Oil and Y2K-- An Updated Report ... by request
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Oil and Y2K An Updated Report Introduction:
Earlier this year in the spring, this author published some comments on Ed Yourdon's Public Discussion Forum on Y2K. The comments stemmed from numerous interviews and conversations with employees in the oil industry. This author grew up in the oil industry and has maintained contacts with other folks around the country in regards to Y2K and its potential impact on the oil industry and also the utilities. As a result of the earlier published comments, many have asked me to provide an update when warranted and others asked simply for an update at timely intervals to update the status of this industry so vital to the economic well-being of the USA. Over the last three months, I've maintained these contacts. I felt that the Labor Day period was an appropriate point to provide an update of where things stand in the Oil Industry. This report is written from the perspective of the folks who are in the trenches doing the remediation work or are watching the remediation as eyewitnesses. They've related to me what they are seeing. While this may or may not seem reliable as a source of information for some readers it may be for others. It is for those others that this report is presented. In the following presentation the reader will find that the analysis of the oil industry is broken down into three distinct segments:
Oil Wells Oil Pipelines Oil Refining
The report does not take into account foreign oil industry information, as this author does not have sufficient first hand information for consideration. This report does take into account only domestic U.S. oil industry operations, primarily on the continental U.S. The foreign oil situation is really a separate aspect for, which there is insufficient data to form any conclusions. However, it does not appear to this author that foreign oil supplies will be any better off than those in the U.S. and may be in far worse shape than here in the U.S. Crude Oil Production -- Wells:
The Bad News:
No significant advancements in preparedness seem to have been made in the oil patches of the continental U.S. Most smaller oil companies have not done significant remediation work on rigs during 1999. It seems that most companies are still holding to a policy of FOF (fix on failure). I've asked why some companies are relying on FOF and the answer comes in 4 parts.
1. Inaccessibility of some systems. Some simply cannot be easily accessed for testing. 2. Lack of replacement parts or the need to provide a special customized application. 3. General state of denial by many decision-makers in small oil firms. 4. Cash Flow problems for many small oil firms hit be the severe downturn in oil prices.
Many smaller firms have been strapped for cash to such an extent that they simply have not been able to afford remediation of Y2K issues especially in the field. The smaller independent oil firms as well as those companies that provide support services are facing difficult times. This combined with the general attitude of denial account for much of the reasoning in lack of progress this year by the industry.
Good News:
Most all new drilling efforts and subsequent wells that are large enough are being equipped with Y2K certified compliant systems. However, that is a drop-in-the-bucket compared to most of the systems now operating in the USA. Also, there has not been that much new drilling activity this year because of lower prices, ($12 dollars for a barrel of oil) for oil at the wholesale levels. Keep in mind, that there are a small but significant amount of oil wells (particularly in the Midwest) that are NOT loaded with embedded chips. In fact, these wells (known as "stripper" wells) have no embedded chips and are dealt with manually. These wells themselves are going to be fine and will continue to operate with little or no problems.
Assessment:
Much is contingent upon the percentage of failure in these larger embedded systems. Fail rates during testing has fluctuated from about 7% to 25%. However, this is based on small samples and may not reflect an anticipated failure rate when the rollover actually transpires. Smaller micro-processing systems seem to be running at lower fail rates in testing but still significant from between 2% to about 7%. The threat to oil pumping operations is primarily related to chip failures but of course we must take into account whether or not electricity will be available also in many cases. There are significant indications here that a large amount of domestic oil production will be curtailed or impaired for perhaps a minimum of several days to indeterminate periods. While this is simply an educated guess it seems reasonable to assume a minimum of 5 to 10% disruption of domestic oil coming out of the ground for perhaps weeks or months. The disruptions could be compounded by the financial difficulties of smaller oil firms that are already in serious trouble. Even the prospect of buyouts by healthy firms take time for transactions to be processed if it is possible to process transactions at the start of the year. Therefore, it is possible to see more significant short-term disruptions in supply just because of the financial chaos that may ensue during the rollover. This is not to say it will happen, but rather that it remains a real threat to continuous supply flows of oil.
Oil Pipelines:
This is another critical aspect to the oil problem. Remediation efforts have been primarily superficial at best. From what I've been able to gather, the Alaska pipeline may be in the best shape. While I don't have sources that are personally proven as reliable to me, I must take what I hear as perhaps at least partially to mostly true. From what I've heard, (3rd and 4th hand) it seems as though the Alaska pipeline operations have received special attention and is probably in the best shape of all pipeline operations. In the continental USA, oil pipelines in the USA seem to have a lot more question marks. My sources indicate that while there has been some remediation, not everything is accessible. A lot of potential problems were left untested and unremediated in part because of inaccessibility or inability to obtain replacement parts and or because funds were simply not available. Some decisions may also have been due to apathy.
Bad News:
Not everything has been tested nor remediated as is claimed publicly at least according to folks who have been involved in those efforts. Companies have attached "happy faces" to published reports without telling the whole story. SCADA systems have proven to be an underestimated problem and difficult to deal with satisfactorily. Many companies seem to have adopted a "fix on failure" policy with plenty of crossed fingers.
Good News:
The Alaska Pipeline system seems to be in much better shape and better prepared for Y2K. This is due in part to the very nature of Alaska's weather. The Alaska operations have always needed to be prepared for contingencies no matter what. This reporter however does not have any first hand reports and must therefore rely upon 3rd and 4th hand information but these sources do seem confident from what they've heard about the Alaska operations. Thus, it seems helpful to include this as some likely good news.
Assessment:
This segment of the industry appears to be extremely vulnerable and has not done nearly, as much remediation and preparation as the public relations mouthpieces would have the public believe. There has not been 100% testing of the embedded systems. SCADA problems have proven to be much harder to solve, or so my sources tell me. The fellows working on these tell me there are a lot of unknowns and not every thing has been tested. They are expecting some serious problems during the rollover. This, combined with at least 5 to 10% loss of domestic crude will further limit supplies of refined oil products still further for again probably a minimum of a few weeks to perhaps months or an indeterminate period.
Oil Refining (for gasoline, diesel, and fuel oil)
The Bad News:
Here is the critical part of the equation. While all refineries do seem to be vulnerable to Y2K and a loss of power, some are more vulnerable than others. Some refineries are not nearly so modernized and therefore have less embedded systems that might go wrong. Others are loaded down with chips. Those refineries (which is most) that do have at least some embedded systems are all vulnerable to electricity outages. Most vulnerable are those refineries that are in colder climates where temperatures on New Year's day are usually at temperatures of 40 degrees Fahrenheit or colder. Why? Crude oil does congeal at temperatures below the 40-degree temperature level. When the crude oil congeals it creates massive problems in a refinery resulting that can result in a shut down for a complete "turnaround" process that can take as much as 90 days to complete dependant upon circumstances. In order to avoid potential problems, refineries in colder climates are now planning on shutting down their operations 2 days prior to 1/1/2000. This will certainly have an impact on supplies for the public consumers, both individual and businesses. Such shutdowns, however, are very dangerous not only in the stoppage but also later in the start up. Explosions are a serious risk not only to health and safety of the workers and nearby environs but also to the continuity of supply because an explosion will shut down a plant for lengthy periods and thus further limit refined supply. There is very little storage capacity. Most refineries have very little storage capability and can only store about 2 to 3 days of production at most...due to elimination of older tanks by order of the EPA. Also, governmental taxation on inventories has provided an impetus for oil companies to reduce storage capacity. Therefore, we can expect a serious snarl in gasoline and diesel supplies for year-end consumption. I would expect some shortages and you WOULD SEE a SPIKE in pricing. In fact expect to see a steady rise in gasoline prices in the coming weeks and months leading up to the rollover. The industry is now seriously discussing and planning for refineries to shut down for at least a 2-day period prior to January 1st. My sources tell me that they do not know of any cold-climate refineries that will be able to keep their crude oil pipelines warm in their refineries IF temperatures do fall below 40 degrees and there is no electricity to keep the lines warm. These sources also admit that there may be some that are capable of maintaining oil line warmth without electricity from their local utilities. Therefore a significant amount of refining capacity is vulnerable to a shut down that will last as long as there is either: 1. No electricity 2. Temperatures of below 40 degrees.
This means that most if not all refineries in the North and Midwest would be affected. It also means that some warmer climate refineries could be vulnerable. Areas around Dallas and West Texas and Louisiana and the northern Gulf Coast could also be vulnerable to temperatures below 40 degrees at night, IF their electricity goes out. Once you factor many of these southern facilities (even though the risk might be lessened) it provides a significant risk to a majority of refining capacity in the USA. The only refineries that would likely be unaffected would be those on the California coastline and perhaps Hawaii. Providing of course that these other areas are able to retain electrical power from their local utility companies. Also, in the previous assessment from last spring, there were optimists who tried to claim that oil refineries have their own power plants. This is indeed true, however, these power plants in most, if not all cases provide emergency power for basic operations and safety and do not have the capability to provide sufficient electricity to keep the crude oil lines in the refinery warm when external temperatures are below 40 degrees Fahrenheit. Also, I'm hearing reports of refineries scrambling to get large power generators to provide back up power to their power plants to start/restart their steam-generated power plants. These generators are however not able to provide sufficient power to keep crude oil lines warm.
Good News:
My sources think that most software systems themselves have been satisfactorily remediated, but there has not been any verification by independent third-party auditors to certify 100% compliance for Y2K. No oil company has been certified as 100% Y2K compliant. This then remains a caveat.
Assessment of Refining Industry:
Things do seem to be looking a little better in regards to refining operations but this is a marginal improvement. Yes, software remediation is substantially complete for most firms in their refining operations as an industry in the whole. However, testing has not been that extensive. It seems that the industry simply relaxed after completing software remediation. The really nervous aspect is in the large embedded chip systems for which most of the industry has been less than aggressive in finding, testing and replacing faulty units. Most sources in the bigger refineries with extensive embedded systems tell me that their own systems have not been completely tested. They do expect problems and failures. They note that their companies have put on smiling "happy faces" for the public, but deep down are highly concerned about whether the software patches will hold and whether or not embedded systems will fail. Fix on failure still seems to be a prevalent view even in the refining sector. Of course the big concern is whether or not local electrical utilities will go down and also whether or not the phone systems will work. Failure in these areas will only compound the problems that refineries are bracing for. Taking into account the plans for most refineries (that are vulnerable to cold weather) to shut down for 2 days prior to the rollover, it seems highly certain that we will see AT LEAST short term disruptions in gasoline, diesel, kerosene, and other refined products for at least a week. Then of course once we factor in the possible problems at the well and in the pipelines … we should expect at the minimum a couple of weeks of very tight supplies to shortages. This is the optimistic scenario. It could easily be much worse.
CONCLUSIONS:
There has been some improvement regarding the overall compliance of the oil industry as a whole. Refineries seem to have made the most progress but my sources still indicate that while their companies claim Y2K compliance or Y2K readiness, the odds are still very lopsided against those companies being able to sustain operations into the New Year. In other words, the companies are lying about their ability to maintain production. It seems to be a good bet that we can expect significant shortfalls in supplies of: 1. Crude oil itself 2. Gasoline 3. Diesel Fuel 4. Heating Fuel What is the duration of such shortfalls? There are too many unknowns to be able to predict with confidence beyond a minimal shortfall of at least a week or two. A lot may depend upon electrical utility capability. If electric utilities go down then a refinery will go down most likely and especially in the colder climes. IF electricity stays up, then the issue becomes one of whether the embedded chips become a problem at the well, in the pipelines, and at the refineries. Failure rates in testing remain significantly higher than published official reports suggest. My sources confirm the reports that Mr. Beach indicated in his Spring '99 report...of 7% to as much as 25% fail rates for certain types of chip systems. It would seem more probable than not that we'll see some significant failures in some parts of all elements of the industry (wells, pipelines, and refining). Why? Remember that much of the industry has adopted a silent policy of "fix on fail" for a variety of reasons. The moderate scenario of probability is that we would expect severe shortages in supplies, perhaps mandating rationing of gasoline for perhaps a couple of months. Whether this rationing is under government mandate or simply the old method of long customer lines and seller-instituted limits per customer is hard to know. This moderate scenario is still based upon power remaining up or being down for only 3 days and only modest disruptions to supply distribution from field to refinery. IF power goes down and stays down then the moderate scenario quickly turns to chaos and we could quickly face a brink from which recovery would be measured in years not weeks or months.
One thing seems more certain now than last spring: Y2K won't be a "bump" in the road for the oil industry. There are a lot of unknown quantifiers that could virtually dissolve the oil industry fairly quickly if certain negatives fell into place at all the wrong times. There is potential for extremely serious problems in the oil industry and therefore within American society as a result of Y2K. Prudent planning is almost a necessity even for those who wish to dismiss and deny that Y2K is a problem. No one knows just how bad it will get, but there is sufficient risk potential that makes personal preparation prudent. Think of it as a form of insurance.
Final thoughts:
Some may read this and say that this report is written to scare folks into buying something. This author is not involved in selling Y2K products or services. Neither does the author have an axe to grind. This report is compiled to provide awareness so that those assessing the situation might be better informed to sift the data and come to their own conclusions. This author is not a firm believer in TEOTWAWKI (The end of the world, as we know it). However, it does seem very plausible that we might seem to get close to such a level. It is this author's view that we will likely see 4 to 6 months of severe disruptions and a fair likelihood of civil unrest with shortages in energy, communications and food supplies. Water and Sewer problems may persist for a couple of months or more but not likely to see prolonged interruptions in service. However, when it comes to the water and sewer issues, this author has no first hand sources of testimony for which to be confident or negative. It simply comes from press accounts and hunches…and should be treated as such by the reader. This author continues to rate the percentage of Y2K impact at somewhere between a 5 to a 7 as being the most likely outcome of the rollover but hoping to be very wrong but not ruling out a worse scenario either.
"R.C."
2 September 1999
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