Energy Jargon Demystified: Turnarounds

With all the recent buzz about the energy sector, I thought I'd define a common piece of industry jargon: turnarounds.

The expression "turnaround" can be particularly confusing, because investors commonly use this term to denote a company that is improving on previously lackluster performance. A turnaround in the refining industry, however, refers to planned maintenance activity that reduces or fully suspends throughput for a period of time.

Turnarounds are required in order to maintain productivity and safety at a refinery. They're performed regularly, most often every four or five years. A partial turnaround only takes one or more units offline, whereas a total turnaround takes the entire plant down. Over 30,000 procedures -- from cleaning to repairs to tie-ins of new equipment -- may comprise the work involved in a major turnaround, which can last a month or longer.

For reasons of both speed and safety, turnaround activity runs 24/7 until it is complete. That equates to a lot of overtime for the hundreds or thousands of contract workers brought on board for the project. Salary costs generally work out to about half the cost of the turnaround, which often runs into the tens of millions of dollars. Valero (NYSE: VLO  ) , for example, budgeted $39 million for the turnaround of its largest refinery in 2005. The plant's turnaround manager (a full-time job) estimated at the time that each additional day over budget would cost the company between $1.2 and $3 million.

The horrific explosion at BP's (NYSE: BP  ) Texas City refinery, also in 2005, occurred at the end of a turnaround. Refineries are more dangerous during these periods, because of the volatility of the compounds being moved around within the various units. This further explains the time sensitivity of completing scheduled maintenance. Because fires and explosions are altogether too common in the industry, an incident-free turnaround is something to be cheered.

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Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool has a disclosure policy.