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TURNER INDUSTRIES GROUP, LLC

TURNER INDUSTRIES GROUP, LLC. LESSONS LEARNED POST-HURRICANE TURNAROUNDS Houston Business Roundtable May 10th, 2006. REPRESENTATIVE TURNAROUNDS Case 1 - 90,000 BPD refinery in Colorado Full plant outage 1 st qtr 06’ - planned 42 days oil-to-oil 350,000 direct man-hours (all contractors)

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TURNER INDUSTRIES GROUP, LLC

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  1. TURNER INDUSTRIES GROUP, LLC LESSONS LEARNED POST-HURRICANE TURNAROUNDS Houston Business Roundtable May 10th, 2006

  2. REPRESENTATIVE TURNAROUNDS • Case 1 - 90,000 BPD refinery in Colorado • Full plant outage 1st qtr 06’ - planned 42 days oil-to-oil • 350,000 direct man-hours (all contractors) • Peak loading of approximately 1,000 directs • Case 2 - 200,000 BPD refinery in Louisiana • FCCU, Alky, HDS & Sulfur Block 1st qtr 06’ - planned 32 days oil-to-oil • 100,000 direct man-hours (Turner only) • Peak loading of approximately 350 directs

  3. CASE 1 • 350,000 direct man-hours with a total installed cost of approximately $80MM (including Capital Projects) • Planned peak manpower loading of approximately 1,000 directs • Planned for 4th qtr 2005 (subsequently deferred to 1st qtr 2006) • HDS, Crude & SRU 3-year run-life to Spring 2008 • AU, FCC, Cat-Poly, VRU & Amine 5-year run-life to Spring 2010 • 1,200 expense work items • ULSD project ($450MM) • FCC revamp adding a 3rd stage separator ($4MM) • CAPEX scope ($2MM)

  4. The turnaround presented specific issues not representative of a "typical" turnaround • (2) large capital projects with an anticipated peak manpower at or around the turnaround time frame • TA hampered by a lack of availability with regard to plant access, lay down areas, office locations, contractor trailers, Owner personnel, contractors and craftsman • Local market is not conducive to heavy industrial construction • The turnaround timing was during winter conditions • TA would reach an over maximum manpower density

  5. To account for these factors, the estimated productivity factors were increased over typical industry standards • 50% productivity loss (30% outage factor and 20% non-typical outage factor) • 10% contingency • 15% allowance for scope growth

  6. Concerned with ability to attract and retain craft labor • Instituted plan to over-man the turnaround in the initial stages in order to assure retention for; • Scope growth • Contingency • Unanticipated productivity losses • Absenteeism & attrition • Recruiting issues

  7. P3 schedule developed to account for resource loading contingency • Developed schedule under normalized conditions (no allowances or contingency) • Leveling techniques used to optimize the schedule to front-end load resources (direct labor) • Added productivity factors to allow for reconciliation to the final budgeted man-hours • Developed external Excel based spreadsheet used to adjust to additional 25% man-power allowance • Re-allocated manpower in P3 via hard logic

  8. Design craft wage rates to attract quality craft & supervision • Original wages were set for 4th qtr 05’ execution TA execution window was deferred to 1st qtr 06’ • Conducted an analysis of current, prevailing and anticipated wage rates that would be required for the new TA timeframe • TA, originally targeted for 4th qtr 05’, was on the downward side of the 4th qtr 05’ peak • New TA window would be in the midst of peak manpower requirements in the Gulf South

  9. This presented several critical (high risk) factors with regard to contracting and labor • Impact of Threats • Unable to attract craft • Unable to adequately staff • Safety concerns • Potential QA issues • Increased personnel turnover • Schedule slippage • Increased LPO

  10. Additional risk to TA due to industry manpower requirements • Would need to implement new wage & compensation structure • Allow for “market-plus” condition w/ “Market” = Gulf South • Ensures wage rates would be sufficiently higher than those in the Gulf-South • Coupled with other incentives and completion bonuses would allow us to attract and maintain quality craft & supervision

  11. However, Hurricane’s Katrina & Rita shifted the industry and further exposed the TA • Projects & TA’s were shifting to 1st qtr 06’, already the predicted peak • Increased industry peak manpower requirements above those previously forecasted • Re-build effort attracted craftsman away from the industrial sector

  12. Developed risk model for three different wage rate / incentive structures • Based on HBR data and contractor surveys • Survey contractors for current / relevant experiences with post-hurricane wages • Optimize wage structure to remove profit motive • Ensure increase goes to craft • Develop flexible attractive wage & incentive structure for current environment • Offer contingency for RLT approval

  13. OPTION “0” - Maintain current wage & compensations structure at pre-hurricane structure

  14. OPTION “1” - Modify wage & compensation to “level 1” • Added approximately 10% to wages w/ an added safety & completion bonus equivalent to 10% of base wage rate

  15. OPTION “2” - Modify wage & compensation to “level 2” • Added approximately 25% to wages w/ an added safety & completion bonus equivalent to 25% of base wage rate • Recommended structure to drive risk profile to “low” (schedule driven TA)

  16. Turnaround Results • Wages: The wage structure ended up below current Gulf Coast norm as competition grew from other turnarounds and post-hurricane rebuilding efforts • Wage rates were set at option “1” with safety & completion bonus to be earned separate from wages • The execution team did not implement contingency for raising wages to option “2” • Per diem and travel were paid • The safety & completion bonus were separated from wage rates instead of earned in real time • Wages affected recruiting but did not affect retention

  17. Manpower: The turnaround was 10-15% under-manned and 20-25% under managed. • Contingency factor too low (10%) • Used incorrect resource profile as the basis for recruiting • Manpower profile based on estimated man-hours per logic driven P3 schedule • No allowance for over-manning • No allowance for contingency or scope growth • Relaxed English speaking requirement to attract craft of Hispanic decent and from Puerto Rico

  18. Absenteeism: was report to be at approximately 10% • Although securing manpower was an issue, absenteeism & attrition appeared to be a non-issue • Safety, Quality & Productivity: poor performance by all standards • (4) recordable injuries on 500,000 direct man-hours (including capital projects) • Weld rejection rate was high, especially on alloy piping • Leaks on start-up • Start-up delayed due to Capital Projects, expense work completed on time

  19. Contributing factors: • Competing turnarounds in Gulf Coast paying higher wages than anticipated • Per diem for working locally (per diem never adjusted) • Contractors were stretched beyond their ability to provide a “known” work force. Recruiting non-familiar craftsman or craft from non-Gulf Coast regions • Inadequate allocation of QC resources (Owner driven) • Inordinate amount of late scope additions & discovery items (added 150,000 man-hours) • Increased unit congestion above 1,500 directs vs. 1,000 planned

  20. CASE 2 • 100,000 Turner direct man-hours with a total installed cost of approximately $125MM (including Capital Projects) • Planned peak manpower loading of approximately 1,000 directs • TA premises set by Owner for a sequential unit turnaround of the FCC, Alky, HDS and Sulfur units • FCC revamp executed by Cat Specialist • HDS & Sulfur units executed by GC • Turner-Industries expense and CAPEX related scope of work in the FCC and Alky units.

  21. The Owners planning premises made some allowances for typical turnaround inefficiencies • Owner Alliance estimating manual plus 20% or Page & Nations plus 40% • Expected significant scope growth through discovery • Mobilized contractor supervision and some craft early • To account for these factors, the Owner made allowance over their typical standards • Allowance for discovery, analysis, recommendation & repair in TA timeline

  22. Concerned with ability to attract and retain craft labor • Manpower / resource profiles • Resource loading the P3 schedule with the total estimated man-hours • Inclusive of productivity factors • Included indirects on an individual task basis • Levelized using a systems turnover based priority • Craft labor rates were estimated pre-hurricanes • Adjusted 1st qtr 06’

  23. Subsequent analysis of the prevailing wages rates and compensation structures for competing projects and turnarounds forced several revisions to the compensation structure • Initially the wages were set for the Gulf-Coast standard plus $3.50 per hour with an additional $3.50 per hour completion bonus • The final rate structure was set (2) weeks prior to the oil-out date to include the total $7.00 per hour as part of the base wage with an additional $3.50 per hour completion bonus.

  24. Turnaround Results • Wages: Owner set the wage rates at post-hurricane rates plus additional incentives • Per diem was paid but no reimbursement was allowed for travel • Wages proved to be sufficient to attract craft labor • Attrition was not due to wages • Per diem was not adequate to cover the lodging costs post-hurricane($60 per day per diem versus $90 per day hotel costs)

  25. Manpower: Turner was 10-12% under-manned in the initial stages of the TA • Turner’s was able to satisfy their manpower needs pre-TA • Previously committed craftsman were either not showing up or left while in process Several factors contributed to the depletion of the recruited work force; • The accelerated start of competing projects / turnarounds plus escalating wages by competing projects • (3) day orientation cycle (unpaid) • Per diem proved to be inadequate for local housing market post-hurricanes

  26. Estimating standards used in 2004 and proved to be in-accurate for a 2006 TA • TA Execution was during peak manpower requirements in the industry • No allowances for scope growth or discovery in resource profile Resource profile in P3 proved to be inaccurate; • Pipe resources (fitters & welders) were identified in the P3 schedule for only those activities that involved pipe welding • Other activities normally classified as piping activities were classified as boilermaker activities • Gives a false measurement of the actual pipe fitters required for the scheduled work.

  27. Manpower concerns were alleviated by several factors: • Late turnover of systems from decommissioning pushed schedule activities • Recruiting effort continued with provisions made for securing non-traditional labor sources • Gained peak manpower earlier than scheduled • Turner was successful in achieving peak manpower within their scheduled window (adjusted for late turnover) • Owner late in turning over discovery work items

  28. Absenteeism: Estimated at 10-12% • Virus attack on TA (craft, staff & supervision) • An issue with the critical craft such as pipe fitters and welders For example: Resource profile calls for (4) welders, the absence of (1) represents a 25% absent rate • Completion bonus not a factor at beginning of TA • Criteria helped as craft banked several weeks of bonus (no more than 2 absences allowed) • Attrition was not due to wages • General malaise in industry

  29. Safety, Quality & Productivity: acceptable performance • (1) recordable injury • High weld reject rate. Fit-up issues due to lack of qualified pipe fitters lead to weld reject rates • Mechanical craft with productivity ranging from a low of .85 to a high approaching 1.00 (<1.00 poor) • Piping craft productivity is forecasted at a .65 • No leaks delaying systems start-up • Instituted strict QC program to follow flange make-up • Increased QC staff above previous “normal”

  30. Other contributing factors; • Productivity factor used for estimating and resource loading was too low for current condition of labor market • Added requirements of post-BP environment increases travel time and complicates logistics • A factor of 40% is to low for a turnaround of this magnitude and complexity • Crew mixture of foreman to craft was set by Owner on a 12-1 basis, revised to a 10-1 ratio but this still proves to be too high in a turnaround environment • Owner late in turning over discovery work items

  31. Improper interpretation of Page unit rates • Page is base rate “plus” inefficiencies for non-TA construction activities • No account made for 2-year difference in labor market and post-hurricane environment

  32. Lessons Learned • Wages & incentives; • Proved to be insufficient for recruiting in a labor market not in view of the Gulf-South, proved effective in recruiting for Gulf-South work • Wages had limited impact on retention as competition increased • Incentives proved effective in retaining craft toward end of TA as they start seeking ROF • Recognize the market & set attractive per diem • Possibly include incentives in bare wages

  33. Estimating • Revise estimating standards to account for current environment. History does not apply. • Plan for contingency wage increases • Historical issue of under-estimating contingency & scope growth • Anticipate the added requirements of the post-BP environment (increase in travel time and complicated logistics) • Increase indirect staffing required to plan, monitor and coordinate craft (supervision, QC, etc.)

  34. Planning • Develop discovery work within first TA 30% of duration • Front-end load manpower, back-end load scope to first 50% duration • Develop TA schedule to allow for over-manning in first 50% of duration • Include allowances in resource profile as well as timeline • Management: • Craft supervision has increased responsibility for planning, productivity & QA/QC. Decrease ratio of craft to foreman to 6-8:1 • Anticipate additional QC staffing to assure tightness

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