Haha! I cannot reproduce on a fresh install of Ubuntu 16.04 in Virtualbox. Same base OS version, same Java version. It's correctly setting Default/128 in the settings.cfg. I can reproduce every time on my host system Ubuntu 16.04/Mint 18. Can you check the code where it's setting G_TEXTURE_PACK when settings.cfg is missing? Where does the value come from? Doesn't seem hardcoded.

you did install from steam first and then did reinstall to the same folder using the webside launcher ?

I never heard of the game until yesterday. Fresh install on both direct download and Steam. I deleted the settings.cfg and started the game. It created it again with Pixel/128.