This story has been updated

Zachry Group, the contractor that has led construction since 2019 of the estimated $10-billion Golden Pass LNG export terminal expansion in Sabine Pass, Texas, filed for Chapter 11 federal bankruptcy protection May 21 for itself and 20 subsidiaries. The San Antonio-based contractor cited “significant financial strain” from ongoing cost battles with project owners Qatar Energy, which has a 70% share, and Exxon Mobil Corp., which owns 30%.

Zachry termed the energy firms “two of the largest, wealthiest, and most sophisticated oil and gas companies on Earth.”

 In legal filings on May 21 in U.S. bankruptcy court in Houston, Zachry Group said it was exploring a “structured exit” from the project and its construction joint venture that also includes contractors Chiyoda Corp. and McDermott International.

 A hearing on the plan is set for June 17.

Qatar Energy

First phase completion delay into 2025 is foreseen for estimated $10.5-billion project set to produce 18-million metric tons annually of quefied natural gas. Photo: Golden Pass LNG Terminal LLC

 Work involved construction of a three-plant addition on more than 900 acres that is set to produce 18-million metric tons annually of liquefied natural gas and generate “billions of dollars of revenue a year” for its owners, said one Zachry document.

 Zachry said that before April, it had weekly project expenses exceeding $40 million for payroll, vendor payments, equipment rental and related services, but only received about $70 million per month from Golden Pass LNG Terminal LLC.

 Zachry Group ranks at No. 28 on the ENR Top 400 Contractors list, reporting $5.4 billion in 2023 revenue. Zachry Construction Corp. ranking separately at No. 215 with $576.4 million in 2023 revenue now is unaffiliated with Zachry Group.

Sharing Details

 In a separate lawsuit later filed in bankruptcy court against the owner entity, Zachry unit Zachry Industrial Inc., which had led construction work for the parent, dramatically details project cost and schedule woes and strained relations—claiming the owner refused to “foot the bill” to meet its demand to ramp up completion.

 By mid-2022, over $2.4 billion in additional funding was needed to complete the project on the schedule Golden Pass wanted,” the Zachry suit states. “The cost was extraordinary, but so was the payday Exxon Mobil and QatarEnergy would receive once the facility was complete.”

 Zachry says it seeks to recover more than $1 billion it says it had to invest in expenses for Golden Pass.

 Golden Pass LNG which has until June 30 to respond to the court filing, said in media statements it acknowledges the Zachry bankruptcy filing, noting that “work continues on the project with McDermott and Chiyoda … with thousands of workers on site.” The owner said it is “committed to completing the project, which now is 75% finished,” but it declined to answer further questions.

 Golden Pass also has not responded to an ENR query.

 An owner spokesperson told Reuters on June 6 it had no update on first-phase completion that one sector analyst speculated could be delayed by six months to end of June 2025. A Zachry spokesperson said the firm “was not aware of any [lawsuit] response filings from Exxon or Qatar Energy” as of June 11.

 The project was awarded to the joint venture under a fixed-price $9.25-billion engineer-procure-construct (EPC) contract. But “unexpected challenges” from the beginning disrupted the schedule and pushed up costs, Zachry says—including numerous plant structures that had to be redesigned because Golden Pass owners “erroneously described soil conditions.” Also, global trade restrictions following Russia’s 2022 invasion of Ukraine drastically hiked materials and fuel costs.

 Zachry's share of the project was valued at $5.8 billion.

 Even so, the Zachry suit says the owners “were focused” on fast completion that required contractors, particularly Zachry as construction lead with 52% of project scope, “to accelerate work and accrue increased costs to get the project back on track.”

 Exxon Mobil is ahead of schedule in its plan to double the size of its LNG portfolio to 40 million tons per year by 2030 and will focus on selling its own gas rather than trading third party supply, a top executive told Reuters in March. There is more value in producing, liquefying and selling gas, said Peter Clarke, Exxon senior vice president for global LNG, adding that long-term contracts account for about 80% of the global LNG trade.

 Qatar, one of the largest global LNG exporters, recently said it will add 16 million metric tons per year to its export capacity plan, now targeting142 million metric tons annually by the end of 2030.

Costs 'Exploded'

 Keeping schedule “was abnormally important” to project owners, Zachry's suit claims, because of the lucrative end-product and the impact of public statements on job progress on their share value and global gas market prices.

 Sector publication Natural Gas intelligence reported May 22 that a four-day rally of natural gas future prices stalled on news of the Zachry bankruptcy, which it says “spooked the market … fueling concerns over the export demand outlook.”

 According to the Zachry suit, by mid-2022, “the project was substantially off track and costs associated exploded,” with an added $2.4 billion needed, including $1.7 billion in change order claims. Zachry and the joint venture paid them, with Qatar Energy and ExxonMobil executives proposing “only a modest increase in immediate funding” and promising John Zachry, chairman and CEO, to “settle up” at the end of the project.

 “Having run out of cash for the project, Zachry faced a stark choice,” the suit explains. “It could either accept and rely on Golden Pass’ representations as true and proceed on the understanding that additional compensation would be provided at a later date, or Zachry could halt work … and default on its vendor, supplier, subcontractor and payroll obligations.”

 By November, “believing they had no choice,” said Zachry's suit, the joint venture partners agreed to a new confidential settlement that waived most of the $1.7 billion in change order claims and excluded some cost items that had previous force majeure legal status.

 But in 2023, Golden Pass pressed Zachry to slow down construction and enter into a cost-reduction plan, promising to fix any cash shortfalls. “The cost reduction process did not work, however, as the contract payment structure never caught Zachry up from all the losses it incurred in prior years,” its lawsuit contends.

Spiraling Down

 The lawsuit notes a failed mediation attempt with owner executives, but also Zachry's inability to pay all its vendors, suppliers and subcontractors. Golden Pass had been paying them directly in recent months, as authorized under a contract amendment, but stopped payments “with no prior notice to Zachry, so it could claim Zachry was in default … for not paying them out of its own pocket,” the suit alleges.

 “In March of this year, Golden Pass began direct-paying vendors, and clawed back much of those funds from advance progress payments due to Zachry,” the filing says. “Once it had bled Zachry dry of all its liquidity, Golden Pass “forced [the contractor] to file Chapter 11 bankruptcy — a bankruptcy that Golden Pass caused.”

 Golden Pass issued Zachry a first notice of default on May 8.

 “We have been transparent with [Golden Pass] and its shareholders as we have attempted to reach a mutually agreeable resolution to these issues,” John Zachry said. “Because we have been unable to find a path forward, we have been forced to take action to protect our business.”

 Zachry says its cash on hand, along with cash generated from operations, will provide “sufficient liquidity for the company to meet its ongoing business obligations during the court-supervised bankruptcy process.” The corporation also intends to “pay vendors and suppliers in full under normal terms for goods and services provided during the bankruptcy case,” it says.

 In an early June state filing, Zachry said workforce layoffs would total about 4,430, but the firm “estimates one-third of employees can be rehired within the next 90 days and the balance could be offered positions over the next 12 months.” a spokesperson told ENR. “We will continue to work with all parties involved to achieve an effective resolution.”

Forward Plans

 There is speculation on how the bankruptcy will further affect the first phase construction completion date, which had been projected for year end. In early May, Golden Pass LNG filed a revised schedule with the Federal Energy Regulatory Commission (FERC)—not released publicly—that allows terminal commissioning to be pushed back to the third or fourth fiscal quarter of 2025, according to publication Natural Gas Inteligence.

 ExxonMobil chairman and CEO Darren Woods had told analysts in early February that exports would begin in the first half of 2025. “Train 1 mechanical completion is expected at the end of 2024,” he said, offering no added information.

 A Golden Pass LNG spokesman told Reuters on June 6 it had no update on first-phase completion, nor on plans to hire a new EPC contractor.

 In an early June inspection report, FERC did not update completion of the liquefaction trains, which it had said in an earlier report was set to be "in the second half of 2024." But the regulator's new report noted that an affiliated gas pipeline project completion was pushed back to "sometime in the first half of 2025," compared to its earlier projection it would occur "prior to the second half of 2024."

 In a statement, Chiyoda said it, Golden Pass LNG and McDermott's CB&I unit were exploring "an execution plan to continue to work together to achieve the successful completion of [the project] upon a Zachry departure.”  In a May 23 update of an earlier announced delay of its planned May 9 release of corporate financial results for its latest fiscal year that ended March 31, Chiyoda noted the need for more time to obtain information related to the Zachry bankrupty filing impact.

 McDermott declined comment on Golden Pass.

 CEO Zachry said construction activities are expected to continue at the firm's other contracted worksites during bankruptcy proceedings. The company also is an EPC partner with engineering firm KBR Inc. for the 13-million-metric-ton-per-year first phase of the Plaquemines LNG project in Louisiana developed by Venture Global LNG Inc. The owner “does not anticipate any material impacts” on work, a spokesperson says.

 Zachry seeks a court order to void the Claims Settlement Agreement and the three amendments to the contract. The contractor also wants the bankruptcy court to lower the priority of any claims that Golden Pass owners file in Zachry’s bankruptcy case, behind other creditors.

 "We are moving through the court-supervised process and we will continue to work with all parties involved to achieve an effective resolution," said the Zachry spokesperson.


 New Wrinkle

 But the three contractors now also face new legal action from owners of the Freeport LNG export terminal project in Freeport, Texas on which they also worked as a joint venture team, according to an April state court suit revealed on June 6.

 It alleges that incorrectly installed electric motors at the $14-billion, 15 million-metric-ton per year export plant, which began operating in 2020, caused shutdowns and needed costly repairs that affected gas prices and caused market volatility. The facility was closed for about eight months after a mid-2022 fire, with shorter outages that have followed.

 "Zachry is aware of the lawsuit and we are cooperating with Freeport LNG on the investigation. To our knowledge, the equipment in question has operated without failure since being installed approximately five years ago," the Zachry spokesperson said. "The preliminary investigation suggests that the issues outlined in the lawsuit do not relate to Zachry’s scope of work. We are working with our joint venture partners to appropriately respond to the lawsuit when and if required."