Less Than 60 Days: Oil Mike Adams November 18, 1999

(Part Four of a Five-Part Series)

Few would argue over the importance of oil to our national economy. We've gone to war over it, we've lost lives over it and we've spent hundred of billions to find more. Oil is of such strategic importance that, during World War II, one of Hitler's main reasons for pushing Eastward was to capture the Soviet Union's precious oil fields.

Clearly, our economy is addicted to fossil fuels. We simply cannot operate as a country without a steady supply of oil.

Unfortunately, the Y2K bug threatens the supply of oil. The United States imports most of its oil, and much of it comes from countries with questionable Y2K compliance, such as Venezuela. Sure, these countries have promised everything will be fine. But so has Italy. So has Russia and China. So has everybody. Which country is going to stand up and say, "We're not compliant" and instantly lose its export market?

The answer is obvious: none. So we're stuck with unverified claims of Y2K compliance from countries we don't necessarily trust (which is, of course, the same way many other countries view the United States).

As a result of all this, there is an undeniably real possibility that our oil imports could be disrupted next year. The duration of these disruptions is largely unknown.

But that's not the end of this Y2K oil problem. Once crude oil reaches the United States, it must be refined. Oil refineries depend on thousands of potentially date-sensitive embedded systems -- and unlike computer software, you usually can't "roll forward the clocks" on embedded systems to test their Y2K compliance. Many refineries are taking a "fix on failure" approach which means, essentially, you cross your fingers and pray. When something breaks, you order the replacement parts, then cross your fingers and keep praying the parts show up sometime soon.

Oil companies paint a pretty picture of their Y2K compliance. On their web sites and in their press releases, they imply Y2K has been solved. There will be no disruption whatsoever to the nation's oil supply thanks to all the efforts of these companies. As they tell it, this is a rock-solid statement of fact.

But their SEC 10-Q filings paint a very different picture. I decided to investigate the 10-Q filings of major U.S. oil companies. If you've never read these statements before, what you're about to learn will probably shock you.

CHEVRON The Chevron document opens with a flat-out admission that Y2K could disrupt the company's operations:

"Among the factors that could cause actual results to differ materially are...potential disruption to the company's operations due to untimely or incomplete resolution of Year 2000 issues by the company and other entities with which it has material relationships; potential liability for remedial actions under existing or future environmental regulations; and potential liability resulting from pending or future litigation."

That's just the warm-up. Next, I was stunned to learn that Chevron readily admits it is "impractical" to fix everything before January 1:

"Because of the scope of Chevron's operations, the company believes it is impractical to eliminate all potential Year 2000 problems before they arise."

This seems to be saying the company has thrown in the towel on Y2K compliance and, instead, chooses to focus on fixing the problems AFTER they occur.

Yet even the effectiveness of those contingency plans is called into question by Chevron:

"In the normal course of business, the company has developed and maintains extensive contingency plans to respond to equipment failures, emergencies and business interruptions. However, contingency planning for Year 2000 issues is complicated by the possibility of multiple and simultaneous incidents, which could significantly impede efforts to respond to emergencies and resume normal business functions. Such incidents may be outside of the company's control..."

Given the potential complexity of Y2K failures, Chevron says it is unable to gauge what might happen. This stands in sharp contrast to the President's Y2K explanation where he says, essentially, "Nothing will happen." Chevron, apparently, disagrees:

"...[Chevron] is not yet able to fully assess the likelihood of significant business interruptions occurring in one or more of its operations around the world. Such interruptions could delay manufacturing and delivery of refined products and chemicals products by the company to customers. The company could also face interruptions in its ability to produce crude oil and natural gas."

Finally, Chevron describes how outside factors could play havoc with the company's operations:

"Because of uncertainties, the actual effects of the Year 2000 issues on Chevron may be different from the company's current assessment. Factors, many of which are outside the control of the company, that could affect Chevron's ability to be Year 2000 compliant by the end of 1999, include: the failure of customers, suppliers, governmental entities and others to achieve compliance, and the inability or failure to identify all critical Year 2000 issues, or to develop appropriate contingency plans for all Year 2000 issues that ultimately may arise."

How does Chevron describe all this publicly? Jim Sullivan, Chevron's Vice Chairman, in a statement on Chevron's web site, says, "As for Chevron, we expect some possibly minor Y2K-related upsets, but nothing major. And certainly nothing we think we will not be prepared to handle through contingency plans and emergency preparedness."

Sounds a little different, doesn't it? That's because the SEC statement is a legal document, enforceable in a court. The public statement made by Sullivan carries almost no legal weight.

Notice, too, how the Sullivan article is absent any claim of Y2K compliance. In fact, the only thing that comes close is when Sullivan says, "I believe Chevron will be prepared for the transition to the Year 2000" rather than "Chevron will be prepared for the transition to the Year 2000." Adding the "I believe" qualifies the statement, making it a personal belief -- an opinion or guess -- rather than a description of the company's state of compliance. You can bet Chevron's lawyers are well aware of this distinction.

Granted, these SEC statements are designed to explore worst-case scenarios in order to warn investors of all possible outcomes. However, I believe it is misleading for companies to publicly imply that these worst-case outcomes don't exist. Chevron, for example, publishes on its web site a summary of its 10-Q filing that edits out much of the worst-sounding text I've included here.

SHELL OIL I found a similar strategy underway at Shell Oil. Shell's 10-Q statement, in my opinion, is camouflaged in more obscure language.

For example, Shell says, "These new systems are represented to be fully Y2K compliant by their manufacturers, and Shell Oil believes that it will have no Y2K issues in its important business computing systems."

Notice how Shell says its vendors told them they were compliant, not that Shell actually tested the systems to verify it. This statement also offers a high-fudge-factor statement, "Shell Oil believes that it will have no Y2K issues..." rather than the much more certain version, "Shell oil will have no Y2K issues..."

Shell's 10-Q statement gets far more interesting, however, when it brags that the company's vendors are "well aware" of the Y2K problem:

"Current indications are that all of Shell Oil's major Third Party customers, suppliers and service providers are well aware of this problem and have programs underway to address it. Physical testing of key interfaces and ongoing discussions are continuing with certain Third Parties to best position Shell Oil to continue its business operations without interruption."

This paragraph, of course, promises nothing. It says, basically, that vendors are aware of Y2K and trying to fix it. That's no different from 1996. Next, Shell implies that one reason it needs contingency plans is because it can't necessarily trust third-party vendors:

"Specific attention is being given to Third Parties that have critical relationships with Shell Oil to insure [sic] that there is not a disruption in the flow of those products or services that are essential to the ability of Shell Oil to carry on its business operations. However, since Shell Oil will remain dependent on Third Party confirmations in certain areas, appropriate contingency plans are being developed in each of Shell Oil's businesses."

Here, finally, Shell admits Y2K could halt company operations:

"Shell Oil realizes that its failure or the failure of critical Third Parties to identify and correct a material Y2K problem could result in an interruption in or failure of certain normal business activities or operations."

Adding to this, Shell describes all the various ways in which outside factors might make their Y2K problem worse:

"Shell Oil's ability to achieve Year 2000 readiness and the level of costs associated therewith could be adversely impacted by, among other things: the availability and cost of programming and testing resources; vendors' ability to install or modify hardware, software or other computer technology in Shell Oil systems; and unanticipated problems identified as the Year 2000 Teams conclude their analysis and verification of IT and Imbedded Technology Systems. Additionally, no precedent exists as to the manner in which to fully detect and eliminate Y2K risks. Thus, it is possible that despite all efforts to identify, analyze and remediate Y2K related problems, not all potential problems may be detected or all remediation efforts operate as intended; it is impossible to accurately predict the impact on Shell Oil in any such case. Finally, the failure of Third Parties to achieve acceptable Y2K compliance and the absence of available contingent suppliers and resources could also materially adversely affect Shell Oil."

That last paragraph lays out the bottom-line truth about Y2K and oil companies. In a world of Y2K spin, half-truths and P.R. promises, the SEC statement is the only legally-binding statement on which we can depend.

EXXON I was unable to find a Year 2000 section on Exxon's web site. But I did find their SEC statement in the Edgar database. It sounds much like the others:

"...[Exxon] could potentially experience disruptions to some mission critical operations or deliveries to customers as a result of Year 2000 issues, particularly in the first few weeks of the year 2000. Such disruptions could include impacts from potentially non-compliant systems utilized by suppliers, customers, government entities or others. Given the diverse nature of Exxon's operations, the varying state of readiness of different countries and suppliers, and the interdependence of Year 2000 impacts, the potential financial impact or liability associated with such disruptions cannot be reasonably estimated."

MOBIL Mobil takes a novel approach to implying a high state of Y2K readiness. They interview Dan Zivney, their Year 2000 project director, then let him make all the great-sounding statements. If Mobil experiences major disruptions after January 1, Zivney might serve as a convenient scapegoat.

The interview with Zivney exudes confidence: "So by planning, preparing and double-checking, Zivney and his team are working towards a January 1, 2000, on which oil and gas wells should pump, refineries should run and customers should be able to buy Mobil gasoline using cash, credit card or their Mobil Speedpass."

Even this statement, however, doesn't say everything will work. It just says everything should work. In Information Technology circles, this is a well-known joke. Imagine the head of American Express asking his chief programmer whether the new system will share frequent-flyer data with airlines and hotels, and the programmer answers, "It should!"

In large programming shops, the phrase, "It should!" really means, "We don't know whether it will." If you translate this back into the Mobil statement, it now reads (my version):

"So by planning, preparing and double-checking, Zivney and his team are working towards a January 1, 2000, on which we don't know whether oil and gas wells will pump, we don't know whether refineries will run and we don't know whether customers will be able to buy Mobil gasoline using cash, credit card or their Mobil Speedpass."

Mobil goes on to admit that its operations could be adversely impacted by the Y2K bug:

"The failure ...for year 2000 reasons of materially important systems or relationships with external agents could have a material adverse effect on Mobil's results of operations, liquidity and/or financial condition. For example, if, for year 2000 reasons, a utility company were to be unable to supply electricity to a Mobil refinery for an extended period, the refinery would have to be shut down for that period, which could result in substantial losses of production, sales and income."

Beyond that, Mobil explains that it can't even describe the multitude of Y2K risks that exist:

"There are, however, an almost infinite number of additional risks which are simply not assessable and for which, therefore, contingency plans cannot be developed. These are the risks of failure for year 2000 reasons of one or more systems or relationships with external agents which, individually, Mobil does not judge to be materially important but whose failure could trigger a cascade of other failures for year 2000 reasons, the combination of which could be materially important or could prevent Mobil from implementing contingency plans it has developed. Such a combination of failures could also have a material adverse effect on Mobil's results of operations, liquidity and/or financial condition."

In describing all the ways a company can fail to get fully compliant, Mobil wins hands-down with this paragraph:

"Actual results could differ materially from the estimates expressed in such forward-looking statements, due to a number of factors. These factors, which are not necessarily all the key factors that could cause such differences, include the following: the inability of such staff and third parties (1) to locate and correct all non-year 2000 compliant computer code in materially important systems and test such corrected code and (2) to install and test upgrades or new systems containing year 2000-compliant computer code, all in accordance with Mobil's estimated timetables; unforeseen costs of completing Project work; Mobil's inability or failure to identify significant year 2000 issues not now contemplated; and the failure of external agents to achieve timely year 2000 readiness."

TEXACO Texaco, too, admits that Y2K problems could severely hamper the company's operations:

"Y2K failures, if not corrected on a timely basis or otherwise mitigated by our contingency plans, could have a material adverse effect on our results of operations, liquidity and overall financial condition."

Like the other companies mentioned here, Texaco also points to a multitude of outside factors that could impact operations:

"Factors that could affect our ability to be Year 2000 compliant by the end of 1999 include: the failure of our customers, suppliers, governmental entities and others to achieve compliance and the inaccuracy of certifications received from them; our inability to identify and remediate every possible problem; and a shortage of necessary programmers, hardware and software."

SPIN CONTROL! As you read this, rest assured the public relations offices of oil companies around the country are busy crafting damage control press releases. Such press releases will attempt to counter the publicly-available SEC statements filed by these companies.

These press releases will have three things in common:

None will use the phrase, "Y2K compliant."

All will use qualifiers such as "things SHOULD work" or "We BELIEVE things will work."

None will guarantee that the worst-case scenarios described in the 10-Q filings won't happen.

As a result, the reactionary press releases will be just more fluff for public consumption, distributed by companies that want to create the impression of Y2K compliance without actually being compliant. In this way, the American public is being herded down a path of deceit, oblivious to the real risks that await them in just forty-two days.

Of all the risk factors present during the Y2K rollover, none is more serious than the possibility of losing oil. Remember, the 1973-1974 recession was caused by a mere 6% drop in the oil supply. What, do you suppose, would be the economic impact if we lose twenty percent?

For the record, let me emphasize that I'm not predicting all these worse-case scenarios will unfold at Chevron, Shell, Exxon, Mobil or Texaco. Instead, I'm urging you to consider the fact that these companies -- on their own -- have described these worst-case scenarios as largely outside their control. And that simple fact stands in great contrast to the Washington explanation that everything is under control.

Not only are the most serious Y2K-related issues not under control, they are not even inside the sphere of control.

Mike Adams is the editor of Y2K Newswire

-- Brooklyn (MSIS@cyberdude.com), November 18, 1999

Answers

But the pollies are very sure nothing will go wrong. These guys must be doomers. Let's go back to sleep.

-- Larry (cobol.programmer@usa.net), November 18, 1999.