Energy industry marks progress on Y2K bug solutions as more issues are raised

Contributing to this story were Energy Policies Editor Patrick Crow, Senior Editor David Knott, and Associate Managing Editor-News Anne Rhodes.

Now less than 1 year away, the changeover to the Year 2000 continues to pose challenges for the petroleum industry.

A recent analysis of the readiness of key oil-producing nations has revealed that their "customer" nations may find their oil supplies threatened if producers fail to fix their Year 2000 (Y2K) problems in time. To protect U.S. interests, says one information technology specialist, the U.S. should establish formal procedures for imparting information to other countries that may be having difficulty solving the problem.

Meanwhile, the U.S. is planning some government policy changes designed to protect partially any companies that are working diligently to fix the Y2K bug.

And a U.S. coalition of about 90 large companies and trade organizations have drafted a legislative proposal to forestall Y2K lawsuits.

On a broader scale, the Organization for Economic Cooperation and Development has established an electronic data clearinghouse for chemical producers in an effort to help them prepare for and prevent chemical accidents that could result from Y2K errors.

In the U.K., the Department of Trade and Industry (DTI) called for Britain's offshore oil and gas producers, gas suppliers, and electricity generators to report progress on preparations for the Y2K problem.

Threat to U.S. imports

The Year 2000 computer problem is a direct threat to U.S. oil imports, says John Warner Jr., corporate executive vice-president of Science Applications International Corp., McLean, Va.

Warner said last year that, with less than 14 months remaining before the millennium, most countries are many months-and some even years-behind the U.S. in identifying and correcting Y2K problems.

"It is in the national economic and security interest of the U.S. that inadequate worldwide attention to this problem does not result in significant economic and political disruption," he said.

Warner noted that the U.S. imports about 50% of the oil it consumes, and the Strategic Petroleum Reserve holds only about 60 days' worth of imports.

"The continued health of the U.S. economy rests on a continuous supply of imported oil. The Y2K computer problem could put this supply in jeopardy."

He said U.S. Department of Energy data show nations supplying U.S. crude and products imports in the first 8 months of 1998 were mostly in Latin America, the Middle East, and Africa Table 1 [92,723 bytes].

Warner said surveys by Gartner Group, an authority on the status of Y2K work, indicate that at least 45% of imported crude and products comes from countries where there is an 80% probability that at least one mission-critical failure will occur in 50% or more of all of the country's commercial and government enterprises (see chart, this page).

"This information indicates a potentially high degree of possible Y2K disruption in these countries and, therefore, in the supply of U.S. imported oil."

Warner said, "An alternative way to view the problem is to compare the Y2K status of the countries supplying U.S. imported oil in terms of the estimated months these countries are behind the U.S. in addressing Y2K issues.

"This method indicates at least 60% of U.S. imports originates in countries 12-18 months behind the U.S. in addressing Y2K problems, (and that was) with only 14 months remaining before the millennium change. Most countries listed in the table with unknown Y2K status also are expected to be well behind the U.S.

"Furthermore, with the significant drop in oil prices during 1998, many of the countries listed in the table-particularly those with economies dependent on oil exports and with national oil companies-are experiencing very significant economic difficulties that impact their ability to address Y2K problems."

Examples

Warner noted that oil companies, particularly in the U.S., have been working on their Y2K problems for several years (OGJ, Sept. 28, 1998, p. 29; and Oct. 5, 1998, Table 2 [141,792 bytes]).

"Companies with older, manually controlled systems are less vulnerable than companies that are more automated. However, many problems have been discovered, and fixes have or are being made."

For instance, he said, Texaco Inc. discovered it had to replace microprocessor boards at each remote terminal used to monitor production data at wellheads. The time from discovery of the problem to developing, testing, and fixing it was 6 months.

"Another oil company discovered a Y2K problem with their hydrogen sulfide detector systems on oil platforms in the North Sea which, if not fixed, would have a significant impact on production."

Warner noted that many supervi- sory control and data acquisition systems, which control pumps and valves on pipelines, have Y2K problems.

He said gas turbine engines used extensively for oil field electrical power generation and steam injectors can have Y2K problems. They also are used to generate electricity at refineries.

Tankers have possible Y2K problems with navigation, power management, cargo control, emergency generators, fire detection, and oily water monitoring systems.

"These possible operational problems are in addition to the more common management information systems problems for a particular company."

Warner noted that oil companies are interdependent through joint ventures and partnerships, but also are dependent on suppliers of electrical power, telecommunications, transportation, banking, and other supplies and services.

"Obviously, even if an oil company in a particular country is Y2K-ready, but the electrical or telecommunications utilities it depends on are not, or if the country's central bank is not, then there are still significant problems for the oil company."

Recommendations

Warner noted oil exports are the lifeblood of many nations, and, if interrupted, their economies and governments may fail.

He recommended the U.S. act to help other nations with the problem.

"The U.S. is the only country in a position to be a world leader in averting a Y2K crisis."

Warner said President Bill Clinton should stress the urgency of the threat to other countries and offer the services of key U.S. agencies to promote awareness.

He said the U.S. should establish an international Y2K knowledge-sharing program.

"Initial steps, already under way by a few U.S. agencies to share their Y2K lessons on the Internet, should be dramatically increased, and the U.S. should offer to host websites where other countries could post their own lessons learned."

And Warner said the U.S. should establish a national security Y2K loan fund of $3-5 billion to help nations whose solution of Y2K problems is in the U.S. national interest.

"The World Bank has established small grants for countries to address broad Y2K problems. However, the grants are very small, and selection of which countries receive these funds is not based on U.S. national security interests. Furthermore, oil-rich countries would not be expected to qualify."

Warner said that, although each nation must solve its own Y2K problems, "Knowledge-sharing between countries receiving the loans and the U.S. could be improved with the provision to encourage the use of U.S. products and services when external contracting is required."

EPA policy change

The U.S. Environmental Protection Agency has announced a new enforcement policy designed to encourage prompt testing of computer-related equipment to ensure that environmental compliance is not impaired by the Y2K bug.

Under this policy, EPA intends to waive 100% of the civil penalties that might otherwise apply and to recommend against criminal prosecution for environmental violations caused during specific tests designed to identify and eliminate Y2K-related malfunctions.

The policy is limited to testing-related violations disclosed to EPA by Feb. 1, 2000, and it is subject to certain conditions, such as the need to design and conduct the tests well in advance of the dates in question, the need to conduct the tests for the shortest possible period of time necessary, the need to correct any testing-related violations immediately, and other conditions to ensure that protection of human health and the environment is not compromised.

The National Petrochemical & Refiners Association reacted positively to the news: "The recently announced (EPA) enforcement policy should give refiners and petrochemical manufacturers some feeling as to how the agency might react, should a company's Y2K testing inadvertently result in minor environmental violations."

EPA says the policy is effective immediately, although it has not yet been published in the Federal Register. It is available electronically at http:/ /es.epa.gov/oeca/eptdd/ocy2k.html.

Legislation

Meanwhile, Sen. Orrin Hatch (R-Utah), Judiciary Committee chairman, said his panel would build on last year's legislation allowing businesses and local governments to share Y2K remediation information without legal liability in most cases.

Hatch said the committee would consider legislation providing alternative dispute mechanisms, special fact-finding masters, and special courts for Y2K litigation "so that solutions to individual problems can be developed and made available more readily to innocent users."

The U.S. Chamber of Commerce said it is working on a legislative proposal that would limit the legal liability of companies, hold the federal government accountable for its own Y2K failings, and provide tax breaks to ease the financial burden of updating computer systems for Y2K.

Under the chamber's plan, companies making an earnest effort to resolve Y2K problems would receive limited liability. And special Y2K courts would be created to hear lawsuits, much in the same way that bankruptcy courts operate.

Also, Sen. Bob Bennett (R-Utah), chairman of the Senate committee set up to deal with the Y2K problem, said his panel will hold a hearing early this year on the potential for Y2K lawsuits to clog the judicial system.

Trade coalition legislation

The Y2K trade coalition's legislation would limit litigation and reduce liability damages in the event of business breakdowns.

The sponsoring groups planned to ask legislators to consider introducing the measure. The legislation was to be discussed at a forthcoming Senate commerce committee hearing. Its chairman, Sen. John McCain (R-Ariz.), has filed his own bill to limit Y2K damages.

Backing the effort are the U.S. Chamber of Commerce, the National Federation of Independent Business, the National Retail Federation, and the National Association of Manufacturers among other trade groups.

The Association of Trial Lawyers of America said it would oppose the legislation.

Morgan Stanley Dean Witter analysts have estimated Y2K fixes would cost the nation's largest companies about $35 billion and predicted that overall spending for public and private entities would reach $78-89 billion.

Industry groups are concerned Y2K problems will be compounded by class-action lawsuits that could total more than $1 trillion.

Jim Wooten, executive director of the U.S. Chamber of Commerce's Institute for Legal Reform, said, "The idea is to take away the legal lottery and the encouragement for plaintiffs' lawyers to turn this into a big windfall."

The industry proposal would require potential plaintiffs to give a company 90 days to devise a plan to fix the complainant's Y2K problem. If not satisfied by the end of that period, the plaintiff could file a lawsuit.

Plaintiffs would have to show they had taken responsible steps to prevent Y2K problems.

Legal liabilities would be assessed proportionally. Both a plaintiff and a defendant could be found at fault for a percentage of the Y2K damages.

Punitive damages would be limited to $250,000 or triple actual damages. For companies with fewer than 25 employees, punitive damages could not exceed $250,000.

Attorney fees would be limited to $1,000/hr, and litigants would be encouraged to use arbitration.

Safety clearinghouse

In order to identify problems related to the millennium bug and its possible effects on chemical installations, the OECD has established an electronic clearinghouse on chemical emergencies.

The OECD working group on chemical accidents consists of government and industry experts responsible for chemical accident prevention, preparedness, and response. At a recent meeting in Paris, the group created an electronic information center for chemical manufacturers and distributors to exchange information that would help them prevent accidents as a results of the Y2K bug.

The clearinghouse will increase the flow of information among government agencies, industry, and others by providing material-reports, websites, et al.-prepared by specialists who have had experience with the Y2K problem. The material will be available to those still struggling with the issue.

The OECD panel will manage the electronic site in cooperation with the relevant United Nations agencies. The information center will also automatically route to designated contact points inquiries and information about the bug and its possible effects on potentially hazardous installations.

The OECD working group has set up the mechanism because it believes many computers responsible for maintenance scheduling, process monitoring and control, and security systems in modern chemical installations are potentially vulnerable to problems related to Y2K failures.

The group also agreed that industry and governments must assume responsibility for the safe operation of chemical installations. There is particular concern about the level of awareness in small and medium-sized businesses.

Embedded technology

Embedded computer chips are proving less of a Year 2000 threat to the oil and gas industry than was previously thought, industry representatives said recently.

Ron Quiggins, director of the Shell Services Co.'s Y2K program, said companies "have not found nearly as many of these systems to be noncompliant as we anticipated when we started."

He said most of the major producing nations would be ready for the Y2K challenge. He said many smaller nations have made little progress, but their systems are much less automated.

"So there's good news and bad news about them being behind."

Quiggins said companies participating in the American Petroleum Institute's Y2K task force are each expected to spend an average of $52 million worldwide this year on Y2K problems.

Representatives from gas pipeline and gas distribution industries, which are cooperating through the Natural Gas Council, said more than half of their companies are in the final stages of remediating and testing their systems to ensure Y2K readiness.

They also noted that Moody's Investors Service has rated the energy industry as being less vulnerable to Y2K problems than other industries because it is less dependent on date-sensitive data for operations systems, and because oil and gas industries have manual overrides as backups for most operations.

U.K. offshore initiative

John Battle, U.K. minister for energy and industry, said DTI would be sent detailed assessment reports from companies and trade bodies and will expect all necessary action to be taken to protect vital services.

"I have approached the senior management of the offshore oil and gas producers," said Battle. "They will provide me with reports based on the checks being carried out on their systems by independent experts.

"The DTI will continue to monitor progress regularly to ensure that the companies take action in good time to reduce any likelihood of disruption to vital services."

DTI said Britain's offshore producers are currently undergoing a stringent assessment of their potential for millennium date-change computer problems, coordinated by the U.K. Offshore Operators Association (Ukooa). Ukooa is expected to report its state of readiness to DTI by March.

Meanwhile, DTI commissioned an independent verification of the process, which will be coordinated with parallel programs by onshore gas suppliers and electric power generators.

DTI also asked refiners and marketers to report on supplies of heating fuels and gasoline in case of computer system crashes, while companies are expected to review their plans to draw on stocks in an emergency.

The government's gas and electricity industry regulators, the Office of Gas Supply (Ofgas) and the Office of Electricity Regulation (Offer), said the gas and electricity sectors are making good progress with millennium date-change plans.

Peter Carter, deputy director general of electricity supply, said, "The aim in the gas and electricity industries is: business as usual over the millennium change. Both industries are well on their way to ensuring this.

"In gas, there are two companies critical to the continuation of the flow of gas to all customers over the millennium period-Transco (which operates the British gas pipeline grid) and Siemens Metering Ltd.

"Ofgas has received initial results from their consulting engineers on the independent assessment they commissioned. This shows that both companies are well advanced in completion of their millennium compliance projects."

Carter said Offer is overseeing the independent assessment initially of 20 major players in the electricity supply sector, comprising the major generators and transmission and distribution companies.

"With about half the assessments complete," said Carter, "findings are that these companies are well on their way. They have largely completed work to rectify critical systems, but some tests to demonstrate full compliance remain outstanding. Companies are indicating completion of testing in the second quarter of 1999."