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.
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