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Interview: Michael Kotara, President - Zachry Sustainable Solutions, Zachry Group 

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Could you give us a brief overview of your background in the energy projects industry and your current role at Zachry?

I've been in the industry now nearly 40 years. I spent 27 years on the owner side with an electric and gas utility company. I retired there as a senior vice president of power generation, so my background is primarily power. I've been at Zachry for over 12 years now, and Zachry works on many other technologies as well, so I've gotten good exposure to the process industry through my time at Zachry. I started out with Zachry in the Business Development group for six years, and then I worked as president of Zachry Engineering Corporation for three years. Most recently I've been president of Zachry Sustainability Solutions for the past three years.

Can you explain the role you see Zachry Sustainability Solutions playing in the energy transition?

Zachry Sustainability Solutions is focused more narrowly than the broader Zachry is. Zachry is focused, as an EPC contractor, on anything industrial, from power generation to refining to chemicals to liquefied natural gas export – anything heavy industrial is in Zachry Group's wheelhouse. Zachry Sustainability Solutions, on the other hand, focuses mainly on energy transition technologies. We saw this trend coming more than three years ago and decided to stand up a separate company that could focus more on specific technologies that our clients were gravitating to in order to decarbonize. Those are related to hydrogen and ammonia, which is the topic at hand here, but also carbon capture, renewable fuels such as sustainable aviation fuel and renewable diesel – as well as nuclear small modular reactors, electrification, and long-duration energy storage.

Those are the focus areas where Zachry Sustainability Solutions builds relationships with technology providers so that we can engage earlier in a client's project development efforts along with the technology licensor. This allows us to incorporate constructability early into the process, which is really important to help keep costs down for clients so that they can actually have a successful project going forward.

Buoyed by supply stimulus within the US and demand incentives in Europe and Asia, momentum for clean hydrogen and its derivative products has driven a wave of zero and low-emission project announcements on the Gulf Coast and wider North America. What is your current view on the number of projects you think will go ahead over the next few years?

What does the crystal ball say? [Laughs] We're approaching the two-year mark now since the passage of IRA, the Inflation Reduction Act, in August of 2022. These are large-scale projects, very big projects that take a lot of planning work before a client can actually understand the project fully and be able to make an intelligent decision on going forward or not. In 2023, right after the passage of the IRA, we saw a lot of opportunities for the front-end engineering and design (FEED) work. And 2024 has continued that trend, so not a lot of projects have yet been able to make the financial investment decision to go forward. There has been a lot of significant escalation in recent years, it's driven up project costs and clients are looking for ways to mitigate those costs because it's putting a lot of pressure on their project pro formas.

There are still some uncertainties around these government incentives. Are the governments going to stick to these incentives in the case of the United States, or, in the case of Japan and South Korea, how are their energy transition bonds going to work? And then we have the other uncertainties, the Class VI injection wells, as an example. I think the state of Louisiana has just won primacy from the EPA so that should help spur things along there. Texas, I believe, is working in that direction as well but there are still some uncertainties there, so that's also a challenge. But in spite of all of these challenges, I think later this year and into early 2025, we're going to see several large-scale hydrogen-ammonia projects achieve FID. Japan is targeting 3 million tons per annum of low-carbon ammonia by 2030. And so here we are in 2024, and to get projects on the ground and completed by 2030, we really need to be getting started later this year, or early next year.

There are potentially two large-scale hydrogen/ammonia projects needed to meet Japan’s goals and I think the United States is well-suited for those because of our stable gas supply. South Korea has the same kind of goals, so maybe there are a couple more projects there. 

Japan also has incentives for renewable natural gas (RNG), or synthetic natural gas (SNG) or e-methane. Japan has quite a large goal for RNG and SNG supplies for its gas distribution companies – I believe 1% of its gas supply, it wants to have sourced from RNG or SNG and that's going to drive projects in the near term as well. And then Europe is attractive for blue ammonia because of its gas supply situation right now. I think all of these things bode very well, I think we're going to see half a dozen or more large-scale hydrogen and ammonia projects in the US because it’s a favorable gas supply situation and it’s a favorable place to build projects. I'm excited about it. I think we're right on the cusp of having some projects reach that critical milestone of achieving FID.

What are some of the major projects your team is currently working on?

Many of the hydrogen-ammonia projects we're working on – about six of them – are not in construction, but in various stages of early engineering. And all the clients in this space typically want to keep it very confidential – what their project specifics are about, where they're at and their capacities. But I will say that we're working on several projects in the space of blue and green ammonia and hydrogen. We're starting to see a growing number of these renewable natural gas, synthetic natural gas projects as well. Zachry is actively pursuing hydrogen/ammonia and renewable natural gas projects with clients who have chosen a variety of technologies.  A key advantage for Zachry is that we focus on the OSBL EP scope and overall construction scope, so we are able to pursue projects across all the major technology providers.  

In other areas of decarbonization, our clients are more open with what's going on and we've issued press releases, so it's in the media and I can talk more about those projects. We're currently supporting Calpine on its Baytown carbon capture project. That project is on the Texas Gulf Coast, it's a cogeneration power project and they're looking at capturing 95% of the CO2 from the flue gas on that project. Zachry is doing the OSBL EP scope for the FEED study as well as the overall constructability study, and our partner is doing the ISBL EP scope for that project. We're also working for a company called NET Power, which is a pretty exciting project. It's their own technology, it's the Allam cycle, which uses supercritical CO2. They’ve spoken about this in the press and about Zachry's involvement. They have a project out in the Permian Basin of West Texas. It’s a 285-megawatt project and it will capture and sequester – actually use for enhanced oil recovery – CO2 to the tune of about 800,000 tons per annum, just under a million tons per annum of captured CO2 for enhanced oil recovery. That's a pretty exciting project. We recently finished up – earlier this year – support for LanzaJet at their Freedom Pines project in Soperton, Georgia. Our scope there was OSBL EP and construction management support for LanzaJet’s sustainable aviation fuel project. And then finally, I would point to our involvement in nuclear small modular reactors. We’re supporting X-energy, a company with their own technology – a high-temperature gas-cooled reactor – and they're working for Dow Chemical at a site in Seadrift that Dow has publicly discussed. It's for four 75-megawatt electric SMRs, although not all of them will be used for electricity generation – they may be using some of those just to process heat. Those are some projects that I would highlight. We're working on others as well, but those are, I think, a nice smattering of technologies across the energy transition spectrum that we're involved in at the moment.

What experience and lessons learned can be applied from previous energy mega projects to the zero and low-emissions hydrogen and derivative projects space?

Zachry is celebrating, this year, 100 years in the construction industry, so it's a pretty incredible record that we have. We've been in the construction industry for a long, long time, and we've been adding engineering to our scope as well, through growing our engineering companies. We've done a lot of projects of increasing scale over the years as we've grown. We have a huge following of skilled craft labor and for these large projects, I would say the skilled craft labor is probably the most important thing. These employees are in very high demand, and Zachry maintains a very good relationship with a large base of skilled craft workers – we do projects across the United States, but especially on the Gulf Coast. I would say what we've learned from other projects is having that following of skilled craft labor is essential and having low employee turnover is also critical, not only for productivity, but also for safety. We pride ourselves on having low employee turnover with our skilled craft employees, which really helps to manage productivity and that is key for keeping costs down. But of course, safety is paramount, so that's really the most important thing.

Another thing we're doing that we think will be directly applicable to energy transition projects is advanced work packaging (AWP). We believe it's critical in the US, where skilled labor is in high demand and at a relatively high cost compared to other places in the world. Advanced work packaging is a tool that we use to ensure productivity and ensure that we make the right progress on the job for the effort that we're spending with our skilled labor workforce.

Another thing that comes up a lot is modularization. What we try to do early in our involvement with clients is to help them understand the trade-offs between modularization and stick-built for project execution. With mega modules, certainly in the hydrogen/ammonia space, we see a lot of this, where the modules – the process modules in particular – would be mega modules, something on the order of, say, 3,000 tons or above, and those would typically be sourced internationally. There are some concerns about international sourcing of mega modules now. Zachry has done quite a bit of that successfully, but now we have more geopolitical risk and shipping risk. We saw that after the COVID-19 pandemic. These modules have a limited number of shippers that can handle them, as specialized shipping equipment is required to transport these mega modules. So, there are some trade-offs – you certainly can lower labor costs, but you can have other costs that come into the equation. Every project has to have its own modularization study done to optimize the decision-making around what would be stick-built on site, and what would be built in a fab yard off site. And for a lot of smaller-sized modules, domestic fabrication is also a good option. You just have to study every project and understand the access to the project to make decisions around modularization. But that's certainly something we're seeing a lot of on these energy transition projects.

Finally, I would say de-risking a project is really critical for both the client and the EPC team. For the client, de-risking typically means trying to provide as much cost certainty as possible. And you can get that through an open book estimating process, and you try to lock in some key long lead equipment with some fixed pricing. That helps to mitigate some of the variability that might happen later in the project life, but it also locks in delivery, which is really important. Then, for the EPC team, understanding the true cost of the project is really the bottom line – understanding material quantities is really important, understanding delivery times of equipment, and ultimately forecasting the labor costs. All of those things that we've done on mega projects in the past – LNG projects, for instance, or polyethylene olefins projects – all those things are very applicable to hydrogen and ammonia projects.

What do you see as the key pillars to successful project execution?

I've already mentioned attracting and retaining skilled craft labor, but it's worth reiterating because it's so important. I would say, early engagement of construction project management teams with engineering project management teams is critical. That means when we have a partner that's doing some of the engineering and procurement scope for, say, the ISBL portion of the project, we typically will co-locate a Zachry team of the construction project management team at our partner's place of business, because they have the most people involved at that point in the early engineering phase. 

As I also mentioned already, AWP is essential, so establishing those construction work areas with our partner is really important and ensuring that we have the engineering and the procurement done to support the path of construction that the team has decided upon. Everybody's got to be on the same page there. This is really critical and must be done right. Out-of-sequence work – for whatever reason that it may happen – leads to poor productivity. That could be a variety of things, it could be delays in engineering or equipment material delays, but anything out of sequence is what we try to eliminate and that's done through co-locating people and having them work together and develop the plan together so everybody has ownership in the plan.

As we await the final IRA rules, how are you working with project developers to prepare for the eventual compliance guidance?

IRA is front and center on every project. Obviously, the incentives are pretty significant, so every developer we're talking with is very keenly aware of the requirements of IRA compliance, which really boil down to prevailing wages and apprenticeship. Zachry continues to refine its IRA compliance plans, and we're working with clients to make sure that they're comfortable with how we're going to comply. We don't see a huge challenge there – it's going to be more about record-keeping, and ensuring that our client has the reporting that was done to show to the Treasury Department when they apply for the production tax credit after the project is complete. We're talking years down the road.

At Zachry, we use a direct hire model for construction and this provides a significant advantage for IRA compliance, because typically more than 85% of the work hours on the project site will be Zachry direct hire employees. That's a big advantage. We don't have a lot of subcontractors – we certainly rely on certain specialty subcontractors that we have long-standing relationships with to do certain scopes of work that they're particularly good at such as underground pilings, field-erected  tanks and some other things of that nature. But with the majority of on-site labor being Zachry’s direct hire employees, I believe Zachry is in a better position to manage and ensure IRA compliance for our clients.

For the prevailing wage requirement, – we are not really concerned about complying with it, we don't have an issue there at all – but we're uncertain about how the Department of Labor (DoL) might impact construction wages going forward. The DoL will issue the prevailing wage determinations for every county in the United States, and we're certainly prepared to comply with that, but it will be interesting to see how the DoL determines wages in counties where there are few projects going on, or vice versa, where there are multiple projects going on, some of which are not going to be taking advantage of IRA incentives. LNG projects, for instance, are huge workforce projects with as many as 5,000-6,000 employees on site. We don't anticipate that many employees for a hydrogen or ammonia project – at least not at the scale of projects that we've seen so far, maybe in the future –  but right now, we're seeing smaller workforces for the project execution plans we're coming up with for the hydrogen and ammonia projects. If you're working next door to an LNG export terminal project, I'm sure the DoL will take into account what the wages are at that project, and they'll use it for the wage determinations. But how often will they update the wage determination? They're going to be in the driver's seat for determining what the prevailing wages are, and we're certainly going to be ready to comply with those. We're just not sure at this point how frequently they'd be updating wages through the life of a project.

Outside of the clarification of the IRA rules, what do you see as the main challenges for these projects in reaching an FID?

Hydrogen and ammonia projects have all the same challenges that any large industrial project has. Significant cost escalation over the last 3-4 years has been a real challenge. Supply chain constraints, especially with major electrical equipment such as generation step-up transformers and switchgear power distribution centers – there are a lot of constraints right now for that kind of equipment, with lead times that are stretching now to three years, so that's a real challenge. And of course, higher interest rates are causing more financing costs, and that's across the spectrum but hydrogen and ammonia projects will certainly feel that just like all the other industrial projects.

Some of the other challenges, I think, that are probably more specific to hydrogen and ammonia would maybe include the newness of the technology. Not really the newness of the ammonia technology or the hydrogen technology – it's been around for a long, long time – but many of the project developers are pushing the technology licensors to use larger and larger scales. That's bringing in some challenges because that brings in uncertainty. You're trying to push a technology that maybe was doing 3,000 tons a day up to maybe 4,000 tons a day – that’s a 33% increase. In the process, flow diagrams don't really look much different, but the actual detailed design engineering may have to look quite different because particular equipment may not be available in the larger sizes. You may have to go to two pieces of equipment where you typically have one piece of equipment. All of a sudden material quantities and equipment counts go up quite a bit, so it brings in uncertainty when scale has increased significantly. That's one of the challenges that we see – that some of the developers are pushing for larger and larger scales, because if they can get to a larger scale, ultimately they can drive costs down. But not knowing where the pitfalls are, where you may have to go to – like I said – two heat exchangers instead of just one because of the manufacturing difficulty of making one large enough to accommodate the requirement, that's what we're working through right now on some projects.

How long do you see these issues lasting? And what are some of the ways in which project developers can help mitigate against these challenges?

We've seen some developers that are taking the more conservative approach, and they're staying with technology scale that has already been done. That eliminates a bunch of the risk that I was just talking about. On the other hand, other developers are trying to push the envelope. From what we've seen, I would say most of the operators that are asset-backed companies that have fleets of plants are typically more conservative and will go with the capacities that are that are already in existence and are well-known. Whereas maybe some of the project developers are trying to get a lot more capacity out of a plant, they're willing to push the envelope a little bit and push the scale up a little higher. Those are the two paths, and I think the more conservative path would lead to less uncertainty and it's what I would recommend.

How does Zachry see the current craft labor supply situation in the Gulf Coast and are there any key initiatives you're employing to help address it?

I think this is a really key topic. Zachry has several large-scale projects in the execution phase right now on the Gulf Coast. And while labor supply is always a concern, right now, we're not having significant labor supply constraints on those projects. That doesn't mean it's not important going forward. On a going forward basis, what's going to drive the availability of labor is going to be how many of these projects happen at the same time. Right now, there are maybe 20-30 different projects that we're aware of that are trying to develop hydrogen or ammonia export projects just along the Gulf Coast or the Mississippi River. That's a pretty concentrated area, so if many of those were to reach FID at the same time, that would be a real problem but I don't think that's going to happen. As we talked about earlier, I think there's room for several projects to achieve FID, and as I mentioned, these projects aren't at the scale of the LNG export terminals that are currently underway. At this point, we're certainly watching it, because it's really important, but we're not overly concerned about it.

Successfully pioneering new and innovative technologies, designs and ways of working can rarely be achieved in isolation. Can you discuss the importance of partnerships in building the next generation of facilities?

Zachry Group – and Zachry Sustainability Solutions as part of Zachry Group – partners with other engineering procurement firms all the time. We've done this for many, many years and so I would say we're quite skilled at integrating our project management teams with our partner's project management teams in order to achieve a common team for the project, which is critical for the project's success. I already mentioned that we like to co-locate our PMO team with our partner to ensure good communications among the combined team. We do this a lot where there are engineering procurement firms that have significant experience with licensed technology that our client is wanting to employ. You're right, the breadth of this technology is so large that you can't be everything to everybody, so you have to know when the time is right to go find a partner who's specialized and who’s done it before. That eliminates risks in the project, so it's the right thing to do and Zachry does that quite often. I don't want to start naming names on the companies we partner with, because I'll certainly leave somebody out, but I can tell you that we partner with a lot of firms that are well known in the industry and we typically like to keep OSBL engineering in our scope. Then overall construction of the OSBL and the ISBL would be in Zachry's scope and we would look for an EP partner with significant experience in the ISBL or the process part and they would be responsible then for the process design and designing any mega modules that may be procured for the project. 

How important is the relationship between owner and EPC? And what advice would you give to owners on how to work most effectively with their EPC partner?

For the first 27 years of my career, I worked as an owner, so this is an interesting question, because the owners are driving the project. What the owners are challenged with is hiring an EPC team, bringing them in and making the owner and the EPC team function as one, because if there's friction there, it's going to be difficult for the entire project. Owners set the tone on how these projects are going to be executed by the EPC, so the owners have to be engaged at the leadership level, I would say. It's really important and you can't just leave it to the project leadership team alone. It has to be senior leadership in the owner company that's engaged with senior leadership at the EPC team. We may have a partner, but all the companies involved have to have a relationship at the senior leadership level, because it's impossible to anticipate every single challenge that might come up. These projects last 3-4 years in duration, so many things will happen over the course of a project. And the project teams will work every day to overcome challenges, but at the end of the day, there are challenges that are going to have to be bumped up to the leadership level. That's where the owner has to be engaged. I lived that when I was at the company that I previously worked for – as an owner I was involved with all the EPC projects. We executed four EPC projects in the last six years that I was there, and I was actively engaged in each of them. And I think that's what it takes from an owner to make these projects successful.

What are some of the most exciting technologies/projects you are seeing implemented currently? And what are some of the latest solutions Zachry is deploying/developing to create the next generation of projects?

As I mentioned, in the hydrogen-ammonia space, some of the technologies are well established, they're just being put to use at a scale that's never been done before, so the challenge is really the scale. And I think that's where companies like Zachry help, because we've done large-scale projects. That's the interesting part of these projects, doing them at a larger scale. Other technologies are more new, like the NET Power technology that I mentioned, which is using the Allam cycle for supercritical CO2, for power generation with integrated carbon capture. That's a really exciting technology, I believe. And then the nuclear small modular reactor technologies, I believe, have been invigorated with a lot of bipartisan support for nuclear as a future energy source, and there are a lot of different technologies there. Zachry's supporting three of them directly. One of them could have a project in Texas, on the Gulf Coast. I think those are very interesting new technologies. And then in the space of sustainable aviation fuel there are projects like LanzaJet's technology that can take alcohol to jet fuel, which I believe is essential for the airline industry. They don't have very many other alternatives to decarbonize, so I think that's a really important technology that's been developed by LanzaJet and others.

The US Gulf Coast is rapidly establishing itself as the epicenter for energy transition projects. Outside of the zero / low emissions hydrogen and derivative space, what are some of the other key industries you are seeing growth in demand for your services?

When I came to Zachry 12 years ago, Zachry was engaged in building a lot of power plants. And then that tapered off a bit as the market shifted and clients stopped building gas-fired power plants and coal-fired power plants and everything transitioned to wind and solar. But now we're seeing that come back and I think resiliency in the power space is becoming more important. The intermittency of wind and solar is a challenge and there is not – at this point – a long-duration energy storage technology that can shift that wind and solar generation by more than four hours. That's not enough – they need to be able to shift that generation by 8-12 hours. So, we're seeing a resurgence of power generation, primarily what everybody refers to as peaker plants, which are typically combustion turbines in simple cycle configuration that can start relatively fast and generate power on demand and can be dispatched as needed. We're seeing growth in that and that's being driven because of data centers. There's another area – data centers in the United States are really taking off and I think a lot of that is being driven because of artificial intelligence putting a significantly higher demand on the internet and on searches on the internet. I've been told that AI internet searches use anywhere from 10 to 30 times as much computing power as a standard internet search and everything is moving toward AI, so if we convert everything to AI it's going to drive data center demand requirements. Data centers are going to become more like power projects, you're going to have a data center built with its own power plant. That's an area that we're keeping a keen eye on outside of the zero or low-emission hydrogen and derivative space. It’s exciting that power generation is coming back around, but now it's being driven not so much by industrial growth as it is by data center growth.

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