Statement of Robert S. Kripowicz
Principal Deputy Assistant for Fossil Energy
U.S. Department of Energy
to the
Special Committee on the Year 2000 Technology Problem
Regarding the Impact of Y2K on Oil Imports
April 22, 1999

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% 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.