PKN ready for Y2K, but some concerns
The question of how well prepared oil giant Polski Koncern Naftowy (PKN) is for Y2K is being overshadowed by that of a more menacing risk the threat of Russian fuel supplies being cut off.
With 80% of Poland's oil imported from Russia and Commonwealth of Independent States' (CIS) countries, the prospect of eastern pipelines shutting down would push up world crude prices and leave PKN and other regional oil concerns at the mercy of other suppliers.
"The worst-case scenario is that the supplier could be blocked for two to three months," said Aziz Unan, a Prague-based analyst at Erste Securities. "If supplies were cut for a limited period of time, it may have an impact on crude oil prices in the short term" with serious consequences for Central and Eastern European economies, pushing up inflation.
PKN has received declarations from CIS suppliers that their deliveries of crude oil are Y2K compliant, said Michal Mierzwa, an analyst at Centrum Operacji Kapitalowych Banku Handlowego (COK BH). But "we can't be sure that pumps in Belarussia or Russia are prepared," he said. And even if Eastern suppliers are prepared for the millennium bug, whether their utilities such as electricity or telecoms are as well is open to question, Unan said.
Should the supply chain be cut, PKN has alternative supply sources, as does Hungarian giant MOL, and the Czech Republic's Unipetrol. Many of those alternative sources would come through Gdansk after being shipped via the North Sea. However, oil moved in this way will not be cheap. Oil prices have already risen more than 50% so far this year, and currently have a spot price of $22 per barrel, which does not include transportation costs, Unan said.
"We estimate that the crude imported from the North Sea via the Pomeranian pipeline represents an additional $60 million per quarter cost," said a Salomon Smith Barney report issued Oct. 25.That translates roughly into $666,666 per day.
But the report also pointed out that Poland has 45 days worth of crude oil in storage, which would offset any potential problems. To prepare for any difficulties, PKN should also make sure it has additional crude in storage.
With third-party factors out of PKN's hands for the time being, the oil giant has been concentrating on doing what it can to prepare for any problems caused by the bug.
To date, PKN's refinery wing, Petrochemia Plock, has allocated $600,000 for Y2K, a figure that falls seriously short of the $9 million MOL is estimated to have put aside, an Erste report issued in October said. However, Petrochemia Plock has almost completed a $2 billion investment program over the course of the last five or six years, and anything installed since 1993 is almost certainly in line with Y2K, Unan said.
Analysts said that, overall, PKN looks more or less prepared for the millennium bug. "The company aims to be Y2K-compliant by October," Salomon's report said.
However, this date excludes the preparation of PKN's almost 2,000 gas stations, whose Y2K program didn't start until June. That program is not expected to be completed by the end of this year, which puts billing systems at potential risk, the report said.
But with growing concern over the level of preparedness of other segments of the energy sector such as producers and distributors, PKN has also readied itself for the possible situation in which electricity or other utilities go down.
"PKN has developed plans to use backup energy sources," Salomon said in its report. Furthermore, "all Plock's mainframe and material systems have been certified."
And while crude pipeline operator Przedsiebiorstwo Eksploatacji Rurociagow Nafty (PERN) is not yet certified, operations can still be handled manually, the report said.
However, PKN still has residual work to do on its IT systems, according to Salomon's report. But the prospect of the firm's computer system crashing is something PKN is ready for, analysts said, given that technical failure is something that can happen at any time. "PKN's operations are too important, and too dangerous for them not to be prepared for all scenarios," Mierzwa said. Instead, greater risk is posed by telecommunications and banking systems crashing, analysts said.
