Profit Margins, Labor Drive North American Petroleum Refining Industry Maintenance Turnaround Schedules

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Researched by Industrial Info Resources (Sugar Land, Texas)--The North American Petroleum Refining Industry has been seeing a downward trend in turnarounds, and there are several reasons for it. Labor constraints, profit margins and equipment availability have greatly contributed to the delay in industry turnarounds. Take labor for example. With the amount of construction underway in 2007, there simply aren’t enough craftsmen to satiate demand. For example, it wouldn’t be feasible for refiners in the Gulf Coast to shut down units at the same time because there isn’t enough labor to go around. When turnaround schedules become more concrete to where it looks like there will be labor constraints, turnarounds are delayed — by a couple of weeks, months and maybe even into the next season.

Labor constraints aren’t specific to just this Industry; all industries are competing for workers. Contractors are bringing skilled craftsmen in from overseas, and there is a push to attract younger workers. The scarcity of labor resources has led to an increase in labor cost during the past two or three years. Non-union skilled crafts that were going for $20 per hour are now garnering $30 per hour or more. As refineries try to keep costs down, they avoid scheduling turnarounds that coincide with those of other refineries in the same region. According to Industrial Info’s Refinery Tracker there are 151 planned and 96 unplanned turnarounds for the fall 2007 season (September-December of 2007), a decrease of 19.5% compared with 307 turnarounds in 2006.

Labor unions could provide a solution. Once locked out of Gulf Coast petrochemical plants, more and more companies are looking to labor unions as a source for reliable and skilled labor services. With stable craft prices based on one- to three-year contracts, the International Brotherhood of Electrical Contractors through the Quality Coastal Initiative is inviting NECA contractors from around the country to get involved with a growing number of petrochem and refining projects on the Gulf Coast.

Profit margins also drive turnaround schedules. In the past three years, profit margins have been huge. In order to take advantage of the market, refiners delayed turnarounds whenever possible. However, the 3:2:1 crack spreads (crude, gasoline and distillate) have deteriorated over the last month or so leading to lower profit margins. Part of the problem is the price of crude oil, which recently exceeded an all time record high of $87 a barrel. In the middle of the year, the industry was at about $30 per crack spread. Now, the industry is down to $3-$5 per crack spread. As the industry nears a break-even point, there isn’t a lot of incentive to keep refineries running. So in the case of profit margins, turnarounds are being accelerated instead of being delayed.

Another issue affecting turnaround schedules is key equipment and material supply. The increase of capital spending on a worldwide basis also increases the amount of time that goods are delivered to a site, adding to delays in maintenance and/or capital project tie-ins. For example, high-pressure reactors are now on a two- to three-year lead time.

With the next round of environmental mandates coming up (2010-12) for the Refining Industry, it is expected that labor constraints will worsen before they get better. In addition to turnaround maintenance, several billion-dollar capacity expansion projects are lined up for the next three or four years. For details, view related October 4, 2007, article - North American Petroleum Refining Industry Could See Five-Fold Increase in Capital Spending in 2008 Compared to 2006.

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