the methane gas project. The settlement allows them to pick a new contractor and resume construction while Zachry Holdings leaves the project, according to the release. The agreement has been approved on an interim basis in order for Zachry to complete its court-supervised restructuring process.
The project, located in the Sabine Pass neighborhood of Port Arthur, was initially estimated to cost $9.25 billion in 2019 but skyrocketed 25% by August 2022 due to COVID-19 and geopolitical issues. A separate case filed in May by affiliate Zachry Industrial alleges that the project began to exceed its projected costs not long after it broke ground in 2019, according to the San Antonio Business Journal. As those costs passed $1 billion over the lump sum budget, the firm submitted numerous change order requests to compensate.
However, Zachry alleges in court documents that the project owners were not cooperative, refusing most of its change orders and only compensating it a fraction of the cost overruns, as it struggled to finish the project on time. These issues eventually led Zachry Holdings to file for bankruptcy in May, citing “significant financial strain” from ongoing cost and schedule disputes.
In the months leading up to May, Zachry alleges it was losing about $30 million every week while being paid only $70 million monthly, per the San Antonio Business Journal.
Zachry had already been making moves to disentangle itself from the project, according to the San Antonio Business Journal. An agreement reached in early June permits the two remaining contractors — Houston-based CB&I, owned by McDermott International, and Japanese engineering firm Chiyoda International Corp. — to continue certain work including site maintenance, environmental management and security.
Golden Pass acknowledged the court’s approval of the interim order, and said it is committed to a safe and successful completion of the project.
"This allows Golden Pass and our construction contractors McDermott and Chiyoda to ramp up site construction activities and progress our LNG terminal. Going forward, we are focused on getting people back to work, including local workers and vendors, and progressing this critical energy project," a spokesperson for Golden Pass LNG said in an email.
LNG troubles a trend?
The Golden Pass project is located at the site of a former import terminal that was converted to process methane gas for export, according to Reuters. With an annual export capacity of approximately 18 million tons, it is expected to expand the supply of the fuel. It’s not the only massive LNG project in the works in the area: Bechtel was recently tapped to build Phase 2 of a separate $13 billion Port Arthur plant.
The projects are part of a wave of new LNG export capacity set to come online as such fossil fuel projects are increasingly less profitable and renewable energy is taking off. An April report from the Institute for Energy Economics and Financial Analysis sees the trend of falling LNG prices and softening demand accelerating faster than expected.
“Lackluster demand growth combined with a massive wave of new export capacity is poised to send global liquefied natural gas markets into oversupply within two years,” according to the report.
In fact, gas plants need to be retired at a faster rate to keep in line with global climate targets to limit temperature increases to 2.7 degrees — a threshold that, if crossed, is projected to bring critical damage to the planet and more extreme weather.
That means “any new gas plants built in the future risk becoming stranded assets and either being decommissioned before the end of their economic life, having to include carbon capture and storage or experiencing significant underutilization,” per the Global Energy Monitor.
Golden Pass was originally supposed to be complete at the end of 2024, but the terminal is now expected to start operating in 2025.
