[Senate Hearing 106-161]
[From the U.S. Government Publishing Office]
S. Hrg. 106-161
YEAR 2000 AND OIL IMPORTS:
CAN Y2K BRING BACK THE GAS LINES?
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HEARING
before the
SPECIAL COMMITTEE ON THE
YEAR 2000 TECHNOLOGY PROBLEM
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
OIL AND ITS AVAILABILITY
__________
APRIL 22, 1999
__________
Printed for the use of the Committee
Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
_______
U.S. GOVERNMENT PRINTING OFFICE
56-952 CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, DC 20402
SPECIAL COMMITTEE ON THE
YEAR 2000 TECHNOLOGY PROBLEM
[Created by S. Res. 208, 105th Cong., 2d Sess. (1998)]
ROBERT F. BENNETT, Utah, Chairman
JON KYL, Arizona CHRISTOPHER J. DODD, Connecticut,
GORDON SMITH, Oregon Vice Chairman
SUSAN M. COLLINS, Maine JOHN EDWARDS, North Carolina
TED STEVENS, Alaska, Ex Officio DANIEL PATRICK MOYNIHAN, New York
ROBERT C. BYRD, West Virginia, Ex
Officio
Robert Cresanti, Staff Director
T.M. (Wilke) Green, Minority Staff Director
(ii)
C O N T E N T S
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STATEMENT BY COMMITTEE MEMBERS
Robert F. Bennett, a U.S. Senator from Utah, Chairman, Special
Committee on the Year 2000 Technology Problem.................. 1
CHRONOLOGICAL ORDER OF WITNESSES
Robert S. Kripowicz, Principal Deputy Assistant Secretary for
Fossil Energy, Department of Energy............................ 3
William C. Ramsay, Director of the Office of Non-Member
Countries, International Energy Association.................... 5
Red Cavaney, President, American Petroleum Institute............. 8
Rear Admiral George N. Naccara, CIO, United States Coast Guard... 16
Bob Malone, President, Alyeska Pipeline Service Company.......... 19
Phillip M. Davies, Area Operations Manager, Chevron Shipping
Company........................................................ 21
Michael J. Ingle, Treasurer, Service Station Dealers of America.. 23
ALPHABETICAL LISTING AND MATERIAL SUBMITTED
Bennett, Hon. Robert F.:
Opening statement............................................ 1
Prepared statement........................................... 31
Cavaney, Red:
Statement.................................................... 8
Prepared statement........................................... 32
Responses to questions submitted by Chairman Bennett......... 35
Davies, Philip M.:
Statement.................................................... 21
Prepared statement........................................... 37
Responses to questions submitted by Chairman Bennett......... 39
Dodd, Hon. Christopher J.: Prepared statement.................... 40
Ingle, Michael J.:
Statement.................................................... 23
Prepared statement........................................... 41
Responses to questions submitted by Chairman Bennett......... 42
Kripowicz, Robert S.:
Statement.................................................... 3
Prepared statement........................................... 43
Responses to questions submitted by Chairman Bennett......... 46
Malone, Bob:
Statement.................................................... 19
Prepared statement........................................... 48
Responses to questions submitted by Chairman Bennett......... 50
Naccara, Rear Adm. George N.:
Statement.................................................... 16
Prepared statement........................................... 52
Responses to questions submitted by Chairman Bennett......... 54
Ramsay, William C.:
Statement.................................................... 5
Prepared statement........................................... 57
Responses to questions submitted by Chairman Bennett......... 59
Stevens, Hon. Ted: Statement..................................... 19
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
PDVSA Y2K Strategy and Actions Summary........................... 62
Prepared Statement of Ken Gunn................................... 68
YEAR 2000 AND OIL IMPORTS: WILL Y2K BRING BACK GAS LINES?
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THURSDAY, APRIL 22, 1999
U.S. Senate,
Special Committee on the Year 2000
Technology Problem,
Washington, DC.
The committee met, pursuant to notice, at 9:35 a.m., in
room SD-538, Dirksen Senate Office Building, Hon. Robert F.
Bennett (chairman of the committee), presiding.
Present: Senators Bennett and Stevens.
OPENING STATEMENT OF HON. ROBERT F. BENNETT, A U.S. SENATOR
FROM UTAH, CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000
TECHNOLOGY PROBLEM
Chairman Bennett. Good morning. The committee will come to
order. Good morning and welcome to a hearing on Y2K and the oil
industry. When the special committee was first established, we
laid out as our first priority an examination of the energy
sector, primarily focusing on power, but recognizing that power
in many instances comes from the oil industry. So it's
appropriate that we follow up today with a hearing on oil and
its availability.
We focused in our first hearing on the fact that all
utilities are highly dependant on services and supplies that
are upstreamed from the actual manufacturer of power, and
consider for a moment what else is affected by oil.
Automobiles, of course, come to mind first. Our ability to get
from Point A to Point B and the price of gas affect how people
perceive the health of the economy, and in return, the
perception of the economy often affects the economy itself.
Americans have recently seen a sharp increase in gasoline
prices resulting from a unified reduction agreement among
gasoline manufacturers. This is not direct cause and effect,
but it is something for us to pause and think on. In March,
OPEC announced that it would cut production by 2.104 million
barrels of oil a day. That sounds like an awful lot, and then
you put it into the total perspective. That is a reduction of
2.6 percent. Well, with the reduction announced of 2.6 percent
in the supply, literally overnight there was a 20 percent
increase in gasoline prices, prices surging even by 20 to 40
cents a gallon.
Clearly, a minimal reduction in world supply can have a
disproportionate impact on price, and a reduction in the amount
of available oil resulting from Y2K-related mishaps poses a
serious and a potential problem very much worth investigating,
and that is one of the reasons for the hearing this morning.
When the price of gas increases, everyone is affected, whether
you happen to drive a car or not. The truckers all let me hear
from them whenever there is a conversation about an increase in
gas tax and the implications of that and the ripple effect
throughout the entire economy.
The cost is not the only concern. Availability is an even
greater concern. The gas lines of the 1970's are still vividly
in the minds of some of the older Americans. Some of the
teenagers may not remember that, but their parents do. A gas
line in and of itself is a symbol of economic difficulty, and
no one wants to revisit that event. The panic over the
possibility of shortage can create a gas line in and of itself,
even if there is no shortage, another reason for us to have a
hearing to examine exactly what will happen and help get the
word out.
Now, inherent to the availability of oil is the readiness
of transportation systems and ports, because more than half the
oil that we use in this country now is imported. It continues
to be the chief priority of this committee to receive accurate
and comprehensive information regarding Y2K readiness in all
sectors of the infrastructure, but getting accurate and
comprehensive information from other countries, those countries
that export oil to us, presents a much more difficult dilemma.
When we look for information on the status of
transportation systems of countries that ship petroleum
products, we are deeply concerned about what we have been able
to find out so far, but the information has been extremely
limited, and we have to make assumptions. If we make overly
optimistic assumptions, we will be adding to a sense of
complacency that can hurt us. If we make overly pessimistic
assumptions, then we can add to the panic.
Now, a reliable, anonymous--we think it's reliable--report
the committee has received indicates there is an apparent lack
of information characterizing the confidence of key nations
about the Y2K status of their shipping services, for example
the top three oil import sources: Canada, Venezuela, and Saudi
Arabia. Information on the transportation systems of these
three countries has been extremely limited. In fact, only
Canada appears to have at least some information that we are
able to get a hold of. There is virtually nothing known that we
can depend on to make confident extrapolations with respect to
the status of the other two countries.
Additionally, should the oil exporting countries be able to
produce and transport oil, will port readiness be a factor?
Will tankers be able to dock and deliver their product? And
will the computers that handle the customs papers be ready to
print things out? We have long since gone beyond the stage of
press hard, you are making four copies, when it comes to the
paper work in a company's international shipments.
All right. While these issues are extremely complicated,
they cannot be simplified by assuming that an oil shortage due
to Y2K problems in one place will be offset by production and
distribution increases in another. The United States is the
largest producer of petroleum products. Saudi Arabia remains
the No. 1 source of crude, but there are literally dozens of
other countries that participate in this global trade business.
It is a very difficult task for us to sort all of this out, and
that is why we are having this hearing, and we are looking
forward to the witnesses who will help us sort it out.
Now, I notice there are a number of younger people in the
audience today. This is Take Your Daughter to Work Day, and
some of the young men in homes have said what about me, and so
it has become Take Your Children to Work Day, and we welcome
these children and hope that it is not so boring that they do
not get something worthwhile out of it. In the spirit of that,
I will note for the record that John Stephenson, who is the
Deputy Staff Director of this committee and who helped organize
today's hearing, is not with us because he and his wife are at
home with the newest member of their family, a 6 pound, 15
ounce baby boy who is probably a little young to take to work
in this kind of an atmosphere. But we send our congratulations
to John and Penny, as well as Eric's older sister Kaity, and
welcome Eric to the Senate family, even if his father is only
on detail.
Now, we are fortunate to have a distinguished group of
witnesses with us today, able to discuss the aspects that I
have talked about in my opening statement, and our first panel
has been assembled to give us a broad picture of the industry
in an international framework. The second panel will focus much
more closely on specific facets of that. We have Robert
Kripowicz, Principal Deputy Assistant Secretary for Fossil
Energy, with the Department of Energy. Mr. Secretary, we are
delighted to have you with us.
We have Ambassador William Ramsay, who is the Director of
the Office of Non-Member Countries International Energy
Association, who rearranged his schedule so that he could be
with us. Sir, we are grateful for that. Mr. Red Cavaney, who is
President of the American Petroleum Institute, which means he
is always ready in Washington with an opinion and some
information for us. That is what trade associations are for.
So we will proceed in that order with this first panel, and
again, gentlemen, our thanks to you for being here this
morning.
Mr. Kripowicz.
STATEMENT OF ROBERT S. KRIPOWICZ, PRINCIPAL DEPUTY ASSISTANT
SECRETARY FOR FOSSIL ENERGY, DEPARTMENT OF ENERGY
Mr. Kripowicz. Thank you, Mr. Chairman. The Department of
Energy has been addressing Year 2000 computer concerns on two
fronts: One, we have been working hard to ensure that all of
our internal mission-critical systems are Y2K compliant, and I
am pleased to report that as of the end of March, 98 percent of
these systems were ready to handle the Y2K changeover, and this
includes all of the mission critical systems of our power
administrations and the Strategic Petroleum Reserve.
Two, and more relevant to the hearing today, we are working
with the President's Council on Year 2000 Conversion to ensure
that the energy industry is also ready. Initially, DOE was
assigned responsibility for the electric power sector, and the
Federal Energy Regulatory Commission was assigned
responsibility for the international oil and gas sector. Last
month, DOE and FERC mutually agreed to transfer lead
responsibility for international oil Y2K preparedness to DOE.
We believe the most valuable role we can play in addressing
the international aspects of this issue is to raise the level
of awareness of the global oil industry and within major oil
producing nations, and we have worked hard to do this. Often,
at our initiative, Y2K issues have been placed on the agendas
of international energy organizations and multilateral energy
forums, including the International Energy Agency, the Asia-
Pacific Economic Cooperation, or APEC Energy Working Group, and
the Steering Committee of the Western Hemisphere Energy
Initiative. We also have extensive bilateral policy discussions
with major oil producing nations, and we have used these
opportunities to call attention to Y2K.
As you will hear, the International Energy Agency is
playing a central role in many of the global efforts to address
Y2K, and the Department of Energy, along with the Government of
Japan and others, has made voluntary contributions to organize
three regional seminars that deal specifically with ways the
international oil industry can ensure Year 2000 compliance. The
first of these seminars was held in Caracas, Venezuela on March
11th and 12th, and the second in Singapore on the 25th and 26th
of March. The third will be conducted in Abu Dhabi in United
Emirates on May 4th and 5th.
To date, our discussions and information gathering have
given us a degree of cautious optimism. The four largest
suppliers of imported oil to the U.S., Venezuela, Canada, Saudi
Arabia, and Mexico, expect their petroleum sectors to be fully
prepared by the end of the year or before. Kuwait, Norway, and
the United Kingdom, likewise, expect to be fully compliant
before the year is out.
Where our information is less complete, in countries like
Nigeria and Angola, multinational oil companies operating in
these areas are taking steps to counter any Y2K problems and
develop contingency plans. We are seeing the active
participation by petroleum associations from many countries and
several of the largest state-owned companies in API's
International Y2K Work Group and in the International Oil
Coordination Council within the Administration. Where there are
gaps in our knowledge, Mr. Chairman, is more in the service
areas that support the overseas oil industry,
telecommunications, electric power, ports and shipping, and
security systems.
Another reason for our cautious optimism is that global
crude oil production and distribution systems have shown
remarkable flexibility in the past. Accidents, weather, worker
strikes, natural disasters, and other disruptions, including
war, have all been encountered over the years, and the global
oil market has adapted. Moreover, today there is also
flexibility in the form of some spare crude oil production
capacity in several countries that could be brought on to
compensate for any shortfall.
Finally, there are commercial and strategic stockpiles of
crude oil. In the United States, we have the Strategic
Petroleum Reserve. This emergency oil inventory is our
insurance policy against oil supply disruptions. Its inventory
currently stands at 561 million barrels, but I might point out
that this week we began receiving the first of nearly 28
million additional barrels of royalty oil that will be
transferred to the reserve from offshore leases over the next
several months. The reserve is Y2K compliant, and it would be
capable within literally a few days of responding to a
Presidential directive to supply crude oil to the market.
In short, Mr. Chairman, at this point we would urge
prudency and planning, but certainly not panic. We will
continue to monitor the situation closely, and we will be
prepared to take appropriate actions as necessary, both before
and at the point where we transition into the new century.
And that concludes my opening statement.
[The prepared statement of Mr. Kripowicz can be found in
the appendix.]
Chairman Bennett. Thank you very much. Ambassador Ramsay.
STATEMENT OF WILLIAM C. RAMSAY, DIRECTOR OF THE OFFICE OF NON-
MEMBER COUNTRIES, INTERNATIONAL ENERGY ASSOCIATION
Mr. Ramsay. Thank you, Mr. Chairman. Thank you for the
opportunity to speak before the committee about Y2K and the
international oil industry.
The Paris-based International Energy Agency is an
intergovernmental body within the Organization for Economic
Cooperation and Development. It carries out a comprehensive
energy program of energy security and policy coordination
amongst its 24 member countries, which include the U.S.,
Canada, Japan, and countries of the European Union. As you have
just heard, the Department of Energy encouraged the IEA's
increased effort on Y2K, both substantially, and more
importantly, financially, and the Government of Japan
contributed as well.
The IEA Year 2000 project in the oil sector has two main
components: awareness raising and information gathering. The
IEA is seeking to raise Y2K awareness among large state and
private oil companies beyond the majors by organizing a series
of seminars in several of the world's most important oil
producing and refining regions. The seminars are targeted on
Year 2000 coordinators and other officials from governments,
oil companies, and the infrastructure providers in which the
industry depends, such as electricity, pipelines, shipping,
ports. Both remediation and contingency planning are covered,
though there is an increasing emphasis on the latter.
By raising the awareness and providing a forum for the
exchange of information, the IEA hopes to prevent at least some
of the oil market bottlenecks related to Y2K. The seminar you
heard about in Venezuela was cosponsored by the Venezuelan
state oil company, PDVSA; the seminar in the Asia-Pacific by
ASCOPE, the ASEAN organization of state oil companies; and in
the Middle East, the Emirates Center for Strategic Studies and
Research is helping us on that seminar. We are examining the
possibility of holding a fourth seminar for eastern Europe and
the former Soviet Union.
The second aspect of the IEA's project is information
gathering and source identification, where our objective is to
be in a position to advise our member governments what action,
if any, elective or individual, they should take in the
possible threat posed by the Year 2000 problem. In order to
draw conclusions about possible Y2K effects, we have been
trying to develop an aggregate picture of the situation.
Companies have a tendency to be focused mostly on their own
micro-situation, and to the extent they look beyond this, it is
generally only to suppliers and infrastructure providers in
which they directly depend; however it is the aggregate result
that will affect the oil market.
Drawing the macro picture requires piecing together the
various micro pictures along the supply chain and across
companies and regions. In doing this, we have found that many
of our target companies are reluctant to share a lot of
meaningful corporate information because of concern about legal
and commercial implications of doing so or about their national
image of reliability. Nevertheless, after two seminars and
discussions with various participants in the oil industry and
its support industries, we have come to some preliminary
conclusions which we plan to refine over the next few months.
As in other industries, Y2K is not just an IT problem. It
is less of a computer problem than one of microchips embedded
in industrial equipment used for production, transportation,
monitoring, and control; and since there are so many chips, an
oil platform may contain as many as 10,000, companies have to
make a business decision on how much effort to put into
remediation and then to prioritize their search and replacement
activities based on the criticality of the systems to the
supply chain. This means Y2K is a management problem.
The good news is that after exhaustive testing, a number of
oil companies say they have found fewer problems at critical
points than they expected. Fortunately, less advanced companies
can learn from the experience of companies that are further
ahead. In particular, the API, which maintains a data base of
equipment, its members have found Y2K compliant and non-
compliant is being made available. We would encourage the API
in its recent efforts to provide this data base on a more
general basis beyond API members if they can. Even if companies
do not have the time or resources to replace many of the
defective components, they can at least have a better idea
where the problems are likely to occur, facilitating their own
contingency planning.
Low oil prices have been a particular burden for oil
companies up until recently. Although we do not have evidence
that this has caused firms to cut Y2K budgets, there is reason
to believe there will be pressure to do so. As a general rule,
the state oil companies, especially those in developing
countries, probably lag the majors in addressing the problem.
However, the largest state oil companies which represent the
supply most important to the United States started relatively
earlier and appeared to be more advanced. Contacts with Saudi
Arabia, Saudi Aramco, and PDVSA in particular have led us to
believe that these key suppliers to the U.S. market take their
preparations quite seriously.
Obviously, oil producing countries rely so heavily on oil
for their national revenue that they have a considerable
incentive to look after their industry. Most oil companies
probably have a fair chance of handling the major Y2K problems
in their own organizations. This is because oil companies are
used to contingency plans, especially in the Third World.
Moreover, the less advanced state-owned oil companies are less
dependent upon technology prone to Year 2000 problems.
Similar to the situation in other industries, a greater
threat to the oil industry is breakdowns in infrastructure
outside the company's control, for example in electricity
grids, telecommunications, and shipping. Such service
infrastructure risks are probably most pronounced in less
developed countries. There is also some concern about the large
amount of outsourcing for various services. Many oil service
companies are small or medium sized and are more likely to lag
large companies in their Y2K preparations.
Oil companies have learned from Y2K exercises that a few
minor glitches can compound to create bottlenecks, and that
which starts as a minor Y2K glitch can cascade into
conventional failures, especially if several such glitches
occur simultaneously. Flexibility and contingency plans will be
crucial, and this is probably an area where everybody can do
more.
The duration of any overall disturbance is unclear, but the
oil industry does not operate in real time, and therefore has
some margin to bring things back to speed. There is generally a
large amount of oil in storage en route, and there is currently
a fair amount of surge capacity among producers.
The oil market effect of Y2K is uncertain, especially since
Y2K effects on the world economy could actually lower energy
demand, but the oil market responds to expectations of supply
and demand, meaning that any nervousness in oil markets could
lead to an increase in demand in the run up to the Year 2000
because of stock building at all levels. It is too early to
speculate on what, if anything, IEA might do collectively to
calm markets or respond to supply disruptions. Our concern is
that unless carefully orchestrated, any such efforts can just
as easily have the opposite effect on market attitudes if our
preparations are read as the clear indication that there is a
serious problem, perhaps perversely stimulating customer
disquiet. It may well be that national level public information
would be more effective.
In any case, ministers of energy from the 24 member
countries of the IEA will address Y2K issues at their biannual
meeting in May in Paris. Our efforts over the next few weeks
will be directed to identifying how we might structure the
fourth seminar to address the various operating entities in the
oil sector of Eastern Europe and the former Soviet Union. As
our efforts progress in looking for the weakest links in the
oil supply chain, we are increasingly alert to non-oil real-
time phenomena which could seriously impede energy delivery
systems such as electricity and gas. More of these
considerations will figure in our fourth seminar.
Finally, if I might just direct your attention to the IEA's
web site which contains pages on the Year 2000 problem. These
provide information on our seminars, IEA work on the Year 2000
relating to the oil industry, and hyper-links to many relevant
web sites dealing with this issue. The web site URL is
available in the written testimony.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Ramsay can be found in the
appendix.]
Chairman Bennett. Thank you very much, Mr. Ambassador. We
appreciate your being here.
Mr. Cavaney.
STATEMENT OF RED CAVANEY, PRESIDENT, AMERICAN PETROLEUM
INSTITUTE
Mr. Cavaney. Mr. Chairman, I want to begin by thanking the
committee for holding this hearing. An informed consumer
benefits us all.
I am president and CEO of the American Petroleum Institute,
representing over 400 member companies involved in every aspect
of the oil and natural gas industry. I appreciate the
opportunity to testify on our industry's preparations for the
Year 2000 and ask that the written statement I have submitted
be made part of the permanent record.
Chairman Bennett. Without objection, it will be.
Mr. Cavaney. The oil and gas industry is working
intensively to prepare for the Year 2000 and feels it will be
ready to continue supplying our customers throughout the year-
end changeover. Our industry has long anticipated the challenge
of Year 2000 computer conversions and has been working hard on
this problem for more than 5 years. Our Year 2000 task force is
coordinating the industry's efforts in sharing technical
information among oil and gas companies and with other
industries. We are a leading participant on the President's
Council on Year 2000 Conversion, and we are working with the
DOE and the Federal Energy Regulatory Commission as well.
In January, API and the Natural Gas Council surveyed the
industry's Y2K readiness. The 1,000 companies that responded
supply 88 percent of the oil and natural gas our nation
consumes. This is what we learned: Of the overwhelming majority
of companies responding, 94 percent said they would be Y2K
ready by September 30, 1999; embedded chips are not the problem
earlier anticipated; and 97 percent of the companies said they
expect to have their Y2K contingency plans in place and tested
before October 1, 1999.
With that said, let me turn to the source of much of our
supply. The U.S. is largly self-sufficient in natural gas. In
1998, our nation imported less than 14 percent of the natural
gas we consumed. Canada was by far the leading foreign
supplier. Oil, however, is another matter. Last year the Nation
imported 56 percent of the crude oil consumed in the United
States. The Department of Energy has indicated that the four
largest exporters to the United States, Venezuela, Canada,
Saudi Arabia, and Mexico, are preparing their computers for Y2K
and expect all critical systems to be Y2K compliant by the end
of 1999.
I have here a letter from the Venezuelan national oil
company, PDVSA, recounting their readiness plans, and I would
like to also submit that for the record.
Chairman Bennett. It will be included.
[The letter referred to can be found in the appendix.]
Mr. Cavaney. The United Kingdom, Kuwait, and Norway also
expect to be Y2K compliant, and API members indicate that their
operating divisions abroad are on track to be Y2K ready. Even
if some foreign suppliers experience Y2K problems, imports
would not stop instantly. There is always some crude oil en
route to the U.S. via tankers, some of which can take up to 5
weeks to cover the seas. If foreign suppliers have production
problems, we will know the day that it happens, giving the
industry time to move supplies around to compensate for any
lost production.
In addition, the Federal Government owns and operates, as
mentioned earlier, the Strategic Petroleum Reserve, an
essential buffer in the event of a serious interruption in any
foreign oil supplies. Although the industry has never
experienced a challenge quite like Y2K, there have been other
disruptions to the flow of oil, and there is a record of the
industry's successful responses.
The industry's flexibility enabled it to continue serving
its customers during the Gulf of Mexico hurricanes of 1998. We
had gasoline supply difficulties during the summer of 1987 and
during the Persian Gulf War, just to cite a few examples. At
the end of the day, the critical question is can we give you a
100 percent guarantee that absolutely no problems will occur
and consumers, without exception, will find what they want,
when they want it. No one can make such a blanket assurance
because we live in an interdependent world, but we can
guarantee that the domestic oil and natural gas industry is
very well prepared to serve our customers in a timely manner
and keep energizing our economy each and every day.
In conclusion, we are concerned, however, about
misinformation on the impact on the Year 2000 conversion being
promoted in the public domain. Some who may mean well but are
uninformed are inviting unintended consequences in the
marketplace when they recommend that consumers should take
their money out of the bank or fill their gasoline tank or
horde gasoline and groceries. Such changes in behavior could
produce consequences that are totally apart from how well our
industry or other industries are doing in their job of
preparing for the future.
Congress can help by putting out current, factual
information about industry preparedness to deal with Y2K and by
avoiding any unnecessary constraints on the private sector.
Congress can also use its oversight role to assure the Y2K
readiness of the SPR, should it be needed.
We appreciate the opportunity to testify today and to
update and enhance the public record on the oil and gas
industry's preparations for the Year 2000. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Cavaney can be found in the
appendix.]
Chairman Bennett. Thank you very much. You have each heard
each other's testimony, so I would like to make this a true
panel, rather than asking a question of any one individual, and
any comments each of you might have on the others' testimony
would be welcome.
Let me start with this question for whomever wishes to
respond. The information that you have given us here this
morning is optimistic, and that is one of the reasons we held
the hearing, so that you would have a platform to deal with the
potential of panic, Mr. Cavaney, that you talked about. I must
comment, one of the problems that we are uncovering is people
deciding that they must stockpile flammable sources of energy
in their own garage, and this is a very dangerous thing to do.
To put a lot of jerry cans of refined gasoline and pile them up
your garage is probably not a prudent thing to do. You would be
better off having a day or two of cold than run the risk of
having your house blow up or burn up.
So it is very encouraging to hear these kinds of reports,
however I have to ask this fundamental question that comes out
of our experience in other areas, and that is are all of these
reports self-reported? Is there any independent verification
from an outside source that says yes, we are as ready, as some
of the companies or countries are saying that we are? Does
anyone wish to respond to that?
Mr. Kripowicz. Mr. Chairman, I would like to say a couple
of things. First of all, with regard to the other people's
testimony, it is clear, you know, that we have been working
very closely over the past period of time.
Chairman Bennett. We will not accuse you of collusion.
Mr. Kripowicz. Among all three organizations. So we are
pretty much telling the same story, because we have been
dealing with each other on a constant basis. If you would have
asked us the same question last year, you would have definitely
got a different answer because of the stage of the process and
the amount of information. You would have gotten a different
response from the Department of Energy on its own internal
systems, and you did, as you remember.
Chairman Bennett. Yes.
Mr. Kripowicz. And the constant awareness has led to, I
think, an increased effort by everybody. In terms of the
question of self-reporting, from the Department of Energy's
point of view, we only verify the systems that we have
responsibility for. So we have to take the word of the self-
reporters, and we follow up on this on a constant basis, and
sometimes the word changes as they get further into the
systems, but basically we have to rely on the organizations
doing the reporting because we have no ability to actually go
in and do verification.
Mr. Ramsay. I would agree with everything that was just
said there. The self-reporting does get checked a bit because a
lot of the majors are operating with a lot of the self-
reporters out there beyond the majors, and multiple majors are
working with the same state oil company. So they get tested and
they get checked. Everyone is worried upstream about whether
they can count on the integrity of their suppliers or their
joint venture partners. So there is a fair amount of internal
cross-checking going on so that truly inconsistent stories
would begin, I think, to emerge.
I think the optimism that you heard, Mr. Chairman is about
a physical barrel optimism that we can handle the--that the
trade can handle what is going on in the market and that the
barrels will be available for consumption. But there is a lot
beyond that that should not lead to complacence. I do not think
there has been enough discussion amongst the sectors. There has
been too much stove pipe conformity being worked on. I do not
think that there has been quite enough contingency planning
among sectors so that people can think through what problems
they might have to deal with and how they might fix them, and I
think companies have a lot of interest in going further than
just making sure the barrels are available, because there is a
question of asset integrity--if equipment fails or equipment is
damaged, this is very expensive--for corporate integrity,
safety, environmental issues.
So there is quite a bit working on companies to get this
right beyond getting the barrels to the marketplace. So, yes, a
bit of cautious optimism but still some warnings that there is
a lot more work to be done, and we will not really have
finished with that work until the first week of January.
Chairman Bennett. Yes, sir?
Mr. Cavaney. Mr. Chairman, I would like to just add a
couple of points, and certainly I am in agreement with the
comments from my two colleagues. First of all, it was mentioned
in some of the earlier testimony, API and its member companies,
over 50 of whom are active in reporting this various data, have
made this available on the web. So it is fully available to
other companies, national oil companies, other countries and,
anybody that's interested. So there is an opportunity both to
have this information checked by those who are working with the
companies but are vendors outside the company, as well as by
other people who would care to take a look at it.
At the end of the day, our companies view very importantly
their franchise to serve their customers, and that as much as
anything else is what is driving them to ensure that they try
to move toward a zero defect environment.
We, as I mentioned in my testimony, are interdependent. We
do rely on the electric power industry, and we do rely on the
telecommunications industry in order to make some of our
operations work successfully. We are already fully engaged in
industry-to-industry discussions on contingency plans, on
readiness to ensure that we have those systems well understood
as we move toward the end of the year.
Chairman Bennett. Well, you and Ambassador Ramsay
anticipated my next question, because you are dependant on
other systems. We have a chart that we use, and I will not
expect you to try to read it at that distance. I have a little
trouble reading it at this distance. But you see the different
colors, and the colors are red, yellow, and green, red being a
country. Down this axis is the country, and across here is the
function. So you can take one country and go across, and red is
probably no chance that they are going to be ready; yellow,
cautious optimism; and green, they are on top of it, and it is
going to work.
Now, you are sitting there saying there is a lot of black
on the chart, Senator. The black simply means we do not know,
and that is the area that gives me concern. This particular
column is the energy column, and presumably that would mean
power available in that country to run dock facilities or other
supporting facilities. If the power goes out, it does not
matter whether the computers are all Y2K compliant.
And there are some countries on here that are fairly
important where we have black. That is we just do not know. The
ones where we have red presumably are not major sources of
energy to this country, but they are major sources to other
countries and could upset the world equilibrium, the world
market equilibrium, and your point, Ambassador Ramsay, that
there has been a lot of stovepiping, but we need some
horizontal thought.
Now, at the risk of angering the appropriate Ambassadors,
two countries that are listed on here as red in the energy area
are Russia and China. We do not get a lot of oil from Russia
and China, but there are countries around the world that do.
Let us suppose for the sake of the scenario that there is a
complete breakdown in energy supplies available, whether it is
oil or natural gas, from Russia and China. How would that hole
in the world supply affect us? How would it affect world
prices? And how would it affect world stability? I am asking
you global-type questions here that you may want to be specific
about, but this committee lives in the world of unfair
questions. So let me throw that out and get your responses and
your reactions.
Yes, sir.
Mr. Cavaney. Mr. Chairman, I would comment on a remark you
made when you gave your opening statement. We are in a time
right now where there are a number of producer nations who are
producing their crude oil at less than full capacity, and so I
think it is safe to say, given the fact that oil travels in a
global market, that were there shortages in certain areas, as
you characterize, there is available excess capacity to produce
more oil and deliver it to those markets, because obviously
there is going to be some incentive to be able to continue
serving those markets.
So as a result of this reduction in OPEC and the
cooperating countries, we do have this opportunity to have a
little bit of a contingency there that I think could serve us
well were one of these things to materialize.
Chairman Bennett. Ambassador Ramsay, let us talk about
natural gas in Europe. Does not a fairly large amount of that
come from Russia, and what kind of a problem would that create?
Mr. Ramsay. There is a lot of natural gas supplied by
Russia into western European systems. I think Germany is 35 or
40 percent dependant on Russian gas, and we have heard from gas
companies that they are making every effort to be Y2K compliant
and the gas companies' history of supply has been impeccable.
Whenever there is a problem, those problems are typically
absorbed internally. We have made an effort to talk with----
Chairman Bennett. Now, do not go by that quite so fast.
Absorbed internally. Do you mean if there is an inability to
produce 100 percent delivery, the Russians are the ones who
take the shorts, and they pass everything else on to the
western Europeans to fulfill their contracts? Is that a fair
summary of what you just said?
Mr. Ramsay. That is a fair summary.
Chairman Bennett. OK. Thank you.
Mr. Ramsay. We have talked to a number of the gas
transporters in Europe, and a great deal of work is going on.
We have talked to customers about their sense of reliance on
these gas supplies. We think more can be done in that regard,
that a little bit closer inspection of what might be the
implications of a pressure shortfall somewhere in the system,
perhaps transit in Ukraine or Belorussia, and believe that that
is work that companies are working on, but companies can work
on that a bit more apparently so that populations can be
comfortable. That is an area that we will focus on in the next
months.
But to go back to a bit more of what you were suggesting
earlier on, remember that in places like the Gulf of Guinea and
Campos Basin in Brazil, Saudi Arabia and other places, the oil
industry is not at the centers of population. It tends to be
off wherever the deposits are found, Nigeria and so forth, and
those producing entities have their own power generation
capacity. They typically will have their own satellite nets.
They will be on infrastructures that are within their own
competence, so that the support infrastructures in many of
those places are inside the stove pipe. That can be somewhat
comforting. That puts a broader responsibility on those
producing entities, but there is some hopes that they have been
attentive to that.
China, as you know, sir, for the moment, is a net importer,
so that if China had a problem in their internal energy supply
systems, that would be an internal Chinese issue, although
problems inside China are never purely internal.
Chairman Bennett. That is right.
Mr. Ramsay. And the same thing could be said about a number
of other countries. If electricity grids go down, these will be
domestic issues that they will need to worry about, conceivably
beyond just energy concerns, but should not cascade out into
world markets. The observation you made earlier about the
interdependence of the world is certainly a right one. Any
supply problems anywhere causing a spike in prices is a problem
everywhere. This market acts as one.
So it is best that we maintain our focus on all these
places in the world, even if we are cautiously optimistic.
Chairman Bennett. Let us talk about the readiness of
maritime shipping. You touched on that briefly. We have talked
about ports and their ability to load and offload tankers full
of oil, but has any assessment been made about the supertankers
and how they will operate and how reliable--well, reliable is
not the word--how vulnerable they are to a Y2K problem?
Yes, sir.
Mr. Cavaney. Mr. Chairman, you will hear from the next
panel in great detail--one of the members companies of API will
be testifying on that--but I would say when we look at tankers
themselves, the systems that they have, all have backups,
manual backups to them. So the concern that even though these
are leased ships in many cases, while they have been certified
and checked out, there is even more and more redundancy in the
system to ensure that those supplies can continue flowing in
that regard.
So it is very proper to look at both ports of debarkation
and ports of call, but also as well as have some confidence
that the ships themselves will be able to navigate the waters
and deliver their product where needed.
Chairman Bennett. Well, you mentioned in your statement
that the embedded chip problem has turned out not to be as
serious as we thought when we first began these hearings, and
that, of course, is a very important aspect of this. One of the
things that terrified us when the committee was formed was the
estimate that two to 3 percent failure on embedded chips would
occur. If you have got 10,000 chips embedded in an oil
platform, that means 200 of them fail, 200 to 300 of them fail,
and that would be enough to shut the platform down.
Now we are thinking that it is more like two or three, that
it is two-tenths of 1 percent instead of 2 percent. So that is
an encouraging factor, and now you tell us that there is a
manual backup.
Mr. Cavaney. In the case of tankers, yes.
Chairman Bennett. That is a further reassurance.
Mr. Kripowicz, you wanted to comment?
Mr. Kripowicz. With regard to the various areas that
support the oil industry such as tankers, electricity, and
other support industries, the President's Council has recently
set up a Y2K international working group that cuts across
lines. We have talked about stovepiping here, but a committee--
a working group has been set up by the council to start looking
at these things across areas just as you were talking about
where that has not been done in the past.
So I would believe that in the next few months, we will
have a much better assessment of how the interaction of the
various sectors affect each other. That working group has just
been set up within the past couple of months.
Mr. Ramsay. Mr. Chairman, on the issue of shipping, we have
had the benefit of Admiral Naccara coming to our seminars to
talk about this, at least in Caracas, but we watch this one,
again, as another of those cross-fertilization opportunities
that we would not want to miss, because the kinds of choke
points around the world that could be difficult for navigation
are important to the oil. I have a couple of them written down
here: the Bab el Mahdab at the bottom of the Red Sea, 3.3
million barrels a day; the Bosphorus, 1.4; the Straits of
Hormuz, 14; the Straits of Malacca, 8.2; the Suez, 3.1. These
are million barrels a day. So they are pretty important
passages and some of them are very difficult. The Bosporus, in
particular, is a dangerous strait, so that the IMO and other
international organizations are beginning to cross the
stovepipes to make sure that there is good discussion, and I am
sure we will hear about that later.
Chairman Bennett. Well, just to illustrate the seriousness
of what you have just said, the staff handed me a copy of the
Year 2000 problem in the oil industry from the international
energy agency with respect to pipelines and again, the
importance of external systems. Let me just read this to you
and have it be part of the record. It says:
The vulnerable nature of pipeline systems to peripheral
communication and control systems was recently highlighted in
Iraq. In February 1999, a missile hit a repeater station on the
Kirkuk to Ceyhan oil pipeline. Although the pipeline itself was
not damaged, the loss of the communication center cut the flow
of oil between Iraq and Turkey.
The pipeline's control centers at Kirkuk and Ceyhan
terminals rely on data from repeater stations to operate
valves, pressure and temperature controls along various stages
of the pipeline. Without data, these control centers were
effectively blind, losing operational control and ordering
system shutdown. An attempt was made to operate the line
manually but was aborted as operationally unfeasible, thus
highlighting the vulnerability of modern pipeline systems to
computerized data and communication links. Repairs took nearly
1 week to complete.
So while nobody is going to be shooting missiles, we hope,
a communications capability could become blind, and in this
case, even though physically the ability to operate the thing
manually was there, it is rendered operationally unfeasible
without the data. It was interrupted for a week.
Now, if I hear your combined testimony, interruption for a
week at one center, even if it is a fairly major center, is not
a crippling problem because there are other capabilities as
well as the ability to go somewhere else and fill the gap. It
is clearly there, but if this were to happen in multiple
places, we could have problems.
Mr. Ramsay. That, sir, is a valid point. This particular
case, the reason that a lot of pressure was not put on the
technical fixes on telecommunications was because of the
squishiness that we have been talking about in the oil sector.
There was so much storage at Ceyhan at the time that there was
no interference of loading vessels out and so no incentive to
use extraordinary costly measures to fix the telecommunications
tower. So there was that flexibility in play, again, in how
they chose to repair it. But as you say, a multiple of these at
the same time is not the same.
Chairman Bennett. OK. Let us talk about one last issue
before we go to the next panel, and that is refining capacity.
We have been talking about crude supplies and the ability to
move them around. Is there an equal flexibility in the capacity
to refine the oil? Prices in California are in the news right
now, more because of refinery capability than crude oil
supplies.
Does anyone have a comment on what would happen if we were
to have interruptions in some refineries? Yes, Mr. Cavaney.
Mr. Cavaney. Mr. Chairman, I will address the first part
which is the point of interdependence that I mentioned to you.
We are very much reliant on the electric power grid and on
telecommunications to keep those refineries operating, much
more so than was mentioned earlier in the upstream area where
we are out in different parts of the world actually with our
own power systems to support us separate from the national
industry. We feel reasonably confident from the beginnings of
the dialogs that we have had about our supplies of electric
power and telecommunications and are going to continue working
with them, you know, to that end.
We have been operating this past year at about 98 percent
capacity. So there continues to remain some excess capacity if
needed. For example, if one refinery for some reason or
another, cannot operate, others can step in. In the United
States----
Chairman Bennett. You say we have. Is that worldwide?
Mr. Cavaney. In the U.S.
Chairman Bennett. So in the U.S. there is excess refinery
capacity?
Mr. Cavaney. A small amount, yes, there is.
Chairman Bennett. I see.
Mr. Cavaney. But more importantly, there is a tremendous
infrastructure of pipelines and the like to move crude oil
products around, finished products to the various areas where
they need to be taken.
You mentioned California. California is a unique situation,
and it would not be accurate to extrapolate the circumstances
that California is undergoing at the present time to a national
scale, and the reason why is because they have a unique
gasoline, and because of its high cost of production, only
refineries in California produce that gasoline. The rest of the
country, basically because of this infrastructure, because of
the flexibility, is able to move product around and fill the
gap.
So we are quite confident that the kind of consternation
that people in California are experiencing from some unplanned
outages are not going to have that scale of concern nationally.
Chairman Bennett. I see. Thank you. I had not realized
that, but as you say, yes, California has its own world as far
as these kinds of issues are concerned.
Thank you all. We appreciate your appearance here, and this
has been a very useful panel.
We will be submitting additional questions in writing to
all of you. We appreciate your attention.
[The questions and responses referred to can be found in
the appendix.]
Chairman Bennett. We will now move to the second panel. Our
second panel will address the maritime transport of oil,
including both tanker and port operations, pipelines, and
finally where the public meets the industry, the gasoline
pumps. You, gentlemen, have heard the conversation in the first
panel, so you have some sense of where it is we are going.
We have with us Rear Admiral George Naccara who is the
Chief Information Officer of the United States Coast Guard; Mr.
Bob Malone, who is President of the Alyeska Pipeline Service
Company; and sir, as a result of your being here, we can
anticipate an appearance by Senator Stevens at some point. I
have three hearings I should be to this morning, all of them
vital, and Senator Stevens is faced with the same. If he is
unable to get here, we will understand, but the chances of his
being here are higher than they would be otherwise. Captain
Phillip Davies, who is the Area Operations Manager for Chevron
Shipping Company; and Mr. Michael Ingle who is the Treasurer of
the Service Station Dealers of America. So we thank you all.
We will start with you, Admiral.
STATEMENT OF REAR ADMIRAL GEORGE N. NACCARA, CIO, UNITED STATES
COAST GUARD
Admiral Naccara. Thank you, sir. Good morning, Mr.
Chairman. As you said, I am George Naccara of the U.S. Coast
Guard, and I have responsibility for the Coast Guard's Year
2000 project.
Your Coast Guard is working to ensure its information
technology systems are prepared for the millennium, since the
Y2K readiness of domestic ports will depend partly on the
readiness of the Coast Guard to respond to disruptions. Our
motto ``Semper Paratus'' means that we must ensure that we can
deliver our marine safety, environmental protection, search and
rescue, and maritime law enforcement services to the public. We
are keenly interested in the Y2K readiness of the maritime
industry we regulate. We have been alerting all segments of the
Marine Transportation System to the threat of Y2K. We are also
busy assessing the Y2K readiness of domestic and international
ships and ports.
To better understand the readiness of companies that
transport, store, refine, and pump oil, we have engaged with
them or their respective trade associations, sharing the podium
at conferences with Chevron, API, and IEA. We know that well-
established companies have robust Y2K projects in place. They
have gone thorough contingency planning, and they expect to be
ready for the millennium.
For example, I have been particularly impressed with
presentations with Chevron on their Y2K project. However, while
some trends in the industry appear favorable, it is very
difficult in such a fragmented industry to assess whether
progress is meeting projections and whether optimism is
justified. Uncertainly remains, for example, as to the
seriousness of the embedded chip problems on ships. At a recent
IEA conference in Caracas, I heard very troubling assessments
of other parts of the Central and South American
infrastructure, such as power and telecommunications.
As Venezuela is the largest supplier of foreign oil to the
United States, these concerns lead me to conclude that we must
continue to push all stakeholders in the Marine Transportation
System to continue contingency plans. I mentioned that the
Coast Guard and others are taking measures to help prepare the
industry for the Year 2000. Some of these measures include a
Coast Guard Y2K awareness conference and industrial sessions on
all three coasts, on the Great Lakes and the inland rivers, and
distribution of over 50,000 Y2K brochures containing
information, Web sites, and 800 info lines to all ships calling
in U.S. ports.
I have attended numerous domestic and international
speaking engagements and will continue to do so. In fact, I was
to address the National Association of Waterfront Employees in
Bermuda just this morning. This has been rescheduled.
Next, a Coast Guard study of the best Y2K readiness
practices in the 48 major inland and coastal ports in the U.S.;
these practices will be shared widely among all captains of the
port and all transportation system stakeholders. The study
includes a risk assessment matrix that can be used to assess
one's own or a partner's Y2K readiness.
I gave a speech to 120 national Y2K coordinators and
delegates at the United Nations in December 1998 in which I
cited potential Y2K disruptions to the international oil
transport industry. The Coast Guard was later asked by Mr.
Koskinen and Ambassador Kamal of the United Nations to lead an
international effort to address the Y2K readiness of the global
Marine Transportation System. The result was a March meeting of
16 international marine trade associations at the International
Maritime Organization, IMO, in London which we jointly
sponsored with the United Kingdom Maritime and Coastguard
Agency.
In preparation, representatives from nine of the trade
associations met several times to draft a Year 2000 Code of
Good Practice. After being modified by meeting attendees,
including very essential contingency planning guidelines and a
list of ship and port critical systems, the code was published
immediately by IMO as Circular 2121. The Coast Guard and the
IMO intend that the Code will become the basis for Y2K
information exchange, assessment, risk management, and
enforcement policies by ships and ports worldwide.
On June 21st and 22nd, there will be another U.N. meeting
of the national Y2K coordinators. Besides urging worldwide
acceptance of this IMO circular as the basis for Y2K policy by
port and flag states, the Coast Guard will distribute its own
Y2K enforcement policy and port operations guidelines.
You have asked me to offer an assessment of areas around
the world where Y2K problems may impede the study, production,
and transport of oil. Clearly, others on that panel today are
better qualified to address the issue of production.
Regarding transport, let me make two points, please. The
Gardner Group and the Department of State have both published
unclassified regional and economic sector assessments of
international Y2K readiness. The studies permit some inferences
as to regional Y2K impacts on the Marine Transportation System,
with the caveat that the MTS is the global industry in which
the readiness of MTS companies is not always the same as that
of countries in which they do business.
I also want to stress that oil transport companies will be
subject both to the uncertainty to embedded chip problems on
ships and ports and to a range of potential disruptions of the
interlinkages of the industry with supply chains and supporting
infrastructures.
Despite these cautions, the Coast Guard is actively
collecting data on the international readiness of the Marine
Transportation System. We are partnering with the U.S.
Transportation Command and other intelligence organizations to
gather data on the Y2K readiness of over 50 key international
ports and critical choke points. We hope to have considerable
data analyzed by this summer, giving us a reasonable picture of
global readiness in the Marine Transportation System.
I have been invited, also, to comment on actions the
Congress or others should take to address Y2K issues impacting
the importation of foreign oil. Certainly, it would seem
prudent for Congress to join with all those concerned about
fuel supplies in taking a message to the American public
against hording petroleum products or topping off our tanks a
day or two before the century change, as we all understand that
kind of an act alone repeated nationwide could lead to
shortages.
To assist the Coast Guard in its preparation for Y2K, I
would also appeal for mindfulness regarding the amount of
information being requested from us on a near-daily basis.
Thank you very much for this opportunity, Mr. Chairman.
[The prepared statement of Admiral Naccara can be found in
the appendix.]
Chairman Bennett. Thank you.
Mr. Malone, we have been joined by Senator Stevens, and we
appreciate your presence here that brings his presence here;
although I will say that Senator Stevens is a more active
member of this committee than many others who do not have as
heavy a burden as he carries, and we are delighted to have him.
Do you have any comments, sir?
STATEMENT OF HON. TED STEVENS, A U.S. SENATOR FROM ALASKA
Senator Stevens. Well, I have come, as you say, because Bob
Malone is a great friend, and I know he has traveled a long
distance to be here today, and I am happy to see him here. The
pipeline that he manages transports 20 percent of our nation's
domestic supply of oil. It is very critical to the Nation, but
also it is more critical to my state's economy, and I think
that there is no question we are in difficulty.
I can remember the day when oil sold for $54 a barrel out
of that pipeline, Bob, and now it is $11. If anyone does not
understand that, the economics of one small state that depends
heavily upon its revenue, you do not have to be a rocket
scientist to understand how important this man's job is to us.
So I am pleased to be here to hear him and appreciate you
coming down.
Chairman Bennett. Mr. Malone.
STATEMENT OF BOB MALONE, PRESIDENT, ALYESKA PIPELINE SERVICE
COMPANY
Mr. Malone. Chairman Bennett, Chairman Stevens, thank you
for your presence. Good morning. As you said, my name is Bob
Malone, and I am the president and chief executive officer of
Alyeska Pipeline Service Company. I am honored to be here with
you today to assure you that Alyeska Pipeline Service Company
will be ready when the clock turns over to January 1, 2000, and
also that the Trans Alaska Pipeline System is fully prepared to
meet the challenges of the new millennium.
The west coast of the United States relies on North Slope
crude for some 40 to 50 percent of their gasoline supply. We do
not plan to let our neighbors down. Just by way of background,
Alyeska is the operator of the 800-mile-long common carrier
pipeline system that today transports 1.2 million barrels a day
of Alaskan North Slope crude. We load an average of 42 tankers
per month at the Valdez Marine Terminal. We provide oil spill
prevention and response services to the tankers that are
transiting Prince William Sound. Since 1977, we have
transported approximately, as Senator Stevens said, 20 percent
of the Nation's domestic crude oil production.
We have a comprehensive Y2K program, with a very simple and
a clear objective, that is to ensure that oil continues to flow
in a safe and environmentally responsible manner. We have
elected to manage our program through an internal single point
of contact. My vice president and chief information officer,
Dave Laurence, who is here with me today, heads that program
up. The structure that we put in place through Dave gives me
the assurance that I need to know where we are, whether we are
meeting the deadlines and any obstacles that are getting in the
way.
We started our initial assessment and evaluation of the Y2K
program on TAPS in 1996. We have used a triage process to
categorize the systems in terms of both mission and business-
critical functions. Those are the functions that we must be
able to perform if we are going to operate TAPS safely and
reliably at the start of the new year.
Today we are devoting our effort to finalizing remediation
by the end of June. We have more than 90 percent of those
mission-critical that will be completed by then, and we will
only have two systems which, by design, will be finished up at
the end of September. We also will have our business
contingency planning complete, again by design, at the end of
November. Our team consists of 70 people who are exclusively
devoted to the Y2K issue. We share information with trade
associations upstream and downstream of our pipeline and also
with our owner companies.
Right now I estimate that final Y2K cost for the Trans
Alaska Pipeline System will be in the area of $30 million. We
decided early in the planning process that in order to ensure
our success, we would follow a very straightforward, simple,
industry standard methodology, that is first to assess the
systems, remediate them or replace them, and have contingency
planning in place.
Every system of the pipeline, the terminal, and our tanker
escort system has been analyzed. We have looked at in excess of
110,000 devices which we have inventoried. Of those,
approximately 27,000 required a detail assessment, and
fortunately we found that only a small number, approximately
130, are going to require either remediation or replacement.
Our efforts have included everything from recoding of the
software to address the double zero to changes in hardware, for
example our security systems at four of our river crossings.
Our efforts focused on completing our contingency planning.
This planning is designed to minimize the risk in the event
that we do experience Y2K failure in either our mission-
critical or business-critical systems. There we are working in
three major areas. The first is the focus on our operating
assets; second, on a companywide operation; and then, of
course, gaining mutual understanding and agreement with
external stakeholders and third parties.
Our contingency plan will assure continuity in our
operation and address any possible failures. For example, we
may actually stage people along the pipeline where they will be
able to manually operate key parts of our system. We're
mobilizing our incident command team, which are the people that
are ready to handle any emergencies in the event that we have a
serious issue.
Mr. Chairman, in closing, I want to again state that
Alyeska Pipeline has anticipated the problem, that we are
remediating that problem, and that we are prepared, and we are
ready to greet the new century, although we may be out in the
weather rather than in the celebration.
Thank you .
[The prepared statement of Mr. Malone can be found in the
appendix.]
Senator Stevens. Mr. Chairman, I have to go back to my
other hearing. Could I ask Bob a question?
Chairman Bennett. Absolutely.
Senator Stevens. Do you have any problems with any of the
contractors which interface with the pipeline? Have you checked
that to see whether there is any critical supply line that
might be affected by Y2K?
Mr. Malone. Chairman Stevens, yes, we have. We are working
with all our suppliers and vendors and contractors in an
assurance process. To date, we have had no indication of any
problem, but like everyone else, that is the most difficult
part of the process at this point in time, which is working
with those contractors and vendor suppliers to get that
assurance, but to date, we have no indication that there will
be a disruption.
Senator Stevens. Is there any date prior to the end of the
year that is critical to the Trans Alaska Pipeline System and
Y2K?
Mr. Malone. Yes, sir, there are. One that comes to mind
immediately is 9-1-99. There is several dates that it is
uncertain whether they will have an impact. We do not think so
right now. We passed through a couple of those already, but the
next one that I am aware of is 9-1-99.
Senator Stevens. 9-9-99, I believe.
Mr. Malone. 9-9. Sorry. 9-9-99.
Senator Stevens. Are you telling us that you are going to
have people out on the pipeline on December 31st at night to
just be there to turn those valves in case something goes
wrong?
Mr. Malone. Yes, sir. In addition to our normal staffing
levels, we will strategically place additional personnel to
assist if needed. Right now, all of my vice presidents will be
in one of our crisis centers. I will be there, and I have asked
that most of our people be there, because the system can be
operated, and we do have procedures for manual operation if
necessary.
Senator Stevens. That is a new experience. It will be sort
of cold out there along that line, Bob.
Mr. Malone. We have thought about that.
Senator Stevens. Thank you very much, Mr. Chairman.
Chairman Bennett. That is not an unusual thing. I was at a
very large financial services company in New York, and they
said they have booked 400 hotel rooms in downtown Manhattan for
New Year's Eve, and I said that is going to be a pretty big
party. And they said, Oh, no. We are going to fill those hotel
rooms with our technical people, and they are there because
they are within walking distance of our computers. We have
canceled all New Year's Eve vacation time and leave in order to
have the technical people available.
So they will be a little more comfortable than the folks in
Alaska, but their holiday will have been interfered with the
same way.
Senator Stevens. Mr. Chairman, as Bob probably knows, I
will be at the Alyeska resort. The ski lifts may not work, but
my wood fireplace does. Thanks.
Chairman Bennett. Thank you, Mr. Chairman. We appreciate
you being here.
Captain Davies.
STATEMENT OF PHILLIP M. DAVIES, AREA OPERATIONS MANAGER,
CHEVRON SHIPPING COMPANY
Mr. Davies. Good day, Mr. Chairman. Today I am also
testifying on behalf of the American Petroleum Institute, as a
significant number of API companies own, operate, or charter
substantial tanker fleets. My own company, Chevron Shipping
Company, operates 35 oil tankers on trade routes throughout the
world, and we have a similar number of third-party ships under
charter at any particular time.
My current responsibilities cover Chevron Shipping
operations throughout the eastern and southeastern United
States, and prior to this, I was a Y2K program manager for
Chevron Shipping Company; and along with Admiral Naccara,
attended several conferences around the world to raise
awareness of Y2K in the marine community. I am happy to say
that since these conferences, and particularly over the last
several months, my opinion of the readiness of the oil shipping
industry to meet the challenges of Y2K has changed
considerably. We have generally prepared well, and we do not
expect major problems at the turn of the millennium.
Through industry organizations such as API and the
protection and indemnity clubs, ship classification societies,
and the efforts of the U.S. Coast Guard and other international
government organizations, there has been a sharing of data on
an unprecedented scale. This information has been shared among
major oil companies, independent tanker operators, and
manufacturers. Various sites on the internet provide a wealth
of information for those looking for compliance data for
equipment fitted to their vessels.
Most companies involved in Y2K follow a phased approach
that is similar to Alyeska that involves identifying equipment,
determining the level of risk posed by the equipment,
prioritizing systems based on the level of risk, and then
developing contingency plans to deal with systems where
compliance cannot reasonably be confirmed. This may include
system replacement, alternative operational modes, or
operational restrictions to ensure safe operations.
Equipment that is critical to the ship's operation tends to
fall into four areas: proportion, steering, navigation/
communication, and cargo. Most problems to date have been found
in either control processes or in the communications equipment.
Both of these areas employ a high degree of PC-based computer
control which are generally easy to repair or replace.
Though the majority of the systems will be repaired or
replaced in the lead-up to December 31, 1999, there will always
be some potential for equipment to fail on board due to a Y2K
malfunction. Within Chevron Shipping, vessel staff has
developed contingency plans to address these failures and on-
board routine is developed around them. In the case of Y2K,
vessels will generally set watch routines to monitor equipment
where the compliance is unknown. Seafarers are trained to deal
with emergencies and contingencies and face adversities daily
such as we can expect could arise from the Y2K problem.
Seafarers are resourceful, and our ships are routinely designed
with redundancies and manual workarounds for critical systems,
and in the case of navigation, to utilize traditional methods.
In the marine oil transportation industry today, crude and
products are transported in either oil company vessels on
tonnage chartered on their behalf. A key role in this process
is the inspection and vetting process which ensures that the
vessel is in acceptable operating condition and is in
compliance with applicable rules and regulations. In
conjunction with this inspection, Chevron and other companies
have been including vessel assessments and the owner/operator's
commitment to Y2K compliance. This assessment includes
appropriate equipment audits, necessary remediation, crew
awareness on the existence of contingency plans.
In order to ensure continued supply, Chevron will only
charter vessels that have shown a high level of compliance and
have contingency plans in place. In addition, the U.S. Coast
Guard is now including Y2K awareness in its on-board program.
It further helps to focus the attention of owners and
operators. Contingency planning is a key step in the Y2K
process, and it takes two forms: preparing to operate the
vessel with equipment that may fail and positioning the vessel
such that efforts of Y2K failure either on board or on another
vessel or facility will have minimal impact on the safety of
the vessel, crew, environment, and cargo.
In order to minimize this risk within Chevron, we have
taken various steps in our contingency planning: Step one would
be to vessels where possible at sea or alongside in port, to
suspend cargo operation during critical periods, and to
increase awareness on board our vessels. We believe other
companies are addressing contingency planning in a similar
fashion.
In conclusion, the API and its member companies support the
U.S. Coast Guard effort to develop national guidance to ensure
key elements are addressed in local government contingency plan
reports. Such guidance will provide such flexibility to allow
individual ports to address their own specific needs. The U.S.
Coast Guard, through the captains of the ports or district
commanders, will take the lead in all major ports to convene
stakeholder groups that can be charged with assessing port
readiness.
Finally, due to leadership of the U.S. Coast Guard and the
initiative of the API and its member companies, the level of
awareness to have Y2K problem is such that the impact on the
oil transportation infrastructure is expected to be minimal. Of
course, Chevron and API members will continue to develop
contingency plans with the U.S. Coast Guard and the oil
transportation industry. The millennium rollover and its
effects are not an emergency or surprise event. Our awareness
of the problem has allowed us to plan well in advance, and the
industry has the knowledge and tools to deal with any problems
that may arise.
And I will be happy to answer your questions later.
[The prepared statement of Mr. Davies can be found in the
appendix.]
Chairman Bennett. Thank you very much. Mr. Ingle.
STATEMENT OF MICHAEL INGLE, TREASURER, SERVICE STATION DEALERS
OF AMERICA
Mr. Ingle. Good morning.
Chairman Bennett. Good morning.
Mr. Ingle. Mr. Chairman and members of the Senate Special
Committee on the Year 2000 Technology Problem, my name is
Michael J. Ingle, and I appreciate the opportunity to appear
before you today to present the dealers community views and
projections concerning gasoline availability on January 1st of
the Year 2000. I have been a dealer for 30 years and currently
operate two Amoco stations in Lanham and Bowie, Maryland. I am
currently serving as the president of the Washington, Maryland,
and Delaware service station association which represents over
1,000 small business members. I am also treasurer of the
Service Station Dealers of America and Allied Trades. SSDA-AT
is a 53-year-old national association representing 22 state and
regional associations with a total membership in excess of
20,000 small businesses in 38 states and individual members in
all 50 states, the District of Columbia, Puerto Rico, and Guam.
Like the motoring public, we too are concerned about
product availability and distribution on January 1, 2000. While
dealers are dependent on their suppliers, we are in the front
lines when consumers have concerns, and we are dependent on the
sale of the motor fuel.
The petroleum industry has been actively addressing the
Year 2000 challenges for the past several years. While
individual service stations are at varying levels of
compliance, the major petroleum companies have not identified
any Y2K challenges that cannot be overcome. In particular, oil
companies and their service stations have reached out to
business partners, customers, and suppliers in order to develop
compatible solutions that share best practices.
Throughout the country, seminars have been presented to the
retailing end of the industry. We have one such meeting
scheduled for May 20th in Annapolis, Maryland. Just as
petroleum marketers are used to preparing contingency plans for
supply disruptions and natural disasters, preparation for the
arrival of the Year 2000 has been no different. Special
contingency plans and backup suppliers and systems are in place
to allow for uninterrupted service to consumers.
Based on recent industry surveys by the Natural Gas Council
and the American Petroleum Institute, the petroleum industry as
a whole is well on its way to being Y2K ready. In fact, almost
all companies surveyed indicated that they will be Y2K ready by
September 30, 1999.
The following are some commonly asked questions by the
public regarding our industry and this issue:
Will service stations be open December 31, 1999 and January
1, 2000? Yes, depending upon the store's usual hours. The Year
2000 is not expected to be a factor in unscheduled store
closings.
Will I be able to use my credit card at a service station
during the Year 2000? Credit cards were one of the first Y2K
issues widely recognized and publicized, therefore service
stations along with the entire retail industry have been
analyzing, replacing, and testing credit card systems to ensure
the Year 2000 compliance. They have also been working closely
with credit card companies in order to guarantee that business
processes are not compromised with rollover to the new
millennium. In isolated incidents, computers would have
problems with some credit cards. The result would mean that
some of these credit card's automated tasks would have to be
done manually.
What are retailers doing to ensure that gasoline will be
available and fuel pumps will be functioning in the Year 2000?
Most service station lights, fuel pumps, and registers rely on
electricity in order to work, thus service stations are working
closely with the utility providers to ensure a smooth
transition to the Year 2000. In particular, the electric
utility industry is preparing for the new millennium in aiming
for 100 percent reliability and electric power on January 1,
2000.
According to a North American Electric Reliability Council
report, virtually all electric power systems in North America
will be ready for the Year 2000 by the target date of June 30,
1999. Consumers can expect few, if any, shortages of petroleum-
based fuels in the Year 2000.
Service stations are working to ensure reliable,
uninterrupted service. Even if there are some isolated supply
interruptions, the impact on consumers will be minimal as
service stations generally have backup suppliers. So if these
primary suppliers experiences Year 2000-related problems,
service stations have additional suppliers that they can
contact.
Should I be stockpiling gasoline in the preparation for the
Year 2000? There is absolutely no reason to stockpile gasoline
in anticipation of the Year 2000. The petroleum industry is not
anticipating any supply distribution disruptions. The latest
survey, mentioned previously, shows that the industry is more
than 90 percent ready. While there may be brief, isolated
incidents or localized problems or circumstances beyond the
industry's control, fuel should remain widely available.
Therefore, the industry urges consumers not to risk their
safety and the safety of their neighbors by storing unnecessary
and possibly unsafe quantities of gasoline in the preparation
for the Year 2000.
Will environmental monitoring systems at service stations
be working properly in the Year 2000? Most environmental
monitoring systems are time and date sensitive, therefore
service stations have been working aggressively to fix computer
systems, equipment, and software that may be sensitive to the
Year 2000 rollover. Although the petroleum industry is not
anticipating any disruptions in this area, it should be noted
that since monitoring systems are equipped for fail-safe
checks, if the equipment experiences problems related to the
Year 2000, at the worst, the tank will simply shut down.
SSDA-AT believes that the industry will be ready for the
new millennium, that product will be available, and that
consumers need not panic. In fact, we are betting our
livelihood on it. Thank you.
[The prepared statement of Mr. Ingle can be found in the
appendix.]
Chairman Bennett. Thank you very much.
Mr. Malone, you gave us some dates that, in the overall
context of this committee, sound quite late, and you said the
dates were deliberately chosen. Will you explain why you are
choosing dates that are so close to the actual millennium turn?
Mr. Malone. Well, let me start with the contingency, Mr.
Chairman. We are, by design, waiting as late as we can, not
with designing. We will have a lot of it done, but the formal
implementation and closure of it, we are waiting as late as
possible to make sure there is nothing more that we need to
include in that contingency plan. So I did not want to leave
the impression that we have not done anything. We are working
that right now. It is going to be finalized this November.
Chairman Bennett. You did not leave that impression, but I
have never heard anybody say this will be done in November by
design. Usually, we hear people saying this will be done by the
end of June, and we will deliberately get everything done as
fast as possible. Here is the impression that you have
deliberately picked November.
Mr. Malone. Again, Mr. Chairman, just to make sure that we
have got everything included before we formalize that
contingency plan. So it will be ready, and it will just be left
open until November.
The two other control systems that were talked about, we
are waiting on a final engineering design and to look at
whether--we know the remediation. We have a workaround if we
need to. What we are working right now is to see if we can get
a delivery on two of our meters. If not, we will do a
workaround, and it will be in compliance. So by design means we
have got a solution, but we are waiting on delivery of a part.
If that does not occur, then we will do it at the end of
September by workaround.
Chairman Bennett. I see.
Now, both Admiral Naccara and Captain Davies, you heard Mr.
Malone talk about the people that are going to be physically
out on the pipeline getting a little chillier than they might
otherwise be on New Year's Eve, and you talk about the ability
of the oil tankers to handle things manually. Are there plans
for larger crews? Will there be people who would otherwise be
home in their beds or celebrating over the time who are going
to have their holiday period interrupted because they are going
to be on the ships, or can the existing size crew handle the
manual operation? Either one of you or both.
Mr. Davies. OK. Mr. Chairman, yes, in general, our own
ships, and here, generally, I will talk about Chevron itself,
although I do know how many of our competitors work and the
independent tanker owners that we use. Over the years, yes, the
automation on ships has increased, but what is tended to happen
is that the technical staff size has stayed the same. So though
we now have unmanned engine rooms at sea and fully automated,
we do have the staff on board because we do our own maintenance
on board the ships, and that has continued to be a function.
Those same engineers, generally the electricians and
electronics officers who are doing the maintenance, are also
available on board to do watches. So when we get to the
millennium, rather than having an unmanned engine room, we will
have people on watch down in the engine room, and yes, we still
do have sufficient manning on the ship to do that.
Chairman Bennett. OK.
Admiral Naccara. Sir, it is conceivable that the U.S. Coast
Guard may require supplemental crews in some cases when vessels
are entering U.S. waters. It will be one of the variables that
the Captain of the Port can control. We have broad authority,
certainly, and can restrict movement. We can prohibit entry of
the vessel, or we would require additional crew if we thought
that was necessary.
But the important element here will be the exchange of
information before they reach the sea buoy, before they are
about to enter U.S. waters, and we hope that we will have
exchanged information so that we can have a good appreciation
for the preparedness of that vessel and the port facility to
which it will offload, and at that point, we can make a
decision, and if the vessel is prepared, and we feel they have
had a good history in complying with international and domestic
regulations, probably the vessel would be able to come in
unhindered. If we have some particular cause for concern, for
example if their contingency plans require additional people at
certain key places, if the crew can resolve that, that would be
fine, but if they need additional people, that is conceivable.
Chairman Bennett. Mr. Malone, you were here and heard me
read the example of what happened in Iraq when there was a
breakdown of data. Even though it had nothing to do with the
physical operation of the pipeline, it produced the same
effect. How susceptible are pipeline control systems in the
United States? Not just yours, but whatever you may know about
other pipelines, what are the chances of a repeat circumstance
like the one I described?
Mr. Malone. Well, Mr. Chairman, I could not comment on
other pipeline systems that are used.
Chairman Bennett. All right.
Mr. Malone. If I could, I will comment on ours.
Chairman Bennett. All right. Fine.
Mr. Malone. Alyeska, we do use repeaters. It is a primary
communication link. So if we were to lose that communication,
our immediate response, my policy is to begin to limit
production and take the line down until we can re-establish
communication. We have, though, two redundant--three systems:
the repeaters, and we also have two backup satellite systems,
and I would also say hopefully by then we will have cut over to
a fiber-optic system, but the repeater is our primary one, so
we would go down the minute we lose communication until we
could move over to the satellites.
Chairman Bennett. Let me ask you a question that you
probably get a lot, but given the amount of hysteria that has
been whipped up on some web sites about Y2K, here is an
opportunity for you to set the record straight. Some people say
that if the Alaskan pipeline is forced to shut down--and I
wrote down you just used the phrase ``take the line down''--
that it will somehow freeze or congeal or whatever, and one
shut down in the pipeline means the entire pipeline from Alaska
down to the lower 48 becomes inoperable for all time. Do you
want to deal with that particular suggestion?
Mr. Malone. Mr. Chairman, I would love to. Let me clarify
the record.
Chairman Bennett. I thought you might be prepared for that
one.
Mr. Malone. Yes, sir. First of all, we have nine million
barrels of storage in Valdez, crude storage. So we could
continue loading tankers. Second of all, the pipeline does not
congeal. It does not freeze up. We have taken the line down
numerous times in minus 40, minus 50-degree-weather for as long
as 5 days, and early studies that were done showed that the
line--this was the 1977 time period--that the line could be
down for as long as 20 to 40 days, and the oil inside the
pipeline, which is insulated, would have to get below minus 20
degrees to get any phase change or jelling.
We also, though, have just completed tests. With the new
crude mix that we have and the injection of natural gas
liquids, preliminary data shows that it would not congeal at
all over any length of time.
Chairman Bennett. I am glad to have that on the record
because that is one of the things we hear all the time: Gee, we
are going to get an embedded chip somewhere in the Alaskan
pipeline, and it is going to turn into a giant fudgecicle. We
will never get any more oil.
Mr. Ingle, the most recent survey in the oil and gas
service captured 48 percent of the service station sector, and
I assume you are responding with your information out of that
survey or some of the information about that survey. The
obvious question will be, well, what about the other 52
percent, and are not we in a situation where the people who are
going to be ready are responding and the people who have
problems are not responding, and does not this really show that
half of the service stations are not ready?
In the same spirit that I gave Mr. Malone the opportunity
to deal with the doomsday scenario in his area, I give you this
question so that you can respond yourself.
Mr. Ingle. In our industry, in our network that we have, we
have different types of service station owners and so forth,
but in our--like in my situation, I am a dealer, and I am
supplied by a major oil company, the Amoco Oil Company. Most of
all the systems that I have are controlled by the oil companies
and the computerization and monitoring systems that we have for
EPA and everything that we have.
You know, I have other problems in my industry that I need
to worry about as far as car repairs and things like that. I am
more worried about that than I am about the gasoline part, and
I guess I will tell you that because we are pretty much assured
by the oil companies that everything is going to be taken care
of, and it already is because they have been working on it for
years.
And I guess an analogy would be this is the business
sector, and there is multi, multi-billions of dollars at stake
here, and our business sector is probably--like that pipeline
over there, like the human being, if it has cutoff its blood
supply or had a heart attack, it is going to die, and we have
got a pipeline over here on this drawing that we have, this
picture over here, and if something happens to that, the blood
is our fuel, and if the fuel does not come, the industry, one,
is going to be totally embarrassed the oil companies as well as
the dealers, as well as I will have gas lines at my pumps, and
I do not want to do that again like I did back in the
seventies.
I just cannot imagine this happening, because there is just
too many billions of dollars at stake here, and no one is going
to be embarrassed enough the let that happen, as well as the
fact that all the contingency plans that I have talked to
different people at Amoco, as well as the industry experts,
that there is all types of backup plans and everything else
that they have in place if this were to happen, because there
is just too much at stake.
Chairman Bennett. Well, if I hear what you are saying, the
fact that only half of the service station owners responded to
the survey is not an indication of the amount of information
you have, that the major oil companies upon whom you depend for
your product have covered 100 percent of the service stations.
Is that basically what you are saying?
Mr. Ingle. Yes. I have had those forms come in, and I am
going to fill them out, but basically what you have got there
is the oil companies are taking care of all that problem, and
as dealers and talking to the other dealers, when we look at
this, and we discuss it, we say, well, we are not in control of
this. There is nothing we can do about it, but we surely will
be on the telephone if we have a problem at our station where
we are concerned ourselves with the front line with the
customers, and we do not have supply or something is shut down.
We are going to be right on the phones.
But we know that the oil companies are taking care of that
problem, and the dealers have no control over that, other than
if something happens, they are going to hear from us.
Chairman Bennett. Well, will an oil company come in to you
and say, OK, the ATM-type machine that you now have currently
in your pump has got to be checked, or is that your
responsibility to check that?
Mr. Ingle. The oil companies do come in and check that,
yes. And we have all these systems, and I know in particular
with Amoco Oil, in our system, they have gone state-of-the-art,
new system, new computer system, and just in the last few
years, that has been a major, major project to put these
systems in that we have now at each one of our facilities, and
because of all that, I am sure that a lot of the concern was
Y2K.
I know credit cards concern me a lot. You know, when I look
at this problem, I do not think that pipeline is going to shut
off. I am, you know, 95 percent, 98 percent sure it is all
going to be fine. There might be an occasional problem here or
there, but it is not going to be something that is going to be
long term. I am more concerned about individual credit customer
coming in trying to use their credit cards at my pump and
finding out there is a particular problem because this credit
card company was not really Y2K ready.
Chairman Bennett. I do not think you will have any problem
with the credit card company. Our experience in other parts of
this committee indicates it will be with the reader at your
pump. We have had the experience where credit card companies
have done what they needed with their host computers back home
and then ran into a merchant somewhere whose computers and an
ATM, for example, in a bank, and the particular computer at the
ATM could not read a card that said 2000.
Now, we are quickly going to point where all credit cards
will be an expiration date of 2000 or later by the time we get
to the end of the year. If you are not at that point, your card
is expired. There were some major companies, credit card
companies, that delayed issuing credit cards with an expiration
date past 1999 until they could check their network of
merchants and make sure all of them had their point-of-sale
machines remediated for just that reason. But we are beyond
that point now.
Mr. Ingle. Well, we have these back up systems. You know,
my businesses are completely computerized, but for instance, we
used to have to stick our tanks on a regular basis, on a daily
basis, and do all of that and call up and order our gasoline.
We are all completely computerized now, at least most of us,
and that is all done by monitoring electronic systems, which is
fabulous, but if it comes down to it where it is a problem, I
will get the old stick out and I will go out and I will stick
the tanks. I will call it in by telephone. Hopefully the
telephone is working, and we will get all of that taken care
of.
So I think that is where we have got to come down to
basics, to where if we have to go back to manual ways of doing
business, we are all prepared to do that. But I pretty much can
assure you that I do not think the pipeline and the fuel is
going to be shut down. There is too much at stake here, way too
much at stake.
Chairman Bennett. I cannot resist. My first memory of a
service station in the situation you have described is filling
a glass bottle that has calibrations printed on it, and then
you open the pump and watch the gas come down the glass bottle.
I hope we do not have to go back to that.
Mr. Ingle. I hope not, because I do not know how to do
that.
Chairman Bennett. You do not know how? It is really very
simple. It is really very simple.
Unless any of you have an final comment you wish to make,
let me thank you all for being here. This has been a productive
hearing, and we hope that not only have we added--we know we
have added to the committee's knowledge about the level of
preparedness, but we hope as a result of your being here, we
have added to the public awareness of how far along we are here
so that no one will feel the necessity to fill their garage
with five-gallon cans filled with flammable material.
Thank you again. The hearing is adjourned.
[Whereupon, at 11:12 a.m., the committee was adjourned.]
A P P E N D I X
------
ALPHABETICAL LISTING AND MATERIAL SUBMITTED
______
Prepared Statement of Chairman Robert F. Bennett
Good morning and welcome to our hearing on Y2K and the oil
industry. When Senate Resolution 208 was passed on April 2, 1998,
establishing this Committee, our first course of action was to prepare
a hearing on the energy sector of our Nation's economy which was held
on June 12, 1998. The repercussions of a computer glitch affecting the
energy business are painfully obvious.
In that first June hearing, I focused on the fact that all
utilities are highly dependent on services, suppliers, and other
upstream sources. Even power distribution companies are dependent on
foreign oil imports. Consider for a moment what else is affected by
oil. Automobiles always come to mind first--our ability to get from
point A to point B. The price of gas affects how people perceive the
health of our economy--and in return the perception of our economy
affects the economy itself. Americans have recently seen a sharp
increase in gasoline prices resulting from a unified reduction
agreement among gasoline manufacturers. In March, OPEC announced that
it would cut production by 2.104 million barrels of oil per day. Though
under this agreement by OPEC companies the amount of oil available to
the world market would only be reduced by 2.6 percent, the effect is
much greater. Literally overnight, this announcement resulted in a 20%
increase in gasoline prices, with prices surging by 20 to even 40 cents
per gallon. Clearly a minimal reduction in world supply can have
disproportionate effects on price. A reduction in the amount of
available oil resulting from Y2K related mishaps poses a serious
problem, and the potential for this happening is worth investigating.
When the price of gas increases, everyone is affected--whether you
happen to drive a car or not. Consider who bears the cost of heightened
shipping costs when product manufacturers must increase prices to
offset an increase in distribution costs. When gas prices go up,
virtually all prices go up. We are interested to learn whether or not
this is a likelihood due to Y2K, because of the tremendous effect this
may have on the economy, and on the wallets of average Americans.
Cost is not the only concern--availability is an even greater
concern. The gas lines of the 1970s are still vividly on the minds of
Americans who were driving at the time. A gas line in and of itself is
a symbol of economic difficulty. No one wants to revisit that event.
There are over 180,000 gas stations nationwide, of which 114 are right
here in Washington, DC. With traffic the way it is in the District, a
gas line in Georgetown or on Capitol Hill would surely bring all the
beltway pundits out of the woodwork in speculation of global economic
ruin. That is why we are here today. That is why we have invited our
witnesses, and we thank them beforehand for their testimony.
Inherent to the availability of oil is the readiness of
transportation systems and ports. It continues to be the chief priority
of the Special Committee to continue to receive accurate and
comprehensive information concerning the Y2K readiness status of all
sectors of our infrastructure. However, getting accurate and
comprehensive information from other countries presents a much more
difficult dilemma. When we look for information on the status of
transportation systems of countries that ship petroleum products, we
are deeply concerned about what we have been able to find; information
has been extremely limited. According to an anonymous reliable report
the Committee received, there is an apparent lack of information
characterizing the confidence of key nations about the Y2K status of
their shipping services. Take for example the top three U.S. oil import
sources--Canada, Venezuela and Saudi Arabia. Information on the
transportation systems of these three countries, which has an obvious
effect on oil distribution, has been extremely limited. In fact, only
Canada appears to have at least some information, and there is
virtually nothing known about the status of the other two countries.
Additionally, should the oil exporting countries be able to produce
and transport oil, will port readiness become a factor? Will tankers be
able to dock and deliver their product? All of these questions need to
be answered.
This issue is extremely complicated, and cannot be simplified by
assuming that an oil shortage due to Y2K problems in one place will be
offset by production and distribution in another. The United States is
the largest producer of petroleum products, and Saudi Arabia remains
the number one source of crude petroleum, yet there are literally
dozens of other countries that participate in this global trade
business, and it is a difficult task to ascertain how problems or
shortages in one place might affect oil trade elsewhere in the global
market.
More importantly, and something that is a fundamental problem in
addressing Y2K issues for a single oil company, is the fact that myriad
date sensitive systems exist within every organization. Flow meters,
transmitters and smart valves all have embedded chips and are key to
pipeline operation. These embedded chips are found in drilling and
production platforms, whether they are earthbound or offshore. The
export terminal must function, and the tanker must successfully
navigate and cross the ocean. Finally, the receiving platform must
operate efficiently, and all this is just to transport the crude oil
from the source to the refinery. The refinery with all of its systems
must function properly. Then assuming domestic transportation services
and point-of-purchase services are up to speed, there should be no
shortage--no lines. We are here today to find out if that's going to be
the case.
__________
Prepared Statement of Red Cavaney
Mr. Chairman and members of the Committee: My name is Red Cavaney,
and I am president and CEO of the American Petroleum Institute. API
represents over 400 member companies in every aspect of the oil and
natural gas industry, including exploration and production,
transportation, refining, and marketing. I am pleased to testify before
you today on our industry's preparations for the Year 2000.
I want to assure this committee and the American people that the
oil and gas industry is working intensively to prepare for the Year
2000 and feels it will be ready to supply our customers at that time.
We have a responsibility to our shareholders, to our customers, and to
our employees to be prepared. We will meet that responsibility. To do
so, we have been engaged in a variety of efforts.
We have long anticipated the challenge of Year 2000 computer
conversions, and the industry has been working hard on this problem for
more than 5 years. Our members asked API to create a special Year 2000
Task Force to coordinate the industry's efforts and to share technical
information directly among more than 50 participating oil and gas
companies, and indirectly through an Internet Web site and by other
means with thousands of others. Our Task Force is also sharing
information with the electric power and telecommunications industries
because of our interrelationship with them and our reliance on their
Y2K preparations. And, we are a leading participant of the President's
Council on Year 2000 Conversion where we represent 10 allied industry
associations and work closely with many others. The industry's efforts
are coordinated with those of the President's Council and with the
Federal Energy Regulatory Commission (FERC).
Within our member companies, our industry's computer experts have
been assessing, repairing, and testing software, hardware, and embedded
processors. They have validated their work by testing that equipment
both online and offline. And, they have been preparing contingency
plans to ensure that there are responses to virtually any eventuality.
Recent evidence demonstrates that all of this work is paying off.
In January, API and the Natural Gas Council surveyed the domestic
oil and gas industry's Y2K readiness. This evaluation included
companies of every size. We explored several facets of the domestic
industry's readiness-including planning, inventory, assessment,
remediation, and validation. Our survey covered both information
systems and embedded chips. The 1,000 companies that responded supply
88 percent of the oil and natural gas the Nation consumes. Here is what
they reported:
(The overwhelming majority of companies responding-94 percent-said
they would be Y2K ready by September 30, 1999, (More than four-fifths-
86 percent-of the companies are in the final stages of fixing and
testing their business information systems, (Seventy-eight percent of
the respondents are in the final stages of fixing and testing hardware
and embedded systems to ensure their operational integrity, (Embedded
chips, once seen as a major obstacle in preparing for Y2K, are not the
problem earlier anticipated; and (Ninety-seven percent of the companies
said they expect to have their Y2K contingency plans in place and
tested before October 1, 1999.
These figures, which show an improvement in the industry's
readiness, update survey data from last year. We believe it is
important that the latest data be part of the official Senate record,
because they show the industry's progress and also help ease any
consumer concerns that are based on outdated information.
Our survey results are only one reason for our confidence in the
industry's ability to meet the challenge of Y2K. Because of the nature
of our industry, crisis planning is a fundamental part of any company's
daily business plan. Companies must have the means available to get the
job done, even if some systems fail unexpectedly. It is within that
framework that our companies have been building contingency plans for
Y2K into their operations. Much of the oil and gas industry's equipment
already has mechanical and manual backups, so that in the event of a
computer malfunction, a company can still run its equipment using
mechanical devices or through manual operations. The industry often
operates this way in the face of hurricanes, lightning, and snowstorms.
Oil and gas companies are used to meeting challenges, and successfully
handling Y2K-as large as it is-is well within our scope of competency.
Still, we are taking nothing for granted and are doing all we can to
assure that we are not surprised and that our systems function smoothly
on January 1st and thereafter.
That said, let me turn to the source of much of our supply. The
U.S. is largely self-sufficient in natural gas. In 1998, the Nation
imported less than 14 percent of the natural gas we consumed. Canada
was by far the leading foreign supplier, with Mexico and Algeria
providing only small fractions of our natural gas imports.
Oil, however, is another matter. Last year, the Nation imported 56
percent of the crude oil consumed in the United States. That is an
average rate of 10.4 million barrels of oil imports a day, according to
the U.S. Department of Energy. Those supplying most of that oil in 1998
were Venezuela, Canada, Saudi Arabia, Mexico, Nigeria, Angola, Iraq,
Colombia, the Virgin Islands, and Algeria.
The Department of Energy (DOE) has indicated that the four largest
exporters to the United States-Venezuela, Canada, Saudi Arabia, and
Mexico-are preparing their computers for Y2K and expect all critical
systems to be Y2K compliant by the end of 1999. In Venezuela, PDVSA,
the state oil company, is addressing the problem of computer programs
and embedded chips with a clearly defined program that is moving ``at
an accelerated pace.'' Saudi Aramco has targeted mid-1999 as the
deadline for its Y2K remediation problem. And PEMEX, Mexico's state
owned oil company, is meeting its deadline to make its information
systems Y2K ready, and appears to be on target in preparing its
industrial systems for the millennium. Its goal is to be Y2K compliant
by the third quarter of 1999.
In addition, Indonesia's state oil and gas company has said its
computer systems will be Y2K compliant by September. Two other
providers, Colombia and Algeria, are evaluating their systems and are
reportedly beginning efforts to be Y2K ready. And, the United Kingdom,
Kuwait, and Norway expect to be Y2K compliant, according to DOE.
Moreover, petroleum associations from the United Kingdom, Canada,
Japan, and Australia are participating either directly or indirectly in
API's Task Force on the Year 2000. They have access to the technical
information on Y2K that our companies are sharing with one another.
American oil companies are in business all over the world. API
members are indicating that their operating divisions abroad are on
track to be Y2K ready. They are operated according to American
standards, and they have contingency plans in place to deal with
problems.
Still, to improve Y2K readiness abroad, and to determine the
international oil industry's ability to meet the U.S. demand for
energy, API's International Oil Y2K Work Group joined with FERC, DOE,
other Federal agencies, and the International Energy Agency to create
an International Oil Coordination Council. Council members exchange
information on industry and government efforts and are working to
assess the industry's Y2K readiness on an international scale.
What if things abroad do go awry because of Y2K? There are a number
of factors to consider in evaluating the impact. First, there is a
great deal of crude oil production capacity in the world. If one
country cannot export, another may be able to compensate. Second, even
if a number of suppliers experience Y2K problems, imports into the U.S.
would not stop instantly. There is always some crude oil enroute to the
U.S. via tankers, some of which can take 5 weeks to cross the seas. If
foreign suppliers have production problems, we will know this the day
it happens. It will be an early warning alert that will give the
industry time to move supplies around and compensate for lost
production. The industry intends to be prepared to minimize the impact
of any failures abroad. If they can be remedied in a short period of
time, then the disruption should be manageable, since inventories can
buffer short delays in securing imports. Third, as for oil and gas
industry equipment itself, we do have experience in what would have to
be done to redress Y2K problems. Finally, beyond private resources, the
Federal Government owns and operates the Strategic Petroleum Reserve
(SPR). We regard the SPR as an essential buffer to protect the economy
in the event of a serious interruption in foreign oil supplies-such as
the two disruptions that occurred in the 1970's. In our view, the SPR
is a resource that could be used if Y2K conditions eventually warrant
their use.
The petroleum industry's Year 2000 efforts are designed to ensure
that products will continue flowing to consumers as usual on January 1,
2000, and thereafter. Although the industry has never experienced a
challenge quite like this, there have been other disruptions to the
flow of oil, and there is a record of our industry's response.
In a 1989 report to the Secretary of Energy, the National Petroleum
Council said it had made 10 inventory studies over the past 50 years to
help the Federal Government in its emergency preparedness. The NPC
noted that ``since the end of World War II, no serious petroleum
shortages have occurred at the consumer level except gasoline lines in
the era of price and allocation controls.'' Yet, NPC said, the system
has experienced repeated stress, including refinery problems that led
to reduced gasoline production in 1988, fuel-switching by electric
utilities from natural gas to oil at the time of a heat wave in 1986,
and a cold wave that reduced both crude and refinery production in
1983-84.
The oil and gas industry was able to overcome the stresses to its
systems because contingency planning and crisis management are a
fundamental part of each company's business plan. Most recently, this
industry's flexibility enabled it to serve its customers during the
hurricanes of 1998 that disrupted offshore production in the Gulf of
Mexico and caused problems at some refineries. It has continuously
brought its products to market despite actions like the Persian Gulf
crisis and the gasoline supply difficulties of the summer of 1997. The
industry seamlessly drew on inventory, or used alternate routing to
deliver its products, or coped with supply problems when refineries
were offline for maintenance by asking other refineries to step up
operations to pick up the demand.
The NPC study also evaluated the impact of six hypothetical stress
scenarios on the industry's ability to deliver. NPC considered a
disruption of oil imports, colder-than-normal weather, a disruption of
natural gas imports from Canada, a disruption in the flow of products
in a Midwestern pipeline, a 30-day shutdown of the Trans-Alaska
Pipeline System and a 30-day disruption of oil imports from Canada.
While the study did not include a Y2K problem, it showed the industry's
ability to respond and what might happen if supplies were disrupted.
NPC reported that ``each of these disruptions could be handled with
varying degrees of problems, but without major hardship, because of the
resiliency and flexibility of the nation's supply system.'' At the end
of the day, the critical question is: ``Can we give you a 100 percent
guarantee that absolutely no problems will occur and consumers, without
exception, will find what they want when they want it?'' No one can
make such a blanket assurance because we live in an interdependent
world. But we can guarantee that the domestic oil and natural gas
industry is well prepared to serve our customers and keep energizing
our economy. We can guarantee that the domestic oil and natural gas
industry has been and is working very intensively on many fronts to
prevent Y2K problems from arising and to successfully handle those
problems that do arise.
The process of manufacturing gasoline, heating oil, diesel fuel,
motor oil and the feedstocks from which essential products are made is
not a real-time event. We are used to managing our way around
inconveniences and interruptions at our facilities. We are used to
responding to outages by redirecting the flow of products and by
drawing on inventories as necessary. We believe that capability will
enable the industry to handle whatever situations arise with minimum
inconvenience to our customers.
We know that some who remember the gasoline lines of the 1970's may
question our resolve. But every competent analysis of that era
concluded that those lines were the result of government price and
allocation controls, not a shortage of gasoline.
A well-informed consumer is our best ally. That is why we are
concerned about misinformation on the impact of the Year 2000
conversion being trafficked in the public domain. We are concerned that
some who may mean well but are nonetheless uninformed are inviting
unintended consequences in the marketplace when they recommend that
consumers should take their money out of the bank, or fill their
gasoline tank, or horde gasoline and groceries. Such changes in
behavior could produce consequences that are totally apart from how
well our industry and other industries are doing the job of preparing
for the future. Congress can help by putting out factual information
about industry preparedness to deal with Y2K, and by avoiding any
unnecessary constraints on the private sector, which has a direct
commercial interest in assuring a continuous flow of products and
services to consumers. Congress can also use its oversight role to
assure the Y2K readiness of the SPR, should it be needed.
The Year 2000 conversion has a very high priority at API and
throughout the oil and gas industry. We are service industry, and we
fully expect to meet the tests of the millennium. What I have presented
here represents the highlights of what we are doing. Additional
information is available on the API Web site at www.api.org/y2k. It
includes a Y2K data base created to foster the sharing of critical
information on testing software, hardware, embedded systems, and
related components. Our site also includes information on what
government is doing and what our companies are doing as they prepare
now to meet consumer needs next year, and thereafter.
We appreciate the opportunity to testify today and to update and
enhance the public record on the oil and gas industry's preparations
for the Year 2000.
Thank you.
__________
Responses of Red Cavaney to Questions Submitted by
Chairman Bennett
Question 1. You mentioned in your testimony that API represents
over 400 member companies in every aspect of the oil and natural gas
industry. You also indicated that API has created a special Y2K task
force with more than 50 participating oil and gas companies. Can you
explain what is being done to ensure that the remaining 350 companies
are also coordinating their efforts to become Y2K compliant?
Answer. While it is true that only 50 companies actively
participate in API's Year 2000 task force, these 50 companies represent
the overwhelming majority of the U.S. petroleum industry. Specifically,
these companies represent:
80 percent of U.S. oil and natural gas production.
73 percent of U.S. refining capacity.
70 percent of U.S. pipeline deliveries.
43 percent of U.S. retail service stations.
In the upstream area in particular, many of the companies that are
not participating in our task force are likely to be joint venture (JV)
partners in various exploration and production efforts with one or more
of the 50 companies that are participating in task force meetings and
workshops. The commercial integrity efforts within these JVs that are
driven by task force member companies would make non-member companies
fully aware of their potential Y2K problems and would quite likely spur
them to address those problems. The interdependency of a partnership is
encouraging this.
Similarly, those 350 companies have customers and suppliers that
are concerned about their own commercial integrity and are encouraging
those oil companies to develop robust Y2K programs as a matter of self-
defense.
Equally important, the free enterprise system has nurtured the
development of a Y2K industry. There are consulting firms, Y2K-specific
publications and Y2K computer experts who are actively marketing their
services. This new Y2K industry is not only working with some of the 50
companies that are participating in the task force, but it is
undoubtedly working with a portion of the 350 companies that are not
task force members.
Question 2. The results of your survey are very reassuring and
impressive. API's efforts are to be commended. You even noted that 97%
of the companies expect to have their Y2K contingency plans in place
and tested before October 1, 1999. Will you please describe how this
testing is going to be done? What kind of business continuity and
contingency plans are in place? What happens to the companies that fail
to meet this deadline? And to those who did not respond to the survey?
Answer. The petroleum industry in the United States is extremely
competitive. Moreover, the United States government has very strict
laws in place to prevent anti-competitive collaboration among oil
companies. As far as I know, there is no industry-wide contingency plan
in place. I want to emphasize, however, that our companies have a clear
understanding of the additional business risk that Year 2000 problems
present to them. They understand that they have a duty to serve their
customers, to protect their shareholders, to preserve their brand
images and to maintain their reputations. That is why Year 2000
preparations in this industry began five years ago. That is why the
investment in Y2K preparations by oil and gas companies now exceeds $2
billion. I do not know a single CEO in this industry who would stand by
and let so highly publicized and highly predictable an event as the
computer changeover damage the company that he or she leads. These
companies have prioritized their risks and have put contingency plans
in place to address them.
Contingency planning is a fundamental part of the oil and gas
business. From exploration to production to transportation and
refining, this is inherently a risk management business. Oil companies
have proven over the years that they are excellent at understanding and
managing their risk portfolio. The Year 2000 issue merely adds another
facet to the risk management dimension.
Industry contingency plans are routinely tested (or ``exercised'')
in the oil industry through the use of what are called ``table-top''
and ``real-time'' drills. These drills are designed with specifically
identified objectives in mind for whatever aspect of the contingency
plan is to be tested. To prepare for the Year 2000, these contingency
plans are being retested by individual companies via simulated Y2K
scenarios that test response capabilities and processes--some on a
worldwide basis.
For those companies that fail to meet the October 1, 1999 date by
which 97 percent of the industry expects to have contingency plans in
place, several things could happen:
(1) Nothing. It might not be a problem in some cases. Companies
could get their plans in place between October 1 and the end of the
year. Or they might not be highly automated or use systems that are
date dependent. Or they may not have one of the very few embedded
systems we're seeing that have a significant impact on safety, the
environment or production effectiveness. Or they may not have key
suppliers or customers that fail or would be interrupted. Under those
circumstances, a company might not see an impact on their business.
(2) If they are publicly traded companies that have to file an SEC
10 disclosure, and they disclose as required, their market value could
be negatively impacted when investors realize the additional risk
associated with owning shares in a company that lacks Y2K contingency
plans.
(3) If a company fails to put appropriate contingency plans in
place, and events at key dates cause problems, they potentially won't
be able to deal effectively with failures and interruptions. If these
are significant, either in magnitude or duration a company could
potentially lose market share and suffer the consequences.
At the end of the day, preparing for Y2K is about preparing for
business continuity. It is about survival and that is driving companies
to develop appropriate Y2K contingency plans, over and above the
activity sponsored by API and the President's Council on Y2K
Conversion.
Question 3. The National Petroleum Council (NPC) study covering the
six hypothetical scenarios on the industry's ability to deliver oil and
gas seems fairly thorough as it assesses variables that are seemingly
unrelated. But each of these scenarios was distinct and finite in its
disruption possibility. What will happen in the gas and oil industry
if, as a result of Y2K, more than one of the scenarios happens
simultaneously or the disruptions create an aggregate bigger than the
singular previously studied?
Answer. We believe that the likelihood of significant simultaneous
disruptions in the Year 2000 is not much higher than likelihood of
simultaneous disruptions today. As I said in response to question
Number Two, our member companies deal with risks on a daily basis and
are prepared to cope with any number of risks simultaneously.
Question 4. Your testimony mentions specific contingencies for the
transportation of oil and gas. However, I am interested to know more
about what is being done to ensure the readiness of oil refineries for
Y2K. Will you explain how oil refineries are doing in their efforts to
become Y2K compliant?
Answer. Like many others in process control industries, we
originally believed that Year 2000 problems posed by ``embedded chips''
would have an adverse impact on our refineries. After a significant
amount of testing and impact analysis, we recognize that the Year 2000
impact of ``embedded chip'' microprocessors at our plants will be
minimal.
In addition to our industry's extensive work in the embedded
systems area, our refineries have also focused on three additional
areas: Remediation of our business information technology (IT) systems;
analysis of our suppliers and customers; and development of contingency
plans. The vast majority of our member firms will have completed the
remediation of their highly critical business IT systems, and the
replacement of the small number of systems containing affected
``embedded chips,'' by June 30. In addition, after having analyzed the
Year 2000 readiness of their key suppliers and customers, refiners will
have in place contingency plans that will be exercised in case of a
failure of any of their key suppliers or customers.
Question 5. You mentioned that the four largest oil exporters to
the U.S.-Venezuela, Canada, Saudi Arabia and Mexico, anticipate having
all critical systems compliant by the end of the year. The largest
supplier of oil to the U.S. is Venezuela. In our report released on
March 5, we compiled data that Venezuela was 9 to 15 months behind the
U.S. in its Y2K preparation. Furthermore, many countries have
underestimated the Y2K impact and have under-prepared. Although you
state that oil companies will be prepared for the Year 2000, have there
been any surveys conducted, or research done, to verify that the oil
companies' critical systems will not be affected if other industries,
such as power, are not prepared? Would you comment on business
continuity and contingency planning within these countries?
Answer. Many API member companies operate facilities in countries
where basic infrastructure support, such as electrical power and
telecommunications, is not reliable. Our companies have learned to deal
with those interruptions, sometimes by developing their own generating
and communications systems. Our companies are used to working their way
around those disruptions and minimizing their impact on operations.
Accordingly, one more disruption because of the Year 2000 will not have
a serious impact on operations.
As for those countries that are reported to be significantly behind
the U.S. in their progress, there are two factors at play. First, they
may not be as automated and as technologically sophisticated as is the
U.S., Western Europe, Canada and Australia, and thus may not have the
problems that we in the West have identified. Second, they may actually
be able to correct their Y2K problems more efficiently and cost
effectively than did U.S. companies because as ``fast followers'' they
can benefit from what the ``pace setter'' countries and ``pace setter''
companies have done.
This sharing and leveraging of knowledge is taking place at a pace
that is amazing. We have an Internet and e-mail literate, globally
focused workforce addressing Y2K issues not only in the oil industry,
but in most industries. Information, best practices, testing results,
and knowledge is being shared, literally at the speed of
telecommunications.
Moreover, the inter-related nature of our industry means that key
suppliers and customers must remain healthy so that we stay healthy.
That is why companies are pushing each other to complete their Y2K
programs. Those nations that are further behind are getting input,
advice and sometimes assistance from their U.S. Western European,
Canadian and Australian investors, from colleagues and even from
competitors.
Finally, organizations such as the World Bank, the International
Energy Agency and API are catalyzing awareness and assistance programs
all over the world.
Question 6. The development of effective contingency plans involves
the participation of all stakeholders and parties who will be called
upon to execute the contingency plans should the need arise. Would you
describe how the petroleum industry is involving its workforce in the
development of contingency plans? Is employee awareness raising and
training widespread as a part of the efforts? How about community and
emergency service provider involvement?
Answer. Most of our member firms have in place, as part of their
normal business process, contingency plans that are exercised
frequently. These same companies are simply utilizing the existing
contingency planning ``network of experts'' and providing them
additional background on the special nature of the Year 2000 problem.
It is the very workforce that operates the fields, the transportation
systems, the refineries and the retail outlets that do the contingency
planning. Workforce ownership of contingency plans is critical to the
potential success of the plans. Their involvement in identifying where
plans are needed, developing the plans, testing these plans through
drills and refining them based on what they learn from the drills is
mandatory in companies with healthy contingency planning processes.
The workforce in the oil industry is highly motivated to keep their
working environment safe and reliable. They realize that to do this
effectively, contingency plans are necessary. The workforce realizes
that Y2K is just one more operational and business risk to be
recognized and to be managed.
Also, as part of our support for the President's Council on Y2K
Conversion, API is proactively urging Year 2000 experts in its member
companies to become involved in the ``Community Action'' awareness
program. We have seen a good number of these people become involved at
the community level.
__________
Prepared Statement of Philip M. Davies
Good day, Mr. Chairman, and members of the Committee.
My name is Captain Phil Davies. Today, I am testifying on behalf of
the American Petroleum Institute (API). API is a national trade
association representing over 400 companies involved in all aspects of
the petroleum industry. A significant number of API companies own,
operate, or charter substantial tanker fleets.
I am currently Area Operations Manager for Chevron Shipping Co. LLC
(CSC). We operate 35 oil tankers on trade routes throughout the world,
and we have a similar number of third-party ships under charter at any
particular time. I am responsible for CSC operations throughout the
eastern and southeastern United States. Prior to this assignment, I was
Year 2000 (Y2K) program manager for Chevron Shipping. In addition to my
duties within the company, I have participated at several conferences
around the world to raise the awareness of Y2K within the marine
community.
I am happy to say that since these conferences and, particularly
over the last several months, my opinion of the readiness of the oil
shipping industry to meet the challenges of Y2K has changed
considerably. We have generally prepared well, and we do not expect
major problems at the turn of the millennium.
Through industry organizations such as API, the Protection and
Indemnity clubs, ship classification societies and the efforts of the
U.S. Coast Guard and other international government organizations,
there has been a sharing of data on an unprecedented scale. This
information has been shared among major oil companies, independent
tanker operators and manufacturers. Various sites on the Internet
provide a wealth of information for those looking for compliance data
for equipment fitted to their vessels.
Process--Vessels Most companies involved in Y2K assessment follow a
phased approach that consists of:
* Identifying equipment, systems, and system integration on board
ship, which could be adversely affected by date changes.
* Determining the level of risk to the vessel that could result
from failure of each system.
* Prioritizing systems based on level of risk and obtaining
manufacturers' advice on compliance and/or test procedures.
* Developing contingency plans for those systems where compliance
cannot be reasonably confirmed. This may include system replacement,
alternative operational modes, or operational restrictions to ensure
safe operations.
Equipment that is critical to the ship's operation tends to fall
into four areas: Propulsion, Steering, Navigation/Communication and
Cargo. Most problems to date have been found in either control
processors or in the communications equipment. Both of these areas
employ a high degree of PC-based computer control, which are generally
easy to repair or replace.
Though the majority of systems will be repaired or replaced in the
lead up to December 31, 1999, there will always be some potential for
equipment to fail onboard due to a Y2K malfunction. Within Chevron
Shipping, vessel staff has developed contingency plans to address these
failures, and onboard routine is developed around them. In the case of
Y2K, vessels will generally set watch routines to monitor equipment
where the compliance is not known. This coverage is a part of most
vessel contingency plans.
Seafarers are trained to deal with emergencies and contingencies,
and face adversities daily such as we can expect could arise from the
Y2K problem. Seafarers are a resourceful lot, and our ships are
routinely designed with redundancies and manual workarounds for
critical systems and, in the case of navigation, to utilize traditional
methods.
Vessel Availability In the marine oil transportation industry
today, crude and products are transported in either oil company vessels
or tonnage chartered on behalf of oil companies. A key role in this
chartering of vessels is the inspection and vetting process, which
ensures the vessel is in acceptable operating condition and is in
compliance with applicable rules and regulations. In conjunction with
this inspection, Chevron and other companies have been including vessel
assessments and the owner/operator's commitment to Y2K compliance
efforts. This assessment includes appropriate equipment audits,
necessary remediation, crew awareness, and the existence of contingency
plans. In order to ensure a continued supply of crude and products,
Chevron will charter only those vessels that are compliant and have
contingency plans in place. Fortunately, over the last few months most
of the operators that we use have realized the potential implications
of the Y2K problem and have instituted programs to address the
concerns.
In addition to the oil companies' program, the U.S. Coast Guard is
now including Y2K awareness efforts in its onboard inspection program.
This further helps to focus the attention of owners and operators.
Contingency Planning Contingency planning is a key step in the Y2K
process. It takes two forms:
* Preparing to operate the vessel with equipment that may fail.
* Positioning the vessel such that the effects of Y2K failure
either onboard or on another vessel or facility will have minimal
impact on the safety of the vessel, crew, environment, and the cargo.
The operation of equipment has been covered above and will be
covered as a part of normal vessel operating procedures. In order to
minimize any external effects on the vessel, there are various steps
that Chevron is taking to minimize the risk:
* Keep vessels at sea or alongside in port.
* Suspend cargo operations during critical periods.
* Increase awareness onboard vessels.
We believe other companies are addressing contingency planning in a
similar fashion.
API and its member companies support the U.S. Coast Guard effort to
develop national guidance to ensure key elements are addressed in local
government contingency plans for ports. Such guidance should provide
sufficient flexibility to allow individual ports to address their own
specific needs. The U.S. Coast Guard, through the Captains of the Ports
or District Commanders, should take the lead in all major ports to
convene stakeholder groups that would be charged with assessing port
readiness, addressing potential areas of deficiency, and preparing
appropriate contingency plans. For example, most ports already sponsor
port safety committees that have broad membership from government,
industry, citizen, and public interest groups. Stakeholder groups can
help each port assess the safety measures necessary to ensure continued
port operations during the critical dates of concern. These groups,
with U.S. Coast Guard leadership, will be able to ensure the
compatibility of individual stakeholder contingency plans within the
port contingency plan.
In conclusion, due to the leadership of the U.S. Coast Guard and
the initiative of API and its member companies, the level of awareness
of the Y2K problem is such that the impact on the oil transportation
infrastructure is expected to be minimal. Of course, Chevron and API
members will continue to develop contingency plans with the U.S. Coast
Guard and the oil transportation industry. The millennium rollover and
its effects are not an emergency or surprise event. Our awareness of
the problem has allowed us to plan well in advance, and the industry
has the knowledge and tools to deal with any problems that may arise.
I would be happy to answer your questions.
__________
Responses of Phillip M. Davies to Questions Submitted by
Chairman Bennett
Question 1. In your testimony you stated that you did not expect
any major Y2K problems to occur. You also stated that ``over the last
few months'' most of the operators of your chartered vessels have
realized the potential Y2K implications and have established programs
to address the concerns. Is it realistic to be so optimistic when you
chartered vessel operators only became fully aware of the problem over
the last few months? Can you explain how it will be possible to
complete all assessments and testing with the little time remaining?
Answer. Fortunately in the shipping industry, though our business
is very widespread we rely upon a limited number of suppliers for both
our vessels and the equipment on them. If a single entity were starting
their remediation program today, then it is unlikely that sufficient
time would exist to complete the program. However, in the marine
industry companies have been able to leverage from those who started
early. This has been made possible by both the myriad of web sites and
by the sharing of information in industry forums and conferences. In
addition to the data sharing, manufacturers have become far more
proactive in their approach to Y2K and its effect on their equipment.
Question 2. You also mentioned the various steps Chevron is taking
to minimize risks, such as keeping vessels at sea or alongside in port,
and suspending cargo operations during critical periods. I applaud your
efforts to be prudent in your preparedness. Do you feel there are
competitive pressures on other shipping companies not to take the same
steps as Chevron, for fear of losing business? For example, shipping
companies switching to other ranker fleets?
Answer. Chevron Shipping is fortunate to operate in an environment
that nurtures Protecting People and the Environment, hence our ability
to take the prudent measures outlined in my testimony. However, we
believe that many other operators are taking similar measures and that
those who act otherwise will still have to comply with Port State
Control through measures such as those contained in IMO circular 2121,
Year 2000--Code Of Good Practice.
Question 3. The maritime insurance industry is critical to
shipping, and has been for hundreds of years. What are they doing at
this point in time to minimize their risks and client's liability in
relation to Y2K?
Answer. This is not my area of expertise, however the Protection
and Indemnity (P&I) clubs in particular are to be commended for their
efforts to both promulgate information on Y2K and their help to the
maritime industry in developing Y2K mitigation and contingency plans.
Two web sites which may give the committee greater insight in answering
this question are:
Ship 2000: http://www.ship2000.com
UK P and I Club: http://www.ukpandi.com
Question 4. You are an international shipping company and operate
in many foreign ports. Has Chevron or API conducted any surveys
regarding the status of international ports? What can you tell us about
the preparedness status of the foreign ports where Chevron operates?
Question 5. As a leading shipping company, what has been the extent
of Chevron's dialogue with host governments in foreign countries? What
have you learned about the readiness of foreign ports?
Answer (Questions 4 and 5). Chevron has had little contact with
outside governments on their readiness for Y2K. However, many of the
terminals at which we load are operated by the Chevron Overseas
production company. These terminals have completed similar projects to
our own and are Y2K ready. Outside of these terminals, we have received
notice from Saudi Aramco that they are Y2K ready.
Question 6. Does Chevron support the Year 2000 Code of Good
Practice and key elements of Y2K contingency plans for ships, ports and
terminals that were developed as a result of meetings held at IMO
headquarters on March 3-4, 1999? What is the best method to get
information about them to the myriad stakeholders in the maritime
industry for appropriate action?
Answer. Chevron supports both the IMO Circular 2121, Year 2000 Code
Of Good Practice, and the US Coast Guard in its efforts to develop
contingency plans for US ports in readiness for this period. We are
working closely with both the US Coast Guard and port user groups in
those areas to which we trade to develop and implement contingency
plans. In terms of IMO Circular 2121, we believe that through Port
State Control, International & National Maritime groups, and P&I clubs
that the IMO circular will reach a broad audience. In addition,
industry publications such as Lloyds List and Fairplay have also given
wide coverage to the Millenium Bug, and it is hard to conceive that in
the wider maritime community anyone is unaware of the problem.
__________
Prepared Statement of Christopher J. Dodd
Mr. Chairman, thank you for holding this hearing today.
The world oil supply faces a series of Y2K risks from the well in
the ground to the gas station in your neighborhood. In addition to the
immediate Y2K problems that oil companies face, the readiness of the
shipping industry and international ports presents an even more
difficult challenge. A breakdown in the international shipping industry
could have a crippling effect on the oil industry. More than 80,000
visits are made to U.S. ports by over 7,000 foreign vessels in any
given year. And yet we have little information on the readiness of
these ships and foreign ports.
Like other global sectors the Committee has examined, we find that
the oil industry is highly dependent upon maritime shipping. Oil
tankers for example depend on reliable on-board navigation,
communication and safety systems, all of which are vulnerable to Y2K
problems. In 1998, Shell Oil examined one of its crude carriers, which
was built in 1996. Y2K testing revealed failures in seven areas,
including radar system mapping, ballast monitoring and ship performance
monitoring. According to Shell, ``Not one of these failures would stop
the ship, but they might if they all happened together.'' Overall, when
Shell assessed their fleet, it found approximately 3,000 embedded chips
on its 50 vessels. Embedded microchips play an important economic role
in modern shipping because they allow even the largest tankers to
operate with very small crews. The highly automated functions make it
difficult for a small crew to manually operate the ship in an
emergency.
Even if oil tanker crews can ``work around'' their Y2K problems,
the crews could quickly become overworked, compromising safety.
Passenger cruise and container ships are more reliant on technology
than oil tankers. Y2K failures on these ships would be even more
difficult to correct.
Ships that experience Y2K-related failures could begin to clog
ports, denying accessibility to other ships and creating serious
logistical problems.
With the exception of North America and Northern Europe, the actual
Y2K readiness of the international ports remains a virtual unknown.
When a ship arrives in port, Y2K related failures could prevent cargo
from being unloaded and oil from being pumped out of tankers. Y2K
difficulties in ports could include the failure of the giant cranes
used to offload containers from ships and could also create congestion.
According to the International Energy Agency, one oil company found
that a dockside crane refused to operate because an embedded chip
determined that it was overdue for a technical inspection.
Some companies, such as British Petroleum (BP), are taking a very
proactive approach to Y2K. BP is very influential in the shipping
business and is the world's third largest user of oil carrying vessels.
In May 1998, BP surveyed 650 companies from which it chartered tankers.
BP made it clear that failing to respond to the questionnaire would
result in termination of charters with the oil company. The response
was disappointing. Half of the companies that BP had used in the
previous two years were unable or unwilling to disclose the Y2K
readiness of their vessels. Beginning in January 1999, BP started
refusing to employ vessels that could not offer an assurance of Y2K
readiness. The shipping companies' failure to prepare for Y2K has put
not only their individual businesses at risk but also the livelihood of
their employees. We have seen evidence of this ``flight to quality'' in
other industries and it will likely continue into the Year 2000. But
while BP and other companies might be able to obtain Y2K ready charter
vessels, they cannot make international ports compliant. This will take
a concerted worldwide outreach to raise awareness and promote realistic
contingency plans.
In the event there were to be a problem, the U.S. has over 540
million barrels of oil in reserve. In 1975, the Strategic Petroleum
Reserve was created as a buffer to ensure that Americans do not suffer
the inconvenience and disruption that the oil crisis of the 1970's
caused. So, despite the fact that we rely on imported oil for over 50%
of our oil usage, the strategic oil reserve can replace imports for up
to 60 days. Should Y2K spark an interruption in the oil supply, the
Strategic Petroleum Reserve could be used to stabilize markets, reduce
sudden price spikes and buy time to resolve any lingering problems. The
oil industry is working hard to solve its Y2K problems and is trying to
achieve Y2K readiness by September of 1999. However, Y2K failures in
maritime shipping and foreign ports still pose serious threats to the
flow of oil and our economic well being.
__________
Prepared Statement of Michael J. Ingle
Mr. Chairman and Members of the Senate Special Committee on the
Year 2000 Technology Problem, my name is Michael J. Ingle and I
appreciate the opportunity to appear before you today to present the
dealer community's views and projections concerning gasoline
availability on January 1, 2000.
I have been a dealer for 30 years and currently operate 2 Amoco
stations--in Lanham and Bowie, Maryland. I am currently serving as
President of the Washington/Maryland/Delaware Association which
represents over 1,000 small business members. I am also Treasurer of
the Service Station Dealers of America and Allied Trades (SSDA-AT).
SSDA-T is a 53 year-old national association representing 22 state and
regional associations with a total membership in excess of 20,000 small
businesses in 38 states; and individual members in all 50 states, the
District of Columbia, Puerto Rico, and Guam.
Like the motoring public, we too are concerned about product
availability and distribution on January 1, 2000. While dealers are
dependent on their suppliers, we are on the front lines when consumers
have concerns. And we are dependent on the sale of motor fuel.
The petroleum industry has been actively addressing Year 2000
challenges for the past several years. While individual service
stations are at varying levels of compliance, the major petroleum
companies have not identified any Y2K challenges that cannot be
overcome. In particular, oil companies and their service stations have
reached out to business partners, customers and suppliers in order to
develop compatible solutions and share best practices. Throughout the
country, seminars have been presented to the retailing end of the
industry. We have one such meeting scheduled for May 20 in Annapolis,
Maryland.
Just as petroleum marketers are used to preparing contingency plans
for supply disruptions and natural disasters, preparation for the
arrival of the Year 2000 has been no different. Special contingency
plans and back-up suppliers and systems are in place to allow for
uninterrupted service to consumers. Based on recent industry surveys by
the Natural Gas Council and the American Petroleum Institute, the
petroleum industry as a whole is well on its way to being Y2K ready. In
fact, almost all companies surveyed indicated that they will be Y2K
ready by September 30, 1999.
Following are some commonly asked questions by the public regarding
our industry and this issue.
Will service stations be open December 31, 1999 and January 1,
2000?
Yes, depending upon the store's usual hours. The Year 2000 is not
expected to be a factor in unscheduled store closings.
Will I be able to use my credit car at a service station on or
during the Year 2000?
Credit cards were one of the first Y2K issues widely recognized and
publicized. Therefore, service stations, along with the entire retail
industry, have been analyzing, replacing and testing credit card
systems to ensure Year 2000 compliance. They have also been working
closely with credit card companies in order to guarantee that business
processes are not compromised with the rollover to the new millennium.
In isolated incidents, computers could have problems with some credit
cards. The result would mean that some of these credit card automated
tasks would have to be done manually.
What are retailers doing to ensure that gasoline will be available
and fuel pumps will be functioning in the Year 2000?
Most service stations' lights, fuel pumps, and registers rely on
electricity in order to work. Thus, service stations are working
closely with their utility providers to ensure a smooth transition to
the Year 2000. In particular, the electric utility industry is
preparing for the new millennium and aiming for 100 percent reliability
of electric power on January 1, 2000. According to a North American
Electric Reliability Council (NERC) report, virtually all-electric
power systems in North American will be ready for the Year 2000 by the
target date of June 30, 1999.
Consumers can expect few, if any, shortages of petroleum-based
fuels in the Year 2000. Service stations are working to ensure
reliable, uninterrupted service. Even if there are some isolated supply
interruptions, the impact on consumers will be minimal, as service
stations generally have back-up suppliers. So, if their primary
supplier experiences Year 2000-related problems, service stations have
additional suppliers they can contact.
Should I be stockpiling gasoline in preparation for the Year 2000?
There is absolutely no reason to stockpile gasoline in anticipation
of the Year 2000. The petroleum industry is not anticipating any supply
or distribution disruptions. The latest survey mentioned previously
shows that the industry is more than 90 percent ready.
While there may be brief, isolated incidents of localized problems
or circumstances beyond the industry's control, fuel should remain
widely available. Therefore, the industry urges consumers not to risk
their safety and the safety of their neighbors by storing unnecessary
and possibly unsafe quantities of gasoline in preparation for the Year
2000.
Will environmental monitoring systems at service stations be
working properly in the Year 2000?
Most environmental monitoring systems are time and date sensitive.
Therefore, service stations have been working aggressively to fix
computer systems, equipment and software that may be sensitive to the
Year 2000 rollover. Although the petroleum industry is not anticipating
any disruptions in this area, it should be noted that since monitoring
systems are equipped with fail-safe checks, if the equipment
experiences problems related to the Year 2000, at the worst, the tank
will simply shut down.
SSDA-AT believes that the industry will be ready for the new
millennium; that product will be available; that consumers need not
panic. In fact, we are betting our livelihood on it.
__________
Responses of Michael J. Ingle to Questions Submitted by
Chairman Bennett
Question 1. In your testimony, you addressed issues related to the
availability of gasoline at the pumps. Given your experience, are there
elements of Y2K that would indicate to you that there may be an impact
on gasoline prices at the pump? Could you please describe them?
Answer. No, we do not anticipate shortages of product that would
lead to increases in prices more than any normal fluctuations due to
the marketplace.
Question 2. As we have looked at other industry sectors, we have
found that small and medium sized businesses tend to be lagging in
their Y2K efforts. You note in your testimony that as President of the
Washington/Maryland/Delaware Association you represent over 1,000 small
businesses. You also noted that the petroleum industry began actively
addressing Y2K several years ago. When would you say that your members
began? Also, please briefly describe the current activities and general
preparedness of your members?
Answer. Our members have been actively working with their suppliers
in anticipation of Y2K for the last year. They have attended seminars
on the subject and received ample literature from our association. In
addition, our supplier representatives have personally visited many
stations in addressing Y2K to ensure that our systems meet the
requirements necessary.
Question 3. I understand that a majority of your members actually
lease the pumps (including the integrated credit card readers that many
pumps have today) at their gas stations. Would you please briefly
describe the equipment at a station that is leased and what is owned?
Who has responsibility for maintenance of the leased equipment? What
type of end-to-end testing is being done?
Answer. The majority of equipment at our members' facilities is
leased from the major oil companies. This includes the pumps, card
readers, etc. The oil company has the responsibility of maintaining the
equipment. They are actively conducting testing at the local level for
compliance.
Question 4. Your testimony refers to the American Petroleum
Institute's (API) industry survey. API's survey profile shows that only
48% of US service stations were represented. This was the lowest rate
among the industries surveyed. Would you please help the committee
understand why service stations had such a low representation? With
over half of the service stations represented, how confident should we
be that the positive picture painted by the survey is a reflection of
reality and applies to service stations?
Answer. As explained in our testimony and also in API's, the
industry began its Y2K readiness at the top and has worked it down to
the local service station, where testing is being currently conducted.
We are confident that the industry will be ready on January 1, 2000 and
product will be available.
Question 5. Service Station Dealers of America's (SSDA) annual
convention is scheduled for the week of June 9-12 in Nashville. This
seems like an opportune time to address this critical pressing problem.
Are you planning on addressing Y2K as part of the convention? What type
of participation do you expect from your members and the large
companies that lease equipment to your members?
Answer. We had a seminar at our convention (held jointly with the
International Tire and Rubber Association) addressing Y2K and the topic
was brought up in other meetings at the convention. We had several
exhibitors that are involved in computer software and equipment that
are very active in Y2K issues.
Question 6. Your testimony indicates that Y2k seminars have been
presented to the retailing end of the industry throughout the country
and one such meeting is scheduled for May 20th in Annapolis. Is SSDA
sponsoring these meetings? What is the focus of these meetings, the
general attendance, and participation?
Answer. SSDA-AT and its state and regional affiliates co-sponsor
these seminars along with the API and other industry groups. They are
open to all members of these industry organizations. The focus is to
educate members on Y2K issues and increase awareness of potential
problems and what issues need to be addressed when dealing with their
suppliers.
Question 7. What are the types of key activities service stations
should be including within the areas of independent verification and
validation (IV&V), end-to-end testing as well as business continuity
and contingency planning?
Answer. Service station dealers are working with their landlords/
suppliers (i.e., major oil companies) to ensure proper planning and
conduct proper testing. This is being done under the direction of the
oil companies, who own the equipment in the stations.
__________
Prepared Statement of Robert S. Kripowicz
Mr. Chairman and Members of the Committee:
The Department of Energy is working with the President's Council on
Year 2000 Conversion and our nation's energy industry to ensure
readiness for the Year 2000. As a member of the President's Council and
as part of our overall energy readiness responsibilities, we are
monitoring the Y2K compliance efforts of the domestic energy sector
(including electric power, nuclear power, and the oil and gas industry)
and selected international energy sectors (including oil and nuclear
power). We are reviewing industry assessments, identifying potential
assistance the Department can provide, and coordinating with industry
on contingency planning.
As we get closer to the millennium transition period, the
Department will be monitoring and analyzing any Y2K events and
incidents, and will be working with industry on response actions as
appropriate. The Department will also take an active role in providing
public information concerning Y2K and the energy sector.
Before I address these activities as they relate to concern over
the future oil imports, I would also like to note that DOE is making
excellent progress in converting its own systems to be Year 2000
compliant. As of March 31, 1999, 98 percent of DOE's mission critical
systems were Y2K
ready, including all of the mission critical systems of DOE's power
administrations.
The President's Council on Year 2000 Conversion International Oil
Aspects The Department's Deputy Secretary is a member of the
President's Council on Year 2000 Conversion. Within the Council, DOE
was initially assigned responsibility for the electric power sector,
and the Federal Energy Regulatory Commission (FERC) was assigned
responsibility for international oil and gas. Since the group's
formation, DOE has worked closely with the FERC
and the American Petroleum Institute on Y2K issues related to both
the domestic and international flow of oil. Last month, by mutual
agreement, the lead responsibility for international oil Y2K
preparedness was transferred to DOE.
In this role, DOE will head the International Oil Coordination
Council which includes membership from the U.S. Department of State,
the National Security Council, the American Petroleum Institute (API),
and others. Our coordination with API in this manner is comparable to
our coordination with the North American Electric Reliability Council
in our lead role on the Electric Power Working Group of the President's
Council.
DOE Actions To Date DOE has discussed Y2K extensively with the
international oil industry and with major oil producing nations at
every opportunity through our bilateral energy policy discussions and
other regular contacts. We have also worked to put energy sector (and
oil industry) Y2K issues on the agendas of international energy
organizations and multilateral energy forums such as the International
Energy Agency, the Asia-Pacific Economic Cooperation (APEC) Energy
Working Group, and the Steering Committee of the Western Hemisphere
Energy Initiative.
The DOE and the Government of Japan also provided the International
Energy Agency (IEA)
with voluntary contributions to organize regional seminars on the
Year 2000 problem and the oil industry. To date, seminars have been
held in Caracas, Venezuela on March 11-12, and in Singapore on March
25-26. A third will be conducted in Abu Dhabi, United Arab Emirates on
May 4-5, and more may be held. These seminars are attracting widespread
regional government and private sector participation. Mr. William
Ramsay from the IEA is here today to discuss the outcome of these
seminars.
Also, the Department asked the APEC Energy Regulators Forum to
report on the Y2K
preparedness of APEC economies at the meeting of the APEC Energy
Working Group in April 1999. In addition, APEC energy ministers
instructed the Energy Working Group to prepare actions that may assist
member economies and business in the remedial and contingency steps
they are taking. (A detailed report, Year 2000 Computer Date Problem
Effects on Short-Term Energy Security in APEC Economies was issued this
month and is available.)
Current Situation Based on our extensive discussions, data
gathering, and monitoring of the Y2K situation in the international oil
industry to date, we believe a great deal of progress has been made in
key producing countries and in the key worldwide systems and networks
of the major international oil companies.
While more needs to be done, and while our information is far from
complete, we believe there is room for cautious optimism at this point.
Our reasons for saying this are as follows:
The four largest suppliers of imported oil to the U.S. Venezuela,
Canada, Saudi Arabia, and Mexico are in the process of converting their
systems and expect their petroleum sectors to be fully prepared by the
end of the year, and in some cases before.
Kuwait, Norway, and the United Kingdom expect their systems to be
fully compliant by the end of the year, and Colombia and Algeria are
actively assessing their systems and pursuing remediation efforts.
While less is known about Y2K preparations in other major producing
countries (like Nigeria, Angola, Iran and Iraq), major international
oil companies operating there (or purchasing there) have system-wide
programs in place to counter the Y2K problem and provide for
contingency planning.
The petroleum associations from many countries and several of the
largest state-owned companies are participating directly or indirectly
(through the operating companies) with API in the International Y2K
Work Group and the International Oil Coordination Council.
There are several other reasons for our cautious optimism at this
point and they include:
The flexibility demonstrated by the oil industry over the years to
deal with unforseen circumstances such as accidents, unscheduled down
time for strikes, severe weather extremes, natural disasters such as
hurricanes and floods, political instability, war, and economic
sanctions.
The enormous financial incentive to keep the oil flowing both for
private industry and for governments of oil producing countries whose
revenues depend considerably on oil.
The flexibility built into the system in the form of commercial and
strategic stockpiles of oil and the existence of spare crude oil
production capacity in several countries. If one country experiences a
problem, another may be able to compensate, or companies could rely on
reserves (inventories).
And finally, in the United States we have the Strategic Petroleum
Reserve:
The Reserve currently holds an inventory of 561 million barrels of
crude oil. If a Presidential decision is made to utilize the Reserve in
an energy emergency, that inventory can be withdrawn at a maximum rate
of 4.1 million barrels per day.
The Reserve is capable of distributing crude oil by out loading
tankers or by intra-state and interstate pipeline systems. The Reserve
is connected by pipeline alone to almost 50 percent of the Nation's
refining capacity.
The Reserve is Y2K compliant. If necessary, drawdown systems can be
operated in a manual mode. The system was designed this way for reasons
other than Y2K, i.e., security.
Ongoing Concerns In spite of the reasons for cautious optimism,
there are gaps in our information and causes for concern. While we know
much more today about the Y2K activities of the major international oil
companies and our principal suppliers, much less is known about the Y2K
condition of infrastructure that the oil industry is dependent upon in
many countries, such as electric power, telecommunications, ports and
shipping, and security systems. A failure of any of these systems could
affect the oil industry's ability to operate.
Moreover, given that the world oil market today is a global market,
tied together by instantaneous trading systems, it is not enough to
worry only about countries that export oil to the United States. A
disruption of world oil supply anywhere, if uncompensated for, will
affect oil prices everywhere. As a rough and ready rule of thumb, the
Energy Information Administration, an independent agency within the
Department that collects and analyses energy data, estimates that a one
million barrel per day loss of supply that is uncompensated for by an
increase in production elsewhere or by a drawdown of stocks, and that
continues for a year, will cause world oil prices to rise by $3-5.00
per barrel. This translates into roughly 7 to 12 cents a gallon at the
pump.
However, if the length of the supply disruption is expected to last
no more than a few days, the impact would be much less, if any. An
example of this was when a relay station in Iraq used to measure the
flow of oil in their pipeline, among other uses, was hit by an Allied
attack in February. The inability to monitor the flow of oil removed
nearly 1 million barrels per day for a week or so. But since the oil
industry correctly gauged the length of the disruption, and there were
storage supplies that were available to make up for some of the
disrupted oil, there was no notable change in oil prices due to this
significant, yet brief loss of oil supply to the world oil market.
Contingency Planning Because of our concerns, we will continue to
monitor domestic and international oil developments very closely. We
also believe that it is important to keep consumers and the public at
large informed with the latest and the best information. A major part
of the public information component of our contingency planning will be
designed to prevent panic buying that, experience shows, and a self-
fulfilling prophecy.
While we see no cause for panic or alarm at this point, consumers
who are dependent on oil should always be prudent in planning for their
heating requirements, and should not wait until the last minute to fill
their home heating oil tanks. Similarly, power generators and large
industrial consumers may want to purchase some additional inventory
well in advance of the year-end as a contingency or hedge against price
increases.
And finally, we will be watching the situation closely and, if
circumstances warrant, we will be prepared to sell oil from the
Strategic Petroleum Reserve to calm the market.
Thank you Mr. Chairman.
__________
Responses of Robert S. Kripowicz to Questions Submitted by
Chairman Bennett
Suppliers of Imported Oil
Question 1. You mentioned that the four largest suppliers of
imported oil to the U.S.-Venezuela, Canada, Saudi Arabia, and Mexico
are in the process of converting their systems and expect their
petroleum sectors to be fully prepared by the end of the year. Has the
Department of Energy or another independent source verified or seen
data that would support this statement?
Answer. Department of Energy's assessment of Y2K preparedness of
the petroleum sectors of the four major suppliers of imported oil to
the U.S. is based upon a broad range of information gathered from
bilateral meetings with the energy ministries of these countries,
contacts with the major multinational oil companies that both operate
in these countries and are their major customers, discussions in
multilateral forums such as the Regional Energy Seminars on Y2K
organized by the International Energy Agency, and by reporting from the
individual Embassies in these countries. Given national sovereignty
concerns as well as individual company proprietary considerations, we
are not aware of any mechanism that would enable a systematic
independent auditing or verification of Y2K preparedness of the oil
sectors in these countries. While we are unaware of any independent
audited or verified data on these country's preparedness, all the
information that we have received from a variety of independent sources
is consistent with our conclusion that they will be fully prepared by
the end of the year.
Stragegic Petroleum Reserve
Question 2. The United States Strategic Petroleum Reserve currently
holds an inventory of 561 million barrels of crude oil. If a decision
is made to utilize the Reserve in an emergency, that inventory can be
withdrawn at a maximum rate of 4.1 million barrels per day. How long
will it take to begin withdrawing crude oil from the Reserve and how
long will it take for the Reserve to reach its maximum rate of 4.1
million barrels per day?
Answer. Under normal conditions, the Reserve is always ready to
begin drawdown within 15 days of a declaration of emergency by the
President. However, knowing that the current threat will happen at a
specific point in time may allow that schedule to be shortened by a few
days. We intend to have all physical systems ready to perform before
the end of the year, and will be ready to draw down immediately upon
notice from the President. Nevertheless, time will be required to
receive bids, make awards, and allow buyers to arrange transportation;
and the schedule for those activities can only be slightly compressed.
It is likely that this activity will take between eleven and thirteen
days.
The Reserve can achieve its maximum rate of 4.1 million barrels per
day within the first day of drawdown. In the early days of any drawdown
the actual rate will depend upon the successful bidders ability to
receive and transport the oil. This is generally contingent upon their
nominating, and scheduling pipeline, and tank farm capacity as well as
in some cases, the scheduling and repositioning of tankers and barges.
U.S. Oil Supply
Question 3. What efforts, if any has DOE made to assess the
readiness of maritime shipping and its impact on the oil supply?
Answer. The Department is in close contact with the Department of
Transportation, the agency that is in direct discussions with shipping
companies and their associations. The Coast Guard is continuing to
monitor and report on progress toward year 2000 compliance in the
tanker industry. The Department of Energy is deferring to
Transportation in assessing the readiness of the industry, however, the
Department of Energy is treating a potential maritime disruption as
similar to a producer/exporter disruption for purposes of contingency
response planning.
Strategic Petroleum Reserve
Question 4. You said that if circumstance warrant, you would be
prepared to sell oil from the Strategic Petroleum Reserve to calm the
market. Has DOE clearly defined what circumstances or threshold would
trigger the selling of oil from the Strategic Petroleum Reserve?
Answer. No, it is has been the policy of every Administration since
the creation of Strategic Petroleum Reserve that the Government will
not define a disruption threshold or trigger price for activating the
Reserve, but will evaluate every disruption based on its unique
circumstances.
Oil Market
Question 5. The Middle Eastern oil producing nations are now
seriously addressing Y2K and its impact on oil production. Because of
their late start, what is the likelihood that we will see Y2K-related
disruptions and price fluctuations in the oil market?
Answer. The Y2K remediation and contingency planning programs being
implemented by the Middle Eastern oil producing nations and the
multinational oil companies that operate there will contribute
significantly to reducing the potential for Y2K related disruptions.
Oil price fluctuations are an integral part of the oil market day in
and day out. Given the flexibility built into the global oil system in
the form of producer and consumer commercial stockpiles, national
strategic stockpiles, and a relatively high level of spare production
capacity in a number of countries, should one country experience a
problem, either a normal operating occurrence or Y2K related, the
ability to alternatively supply oil from these sources suggest that any
price fluctuations will be relatively minor and of short duration.
Oil for Heating
Question 6. You mentioned that consumers dependent upon oil for
heating should not wait until the last minute to fill their heating
tanks. Can you recommend a particular time frame in which consumers
should top off their oil tank?
Answer. Rather than ``topping off'' their tanks in anticipation of
January 1, 2000, we recommend that consumers should follow their
customary practices for filling heating tanks. The timing of filling a
tank will depend on the size of the tank, the usage rate (reflecting
weather), and, in many cases, the contractual fill program they have
with their heating oil supplier.
Y2K and U.S. Oil Supply
Question 7. If Y2K is somehow much more severe than is being
projected by the oil industry and it produces significant simultaneous
problems in multiple production sites. Has DOE developed a policy to
respond to such consequences if they begin to impact U.S. oil supply?
For example, I would expect that companies would naturally fix their
own problems. However, because of infrastructure problems in some
nations, companies might require special assistance. At what point does
the problem become significant enough to trigger DOE concerns or
responses?
Answer. U.S. policy recognizes the best and perhaps only effective
way to mitigate the impacts resulting from a severe oil supply
disruption is to introduce additional supplies into the market. Should
a severe oil supply disruption be caused by Y2K related production or
distribution problems the U.S. will be prepared to supplement available
petroleum supplies by the sale and drawdown of oil from the Strategic
Petroleum Reserve (SPR). A fundamental precept of DOE's energy policy
is reliance on market forces to distribute supply. We believe that the
most economically and operationally efficient way to distribute oil
from the SPR is to allow the companies to exercise their individual
preferences. Given the interdependence of our energy market with that
of other major oil consuming nations and the fact that the benefits of
any individual action taken by the United States will be enhanced
considerably by coordination with these nations, a drawdown of the SPR
would be carried out in coordination with our allies in the
International Energy Agency (IEA).
Refined Gasoline and Fuel Oil
Question 8. If the supply of unrefined oil in the U.S. was
completely stopped, how much refined product (gasoline and fuel oil for
personal consumption) is in the system and how long would that supply
last?
Answer. Products are held in inventory at several locations,
categorized as primary, secondary, and tertiary storage. Primary
storage inventories are located at refineries, pipelines, and bulk
terminals (wholesale marketing facilities having at least 50,000
barrels of storage capacity or receiving products by barge, tanker, or
pipelines). Secondary storage inventories are held at numerous bulk
plants (smaller storage facilities and receiving products by rail or
truck only) and retail establishments. Tertiary storage consists of the
inventories held in vehicle tanks, homes, or businesses. Products on
the ocean, moving in barges, or in offshore tankage are not included in
any inventory category until they reach an onshore location. On the
other hand, some portion of inventory is not readily available to meet
consumer demand because it is working inventory (tank bottoms, pipeline
fill).
Primary storage locations are the source of the weekly, monthly and
annual inventory numbers provided by the Department of Energy and the
industry. Few estimates of the inventory in secondary and tertiary
storage exist. The most recent estimate was prepared by the National
Petroleum Council as of March 31, 1988. At that time they estimated
that primary gasoline inventory was about 2/3 of total gasoline
inventory and primary distillate inventory was about 2/5 of total
distillate inventory.
An estimate of the days-of-supply for a given product can be
calculated by dividing the usable inventory level at a point in time by
the level of demand--(barrels in primary inventory less some measure of
operating inventory) divided by demand (in barrels/day) = number of
days. General demand levels for next winter will be a function of the
economy and the weather at that time. Inventory numbers will be
measured as primary inventory levels next winter. Better forecasts of
those numbers should be available next fall. The Energy Information
Administration, for example, will release forecasts of demand and
supply, incorporating the winter weather forecast as part of the EIA
Winter Fuels Conference in October.
A days-of-supply calculation should not be used as an absolute
measure of product availability. One concern is that sometime during
December gasoline and distillate product will shift from primary to
secondary or tertiary storage to an unusual extent if consumers hoard
product. In that case, the days of supply numbers would not necessarily
reflect true product availability for consumer use. Hoarding could lead
to misperceptions of supply as well as contribute to spot outages or
price runups in the system.
__________
Prepared Statement of Bob Malone
Chairman Bennett, Members of the Committee,
Good morning. My name is Bob Malone and I am the President and
Chief Executive Officer of Alyeska Pipeline Service Company. I am
honored to be invited to join you here today to talk about how the
pipeline industry is addressing the Y2K problem. I am also pleased to
be here to assure you that Alyeska Pipeline Service Company will be
ready when the clock turns over to January 1, 2000, and that the Trans
Alaska Pipeline System (TAPS) is fully prepared to meet the challenges
of the new millennium.
As President of the company responsible for delivering 20% of the
nation's domestic crude oil supply, I assure you that we will ready to
transport a continuous supply of oil on January 1, 2000 and beyond. The
west coast of the United States relies on North Slope crude oil for
some 45 to 50 percent of its gasoline supply. We will not let our
neighbors down.
Before I speak about the specific steps we are taking to address
the Y2K problem, I'd like bring you up-to-date on Alyeska and the Trans
Alaska Pipeline System. Alyeska Pipeline is an 800-mile long common
carrier pipeline system that transports approximately 1.2 million
barrels per day. Alyeska loads an average of 42 tankers per month at
our Valdez Marine Terminal, and provides oil spill prevention and
response services to the tankers transiting Prince William Sound. Since
1977, TAPS has supplied approximately 20 percent of the nation's
domestic crude oil production. Alyeska Pipeline is owned by seven major
oil companies, with BP Amoco, ARCO and Exxon holding the majority
interest. These companies have been actively supporting our Y2K effort.
Alyeska's Plan for the Y2K Problem
TAPS is a complex system that is critical to our nation's domestic
energy supply. We recognize that this vital link must be in place as we
approach the Year 2000, and so we have taken the Y2K issue very
seriously. We have been actively addressing the potential problem since
1996, to ensure it will not be a problem for our customers or consumers
of the product we transport. I am confident that you will be confident
in our ability to transport oil as I share with you our Y2K program.
Alyeska has a comprehensive Y2K program with a clear objective: To
ensure that oil continues to flow in a safe and environmentally
responsible manner. Our program is being managed with a single point of
accountability. Our Vice President and Chief Information Officer, Dave
Laurence, is here with me today. The structure I have in place gives me
the assurance I need to know where we are, whether we are meeting the
deadlines I have set, and what obstacles are standing in the way of our
success. It also gives me the assurance to tell you that we are well
into the process of having inventoried, assessed, remediated and tested
those systems that will ensure our objective.
Y2K History
We started our initial assessment and evaluation of the Y2K problem
on TAPS in 1996. This was followed by an assessment of computing
infrastructure and key applications in 1997. We used a triage process
to categorize systems in terms of mission and business critical
functions--those functions that we must be able to perform to operate
TAPS safely and reliably with the start of the new year.
In early 1998, we expanded our Y2K program to include control
systems, network and communications systems, and vendor readiness. Our
program revealed that some of the original systems installed on the
Trans Alaska Pipeline System pre-date the Y2K issue, and do not require
major remediation.
In excess of 110,000 devices were inventoried as potentially Y2K
sensitive on the pipeline and at the Valdez Marine Terminal. One of
these, approximately 27,000 devices required detailed assessment. But
only a small number of these, 132 devices, required remediation or
replacement.
Our control systems inventory found 11 areas that needed
remediation. For instance, our Ballast Water Treatment Facility needed
upgrades to the control system in order to continue to process ballast
from the tankers that call on Port Valdez. We also included a review of
our infrastructure providers, such as utility companies, and are
working to minimize the degree of disruption that they can cause
Alyeska.
In 1999, we have devoted our efforts to finalizing remediation and
testing by the end of June. A few systems will require additional work
into the third quarter, and our business contingency planning will be
complete by the end of November.
We learned that our main concern should be on systems that we
installed in the past ten years, and that is where we began focusing
our effort. We think in terms of mission and business critical
functions--those functions that must be able to perform with the start
of the new year.
Our team consists of 70 people devoted exclusively to the Y2K
issue. They, in turn, are supported by many of the 900 Alyeska
employees who work on TAPS. We have teams in operations and engineering
to ensure that the crude oil continues to flow. Other support teams are
working on issues like safety, security and environmental protection.
We are also actively sharing information and lessons learned with our
owner companies.
We estimate that the final Y2K cost for TAPS will be in the $30
million range. It is money well-spent to provide assurance to the
country that we are in a good position today because we have dedicated
the necessary resources to responding to this problem.
Alyeska's Y2K Program
Alyeska decided early in the planning process that in order to
ensure our success we would follow the industry standard methodology.
Therefore, the program I'm about to describe is similar to that of
other pipeline and oil facilities. It involves three major steps:
Assessment of the system, which includes taking inventory
and evaluating what remediation is necessary.
Remediation or replacement, which includes testing the
fixes and changes that have been made.
Contingency Planning, which will further reduce the risk
of a problem.
Assessment
At Alyeska Pipeline, our initial assessment was thorough and
complete. Every system of the pipeline, terminal and our tanker escort
system was analyzed to determine the work that was necessary to ensure
safe, reliable oil flow. As we have remediated, we continue to re-
assess our earlier assumptions and findings. And we have found that we
have done the right work at the right time. Some of the larger systems
we've addressed include:
Communication and Control Systems, which include our
Operations Control Center in Valdez and our communications with remote
gate valves.
Mainline Turbines and Pumps that keep the oil flowing.
Leak Detection System, which helps us determine if there
is a leak in the system.
Remediation
Like many others in the oil industry, Alyeska has complex, inter-
related systems that require detailed remediation. Our remediation
efforts have included everything from re-coding of software to address
the double zero date, to changes in hardware such as the programmable
logic controllers that monitor security at four critical river
crossings. As the Y2K Team replaces one system or device, the inter-
dependent systems related to that device have to be re-tested. With
each fix we make, we look up and down that system to ensure overall
success. We only consider remediation complete when we have completed
testing of the fix and the inter-related systems.
You will find it reassuring to know that over 90% of our mission-
critical system work will be complete by June 30, 1999. Our business-
critical systems, such as our payroll system, will be complete by
September 30, 1999.
Contingency Planning
Our efforts are now focusing on completing our contingency
planning, which is an essential step in the Y2K preparation effort.
This planning will minimize the risk in the event that we do experience
Y2K failures in our mission and business critical systems. We are
working in three major areas:
Assessment of individual operational assets and support
groups.
Evaluation of company-wide operations, business functions
and key vendors.
Development of mutual understanding and agreements with
external stakeholders and third parties on how to respond and recover
from Y2K failures. For example, we are working with the oil producers
on the North Slope, the shipping companies that operate tankers in
Prince William Sound, our regulators, such as the U.S. Coast Guard, and
our critical vendors.
Our plan will assure continuity in our operation and address any
possible failures. For instance, we may stage individuals at areas of
high risk along the pipeline system where they will be able to manually
operate key systems. We are mobilizing our Incident Command System,
which is a well-oiled team of people who handle emergencies along the
pipeline system. Key Alyeska leadership will be on site and prepared to
respond as many around the world are celebrating the new century.
Alyeska Pipeline, as operator of the Trans Alaska Pipeline System, will
be ready to assure the flow of oil from the North Slope of Alaska to
Valdez and the lower 48.
Domestic Pipeline Readiness
I'd like to say a few words about the other pipelines across this
nation that are critical links in our domestic energy supply. As a
member of the Association of Oil Pipe Lines (AOPL), I can assure you
that the companies who operate the vast network of pipelines across
this nation are ready for the Year 2000. AOPL is a trade association of
common carrier oil pipelines whose members transport over 80 percent of
the crude oil and petroleum products that travel by pipeline in the
United States. We have coordinated our effort to ensure success to all
sectors of the pipeline industry. Our approach has been three-fold:
Senior level sponsorship and commitment that ensures
commitment at all levels in the organization.
Business ownership and accountability, from the top down
through all the functional areas, including the information systems
experts.
Tight management within the corporate environment using
normal business processes.
The pipeline industry has relied on alliances to address the Y2K
problem. For instance, AOPL has held workshops each year for the past
three years to educate and share information about Y2K efforts. As a
member of the American Petroleum Institute, the trade association that
represents 400 oil and gas companies, I am aware of the Y2K task force
that has been in place since 1997 to assist the industry. This sharing
of information allows each one of us to educate others about the
lessons we have learned as we remediate and test our systems. As an
industry, we have replaced equipment, rewritten computer programs,
tested components of our system and developed contingency plans so that
we are prepared.
AOPL has been conducting surveys of the industry to determine if
concern exists as we move toward the end of the year. These can be
categorized in three areas:
Vendor issues, such as concern over software and system
certification.
Resource issues, such as a lack of people and funding.
Supply chain issues, such as the readiness of customers
and suppliers.
These three issues lead me to make this final point about the
industry in general--We can ensure that we are prepared, and we can ask
others to prepare as well, but in the end a small risk exists. Let me
assure you that in the unlikely event that a problem occurs, the
pipeline industry is ready, willing and able to handle it.
CONCLUSION
In closing, I want to state again that Alyeska Pipeline has
anticipated the problem, remediated the problem and we are prepared. We
have engaged highly talented people and have allocated the necessary
resources to tackle the Y2K challenge. I can assure you that we are
taking the necessary steps to have the Trans Alaska Pipeline System
ready for the transition into the year 2000. When the cold and darkness
of December has settled on Alaska, at Alyeska we will be warm and
confident in our ability to handle the final crisis of the century.
__________
Responses of Bob Malone to Questions Submitted by
Chairman Bennett
Question 1. What degree of confidence do you have in the ability of
local supplier utilities to Alyeska to be up and running in the Year
2000? And what does this mean for other Alaskans who may be in need of
the services of those utilities?
Answer. We have carried out a detailed evaluation of all our
mission and business critical utility providers. Based on the
information we have obtained on them through correspondence, telephone
conversations, research on the Web and other public sources, we have
established an acceptable level of confidence that they will be Y2K
Ready. Not withstanding their commitment and efforts to become Y2K
ready, we are in the process of developing contingency plans that
assume some level of failure and disruption to their services. Where
appropriate we will develop joint contingency plans with utility
providers. With respect to power supplies and communication systems, we
have adequate independent back up systems that mitigate most utility
failures.
Question 2. What effect could the failure of any governmental
systems upon which you rely have on your readiness for the year 2000?
Answer. Failure of some governmental systems could have a serious
impact on Alyeska. Our primary area of concern is with the Coast Guard
who are in the process of completing Y2K evaluations, remediations and
replacements of navigation and communications equipment in Prince
William Sound. Their failure to be Y2K Ready could seriously impact the
safe movement of oil tankers entering and leaving Prince William Sound.
Other governmental failures that could impact Alyeska include
systems used by Federal and State agencies in the Joint Pipeline Office
(JPO) that provides oversight of the Pipeline. These agencies,
including the Department of Transportation, are responsible for issuing
permits and other notices to Alyeska for regulated activities. Our
internal contingency planning efforts include developing joint plans
with the JPO to ensure emergency response and recovery work can be
carried out without unnecessary delay. The failure of any emergency
services (911), emergency response organizations and other governmental
groups involved in Mutual Aid services pose some risk to Alyeska and
the Alaskan community as a whole.
Question 3. Have you hired an IV & V contractor?
Answer. Alyeska has chosen not to employ an Independent Validation
& Verification (IV&V) contractor to review its Y2K work. Alyeska's Y2K
program incorporates the checks and balances of external review through
its resourcing strategy for its Y2K Team and its regular interactions
with the Pipeline Owners. It is normally only beneficial to consider
using a IV&V contractor when a Y2K program is internally driven by
employees both during the development and implementation phases of the
work. Alyeska took a different approach by developing and implementing
its Y2K program using multiple external contractors engaged in Y2K work
programs with other major oil companies. This enabled us to learn from
others mistakes and ensured that the methodology we adopted was well
proven across industry. Our Y2K implementation team had a peak of 70
full time staff who predominantly came from specialized contracting
organizations supporting Alyeska's business. We also adopted a
philosophy of peer review with our Owner Companies and have actively
exchanged information and experiences during each phase of our program.
Our Contingency Planning program has been implemented a little
differently. It is essential that the process of Contingency Planning
is owned and implemented by our internal organization because they
fully understand our operational, technical and business functions.
However, we are using limited external resources to help develop,
manage and coordinate our program, and to help facilitate resolution of
issues that cut across asset boundaries.
Question 4. Are there any plans for end-to-end testing either
within your system or across system lines?
Answer. Whenever possible, we are conducting end to end testing of
complete systems including the full integration testing of applications
on our enterprise server. Often it is technically difficult, or
impossible to conduct date roll over tests on controls systems that do
not have a master clock to input a date change. We have a team of
engineers devoted to conducting system integration and interface tests.
They are specifically targeting systems that have distinct interfaces
between different technologies such as the hardware and software found
at interfaces between traditional IT and controls systems.
Question 5. On page 5 of your testimony, you state that ``the vast
network of pipelines across this nation are currently ready for the
Year 2000.'' Does that mean they are currently ready or that you are
confident that they will be ready? What empirical information can you
provide the committee that supports your view of the industry's
condition?
Answer. Based on recently compiled industry survey information, oil
pipelines have generally completed testing and remediation of Year 2000
related problems on their systems and are focusing on their contingency
plans and coordination with their suppliers and customers. The industry
survey indicates that pipelines--both oil and gas--will be ready for
2000 well before the end of the year. Pipelines are, in fact, in the
final stages of their Y2K readiness programs for all phases of their
operations. They are also making sure that infrastructure providers,
such as telecommunications and electric power, will also be ready on
January 1. While the interdependencies with telecommunications and
power suppliers could potentially cause problems, redundant computer
systems and communications paths permit simulation and testing.
Question 6. Could you provide the Association of Oil Pipe Lines'
surveys for the record of this hearing?
Answer. The oil industry Year 2000 Readiness surveys are not in the
possession of Alyeska Service Company nor is Alyeska privy to the
individual survey information. The oil pipeline industry surveys were
collected and assimilated by the American Petroleum Institute as part
of its cooperative effort with the President's Council on Year 2000
Compliance to assess oil industry preparedness. Each oil company,
including pipelines, submits the survey information to API on a
confidential basis. We understand that once the survey information is
assimilated into the API database, the individual surveys are not
retained.
__________
Prepared Statement of Rear Admiral George N. Naccara
Good afternoon, Mr. Chairman and distinguished members of the
Committee. I am Rear Admiral George Naccara, the Coast Guard's Chief
Information Officer. I have responsibility for the Coast Guard's Year
2000 (Y2K) project.
The Coast Guard is certainly aware of the potential for disruption
posed by the so-called millennium bug, both to Coast Guard readiness
and to all segments of the marine transportation system (MTS). The
Coast Guard is working diligently to ensure its own information
technology systems are prepared for the millennium, since an important
component of the Y2K readiness of our domestic ports will be the
readiness of the Coast Guard to respond to any disruptions that may
occur. Our motto is ``Semper Paratus''--Always Ready--and therefore, we
must similarly ensure that the systems and equipment with which we
deliver our marine safety, environmental protection, search and rescue,
and maritime law enforcement services to the public are also ready.
We are also keenly interested in the Y2K readiness of the industry
we regulate. We have been working intensely since our first Y2K
Conference with the Maritime Association of the Port of New York/New
Jersey in February 1998 to alert all segments of the MTS industry to
the threat of Y2K. I will address a number of the awareness-building
measures we have taken specifically a bit later. Concurrent with our
awareness-building initiatives, we have focused our attention on
assessing the Y2K readiness of the MTS, both ships and ports, domestic
and international.
Needless to say, the companies that transport, store, refine, and
pump oil play a prominent role in both these realms. To gain a better
understanding of their readiness, we have engaged with a number of them
directly, and in some cases through their representative trade
associations. We have shared the podium at a number of conferences with
several of them, including organizations represented here at this
table. What we have learned from them is that, as in other industries,
larger and well-resourced companies take Y2K very seriously, have
robust Y2K projects in place, and expect to be ready for the
millennium. In particular, large, horizontally integrated oil companies
have demonstrated very comprehensive Y2K projects, including thorough
contingency planning. In a recent Lloyds of London Press survey of
about 4,500 shipowners/operators and port authorities/operators
resident in 40 countries, 80-90 percent reported awareness of the Y2K
problem; 50 percent expected to be Y2K-ready by the end of the second
quarter of 1999, with the balance ready by the end of the year.
While this news appears to be good, in a fragmented industry it is
very difficult to assess whether progress is meeting projections, and
whether optimism is justified. Significant unknowns remain--the degree
to which the embedded chip problem on ships will cause disruptions, for
example. At a conference sponsored by the International Energy Agency
which I attended in Caracas, Venezuela, I heard troubling assessments
of the Y2K readiness of other parts of the infrastructure that support
ports and facilities in Central and South America, such as power and
communications. Since Venezuela is the largest supplier of foreign oil
to the United States, I take these concerns seriously, and they lead me
to conclude that we must continue to push all stakeholders in the MTS
to continue working, testing, and contingency planning.
I mentioned that the Coast Guard and others are taking measures to
help prepare the industry for the Year 2000. These measures include the
following:
An aggressive Coast Guard Y2K awareness campaign, which
has included conferences and industry sessions on three coasts, the
Great Lakes, and the inland rivers; and the distribution of over 50,000
Y2K brochures, which contain information, Web sites, and an (800)
number, to ships calling at U.S. ports. Also, I have attended a large
number of speaking engagements in both domestic and international
locations. These efforts are ongoing; in fact I was to have addressed
the National Association of Waterfront Employers in Bermuda this
morning--this has been rescheduled to tomorrow morning.
A Coast Guard study of the best Y2K readiness practices
in the 48 major inland and coastal ports in the United States. These
practices will be shared widely among all the Coast Guard Captains of
the Port, as well as with MTS stakeholders around the country. The
study includes a highly flexible risk assessment matrix that the Coast
Guard and MTS stakeholders can use to assess their own or their
partners' Y2K readiness.
A speech I presented on the international MTS to 120
national Y2K coordinators at a Y2K session at the United Nations (UN)
on December 11, 1998. Among other issues, the speech directed
delegates' attention to the vulnerability of the international oil
transport industry to Y2K disruptions. This speech led to the Coast
Guard being asked by Mr. Koskinen and Ambassador Kamal of the UN to
lead an international effort to address the Y2K readiness of the global
MTS. The result was a March 3-4 meeting of 16 international MTS trade
associations at the headquarters of the International Maritime
Organization (IMO) in London, jointly sponsored by the U.S. Coast Guard
and the UK Maritime and Coastguard Agency. In preparation for the
meeting, representatives from nine of the trade associations, including
Intertanko (which represents 75 percent of the world's independent
tankship operators), met and drafted a Year 2000 Code of Good Practice
for the MTS. After modifications by the meeting attendees (including
very essential contingency planning guidance and a list of ship and
port-critical systems that I urged them to add), the Code was issued
immediately by the IMO as IMO Circular 2121. It is the intent of the
Coast Guard and the IMO that the document will become the basis for Y2K
information exchange, assessment, risk management, and enforcement
policies by ships and ports worldwide. It must form the template for
flag state and port state enforcement efforts to ensure consistency
among nations.
The May 1999 meeting of the Maritime Safety Committee of
the IMO will focus on IMO Circular 2121, and its implementation
worldwide as the standard for Y2K risk assessment and enforcement. It
should be noted that both the IMO and the U.S. Coast Guard are urging
cooperation on the adoption of the IMO Code, but have no power to
enforce its adoption internationally, as we are dealing with sovereign
states and a large percentage of foreign flag vessels.
One June 21 and 22 there will be another meeting at the
United Nations of the national Y2K coordinators, with a focus on all
segments of the world economy, including in the Y2K readiness of the
international MTS. At that meeting, the Coast Guard will not only urge
worldwide acceptance of the IMO document as the basis for Y2K policy by
port state control states, but will also distribute its own Y2K
enforcement policy and the Port Operations Y2K Guidelines. The
guidelines, which include the risk assessment matrix, will go hand-in-
hand with the IMO Code to assist states to address their ships' and
ports' Y2K readiness.
The Coast Guard is providing a representative to several
international forums on a range of Y2K issues, including an Asian
Pacific Economic Cooperation (APEC) symposium in Singapore, an
International Telecommunications Union (ITU) global cross-sector
meeting in Geneva, an African regional Y2K conference, the second South
American Y2K forum here in Washington, D.C., and an International
Energy Agency-sponsored Middle East/Africa oil seminar in Abu Dhabi,
United Arab Emirates.
I have been asked to offer an assessment of areas around the world
where Y2K problems may impede the steady production and transport of
oil. Clearly, others seated here at the table are better qualified to
address the issue of production. Regarding transport, let me make two
points:
The Gartner Group and the Department of State have both
published unclassified regional and economic sector assessments of
international Y2K readiness. The CIA has also done some assessment
studies, which are classified. These studies permit some inferences as
to what regional Y2K impacts on the MTS might be, with the caveat that
the MTS is a global industry in which the readiness of MTS companies is
not always the same as that of the countries in which they do business.
I will not attempt to review these regional findings here, as they are
readily available. Nevertheless, I want to stress that the oil
transport companies will be subject both to the uncertainties of the
embedded chip problem on ships and in ports, and to a range of
potential disruptions in the interlinkages of the industry with supply
chains and supporting infrastructures.
Despite these cautions, the Coast Guard is actively
trying to improve its data on the international readiness of the MTS.
We are currently partnering with the United States Transportation
Command in a data gathering effort on the Y2K readiness of over 50 key
international ports and critical choke points. We hope to have
considerable data on these ports collected and analyzed by summer,
which will give us a reasonable picture of global readiness in the MTS.
This will allow time to take corrective measures, or further develop
contingency plans.
I have been invited to comment on actions the Congress or others
should take to address Y2K issues impacting the importation of foreign
oil. It would seem prudent for Members of Congress to join with all
those concerned about fuel supplies in taking a message of caution to
the American public, caution against hoarding petroleum products, or
topping-off tanks a day or two before the century change, as we
understand that that act alone, repeated nationwide, could lead to
shortages. To assist the Coast Guard in its preparations for Y2K, I
would also appeal for mindfulness regarding the tremendous amount of
information being requested from us on a near-daily basis.
Thank you for the opportunity to appear before you today. I will be
happy to answer any questions you may have.
__________
Responses of Rear Admiral George N. Naccara to Questions Submitted by
Chairman Bennett
Y2K ENFORCEMENT POLICY
Question 1. You stated that the Coast Guard will disseminate its
Y2K enforcement policy this coming June at the United Nations Y2K
coordinators meeting. It's good to hear that the Coast Guard will put
out a definite policy on this topic. Are similar policies being issued
to your knowledge elsewhere in the world? If so, are there emerging
problems with policy differences that may interfere with shipping? If
there aren't any such policies, what is that telling us about the
preparations at foreign ports?
Answer. The U.S. Coast Guard and the United Kingdom Maritime and
Coastguard Agency co-hosted a meeting of 16 international maritime
trade associations at the Headquarters of the International Maritime
Organization (IMO) in London on March 3 and 4, 1999. The meeting
produced a Year 2000 Code of Good Practice for the Marine
Transportation System (MTS) that was promptly issued by the IMO as IMO
Circular Letter 2121. The Code contains questionnaires for the exchange
of Y2K readiness information between ships, ports, and terminals, as
well as contingency planning guidance, and lists of critical systems
for ships and ports. The intent of the U.S. Coast Guard and the other
participants at the meeting is that the Code will become the basis for
a consistent international approach to vessel entry and risk assessment
during critical Y2K periods. The U.S. Coast Guard enforcement policy to
be issued by the end of June, and published shortly thereafter in the
Federal Register, will be closely aligned with the IMO document. We
have been encouraged to hear that the Canadians will closely align
their policy with the IMO document, and the Australian government has
actually retracted earlier policy pronouncements and reissued their
maritime Y2K policy, closely aligning with the IMO document. We do not
have a complete list of other nations' policies at this time, but we
anticipate that most, if not all, maritime nations will follow suit. To
further this trend and offer practical guidance in the implementation
of the IMO document, the U.S. Coast Guard exercised its approach with
some commercial shipping lines and the Port of Los Angeles/Long Beach
on June 14 and 15, 1999. The results will be compiled into a
``template'' to be distributed to national Y2K coordinators at the
United Nations on June 23, 1999.
LLOYD'S OF LONDON PRESS SURVEY
Question 2. You referred to the Lloyd's of London Press survey of
4,500 ship owners and operators. As you are well aware, there haven't
been many incidents in the past of false reporting and mis-
certification in the maritime industry. It has often been that
certification was available for a fixed fee and incidents have occurred
with property loss and environmental damage. You said yourself that
this is a fragmented industry that is difficult to assess. How much
confidence should we put in this survey? Is there any way to check or
verify even a sample of the results? Do you have suggestions in this
regard?
Answer. The value of such surveys may be limited. We have learned
that legal and public relations concerns have diluted the value of
self-reported Y2K readiness information. Nevertheless, we do feel that
the Lloyd's survey (and others conducted by industry associations like
the International Chamber of Shipping (ICS) and the American
Associations of Port Authorities (AAPA)) reflects that the majority of
the industry is seriously addressing the Y2K problem. Our many contacts
with major companies and trade associations in the industry confirm
this. Though the responses tell us less about small and medium size
companies, we recognize that size is not automatically a factor in how
seriously the Y2K issue is being addressed. The U.S. Coast Guard cannot
directly validate the survey results. However, the U.S. Coast Guard is
continuing to collect data about the readiness of U.S. ports and
companies, as well as the major stakeholders in the ports. Further, we
are gathering information available from other government sources about
the readiness of the global industry.
ASSESSMENT OF KEY INTERNATIONAL PORTS
Question 3. You mentioned that the Coast Guard and the U.S.
Transportation Command are assessing the readiness of 50 key
international ports and expect the analysis to be done this summer.
This will allow time to take corrective action and develop contingency
plans. Would you please describe typical corrections that could be
taken with regard to a foreign port? Also, what would be contained in a
business continuity and contingency plan such as you referred to? Is
there enough time remaining to accomplish this?
Answer. There is little the United States or the U.S. Coast Guard
can do to directly correct Y2K problems in foreign ports. However, we
have been working with other key stakeholders in the international
Marine Transportation System (MTS) to achieve a cooperative approach to
making a global industry Y2K-ready. Our program to assist foreign ports
has three major components:
Outreach. Planned speaking engagements, both in this country and
abroad, to international organizations, such as the International
Energy Agency, the American Association of Port Authorities, and the
Western Hemispheric Transportation Sector Regional Work Group. These
presentations will strongly urge all MTS stakeholders to continue
preparing their own technology for Y2K and to work with other
stakeholders in all ports, domestic and international, toward a maximum
state of readiness for potential Y2K disruptions.
Establishment of an international standard for ship/port
communications and Y2K risk assessment. This important initiative
culminated in the Year 2000 Code of Good Practice, International
Maritime Organization (IMO) Circular 2121. Issuance of this document by
IMO to the member nations will raise the visibility of the Y2K and
contribute greatly to a balanced, consistent approach to the
communications, risk assessment, and contingency planning needed on the
part of all maritime nations to minimize disruptions to global MTS
commerce.
Contingency Planning. Effective contingency planning is a strong
and constant theme in U.S. Coast Guard presentations, as well as in
virtually all presentations given by other organizations at
international meetings on Y2K. Effective contingency planning is needed
as the most effective antidote to foreseeable disruptions in the MTS
due toY2K. The U.S. Coast Guard has continued to advocate strongly for
a focus on contingency planning in all public statements about Y2K, and
in most of its published Y2K materials.
The above program components represent ongoing corrective measures
that apply to the entire international MTS. If assessment information
on international ports reveals particularly insufficient progress in
Y2K preparations in some country, affecting the readiness of their
ports, action can be taken to assist them. Numerous organizations,
ranging from the State Department, to the World Bank, to the
international MTS trade associations, to the U.S. Coast Guard, can
assist with professional advice, model contingency plans, risk
assessment tools, even financial assistance to help them with their
preparations, which at this late date will be primarily focused on
contingency planning.
It is unrealistic to give an adequate description of such a
Business Continuity and Contingency Plan (BCCP). However, the U.S.
Coast Guard has now submitted its own BCCP to the Department of
Transportation. Though the document is U.S. Coast Guard specific, much
of the information, particularly the planning principles and
assumptions, has universal application.
Clearly, there is time enough remaining to accomplish BCCP planning
and to design plans that will ensure the continuity of core business
functions of any organization in some manner.
Y2K PROJECTS FOR SMALL COMPANIES
Question 4. You mentioned that ``large and well-resourced companies
take Y2K very seriously, have robust Y2K projects in place, and expect
to be ready for the millennium.'' What about smaller and less-resourced
companies? Even if they are not critical to the supply of oil, they
certainly can do a lot of damage when they have an accident.
Answer. The international Marine Transportation System is a
tremendously interlinked industry and we acknowledge that very small
participants can play pivotal roles. Failure of a small supplier to a
pipeline company might conceivably halt operations of a pipeline, which
in turn could back up tankships in a port. And, of course, a small
petroleum company could have a serious spill. To date, we have only
anecdotal information about smaller companies and this limited
information reveals that some companies have made serious efforts to
address their Y2K issues, while others have adopted a ``fix on
failure'' approach. For this reason, the U.S. Coast Guard has:
a. Urged companies individually to communicate with their key
business partners, large and small, not only to ensure that they are
making serious preparations for Y2K, but to ensure that their own
contingency plans provide for alternative methods of obtaining the
services that these partners provide, should they become unavailable.
b. Directed Captains of the Port to foster the formation of local
and regional Y2K readiness committees, made up of key stakeholders, who
will work together for the overall Y2K readiness of the port.
c. Directed Captains of the Port to assess the Y2K readiness of
companies doing business in their port zone. Should they determine that
any company, large or small, appears to have made insufficient
preparations for Y2K and may present a risk to the environment, they
will assess this risk using the U.S. Coast Guard Y2K risk assessment
matrix. If necessary, they may then take appropriate measures to have
the problem corrected, or place limitations on the operations of the
company.
__________
Prepared Statement of William C. Ramsay
Introduction
Mr. Chairman, thank you for the opportunity to speak before this
Committee about the implications of the year 2000 problem for the
international oil industry.
The Paris-based International Energy Agency (IEA) is an
intergovernmental body within the framework of the Organization for
Economic Cooperation and Development (OECD). It carries out a
comprehensive program of energy security and policy cooperation among
its twenty-four member countries, which include the United States,
Canada, Japan and the countries of the European Union. I am the
Director of the Office of non-Member Countries, which handles relations
with non-OECD countries, especially those large energy producers and
consumers that can have an impact on the world oil market and thus on
the energy security of our members.
In October 1998 our member countries gave the IEA Secretariat a
mandate to examine the possible impacts of the year 2000 problem on the
oil industry and the implications for the energy security of IEA member
countries. (Most IEA member countries are net oil importers.) The US
Department of Energy can be credited to a large degree for encouraging
the IEA's increased effort on Y2K, both substantially and financially.
The government of Japan has provided additional financial support.
I will first describe the IEA project, then cover what we have
learned from it so far.
Awareness Raising and Information Gathering
The IEA year 2000 project in the oil sector has two main
components: 1) awareness raising, and 2) information gathering
The IEA is pursuing the ``awareness raising'' component by
organizing a series of seminars in several of the world's most
important oil producing and refining regions. The seminars bring
together year-2000 coordinators and other officials from governments,
oil companies and the infrastructure providers on which the industry
depends (such as electricity grids, pipelines, the shipping industry
and ports), with the aim of raising awareness of the problem and
facilitating the sharing of information, experience and ideas about
solutions. Both remediation and contingency planning are covered,
though there is an emphasis on the latter.
We have made a special effort to include the large state-owned oil
companies from developing countries--which account for a large part of
the world's oil production--while participation by the major
international oil companies helps promote a cross-fertilization of
experience and ideas.
By raising awareness and providing a forum for the exchange of
information, the IEA hopes to prevent at least some possible oil market
bottlenecks related to the year 2000 problem.
The first seminar was held for the Latin America region
on 11-12 March in Caracas, Venezuela. It was attended by
representatives from about a dozen countries, including a broad range
of Venezuelan state and joint venture producers. The meeting was co-
hosted by the Venezuelan state oil company, PDVSA.
The seminar for the Asia-Pacific region took place on 25-
26 March in Singapore. It was also attended by representatives of about
a dozen countries and was held with some assistance from ASCOPE, the
ASEAN organization of state oil companies.
The third seminar, which will cover the Middle East/
Africa region, is scheduled to take place on 4-5 May in Abu Dhabi, and
will be co-hosted by the Emirates Center for Strategic Studies and
Research.
We are examining the possibility of holding a fourth
seminar for Europe and the former Soviet Union.
The second aspect of the IEA's project is information gathering and
source identification. This is facilitated significantly by the
seminars, which bring together some of the major players on the
international oil market.
The objective of our information gathering activity is to be in a
position to advise our member governments what action, if any,
collective or individual, they should take in response to the possible
threat posed by the year 2000 problem in the oil sector.
In order to draw conclusions about the possible effects of the year
2000 problem in the oil sector, we have been trying to develop an
aggregate picture of the situation. Too few people are looking at the
cumulative effect of small probability events across sectors on
collective activities. This is probably because everyone,
understandably, is more concerned about their own micro-situation; and
to the extent that they look beyond this, it is generally only to
suppliers and infrastructure providers upon which they directly depend.
However, it is the aggregate result that will effect the oil market.
Thus the IEA, which is mandated by its members to look after energy
security, may have a unique role to play in trying to develop an
appreciation for this aggregate picture.
Drawing a macro picture requires piecing together the various micro
pictures along the supply chain and across companies and regions. This
is extremely difficult because the micro information is scarce and very
often unreliable. We have found that many of our target companies are
reluctant to share a lot of meaningful information because many of them
are concerned about the legal and commercial implications of doing so,
or about their national image of reliability. Nevertheless, after two
seminars and discussions with various participants in the oil industry
and in the support industries on which it depends, we have come to some
preliminary conclusions, which we plan to refine over the next few
months.
Preliminary Conclusions
- As in other industries, Y2K is not just an IT problem. For one
thing, in the technologically advanced oil industry, it is less of a
computer problem than one of microchips embedded in industrial
equipment used for production, transportation, monitoring and control.
And since there are so many chips (a typical oil platform has 10,000),
companies must make a business decision on how much effort to put into
remediation and then to prioritize their search and replacement
activities based on the criticality of systems to the supply chain. As
in other industries, this means Y2K is a management problem.
- The good news is that, after exhaustive testing, a number of oil
companies say they have found fewer problems at critical points than
anticipated. But it still takes as much effort to find one critical
problem as it does to find 10. Fortunately, less advanced companies can
learn from the experience of companies that are farther ahead. The
American Petroleum Institute (API) maintains a data base of equipment
its members have found to be Y2K compliant and non-compliant. We would
encourage the API in its recent efforts to provide access to this data
base to non-API members. This could help some companies save a
considerable amount of time re-checking components already tested by
the major international companies. Even if companies do not have time
or resources to replace many of the defective components identified,
they can at least have a better idea about where problems are likely to
occur, and this could aid them in their contingency planning.
- Low oil prices have been a particular burden for oil companies.
Although we do not have evidence that this has caused firms to cut Y2K
budgets, there is reason to believe there will be pressure to spend
less.
- As a general rule, the state oil companies--especially those in
developing countries--probably lag the majors in addressing the
problem. A number have openly stated to us that they only began
seriously looking at the problem around mid-1998, while most majors
started some two years earlier. However, the largest state-owned
companies, which supply most of the oil imported by the US, generally
started somewhat earlier and appear to be more advanced. Contacts with
Saudi Aramco and PDVSA in particular lead us to believe that these key
suppliers to the US market take their preparations quite seriously.
Obviously, many oil producing countries outside the OECD rely so
heavily on oil for their national revenue that they have considerable
incentive to look after their industry. Although most governments
understand this imperative, it is not yet clear to us whether all are
taking or are capable of taking the necessary action.
- Most oil companies probably have a fair chance of handling the
major Y2K problems in their own organizations. This is because oil
companies are used to contingency planning, especially in the third
world. Moreover, some of the less advanced state-owned oil companies
are less dependent upon technology prone to year 2000 problems.
- Similar to the situation in other industries, what could be a
greater threat to the oil industry is breakdown in infrastructure
outside oil companies' control, for example, in electricity grids,
telecommunications and shipping. Such service infrastructure risks are
probably more pronounced in less developed countries, though as stated
before, are mitigated somewhat by less dependence upon Y2K-prone
technology and greater experience in contingency planning from having
to deal with it on more of a daily basis. There is also some concern
about the large amount of ``outsourcing'' for various services, which
has increased in recent years. Many oil service companies are small or
medium-sized enterprises, and it is generally believed that SMEs are
more likely to lag large companies in Y2K preparations.
- Oil companies have learned from Y2K gaming exercises that a few
minor glitches can compound to create bottlenecks, and that what starts
as a minor Y2K glitch can cascade into conventional failures. Moreover,
the likelihood of this happening is aggravated by the fact that such
glitches could occur simultaneously. Flexibility in contingency plans
will be crucial. Although one may never face the situation simulated,
simulation exercises undoubtably make contingency plans and teams more
flexible. Unfortunately, it appears that only some of the majors are
now at the point in their Y2K programs of engaging in simulation
exercises.
- The duration of any overall disturbance is unclear. Though
fortunately, unlike the electricity sector, the oil industry does not
operate in ``real time'', and therefore has some margin to bring things
back to speed. One of the reasons for this is that there is generally a
large amount of oil in storage and en route, and there is currently a
fair amount of surge capacity among producers. According to some
experts we have talked to, knock-on effects of Y2K in the oil industry
could last into Q2 as problems compound down the supply chain over
time. Although such problems are likely to be mostly in the area of
delayed shipment and payment problems, they could still affect oil
supplies and markets.
- The oil market effect of Y2K is uncertain, especially since Y2K
effects on the world economy could lower energy demand. However, the
oil market actually acts upon the expectation of supply and demand.
This means that any nervousness in oil markets about the availability
of oil due to year 2000 problems could lead to an increase in demand in
the run up to the year 2000 because of stock building, including down
to ordinary citizens filling jerry cans with gasoline.
I might add that IEA governments, with the participation of a
number of oil companies, are planning a test of their emergency
response mechanism, simulating a response to possible Y2K-related
disruptions. We are now planning such scenarios.
The IEA will be refining its conclusions over the course of the
year and provide updates to its member countries.
We cannot speculate at this time on whether there is anything the
IEA might do collectively, for instance, in an effort to calm markets
or respond to supply disruptions. Our concern is that, unless carefully
orchestrated, any such efforts can just as easily have the opposite
effect on market attitudes if our preparations are read as a clear
indication that there is a serious problem, perhaps perversely
stimulating consumer disquiet. It may well be that national level
public information would be more effective in this case. IEA Members
will consider what measure might be appropriate either collectively or
individually. As a first step, Ministers of energy from the 24-member
countries of the IEA will address Y2K issues at their bi-annual meeting
in May.
Our efforts over the next weeks will be directed at identifying how
we might structure a fourth seminar to address the various operating
entities in the oil sector of Eastern Europe and the former Soviet
Union. As our efforts progress in looking for the weakest links in the
oil supply chain, we are increasingly alert to non-oil ``real-time''
phenomena which could seriously impede energy delivery systems, such as
electricity and gas. More of these considerations will figure in our
fourth seminar.
Finally, I would like to direct your attention to the IEA's web
site, which contains pages on the year 2000 problem. These provide
information on our seminars, IEA work on the year 2000 problem in the
oil industry, and hyper-links to many relevant web sites dealing with
this issue. The IEA's web pages on the year 2000 problem in the oil
industry may be found at: http://www.iea.org/ieay2k/y2khome
Thank you Mr. Chairman.
__________
Responses of William C. Ramsay to Questions Submitted by
Chairman Bennett
Question 1. You mentioned that the American Petroleum Institute
(API) is maintaining a database of equipment that its members have
found to be either Y2K Compliant or non-Compliant. You say the
International Energy Agency is encouraging API to make this database
available to non-members.
Would you be more explicit about why you think this is not
happening? Are there steps that can be taken by the Administration to
open up this information? What steps could Congress take to make this
information more available?
Answer. . . . ``We would encourage the API in its recent efforts
to provide this database on a more general basis beyond API members if
they can . . .''
The API operates a membership system that was in place before Y2K
became an issue of general concern. We are aware that they have already
made efforts to extend the availability of this database to non-
members, but they quote a fee of U.S. $6000 for the privilege. Free
access or access subsidised by the Government would obviously widen the
potential audience. The information would also be more generally
accessible if it was not listed as a ``members only'' service and was
given more prominence on the site.
Question 2. I'm very concerned to hear that some of the state owned
companies (especially in the developing countries) have only begun
looking into the Y2K problem in mid 1998. This would seem to imply that
they have little chance of completing remediation by December 31st of
this year.
Would you say this conclusion is correct? Are there actions that
the U.N. or other international organizations should be taking that
could help minimize the problems these countries will face? What about
action on the part of the U.S. Government?
Answer. . . . ``As a general rule, the state oil companies,
especially those in developing countries, probably lag the majors in
addressing the problem. However, the largest state oil companies which
represent the supply most important to the United States started
relatively earlier and appeared to be more advanced. . .''
This is probably true. The state of readiness by December 31st
depends on many factors unique to each company. The way in which they
close to tackle the issue, the resources involved, the relative
vulnerability of the company's systems and the local infrastructure
will all contribute to the outcome. Offers of technical help and
information sharing are key to resolving the issue within the
timeframe. A practical offer of hands-on technical assistance/
consultancy advise would be more effective. In the limited time
available direct assistance by their key customers is preferable to
financial assistance which has little chance of filtering through
bureaucracies in time.
Question 3. I believe that you are quite correct in your statement
that much can be learned about contingency plan credibility through
simulations, drills, and exercises. It is unfortunate that more
organizations than the major international oil companies are doing
this.
Can you suggest actions that can be taken by Governmental and
industry organizations that would improve this situation quickly?
Answer. . . . ``no relevant quote from Ambassador Ramsay is
evident in the copy of the testimony received for review . . .''
Companies are in many ways constrained by anti-trust concerns and
see considerable risk of liability which causes their lawyers to
recommend caution on public statements or on collaboration with others
who might be party to a liability case at a later moment. If the
Government wants to expedite remediation it must take rapid and
positive action. Companies should not only be offered protection in law
when sharing Y2K data, they should be encouraged to share it. (The API
has recently made available a model for contingency planning in the oil
industry).
Question 4. The test of the IEA emergency response mechanism,
``with the participation of a number of oil companies'', to simulate a
response to Y2K-related disruptions sounds intriguing. This is the
first time that the committee has heard of this exercise.
Would you please provide more detail on what the response mechanism
is and how it will operate? When will this test occur? How open and
public will it be?
Answer. The exercise, planned for late September will involve major
oil companies as well as energy security experts from the IEA's 24
Member governments. One element of the exercise will address the
potential impact on world oil supply of computer problems in the first
days and weeks of the year 2000--now widely known as the Y2K problem.
The IEA, founded in the aftermath of the 1973-74 oil shock, is
dedicated to maintaining worldwide security of energy supplies. To this
end, the Agency maintains a wide range of response measures, including
emergency oil stocks, sharing of oil among members and programmers to
restrain demand.
Over the past few months, the IEA has held seminars on Y2K in
Caracas, Singapore, and Abu Dhabi. In these seminars oil producers, the
energy industry, and Y2K experts have shared information and discussed
preparations for the millennium rollover. A fourth such seminar will be
held in Moscow in July. The Y2K element in September's simulation
exercise will reflect lessons learned in these seminars.
__________
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
----------
__________
Prepared Statement of Ken Gunn
My name is Ken Gunn, President of Caliber Consulting. I was asked
to provide a statement for the record on the Y2K activities and
preparedness of the petroleum industry at the wholesale level of
distribution. Before proceeding, I will briefly discuss my background
and qualifications in addition to a summary of Y2K activities I have
been involved in with the petroleum industry.
Prior to starting my own consulting business, I was employed by
Chevron Products Company in their marketing organization. I started
work in their company owned and operated service stations. During the
14 years I worked with Chevron Products Co., I moved through numerous
assignments. In my last assignment as a wholesale coordinator I was
responsible for the wholesale distributors, also commonly referred to
as jobbers, for the geographic area of El Paso west through Southern
California. The oversight covered contracts, marketing programs,
product integrity and supply issues.
My Y2K activities over the last 18 months have been directed
towards supporting various petroleum and convenience store state
associations in educating their membership on Y2K. I have done seminars
and workshops for these associations in over 30 states. In addition to
state association, I have provided support to the National Association
of Convenience Stores, the Society of Independent Gasoline Marketers of
America, the Oil Price Information Service and Conoco. The comments I
will provide in this statement are based on my ``hands-on''
observations and discussions with wholesale distributors around the
country.
As industry background information, wholesale distributors are
independent companies that typically have contracts with one or more
supplier/refiner companies. In many cases they also have authority by
contract to use the supplier/refiners trademark in the marketing of
fuel products. Many convenience stores and service stations in the
country receive fuel through wholesale distributors.
The wholesale distributors market over 50% of gasoline, more than
60% of diesel fuel and more than 90% of fuel oil sold in the United
States. Clearly, they are a key component to the effective distribution
of petroleum refined products in this country.
During my sessions with distributors, I inquire of their Y2K status
by asking whether someone in the company is assigned to Y2K, if they
have a written plan, and if they have spent any money. Rarely do I get
a response with more than 50% of the distributors indicating they have
assigned someone to Y2K. There are even fewer responses indicating
there is a written plan or that money has been spent.
The lack of spending money is probably the most telling. Companies
I have done on site Y2K engagements with generally have budgets ranging
from $100,000 to $500,000 and networks of convenience stores ranging in
numbers from 10 to 50. The dollars spent have been for company office
business systems and store upgrades, such as software for point of sale
terminals and the card readers at the pump islands.
There are a number of reasons why Y2K activity is not at a higher
level for wholesalers. The December 22, 1998 tank upgrade deadline had
considerable resources applied to it last year for many wholesalers.
Wholesalers are tending to wait before spending resources on Y2K
because of the continued merger activity within the industry. In
addition to mergers at the refiner level, considerable acquisition
activity is happening at the wholesale level. Finally, I have had a
limited number of people indicate they foresee Y2K as nothing but smoke
and mirrors. They intend to wait until January to see what needs to be
fixed.
In general, some of my concerns and issues are as follows:
1. I believe there will be some business disruptions at some
wholesaler offices which will cause problems in day to day business
activities. For example, during one on-site engagement, a wholesaler
asked the vendor who sold them their computing system, software and
hardware, if the system was Y2K compliant. They received a verbal
response that it was. During our work with them, we asked the vendor
specific Y2K questions regarding the system and discovered that the
hardware, operating system and some software applications were not
compliant. The fix cost approximately $20,000 and took six weeks to get
scheduled. Asking the right questions about compliancy is critical,
along with time allowed to remediate.
2. Assuming the scenario above occurs, in January you may find a
lack of resources to handle the problems encountered in the
marketplace. It is imperative that companies have contingency plans
developed in order to deal with the unexpected. At this time few
wholesalers have contingency plans in place.
3. Concerning convenience stores, problems could occur with Point
of Sale terminals. This problem can be alleviated by switching to a
manual mode of operation. The key is being prepared to switch if
needed. Gasoline dispensers should not experience Y2K problems.
4. For the wholesalers of diesel fuel to commercial accounts, truck
stops, etc., the Y2K exposure is at the customer level. If a
manufacturing company has problems with embedded chips in their
machinery and ceases to operate for a few days or weeks, the wholesaler
will feel a financial impact. Particularly if the customer is a large
account or if multiple customers have difficulties.
In discussions with a financial lender about loan portfolios and
the cause for a loan to have a missed payment, we received this
comment. When the lender did a root cause analysis as to why a loan
payment was missed or delayed, often it was due to the borrower having
disruption of business of only one day.
5. I have had numerous wholesalers indicate that commercial
customers, particularly hospitals and in one case a utility company,
have requested that a tanker(s) of diesel fuel be dedicated for their
needs during the transition to the new year. The use would be for back-
up generators or fuel to keep their trucks on the road.
My concern is the strain this would put on the distribution system
because of the limited number of available trucks. Trucks assigned to
one account cannot service other customers. Lastly, I am concerned
about whether enough fuel will be in inventory at a product terminal to
handle a spike in demand the last couple of days of December.
6. While the issue of commercial accounts storing additional diesel
is of concern, a far greater exposure exists from the general public.
People may want to fill their gas tanks the last couple days of
December. If this were to happen in mass, the amount of available
gasoline in a market would dry-up in a short period of time. Recovering
from this situation would take time because some markets are
considerable distances from product terminals/refineries. Another
potential problem can be caused by having to prioritize customers or
market areas for re-supply.
The big challenge, for supplier/refiners and wholesalers of whether
to have increased levels of fuel inventories on hand in December for
the potential spike in demand, is from a cost basis and acquiring
additional fuel. The current fuel distribution network in the country
operates in a just-in-time mode. To work on increasing inventories at
terminals and convenience stores will require planning starting as
early as September.
7. In addition to spikes in demand during December, the price of
fuel is also in question. Past experience, such as refinery fires
causing drops in fuel inventories, indicates that prices will rise.
I advise my audiences that I feel Y2K is a business problem. While
spot outages of power, etc., may happen, it should be limited. However,
a misinformed consumer can make Y2K a personnel problem if they
overreact and hoard fuel, money and food in a short period of time. I
am concerned that the media reporting on Y2K has too often been on the
extreme side on the issue. I see a lack of investigative work done to
clarify what is being said by individuals interviewed.
In closing, I offer these comments:
A proactive outreach to the consumer, clarifying what Y2K
is and what it is not, is critical to minimize the potential scenarios
described above. Credible spokespersons must be educated on the topic
and actively work to get the accurate information out.
I believe there should be media outreach that better
educates people on Y2K issues.
I anticipate business disruptions with wholesalers may
cause some to incur financial losses, and in some cases to go out of
business. The nature of the market is that a competitor will see this
as an opportunity and fill the void.
It must be recognized that some far right groups will use
lack of information or fear to their advantage. For example, I attended
a community meeting on Y2K here in Bozeman, Montana. The meeting was
organized by a neighborhood group to start raising people's awareness
on Y2K. More than 200 people attended. During the Q & A portion of the
meeting, a gentleman stood waving a manila envelope and stated; ``I
have enclosed in this envelope copies of secret legislation from
Washington, D.C. that martial law will be imposed January 1, 2000.''
As crazy as it sounds, I observed that people were paying attention
and several clapped.
On that note, I appreciate this opportunity to offer my thoughts
and information on Y2K for the petroleum industry at the wholesale
business level. If anyone has any questions, I can be contacted at 1-
800-811-4866 or [email protected].