Insurers told to be wary of covering Y2K noncompliant operators

Some offshore oil and gas operators still have no Year 2000 compliance program in place, and insurers should be wary of giving them coverage. That warning was delivered to a recent International Union of Marine Insurance conference in Lisbon. "Some companies appear to have no program whatsoever; others have indicated that they intend to implement superficial fixes such as trying to switch back all their computer clocks by 20 years," said James Miller, chief engineer at the energy division of

Oct. 5, 1998

3 min read

Some offshore oil and gas operators still have no Year 2000 compliance program in place, and insurers should be wary of giving them coverage.

That warning was delivered to a recent International Union of Marine Insurance conference in Lisbon.

"Some companies appear to have no program whatsoever; others have indicated that they intend to implement superficial fixes such as trying to switch back all their computer clocks by 20 years," said James Miller, chief engineer at the energy division of insurer AIG Europe.

"These companies should be of concern to insurers," he said. Miller said the sector was vulnerable to extensive damage from the millennium bug-the problem caused because computer date systems are unable to recognize the year 2000. Gas detection systems, control valves, fire pumps and monitoring equipment all rely heavily on embedded computer chips that could suffer from the bug if undetected, he said.

"What might have been a very small or nonexistent claim could be magnified into a claim worth tens of millions of dollars, and the realization for these companies may come too late," he said.

Industry compliance

Miller said that task forces had been set up in the U.K. and Norwegian oil sectors, with a more ad hoc approach being taken in the Gulf of Mexico. He added that while most major oil companies had established compliance programs encompassing their world operations, such an approach was not universal.

"One national oil company has said they do not believe they have the (millennium bug) problem. This is despite the fact that they operate large integrated platforms with computer-based control systems," Miller said. "Insurers should do whatever they can to verify their assured's state of readiness," said Miller. He added that companies should have contingency plans in place in case they have missed something in their compliance programs.

Contrary view

However, Tim Weare, a Price Waterhouse partner currently on assignment in Colombia to update the financial package software of one oil major, disputes the claim that oil companies are not preparing themselves for the Year 2000 challenge: "Certainly the oil majors are targeting significant investments at updating their systems, in spite of the fact that major cuts in investment are having to be made as a result of poor oil prices. Indeed, I would say that the oil industry is ahead of many other industries in tackling the issue."

He estimates that it is costing oil companies "a couple of million dollars" per country just to update their financial packages, and possibly even more to update control and instrumentation software. "The reason for the high costs is that, in the case of financial packages, the software has to be updated to suit local requirements in areas such as taxation and licensing. In other words, the adaption has to be specially tailored for each country.

"As for control and instrumentation, when the systems were installed-often as long ago as 10 years-they were effectively frozen in time, since it was never realized that there was a need to upgrade them. The result is that now the whole system, and not just the software, has to be upgraded-and clearly that requires significant amounts of investment.

"Nevertheless, there is little doubt in my mind that oil companies are seeing this as an unavoidable cost and are making a huge amount of effort to get their systems upgraded in time."