Oil and Y2K An Updated Report Introduction:

Earlier this year in the spring, this author published some comments on Ed Yourdon's Public Discussion Forum on Y2K. The comments stemmed from numerous interviews and conversations with employees in the oil industry. This author grew up in the oil industry and has maintained contacts with other folks around the country in regards to Y2K and its potential impact on the oil industry and also the utilities. As a result of the earlier published comments, many have asked me to provide an update when warranted and others asked simply for an update at timely intervals to update the status of this industry so vital to the economic well-being of the USA. Over the last three months, I've maintained these contacts. I felt that the Labor Day period was an appropriate point to provide an update of where things stand in the Oil Industry. This report is written from the perspective of the folks who are in the trenches doing the remediation work or are watching the remediation as eyewitnesses. They've related to me what they are seeing. While this may or may not seem reliable as a source of information for some readers it may be for others. It is for those others that this report is presented. In the following presentation the reader will find that the analysis of the oil industry is broken down into three distinct segments:

Oil Wells Oil Pipelines Oil Refining

The report does not take into account foreign oil industry information, as this author does not have sufficient first hand information for consideration. This report does take into account only domestic U.S. oil industry operations, primarily on the continental U.S. The foreign oil situation is really a separate aspect for, which there is insufficient data to form any conclusions. However, it does not appear to this author that foreign oil supplies will be any better off than those in the U.S. and may be in far worse shape than here in the U.S. Crude Oil Production -- Wells:

The Bad News:

No significant advancements in preparedness seem to have been made in the oil patches of the continental U.S. Most smaller oil companies have not done significant remediation work on rigs during 1999. It seems that most companies are still holding to a policy of FOF (fix on failure). I've asked why some companies are relying on FOF and the answer comes in 4 parts.

1. Inaccessibility of some systems. Some simply cannot be easily accessed for testing. 2. Lack of replacement parts or the need to provide a special customized application. 3. General state of denial by many decision-makers in small oil firms. 4. Cash Flow problems for many small oil firms hit be the severe downturn in oil prices.

Many smaller firms have been strapped for cash to such an extent that they simply have not been able to afford remediation of Y2K issues especially in the field. The smaller independent oil firms as well as those companies that provide support services are facing difficult times. This combined with the general attitude of denial account for much of the reasoning in lack of progress this year by the industry. Good News:

Most all new drilling efforts and subsequent wells that are large enough are being equipped with Y2K certified compliant systems. However, that is a drop-in-the-bucket compared to most of the systems now operating in the USA. Also, there has not been that much new drilling activity this year because of lower prices, ($12 dollars for a barrel of oil) for oil at the wholesale levels. Keep in mind, that there are a small but significant amount of oil wells (particularly in the Midwest) that are NOT loaded with embedded chips. In fact, these wells (known as "stripper" wells) have no embedded chips and are dealt with manually. These wells themselves are going to be fine and will continue to operate with little or no problems. Assessment:

Much is contingent upon the percentage of failure in these larger embedded systems. Fail rates during testing has fluctuated from about 7% to 25%. However, this is based on small samples and may not reflect an anticipated failure rate when the rollover actually transpires. Smaller micro-processing systems seem to be running at lower fail rates in testing but still significant from between 2% to about 7%. The threat to oil pumping operations is primarily related to chip failures but of course we must take into account whether or not electricity will be available also in many cases. There are significant indications here that a large amount of domestic oil production will be curtailed or impaired for perhaps a minimum of several days to indeterminate periods. While this is simply an educated guess it seems reasonable to assume a minimum of 5 to 10% disruption of domestic oil coming out of the ground for perhaps weeks or months. The disruptions could be compounded by the financial difficulties of smaller oil firms that are already in serious trouble. Even the prospect of buyouts by healthy firms take time for transactions to be processed if it is possible to process transactions at the start of the year. Therefore, it is possible to see more significant short-term disruptions in supply just because of the financial chaos that may ensue during the rollover. This is not to say it will happen, but rather that it remains a real threat to continuous supply flows of oil. Oil Pipelines:

This is another critical aspect to the oil problem. Remediation efforts have been primarily superficial at best. From what I've been able to gather, the Alaska pipeline may be in the best shape. While I don't have sources that are personally proven as reliable to me, I must take what I hear as perhaps at least partially to mostly true. From what I've heard, (3rd and 4th hand) it seems as though the Alaska pipeline operations have received special attention and is probably in the best shape of all pipeline operations. In the continental USA, oil pipelines in the USA seem to have a lot more question marks. My sources indicate that while there has been some remediation, not everything is accessible. A lot of potential problems were left untested and unremediated in part because of inaccessibility or inability to obtain replacement parts and or because funds were simply not available. Some decisions may also have been due to apathy. Bad News:

Not everything has been tested nor remediated as is claimed publicly at least according to folks who have been involved in those efforts. Companies have attached "happy faces" to published reports without telling the whole story. SCADA systems have proven to be an underestimated problem and difficult to deal with satisfactorily. Many companies seem to have adopted a "fix on failure" policy with plenty of crossed fingers.

Good News:

The Alaska Pipeline system seems to be in much better shape and better prepared for Y2K. This is due in part to the very nature of Alaska's weather. The Alaska operations have always needed to be prepared for contingencies no matter what. This reporter however does not have any first hand reports and must therefore rely upon 3rd and 4th hand information but these sources do seem confident from what they've heard about the Alaska operations. Thus, it seems helpful to include this as some likely good news.

Assessment:

This segment of the industry appears to be extremely vulnerable and has not done nearly, as much remediation and preparation as the public relations mouthpieces would have the public believe. There has not been 100% testing of the embedded systems. SCADA problems have proven to be much harder to solve, or so my sources tell me. The fellows working on these tell me there are a lot of unknowns and not every thing has been tested. They are expecting some serious problems during the rollover. This, combined with at least 5 to 10% loss of domestic crude will further limit supplies of refined oil products still further for again probably a minimum of a few weeks to perhaps months or an indeterminate period.

Oil Refining (for gasoline, diesel, and fuel oil)

The Bad News: Here is the critical part of the equation. While all refineries do seem to be vulnerable to Y2K and a loss of power, some are more vulnerable than others. Some refineries are not nearly so modernized and therefore have less embedded systems that might go wrong. Others are loaded down with chips. Those refineries (which is most) that do have at least some embedded systems are all vulnerable to electricity outages. Most vulnerable are those refineries that are in colder climates where temperatures on New Year's day are usually at temperatures of 40 degrees Fahrenheit or colder. Why? Crude oil does congeal at temperatures below the 40-degree temperature level. When the crude oil congeals it creates massive problems in a refinery resulting that can result in a shut down for a complete "turnaround" process that can take as much as 90 days to complete dependant upon circumstances. In order to avoid potential problems, refineries in colder climates are now planning on shutting down their operations 2 days prior to 1/1/2000. This will certainly have an impact on supplies for the public consumers, both individual and businesses. Such shutdowns, however, are very dangerous not only in the stoppage but also later in the start up. Explosions are a serious risk not only to health and safety of the workers and nearby environs but also to the continuity of supply because an explosion will shut down a plant for lengthy periods and thus further limit refined supply. There is very little storage capacity. Most refineries have very little storage capability and can only store about 2 to 3 days of production at most...due to elimination of older tanks by order of the EPA. Also, governmental taxation on inventories has provided an impetus for oil companies to reduce storage capacity. Therefore, we can expect a serious snarl in gasoline and diesel supplies for year-end consumption. I would expect some shortages and you WOULD SEE a SPIKE in pricing. In fact expect to see a steady rise in gasoline prices in the coming weeks and months leading up to the rollover. The industry is now seriously discussing and planning for refineries to shut down for at least a 2-day period prior to January 1st. My sources tell me that they do not know of any cold-climate refineries that will be able to keep their crude oil pipelines warm in their refineries IF temperatures do fall below 40 degrees and there is no electricity to keep the lines warm. These sources also admit that there may be some that are capable of maintaining oil line warmth without electricity from their local utilities. Therefore a significant amount of refining capacity is vulnerable to a shut down that will last as long as there is either: 1. No electricity 2. Temperatures of below 40 degrees.

This means that most if not all refineries in the North and Midwest would be affected. It also means that some warmer climate refineries could be vulnerable. Areas around Dallas and West Texas and Louisiana and the northern Gulf Coast could also be vulnerable to temperatures below 40 degrees at night, IF their electricity goes out. Once you factor many of these southern facilities (even though the risk might be lessened) it provides a significant risk to a majority of refining capacity in the USA. The only refineries that would likely be unaffected would be those on the California coastline and perhaps Hawaii. Providing of course that these other areas are able to retain electrical power from their local utility companies. Also, in the previous assessment from last spring, there were optimists who tried to claim that oil refineries have their own power plants. This is indeed true, however, these power plants in most, if not all cases provide emergency power for basic operations and safety and do not have the capability to provide sufficient electricity to keep the crude oil lines in the refinery warm when external temperatures are below 40 degrees Fahrenheit. Also, I'm hearing reports of refineries scrambling to get large power generators to provide back up power to their power plants to start/restart their steam-generated power plants. These generators are however not able to provide sufficient power to keep crude oil lines warm.

Good News:

My sources think that most software systems themselves have been satisfactorily remediated, but there has not been any verification by independent third-party auditors to certify 100% compliance for Y2K. No oil company has been certified as 100% Y2K compliant. This then remains a caveat.

Assessment of Refining Industry:

Things do seem to be looking a little better in regards to refining operations but this is a marginal improvement. Yes, software remediation is substantially complete for most firms in their refining operations as an industry in the whole. However, testing has not been that extensive. It seems that the industry simply relaxed after completing software remediation. The really nervous aspect is in the large embedded chip systems for which most of the industry has been less than aggressive in finding, testing and replacing faulty units. Most sources in the bigger refineries with extensive embedded systems tell me that their own systems have not been completely tested. They do expect problems and failures. They note that their companies have put on smiling "happy faces" for the public, but deep down are highly concerned about whether the software patches will hold and whether or not embedded systems will fail. Fix on failure still seems to be a prevalent view even in the refining sector. Of course the big concern is whether or not local electrical utilities will go down and also whether or not the phone systems will work. Failure in these areas will only compound the problems that refineries are bracing for. Taking into account the plans for most refineries (that are vulnerable to cold weather) to shut down for 2 days prior to the rollover, it seems highly certain that we will see AT LEAST short term disruptions in gasoline, diesel, kerosene, and other refined products for at least a week. Then of course once we factor in the possible problems at the well and in the pipelines  we should expect at the minimum a couple of weeks of very tight supplies to shortages. This is the optimistic scenario. It could easily be much worse.

CONCLUSIONS: There has been some improvement regarding the overall compliance of the oil industry as a whole. Refineries seem to have made the most progress but my sources still indicate that while their companies claim Y2K compliance or Y2K readiness, the odds are still very lopsided against those companies being able to sustain operations into the New Year. In other words, the companies are lying about their ability to maintain production. It seems to be a good bet that we can expect significant shortfalls in supplies of: 1. Crude oil itself 2. Gasoline 3. Diesel Fuel 4. Heating Fuel What is the duration of such shortfalls? There are too many unknowns to be able to predict with confidence beyond a minimal shortfall of at least a week or two. A lot may depend upon electrical utility capability. If electric utilities go down then a refinery will go down most likely and especially in the colder climes. IF electricity stays up, then the issue becomes one of whether the embedded chips become a problem at the well, in the pipelines, and at the refineries. Failure rates in testing remain significantly higher than published official reports suggest. My sources confirm the reports that Mr. Beach indicated in his Spring '99 report...of 7% to as much as 25% fail rates for certain types of chip systems. It would seem more probable than not that we'll see some significant failures in some parts of all elements of the industry (wells, pipelines, and refining). Why? Remember that much of the industry has adopted a silent policy of "fix on fail" for a variety of reasons. The moderate scenario of probability is that we would expect severe shortages in supplies, perhaps mandating rationing of gasoline for perhaps a couple of months. Whether this rationing is under government mandate or simply the old method of long customer lines and seller-instituted limits per customer is hard to know. This moderate scenario is still based upon power remaining up or being down for only 3 days and only modest disruptions to supply distribution from field to refinery. IF power goes down and stays down then the moderate scenario quickly turns to chaos and we could quickly face a brink from which recovery would be measured in years not weeks or months.

One thing seems more certain now than last spring: Y2K won't be a "bump" in the road for the oil industry. There are a lot of unknown quantifiers that could virtually dissolve the oil industry fairly quickly if certain negatives fell into place at all the wrong times. There is potential for extremely serious problems in the oil industry and therefore within American society as a result of Y2K. Prudent planning is almost a necessity even for those who wish to dismiss and deny that Y2K is a problem. No one knows just how bad it will get, but there is sufficient risk potential that makes personal preparation prudent. Think of it as a form of insurance.

Final thoughts:

Some may read this and say that this report is written to scare folks into buying something. This author is not involved in selling Y2K products or services. Neither does the author have an axe to grind. This report is compiled to provide awareness so that those assessing the situation might be better informed to sift the data and come to their own conclusions. This author is not a firm believer in TEOTWAWKI (The end of the world, as we know it). However, it does seem very plausible that we might seem to get close to such a level. It is this author's view that we will likely see 4 to 6 months of severe disruptions and a fair likelihood of civil unrest with shortages in energy, communications and food supplies. Water and Sewer problems may persist for a couple of months or more but not likely to see prolonged interruptions in service. However, when it comes to the water and sewer issues, this author has no first hand sources of testimony for which to be confident or negative. It simply comes from press accounts and hunchesand should be treated as such by the reader. This author continues to rate the percentage of Y2K impact at somewhere between a 5 to a 7 as being the most likely outcome of the rollover but hoping to be very wrong but not ruling out a worse scenario either.

-- R.C. (racambab@mailcity.com), August 30, 1999

Answers

Previous threads: Oil/Gas are the real problems in Y2k? -- R.C. June 15, 1999

Did some Polly's want names and proof that the oil industry is in trouble? -- R.C. June 27, 1999

Another good thread:

The Oil Industry and the Y2K Problem: IEA (International Energy Agency findings) posted by regualar May 19, 1999.

Note - the International Energy Agency's website was last updated July 26, 1999. Might be worth a look: http://www.iea.org/ieay2 k/homepage.htm

-- Linda (lwmb@psln.com), August 30, 1999.

Thanks for the update.

I work for a large independent domestic oil company and I monitor our Y2K effort. We have about 50 more mission-critical software systems to complete (out of about 200 identified). We have 123 days remaining.

Can we bring them online at a rate of three per week? I'm not a codehead, but that seems to be an impossible task to me.

-- Dog Gone (layinglow@rollover.now), August 30, 1999.

RC:

Thanks for the update. I did some checking on my own, going as far as contacting Petroleum engineers at random via email.

All confirmed the basic possibilities as you outlined them above.

Your "5-7" feels more like my "8+".

Keep us updated.

-- Jon Williamson (jwilliamson003@sprintmail.com), August 30, 1999.

All the itricacies of oil industry y2k fundamenatals aside, do you want to know what the 'oil people in the know' think of the y2k threat? Its not hard to determine. Just check the commodity page of the WSJ or most major newspapers.

In the mid and late 80s, oil pricing economics were wrestled from the control of OPEC and major oil companies by the introduction and success of NYMEX oil futures contracts. These markets reflect how big a deal oil companies and executives think y2k and other risks are gonna hit. And unlike these posts, NYMEX participants are putting big money where their mouths are. If oil industry executives, refinery personel, traders and engineers really think the y2k threat is substantial, you'd see a huge margin between Dec '99 deliveries and post 2000 months. Previous to August, I could not discern any y2k risk reflected. We've since seen a steady rise in this '99 vs 2000 'backwardation' but it certainly doesn't reflect catistrophic failures or an intention to shut refineries down for a couple of days. I think the NYMEX values currently reflect the anticipation of extensive Dec hoarding but no big rollover problems.

Personally I don't think these values reflect enough 3rd world supply risk, which is why I've been happily long Dec products/short 2000 deliveries since mid July. Watch these spreads for a true reflection of what the industry pros think of the y2k threat. My prediction??? $30 crude and these spreads at least twice as wide, extensive hoarding, some production/refining probs in Russia, Iraq, Iran, Libya, the Venz and several smaller producers but no big US or Gulf producer operational probs....

-- Downstreamer (downstream@bigfoot.com), August 30, 1999.

Downstreamer commented:

"And unlike these posts, NYMEX participants are putting big money where their mouths are."

Well lets see Downstreamer, crude oil has double in the last 9 months or so. When is the last time we saw this happen? Maybe just maybe BIG MONEY sees something coming.

Is it possible we will see crude oil prices continue to ACCELERATE in the near future?

What effect on the economy does a doubling of crude prices have?

Ray

-- Ray (ray@totacc.com), August 30, 1999.

Italics Off

-- Ray (ray@totacc.com), August 30, 1999.

Thanks R.C.

Downstream,

You will see at least $50 a barrel by February of 2000.

Take it to the bank, if yours is still open then.

-- nothere nothere (notherethere@hotmail.com), August 30, 1999.

The price may not be a problem...if we cannot get it shipped in to Hawai'i.

-- Mad Monk (madmonk@hawaiian.net), August 30, 1999.

Ray, Its gonna get interesting. I'm partially with you. These oil prices are going a lot higher. But I can cite several times in the past when we've seen similar oil price run ups.

During the prelude to the Gulf War we saw oil prices double in just over 3 months.

The most interesting and circumspect doubling of oil prices was Nov of 88 thru April of 89. '88 was a Presidential election year. Reagan and Bush were very tight with the Saudis. The Saudis resisted all efforts to reign in production or improve oil prices throughout '88. Summer of '88, they even vetoed an OPEC production cutback deal which would have included 6 non-OPEC producers including Mexico. Two weeks after Bush was elected, the Saudis agreed to a big OPEC deal. Oil prices went from $10 (in Nov) to $22 by April.

The Republicans definately recognised the importance of moderate oil prices to a healthy economy especially in an election year. So that answers your other question - our economy should sputter. What is the only factor that's slowed our economy in the last 30 years? Oil price escalations - '74, '79, '91 and now '99.

-- Downstreamer (downstream@bigfoot.com), August 30, 1999.

Hi Downstreamer,

You said: "If oil industry executives, refinery personel, traders and engineers really think the y2k threat is substantial, you'd see a huge margin between Dec '99 deliveries and post 2000 months. Previous to August, I could not discern any y2k risk reflected."

My response: Sounds like your quite a commodities player. I used to do that til I got burned out of my shorts one too many times, if you know what I mean.

One thing I've found in my survey and interviews with the ordinary oil patch folks out there trying to fix their problems is that upper level management in the oil biz had not really grasped the problem nor did they have a clue as to what was going on. One source told me that only in the last few weeks has it dawned on the boys in the ivory towers at corporate that there might just be a problem with regards to cold weather and a lack of electrical utility resources. This source tells me that it was like the panic light went on and someone had lit a fire under some ____ (well you can figure it out). Now all of sudden this source's Y2K remediation team is getting quite a bit of attention. SO, WHY NOW? WHY ALL OF A SUDDEN? A couple of other folks tell me the same story in their camps too. Also a lot of the small operators (particularly in Texas) didn't even know what Y2K was all about or what Y2K even meant! It was like they don't get out much, except to go to the bank.

Frankly, the folks running the oil companies are not nearly as bright as you would perhaps give them credit. These folks don't really know nor understand what's going on in the trenches (until usually it is too late). This seems to be the case now with Y2K.

As for playing the oil market...most of the oil company activity is more involved in hedging than speculating. I have known very few to play the oil market. Most are too wary to get suckered in to playing the Merc. game for shear speculation. In the oil pits you don't usually see all that much action in the outer months of winter until August (usually) which I suspect explains why you're only now seeing the differentials begining to show up. You do make a very valid point though about how things are beginning to take shape in the Merc oil pit. $30.00 may become a rather conservative figure by the end of the year but that is a dicey game to predict. My sources indicate that even without Y2K at all, things appear to be rather tight on the supply side for year-end. Regarding Gulf states. I've heard rumbling rumors that Saudi Arabia is having serious problems in remediating their water desalination plants. IF that is true and they don't get it fixed water could become more expensive than oil, maybe more expensive than gold over there.

-- R.C. (racambab@mailcity.com), August 30, 1999.

Hi Jon,

You're welcome. I think you were one of the many who had asked me to keep updating and so I now have. I don't know if there will be any significant news between now and the holidays to update, but if there is I intend to do so. Things seem to move slowly in the oil biz regarding Y2K but I figure that if nothing else there will be some significance to report by the holidays even if it is just to say there is no change. I do expect to see a flurry of action and news by mid December. Regarding the 8+ as you see it...well it is certainly plausible and so is a 3 or 4. But it certainly won't be a bump in the road for the oil industry. I suspect they'll be hanging on for dear life by rollover.

-- R.C. (racambab@mailcity.com), August 30, 1999.

Nothere,

You're welcome. Bank? What bank? :-)

-- R.C. (racambab@mailcity.com), August 30, 1999.

Dog Gone, unless the people at your company are working Holidays and weekends, they have 87 days at best.

-- (just@helping.out), August 30, 1999.

Downstreamer's point is essentially correct. At this time the futures markets reflect a scenario in which physical deliveries are not impacted by Y2K. In other words, The October contract finished up .74 today to close at 22.01 and November finished at 21.98 rising 0.72 cents. Now look at December which closed at 21.86 and Jan which closed at 21.51.

Perhaps we should line them up to see my point here.

Oct 22.01

Nov 21.98

Dec 21.86

Jan 21.51

Feb 21.14!!!!

Here's the deal. The market is telling us that they think by Feb the world will be awash in oil. I've heard it several times now at industry functions listening to guys who know jack shit about Y2K pontificate on where they think the market will be by then. The prevailing theory amoung these dorks is that the market will stockpile in Nov. and we'll be chock a block (all storage full) by Dec. then when this whole Ytewkay thing blows over and is a non event, we'll be swimming in crude and the market will have to come off. This is a very, very shortsighted view, but one that I think is widely held amoung the "average commercials" meaning guys who are hedgers (and not very good ones). Then, you've got the other class of speculators, the FUNDS. Trust me, the selloff that we had last Friday didn't have shit to do with any little old refinery position unwinding hedges. When the funds are long, and they come out a sellin the market will tank. Since there was some profit to be taken, (the market had risen quite nicely) they took it Friday ahead of the little BS meeting which took place amoung the Ven, Saudi Mex love triangle.

Since nothing happened at the meeting and there were some refinery probs in the gulf coast and mid con today, the gasoline took off and crude went with it for the ride, stupid as that may sound. I think the funds went in and got long again. I think they will stay long for a while.

So those are essentially your players. Commercials who hedge,Large Commercials Who Spec Trade and Hedge and Large Non Commercials who spec trade (aka The FUNDs). The rest really don't matter.

By October 1 the markets should be reflecting a much diff. reality. Yee ha.

-- Gordon (g_gecko_69@hotmail.com), August 30, 1999.

RC I guess my futures perspective is just attempting to refute the contention that oil companies know they have big y2k probs and are just covering it up. If they know they have big probs they'd be in the futures markets big time. '99 values would be $10 /barrel over 2000. I agree that some executives are just coming to the revelation that probs are bigger than previously anticipated. That's why were seeing +2 cent gasoline rallies every other day of late. Whereas most oil executives are in denial, most came up through the engineering ranks and are smarter and in a better informational position than I am to evaluate this prob.

In terms of oil company speculating in futures markets you are right concerning the majors. They mostly just hedge. But there are plenty of pesky traders/independents such as Tosco that have been buying up Dec gasoline futures so fast one could bet they're thinking squeeze play well before the rollover. Another big change thats taken place with oil futures in the past few years - the oil companies have been usurped by the big hedge funds in dominating trading volume. So do the George Soros' & Paul Tudor Jones have an informational advantage on y2k? I doubt it although their trend following trading programs will be piling on the uptrend.

Commodity markets are tough because there's too muck risk and leverage. Don't use it all. So you think oil is going to $30 and you go out and buy 5 Dec crude futures. We get a $2 barrel wash out like we saw last week and you get forced out to the tune of a $10K loss. Like many of these posts, thats a simplistic approach. I've lasted and profited because I play the lower risk spreads. You think there's bigger y2k risks than the market reflects? Don't just buy oil futures. Spread it. Buy Dec products and sell some 2000 delivery month. Dec/Mar is pretty conservative. Go out further on the short side for more bang for your $.

On an aside, do the Saudis and other Gulf producers need their water desal plants for refinery operations?

-- Downstreamer (downstream@bigfoot.com), August 30, 1999.

To Downstreamer:

I'll respond to the main body of your last response in a minute but allow me to clarify an ambiguity regarding the Saudi water status and your comment which was ...

"On an aside, do the Saudis and other Gulf producers need their water desal plants for refinery operations?"

I guess I should have elaborated more so it wouldn't be misunderstood. I was referencing the critical need for drinking water in Saudi Arabia. Those desalinization plants are the main source for drinking water. No drinking water=death. In other words, from what I have been able to gather the desal. plants are loaded with embedded systems and they've had trouble remediating. This info was as of earlier this year. Without desal. it might be a little difficult for humans to live there. It may not be a serious impediment to oil flow but then again, it might. Sorry for the confusion.

-- R.C. (racambab@mailcity.com), August 31, 1999.

To Downstreamer,

I think maybe we've had a little misunderstanding here and it may be due to inappropriate wording on my part. I think the big oil boys are beginning to realize that they've GOT real problems with Y2K bigger than previously estimated. The trader types are primarily out of the loop in regards to Y2k except for reading the reports from folks like Gartner, etc. I don't know what Gartner has been saying lately but I know they were putting on a happy face for oil while my sources were cursing the nightmares they were attempting to resolve several months back before being told to stand down and pretend things were going to be okay in embedded systems. (despite the tests showing otherwise).

Bottom line. I wouldn't infer much from the markets right now because traders have no clue as to what's going on in the "trenches" of Y2k remediation in the oil industry. Even the big oil "majors" execs don't have a clue...they're too busy golfing and frankly they don't want to know it all anyway.

Regarding the Hedge funds... I agree completely ...

Good info you've given, though. Always like to talk with traders, but I'm glad I'm not doing it anymore. I gave it up 10 years ago for Lent. Ha ha.

-- R.C. (racambab@mailcity.com), August 31, 1999.

Gordon,

Regarding the market and what it thinks? We both know the market doesn't know diddly. But this doesn't mean that the market is being driven by the actual attitudes or knowledge of the "big oil execs." Instead, it is being driven by small speculators and hedge fund folks who are following the PR hand outs from Big oil and the industry that everything is hunky dory.

Most of the "majors" traders that are doing the hedging are most likely being kept out of the loop in order to prevent excessive speculation. The last thing the majors want is another Fed Antitrust suit for price gouging like in every other oil crisis. There are likely very few in each of the respective big oil companies that really know what is going on with their company and Y2K. The rest have only pieces of the puzzle. Most mid-level folks at corporate are too busy pushing a few papers around, making a few calls before heading out the door for either a 3/4 hour lunch or playing golf, etc. They're not in touch with reality.

Very interesting trader data that you shared. I enjoyed reading it. Regarding your comments on hearing these idiots "pontificate"... I agree with you whole heartedly. I'm hearing that we may see actual crude shortages by the holiday. Also, demand will be higher as folks do start some personal stockpiling. I've got a relative who started stockpiling gasoline a little too early. But there will be a fair amount of personal stockpiling even if its little more than everyone topping off their car's gas tank. and Filling their lawnmower gas can. Remember too... that a lot of folks are likely to be traveling out to the "country" so a lot more gasoline will be used up too.

Remember something else though about stockpiling. The industry doesn't have the storage capacity that it once had. EPA kinda came in and rewrote the rulebook on storage in the last few years. Most plants can only store about 2 to 3 days worth of demand in advance in this new "Green" era of EPA sanctions. I speak now of gasoline, not crude. Much of the tanks still standing have been "outlawed" by the EPA. Also tanks can no longer be switched from various products to other products and back again, etc like they used to. SO... there won't be near as much stockpiling as these boys wish to think. I suspect most of them are thinking of reruns of the previous oil crisis before the advent of the Super EPA laws.

October 1st is your pick for a change in market attitude? Hmmm... maybe so... you'd know better than myself...but I have my doubts. I think there will be a run up in prices ... oh yes... but I don't know if at that point it will really carry over into February contracts by then.

-- R.C. (racambab@mailcity.com), August 31, 1999.

So futures market participants and oil company management don't know diddly. The typical oil co. management has come up through the very competitive ranks with a chemical or process engineering degree and most likely - an MBA. Hes worked at a refinery or out in the oil patch for over 30 years. He knows a heck of a lot more about embedded chips and oil flow processes than anyone posting here. You guys can belittle him because he plays golf but thats irrelevant. His main duty is to protect company health and profitability. Hes good at it. If he knows his company's refinery or oil production isnt gonna make it through the rollover, he knows how to secure early 2000 products prices via the cash or futures markets to cover his contractual obligations. He'd cover his anticipated early 2000 crude production lapses the same way. Early 2000 economics would reflect this relative to late '99.

Futures markets, being transparent and tied into actual physical spot market and wholesale economics, do a much better job of reflecting risks than this posted dribble. Further non-oil industry futures markets participants have overcome daunting odds of success in a dog eat dog environment. Ninety to ninety five percent get blown out in their first year of trading. Dont belittle their market opinions either. If these traders are so stupid and these oil futures markets don't reflect reality- you now have the opportunity to set up a trading account, trade the Y2k disparity, make an absolute killing because the oil executives and traders are so stupid, and go out and stock your y2k bunker with enough weapons, silver coins and canned goods to last you for 3 lifetimes. But my other down-to-earth advice - don't quit your day job....

-- Downstreamer (downstream@bigfoot.com), August 31, 1999.

R.C.,

-- nothere nothere (notherethere@hotmail.com), August 31, 1999.

R.C.,

Let's try this again.

I think I posted this earlier on another thread, but I received information on an email list serv from a remediator in Saudi Arabia.

He reported that the Saudis had only recently gone GI and are trying to spend beaucoup bucks to fix the problem. Apparently the French are in charge of the desalination plants and at first glance appeared to be in good shape.

Unfortunately, the cargo loading systems in the ports are in horrible shape. He was not confident that the problems would be worked out in time for rollover. If they cannot load the oil onto the tankers, we don't get the oil.

-- nothere nothere (notherethere@hotmail.com), August 31, 1999.

Nowhere,

Thanks for the info on Saudi Arabia. My information on Desalinization dates back to late winter around late Feb or early March (I think) so and it certainly was not first hand sources...so your input is appreciated. Also the loading aspect is certainly a critical factor. Is your source reporting first hand knowledge of the cargo loading situation?

I suspect that you're like me and find it frustrating at the lack of 1st hand information from some of these foreign situations.

-- R.C. (racambab@mailcity.com), August 31, 1999.

Nothere,

Sorry, I mistyped you as nowhere... I wasn't paying close attention.

-- R.C. (racambab@mailcity.com), August 31, 1999.

I differentiate between major oil company operations that have been working long and hard on this problem and the oil market renegades which are pretty isolated on technology issues. The Saudis have had a +40 year relationship with the majors via ARAMCO (Mobil, Exxon, Chevron & Texaco)which is responsible for many technical issues and marketing over 90% of Saudi output. Alot of countries like Nigeria are the same way. They are a basket case but they have consortiums with the majors to develop and manage their oil reserves and production. The majors might come up short in remediation but at least I know they've been working on it for a couple of years. Its the Syrians, Libyans, Iranians, Iraqis, and Russians that are way behind on the game, but they are so archaic they're probably mostly analog anyway. Oil production will sputter. We might se something similar to the $40 Gulf War price spike but how much is demand gonna drop in early 2000? Answer= a lot as businesses sputter also and everyone works off record high inventories.

-- Downstreamer (downstream@bigfoot.com), August 31, 1999.

BREAKING NEWS which I'm sure will get related to y2k in this forum: 1) Crude unit shut at Exxon Baytown today due to a leak - one of the largest refineries in the US. 2) The Chairman of the Venz nationalized oil company,PDVSA, just resigned for undisclosed reasons...

-- Downstreamer (downstream@bigfoot.com), August 31, 1999.

Dog Gone, unless the people at your company are working Holidays and weekends, they have 87 days at best.

They're not. Yet.

-- Dog Gone (layinglow@rollover.now), August 31, 1999.

R.C.,

Yes, he has first hand knowledge on the scene and said that his recent review indicated that essentially 0% of the cargo loading systems have been remediated so far, and that it appeared that the systems would have a nearly 100% failure rate. They would simply not be able to load any cargo.

It is true that the Saudis have a longstanding relationship with ARAMCO, but his impression was that the Saudis assumed they would take care of all of the problems. They had completely ignored the local issues, and the Saudis had assumed that since it wasn't a big deal in the U.S. where they have lots of computers, it wouldn't be a big deal in S.A. either.

In contrast to the U.S., Y2K is now making prominent news in S.A. and the people are being encouraged to prepare.

Obviously, he expects to be of considerable help in remediating the ports or he wouldn't be there, but the situation there is serious. He assumed that the smaller nations were worse off, and may eventually consult with them as well.

Downstreamer,

Think stagflation. Thanks for the other oil info as well.

-- nothere nothere (notherethere@hotmail.com), August 31, 1999.

Downstreamer,

Thanks for your input and views on Y2K and oil. I suspect you're right in regards to oil output and demand come 2000. I think you make very excellent points that everyone who reads this thread should take into consideration as the clock ticks down. Regarding your late-breaking news... also VERY interesting. Thanks for the info. Its really good for all of us to input what we can of what we know in every aspect of Y2K so we can better assess and re-evaluate as we go along. I think its possible that as we get closer to the rollover we'll get a continuing mix of positive and negative news from each other that will hopefully help us get a clearer picture as to the severity or lack thereof on Y2K. Thanks again.

-- R.C. (racambab@mailcity.com), August 31, 1999.

Nothere,

Now that IS interesting news. Thank you for sharing that information. This is the first I've heard of such problems. It would be could to get another couple of sources on this. The reporter in me likes to have more than one source...at least two or three corroborating sources or more is best. Not that I discount what you're saying, but I could relate a lot of material I've heard from single sources but I just don't feel comfortable in publicizing from a single source and then claim it as reliable. I mentioned in another related thread about Venezuela and a single source...I just don't feel that comfortable in that one source because he may not have the full picture but just isolated aspects or he may have been misinformed by others. Your information however is from a first-hand source and that does make a difference as opposed to 4th or 5th hand information.

-- R.C. (racambab@mailcity.com), August 31, 1999.

Shortages of black gold + high prices = WAR

Post Y2K I expect some Middle East battles to be fought over control of oil fields.

-- Randolph (dinosaur@williams-net.com), September 01, 1999.

All I gotta say is some of my best customers ( especially diesel generator buyers) have been guys in the oil industry -- and I picked their brains when they called me... very knowledgeable... and very concerned.

actions speak louder than words folks.

We all know "What" is coming..... but, do you want to allow yourself to believe it!

Most do not (Polly's)

-- Bo (arctic@cybernet1.com), September 01, 1999.

F'n A!! you go, Bo! the bigwigs are bunkin' up, you can believe that! gettin readier every day.....

-- notapatsy (patsycoleman@hotmail.com), September 02, 1999.

This thread Linked by Gary North.

Newbies, this topic is also covered on other threads. Go to top of this page, click on TimeBomb 2000 (Y2000) hot link, which will land you on New Questions page. If you get "Server Busy," just keep hitting your browser Refresh/Reload button until the MIT server delivers the page. Then, click the hot link New Answers at the top of the page.

When you're on the Recent Answers page, do a Find for OIL. Happy reading! Oh, and this Forum has all the latest & greatest about Y2K and all possible related peripheral issues. Check out the archives!

-- Ashton & Leska in Cascadia (allaha@earthlink.net), September 02, 1999.

RC - Good, concise report = Thank you for the effort.

Also, please note I appreciate you being able to separate your comments (and opinions) from the "report" itself. That's not easy to do, and importatnt to be able to do it.

____

You did not include or factor in the complexity of the generic oil refinery/plastics plant/chemical plant: they are a virtually hteir own utility, sized for small to medium town. Steam and power production are from a local (internal power plant) source - so they have all the potential problem of every power plant in the US and rest of the world. The plant grid is itself also linked to the outside grid through a major substation - again power and control functions are vunerable, not the least is the "billing" fro megawatts of power used.

Controls and communications in the refinery put all other industries to shame, and are ten-twenty times more complex than a nuclear power plant. Cooling, pressure control and pipiing are more complex by far than power plants, and are mostly both toxic and explosive: if it fails, a power plant is much less likely to "blow up" than a refinery.

Water = real trouble. If they do not pump their own (and clean it, purify it, and treat it afterwards) then they must rely on the locl water system for fire control, cooling water to heat exchangers and distillers, process water (that is used in the plastic itself), and then make-up water to cooling ponds and to the main circ water system.

No water = no production. No power = no production. No controls = no production. Bad or no controls = no production. No shipping (pipes, trucks, AND ships) = no production. No raw oil = no production......no polution controls = no production. No natural gas (for boilers/steam/production source/raw material stock) = no production.

-- Robert A. Cook, PE (Kennesaw, GA) (cook.r@csaatl.com), September 02, 1999.

Robert,

Do you know if mideast refineries are dependent on desalination plants for their operations?

I guess I'm just stuck on these NYMEX futures market values. The Dec heat crack at $2.90 / barrel is darn cheap by historical standards and would not reflect any refinery rollover risks. Either the thrust of this thread is way off or the market is.

-- Downstreamer (downstream@bigfoot.com), September 02, 1999.

There is actually very, little processing itself and refineing in the MidEast: the biggest "plants" there are really just transhipment points, the same raw product goes out that comes in, still just crude oil or natural gas.

Exceptions of course, but someone wrote once about military ops there some words to the effect that "it would be ironic to have to report (my) army had run out of fuel in the midst of an oil field ..." but its certainly is possible. Crude oil is only slightly more viscous than tar (liquid asphalt) - it is pumped by massive pumps that almost literally "push" it through pipelines into tankers, rather than "flowing" into the tank. You can't burn it easily, and raw crude is very dificult to use for anything directly - it screws up burners for example if the wrong weight, clarity, and density of oil gets fed to boiler.

Why no refienring there? No market, hard to get people and maintain the industry, no market for refined products (no secondary plants for nylon, plastic, ethylene, butadiane, etc....so why create a refined product if you just have to ship the refined product anyway - which contaminates the newly refined output? Water, power, support, and infrastructure are missing too.

For example, if you ar ein Houston and need a valve, a pump, or an instrument, or a panel, or a fluerescent light or a computer controller, you drive up the road in your pickup truck and get one from any of thirty (opr three hundred) venders. An hour later you're back inbusiness. In the MidEast, two days later they have begun to ship your motor to you, and it arrives another two after that (airfreight) or three weeks (by ship!) - then you find out you need a gasket ....

-- Robert A. Cook, PE (Kennesaw, GA) (cook.r@csaatl.com), September 02, 1999.

Robert, Relative to crude production the mideast doesn't have much refining capacity but its still substantial. According to the latest Oil & Gas Journal Worldwide Refining issue.... Saudi Arabia has 1.7m bls/day of capacity, Kuwait 900K, Iran 1.5m, Iraq 350K, Bahrain 250K, Turkey just lost half of their 660K to the quake/fire, UAE 300K, and Egypt 570K. So its over 6m barrels/day- figure 55% gasoline and 25% distillate. In support of your previous post on refinery complexities, I'm thinking crude output might fare better than 3rd world/non-major refining operations. Why are NYMEX, IPE (London) and spot products prices so cheap relative to their historical relationships with crude? The markets are saying refineries are gonna do just fine...

-- Downstreamer (downstream@bigfoot.com), September 02, 1999.

Downstreamer,

You indicated that this thread's premise is either wrong or the markets are wrong. You imply that the markets are infallible. Such a notion would be an incorrect assumption. Markets are indeed fallible. Look at Stock Markets. Japan's stock market bubbled up to massive proportions. It later corrected. Currently our stock markets seem to be copying the Japanese markets of 10 years ago. Just an example of fallibility of a market. So too with the current state of oil market pricing.

Oil traders are the victims of believing the spin-meisters of our gov't, and of the oil industry itself. I suspect, the oil co's are actually believing their own spin. As I've said before, my sources are indicating that your ivory castle corporate leaders are essentially "clueless in Seattle" in regards to the real status of Y2K in the 'field.' This is due in part to bad management styles, wishful thinking and human egos. There simply are not that many folks in a position to see that much of the big picture. It seems most are caught up in their own little world and see only what is directly in front of them and not further down the road. Some might call it myopia of the brain.

Also, as I stated elsewhere, the oil market generally likes to run within a 6 month window of action. You're just now entering a period where the positions in January and February are going to become factors. I suspect that the market will begin a re-evaluation of 1st Quarter, 2000 in the next 4 to 6 weeks. Then, I think you'll see the "fur fly."

Regarding your comments to Robert Cook about refining stats in the Gulf. You're right on target there. I am thinking though that most of that gasoline from Saudi Arabia goes to Europe. (just a guess) I think we rely on the Saudis for crude oil itself. As I said earlier about the Desalinization...my concern was simply for drinking water in enough quantity to avoid people who run the oil segments to not die of thirst, more so than for the support of a refining process.

-- R.C. (racambab@mailcity.com), September 03, 1999.

br>These two threads should be together. Great threads!

 Why did the Saudi's jump into the VLCC market today?

And as mentioned in the thread above I believe that the Oil dudes want the oil in the water. As they don't have much of a local market it has to be shipped.

Of course you need ships and what not,,, oh there not complient??

I would recommened the link below from DOT (Coast Guard)

Year 2000 (Y2K) Reporting Requirements for Vessels and Marine Facilities

Due to the unique nature of the Year 2000 (Y2K) problem, this rule is being published as a temporary interim rule and is being made effective on July 23, 1999.

Might do a bit of digging for this subject.

-- Brian (imager@home.com), September 03, 1999.

Well I didn't have far to go.

Snip

Discussion of Regulatory Action

Due to the unique nature of the Year 2000 (Y2K) problem, this rule is being published as a temporary interim rule and is being made effective on July 23, 1999. It will have considerable positive impact on marine safety by establishing a reporting requirement for certain vessels and marine facilities on Y2K preparedness. The rule is temporary in nature--it runs for a defined period of time and is tailored to critical Y2K-related dates.

-- Brian (imager@home.com), September 03, 1999.

RC, I'm with you guys and well positioned for the 'market disparity'. I'm just trying to interject some sensibility and moderation. Chavez, the new Prez in Venz ousts a few PDVSA appointees from the previous administration to install his cronies - or the Saudis go out and charter a few tankers and ITS A HUGE Y2K DEAL in this forum. Y2k is gonna be big enough without all the embellishments.

About 80,000 bls a day (3.3 mil gals)of Saudi gasoline get imported to the US. But (my ongoing point) marekts are pretty efficient. If European gasoline spikes up due to numerous transAtlantic refinery problems, traders are gonna be all over that arb and if the tankers are running, gasoline will flow there. For example Hess St Croix is one of the largest refineries in the hemisphere. Their gasoline and output normally flows to the US. But when Europe's prices spike they ship east.... Its all interrelated.

-- Downstreamer (downstream@bigfoot.com), September 03, 1999.

having worked in Saudi Arabia as a trainer for a couple of years I can reliably say that they couldn't organise a piss-up in a brewery!

It will not be pretty - the country is in a shambles most of the time anyway but manages to stumble along with the aid of a mountain of expats - mainly American and Indian... many of these folks will be flying home for the holidays... think about it...

-- Andy (2000EOD@prodigy.net), September 04, 1999.

R.C. Your reports have really rattled me. I haven't been convinced re: non-event OR TEOTWAWKI. I was starting to feel fairly good about my preps for whatever. My brain's telling me not to pay attention to everything you say because you could be some incredibly intelligent 15 yr. old sitting at his PC and playing mind games with naive readers such as myself. My gut tells me I shouldn't discount everything you say. Knowing what you claim to know, how extensive are your preps? What is your gut telling you in regard to how much water and such to put up? Lastly, if you can back-up what you've said, would it be unreasonable to email Sen. Bennett and others like him who don't seem quite so apt to pat our hands re: y2k? I'm SO concerned because I'm not just putting up supplies for myself, but figuring we'll be having to fill in the gaps for those around us who have done nothing. How about contacting John Gibson on MSNBC? I think that's his name..he seems rather down to earth. Do I seem to be rambling? Sigh...geez...somebody wake me up!

beej

-- beej (beej@ppbbs.com), October 03, 1999.