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For 2 oil-rich nations, Y2K efforts in pipeline

By Richard Chacsn, Globe Staff, 10/26/99

ARAGUANA, Venezuela - The skyline along this hot and arid peninsula, which lies between the northern coast of Venezuela and the island of Aruba, is dominated not by buildings but by an endless maze of metal.

More than 940,000 barrels of petroleum flow through miles of pipes, tanks, and ovens and onto supertankers each day, most of it destined for the East Coast of the United States.

At the core of this carefully orchestrated movement of oil through twisted steel, large banks of computers monitor every step, making the world's largest oil refinery a crucial laboratory for one of the world's most important technological experiments.

From Venezuela to Beijing, governments and corporations around the world are scurrying to solve the Y2K problem, all with varying degrees of optimism. As is widely known, on Jan. 1 older computers may interpret the year '00 as 1900 instead of 2000. If the Y2K bug is not fixed, specialists warn, there could be computer crashes and disruptions in service from utilities, businesses, and governments.

The effects of a computer meltdown would be devastating for countries like Venezuela and Mexico, Latin America's biggest oil producers, whose economies depend heavily on how much petroleum they sell to the United States. For Americans who get most of their oil from Latin America - and who are being assured that most critical systems in the United States are now Y2K-compliant - an oil supply disruption could mean everything from higher prices at the gas pumps next year to long-term fuel shortages.

Officials at both Petroleos de Venezuela, S.A. (PDVSA) and Petroleos de Mexico (PEMEX) sound confident when they talk about their Y2K conversion strategies. Both companies, which are state-controlled monopolies, say they have updated more than 95 percent of their computers.

But even the most optimistic programmers admit they won't know whether their preparations will work until that Saturday in January.

''Everything from our payroll to the pipelines and our health clinics is run mostly by technology,'' said Luis Paredes, Y2K project director for PDVSA in Paraguana. ''We've taken care of just about everything, but there are so many possibilities of what could happen at midnight.''

To underscore the concerns that something could happen on New Year's Day, both corporations have developed dozens of contingency plans to cover virtually every aspect of their operations. PEMEX alone, which delivers about 1.3 million barrels of oil a day to the United States, has prepared 281 different emergency responses in case anything goes wrong.

At the PDVSA refinery in Paraguana, which was created in 1997 when two separate refineries were connected by a 15-mile pipeline that runs alongside the main highway, technicians have been working since mid-1998 to update their computers.

Most of the crude oil here comes from wells around Lake Maracaibo and the Gulf of Venezuela to the southwest. When it arrives, it is cleaned, cooked, distilled, and mixed with additives that produce everything from unleaded gasoline to kerosene and propane gas.

The mixtures are then stored in massive tanks that must preserve the proper chemical combination of each product. From there, the final products are sent via a spaghetti bowl of narrow, silver-colored pipes to the docks for delivery onto waiting tankers.

To cut labor costs and modernize its systems, the Venezuelan operation, like many US oil companies, began investing billions of dollars more than 20 years ago to automate nearly every step of the production process from the well to the tanker.

But relying so much on technology has also made it more vulnerable to any glitch that might occur. So far, PDVSA has spent more than $200 million to adapt its entire computer system.

''There's an understanding that this is not just a technical issue, but a serious business matter,'' said Ivan Crespo, Y2K director at the company's headquarters in Caracas. ''If something goes wrong, it could affect our ability to deliver to our clients or the way we pay our suppliers.''

By contrast, PEMEX, which gets most of its heavy crude oil from offshore platforms in the Gulf of Mexico, has not invested as much in technology - it even exports most of its heaviest petroleum to the United States for refining - meaning that while its production processes may not be as advanced as PDVSA's, it faces less Y2K risk. Experts say the company's financial departments are the most dependent on computers.

''It still has many systems and computers that must be Y2K compliant,'' said Alredo Jalife-Rahme, an international relations professor at the University of the Americas in Mexico City who has studied PEMEX's operations. ''They say they've solved nearly all their problems, but it is a very closed institution and we haven't had any outside observer who can verify what they've done.''

To help remedy their Y2K problems and to reassure their American clients, both the Venezuelan and Mexican firms have collaborated with national and international Y2K commissions, such as the American Petroleum Institute's Year 2000 task force.

Ron Quiggins, the task force chairman, said the US petroleum industry is about 90 percent compliant, based on its last quarterly survey. What's more, he added, any disturbances that might happen abroad from the Y2K bug probably won't be immediately felt because the United States has about three months' worth of oil reserves saved up.

''We are basically a risk-based industry, so this is nothing more than managing another risk,'' said Quiggins. ''But unlike the electricity and telephone industry, we can store fuel even if our supply chain is cut off.''

George Baker, a petroleum industry analyst in Houston, agrees up to a point. Although any temporary glitches in Venezuela and Mexico could be made up by domestic producers without any dramatic surge in retail gas prices, that could change if companies try to profit off the fears of scarcity.

''This industry has some irrational components, and scarcity has a market value,'' Baker said. ''Even if the underlying reality is that there is enough fuel, gasoline marketers know how to work a scarcity scenario at the pump.''

For many US petroleum industry officials, the biggest concerns about foreign providers like PDVSA and PEMEX are not so much about the companies' Y2K strategies but about whether their respective governments, suppliers, and banks will be ready.

A US Senate report released in August concluded that Venezuela was 12 to 18 months behind schedule in adapting its most critical government and business systems, mostly because of the political and economic turmoil that has gripped that country. It also predicted that 33 percent of all Mexico's computer systems would fail because of Y2K problems.

Mexican officials dismiss such reports as ''misinformation.'' And they argue that more than 5 million computers in three major sectors - government, financial, and nonfinancial - have been successfully converted.

''We benefit from the fact that many of our most important systems are concentrated in a small number of organizations, like PEMEX,'' said Antonio Puig Escudero, president of Mexico's Institute on Statistics, Geography and Information, the federal agency that oversees the country's Y2K commission.

Even if all this Y2K anxiety ultimately turns out to be more hype than crash, Puig notes that there has been a benefit to all that worrying.

''This has been a huge challenge for us, but here has been an unexpected positive impact,'' Puig said. ''This has increased our cultural awareness of computers.''

This story ran on page A01 of the Boston Globe on 10/26/99. ) Copyright 1999 Globe Newspaper Company.

-- Homer Beanfang (Bats@inbellfry.com), October 26, 1999

Answers

I've told you it's going to be an avalanche with our economy. This is the real problem that's going to strike.

-- DGBennett (bennett1@peachnet.com), October 26, 1999.

Very interesting and informative article, Homer. Thanks for posting it. There definitely has been computerized automation in other countries. Progress JIT for the rug to be pulled out ...

-- Ashton & Leska in Cascadia (allaha@earthlink.net), October 26, 1999.