LESSONS LEARNEDLESSONS LEARNED

POST-HURRICANE TURNAROUNDSPOST-HURRICANE TURNAROUNDS

Houston Business RoundtableHouston Business RoundtableMay 10th, 2006May 10th, 2006

TURNER INDUSTRIES GROUP, LLCTURNER INDUSTRIES GROUP, LLC

REPRESENTATIVE TURNAROUNDSREPRESENTATIVE TURNAROUNDS

Case 1 - 90,000 BPD refinery in ColoradoCase 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 LouisianaCase 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

CASE 1CASE 1

350,000 direct man-hours with a total installed cost of 350,000 direct man-hours with a total installed cost of approximately $80MM (including Capital Projects)approximately $80MM (including Capital Projects)Planned peak manpower loading of approximately 1,000 Planned peak manpower loading of approximately 1,000 directsdirects

Planned for 4th qtr 2005 (subsequently deferred to 1st qtr 2006)HDS, Crude & SRU 3-year run-life to Spring 2008AU, FCC, Cat-Poly, VRU & Amine 5-year run-life to Spring 20101,200 expense work itemsULSD project ($450MM)FCC revamp adding a 3rd stage separator ($4MM)CAPEX scope ($2MM)

The turnaround presented specific issues not representative of a The turnaround presented specific issues not representative of a "typical" turnaround"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

To account for these factors, the estimated productivity factors To account for these factors, the estimated productivity factors were increased over typical industry standardswere increased over typical industry standards

50% productivity loss (30% outage factor and 20% non-typical outage factor)

10% contingency

15% allowance for scope growth

Concerned with ability to attract and retain craft laborConcerned 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

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

Design craft wage rates to attract quality craft & supervision

Original wages were set for 4th qtr 05’ execution

TA execution window was deferred to 1TA execution window was deferred to 1stst qtr 06’ 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

This presented several critical (high risk) factors with regard to This presented several critical (high risk) factors with regard to contracting and laborcontracting and labor

Description of Threat SeverityProbability

Lack of resources (general) HIGH MEDIUMLack of qualified crafts and their availability

HIGH HIGH

Lack of resources in view of Colorado HIGH MEDIUMContinual decline of qualified work force HIGH HIGHWorkforce attracted away from industrial sector

HIGH HIGH

Lack of specialty welders MEDIUM MEDIUM

Impact of ThreatsImpact of Threats•Unable to attract craft•Unable to adequately staff•Safety concerns•Potential QA issues•Increased personnel turnover•Schedule slippage•Increased LPO

Additional risk to TA due to industry manpower requirementsAdditional 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

However, Hurricane’s Katrina & Rita shifted the industry and However, Hurricane’s Katrina & Rita shifted the industry and further exposed the TAfurther 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

Developed risk model for three different wage rate / incentive Developed risk model for three different wage rate / incentive structuresstructures

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

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

Description of Threat Probability

Consequence

Forces contractors to recruit non-familiar craftsman

HIGH Safety, QA, productivity

Forces contractors to recruit less skilled craftsman to match wage rates

HIGH Safety, QA, productivity

Lower skill set equals decreased safety performance

HIGH LTI, Recordable, Fatality

Lower skill set equals decreased productivity MEDIUM Cost & schedule creep (LPO)

Will increased attrition and turnover (less dedicated craftsman)

MEDIUM Safety, QA, productivity

Increases recruiting time frame HIGH Cost & schedule creep (LPO)

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

Description of Threat Probability

Consequence

Increases TA cost HIGH Approximate $1MMForces contractors to recruit non-familiar craftsman

MEDIUM Safety, QA, productivity

Forces contractors to recruit less skilled craftsman to match wage rates

MEDIUM Safety, QA, productivity

Lower skill set equals decreased safety performance

LOW LTI, Recordable, Fatality

Lower skill set equals decreased productivity LOW Cost & schedule creep (LPO)

Will increased attrition and turnover (less dedicated craftsman)

MEDIUM Safety, QA, productivity

Increases recruiting time frame MEDIUM Cost & schedule creep (LPO)

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)

Description of Threat Probability

Consequence

Increases TA cost HIGH Approximate $5MMForces contractors to recruit non-familiar craftsman

LOW Safety, QA, productivity

Forces contractors to recruit less skilled craftsman to match wage rates

LOW Safety, QA, productivity

Lower skill set equals decreased safety performance

LOW LTI, Recordable, Fatality

Lower skill set equals decreased productivity LOW Cost & schedule creep (LPO)

Will increased attrition and turnover (less dedicated craftsman)

LOW Safety, QA, productivity

Increases recruiting time frame LOW Cost & schedule creep (LPO)

Turnaround ResultsTurnaround 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

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

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

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

CASE 2CASE 2

100,000 Turner direct man-hours with a total installed cost 100,000 Turner direct man-hours with a total installed cost of approximately $125MM (including Capital Projects)of approximately $125MM (including Capital Projects)Planned peak manpower loading of approximately 1,000 Planned peak manpower loading of approximately 1,000 directsdirectsTA premises set by Owner for a sequential unit turnaround TA premises set by Owner for a sequential unit turnaround of the FCC, Alky, HDS and Sulfur unitsof 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.

The Owners planning premises made some allowances for typical The Owners planning premises made some allowances for typical turnaround inefficienciesturnaround 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 To account for these factors, the Owner made allowance over their typical standardstheir typical standards

Allowance for discovery, analysis, recommendation & repair in TA timeline

Concerned with ability to attract and retain craft laborConcerned 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’

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.

Turnaround ResultsTurnaround 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)

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

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.

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

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

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”

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

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

Lessons LearnedLessons 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

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.)

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