The oil and gas industry is experiencing an increasing demand for advanced technology and expertise in the Middle East at a time when the sector as a whole is changing its approach to acquiring, transferring, and protecting its intellectual capital.
While the region has traditionally been associated with low technology and low cost production, the volume, scale, and complexity of energy projects across the Middle East are creating increasing demand for high technology solutions and know how.
The factors influencing this trend include the accelerating need for enhanced oil recovery, sour gas, heavy oil, tight gas, LNG, GTL, “clean fuels” refineries, carbon capture and storage, nuclear, and solar technologies.
This intelligent energy trend, which can be evidenced by Saudi Aramco’s drive towards high technology solutions, presents major opportunities and challenges for international companies in relation to intellectual property acquisition, transfer, and protection across the region.
Just over half of the world’s proven conventional oil reserves and 42% of the world’s proven conventional gas reserves are in the Middle East and North Africa (MENA). The region has 13 of the world’s 20 giant oilfields, as well as the largest gas field in the world. There is an estimated US$3 trillion of projects underway or planned in the six Gulf Cooperation Council countries (Saudi Arabia, United Arab Emirates, Kuwait, Oman, Bahrain and Qatar) plus Iraq and Iran. The majority of these relate to upstream oil and gas, downstream (including refineries, LNG and GTL), petrochemicals and related infrastructure projects.
Hugh Fraser, managing partner in the Middle East for US law firm Andrews Kurth explained: “The scale of opportunity is significant. The region has 78 years remaining of oil production to reserves compared with a global average of 53 years and for gas it is over 100 years compared with a global average of 56 years. Combine this with an estimated $480 billion of project work now under study, in design or out to bid and you can understand why ADIPEC seems to double in size each year.”
Projects with values in excess of $10 billion include the Jubail, Yanbu and Petrorabigh refineries and petrochemicals schemes in Saudi Arabia; the Rumaila, West Qurna and Majnoon field development in Iraq; Zadco Upper Zakum artificial islands field development, ADCO onshore field development programmes, ADMA-OPCO offshore field developments and Shah/Bab sour gas field developments in Abu Dhabi; Khazzan deep/tight gas project in Oman; and the Barzan gas development in Qatar.
“The retreat of IOCs from the region seen in the 1970s has been reversed and the petroleum industry is balancing the politics of resource nationalism with the need for IOCs and their technology. A further drive to advanced technology will certainly follow if the current and prospective Red Sea and East Mediterranean exploration and appraisal programmes bear fruit and bring deepwater fields into play, in a region largely dominated by onshore and shallow water production,” Fraser says.
The region’s technology requirements are wide-ranging and include enhanced oil recovery and artificial lift; LNG and GTL; seismic, geology, reservoir characterisation and fluid modelling; unconventional drilling and completions – horizontal drilling and hydraulic fracturing; advanced completions and well intervention; automation, advanced control systems and digital systems; asset integrity management; and carbon capture and storage. The need for nuclear power and renewables, especially solar, waste to energy, desalination, and IT security and asset protection technologies is also increasing.
Fraser says: “As the technology needs across the region become increasingly complex it will be incumbent upon companies to ensure that they have the appropriate strategies and protections in place for their IP as part of their overall risk and reward assessments.
“There are a number of fundamental commercial and legal considerations for market entrants. These include territorial application of patent rights, who owns new IP that arises from work, specialist personnel contracts and restrictive covenants that reflect the increasingly mobile and consultant-heavy workforce, licensing and enhanced technology services agreements, and infringement monitoring, defence and indemnities. Appropriate weight must also be given to the governing law of contracts and statutory laws, dispute resolution planning and jurisdiction issues.”
With an increasing amount of private equity investment in the service sector, businesses also need to be plan ahead for corporate exit strategies and due diligence, including establishing IP asset registers and audits.
These issues are arising against a backdrop of significant change in how the energy industry trades in IP and technology. Jeff Dodd, a partner and chair of Andrews Kurth’s IP and technology transactions group, sees two key themes setting the current agenda.
“The industry has traditionally been heavily invested in technology and innovation which was distributed embodied in tangible products, principally equipment, or in connection with services. The shift that is now occurring is that transactions involving oilfield technology are becoming international, market-driven acquisition and trading with new participants getting involved. At the same time, we are seeing a deconstruction of product and service components from IP and technology components. In other words, oil and gas is becoming like the other major, global technology markets,” explained Dodd.
The industry’s traditional IP value chain – comprising creation, securing, acquisition and monetisation of IP – now has many complicating factors.
On the creation front, the mobility of innovative workers within the industry creates issues of who owns inventions and how information leakage is contained whilst collaborations can create problems around co-ownership.
Dodd says: “Companies need to have clear contractual provisions, including assignment, license, sharing, enforcement and exit mechanisms, in place to address these factors. Likewise, when it comes to securing IP there needs to be far greater diligence and analysis on the creation and securing process to take account of the ebb and flow of IP strength.”
In acquiring IP the importance of evaluation in the round is growing, according to Dodd: “Look in your backyard, your neighbour’s backyard and your neighbour’s neighbour’s backyard. In evaluating the acquisition of IP you have to think of what competitors are doing, industry trends and the international dimension too in order to have a strategy that is informed by gap and vulnerability analysis, alongside understanding of your IP strengths.”
However, it is the monetisation section of the value chain where perhaps the greatest changes are occurring.
“The industry is increasingly deconstructing IP from products or services to provide greater control over distribution and income streams. Monetisation of IP is considered earlier than ever before and this is driven by market forces that compel mining of IP to identify and unlock value. The market drives more aggressive IP acquisition or blocking, challenge and assertion and IP is being evaluated more thoroughly for repurposing in other industry sectors,” Dodd says.
“New financing arrangements and investors, wholly focused on IP, are also driving change, creating more visibility of IP value, or the lack of IP value, and facilitating international trade in IP and technology which is separate from the traditional products and services route.”
The new market dynamics and techniques for decoupling and trading in oil and gas IP may not yet be as publicised as in other technology markets but they are evident and growing. Energy companies therefore need to evaluate their IP strategies in light of the changes to the value chain and recognize that the old US and European focus for IP protection is outmoded.
“The trade in energy IP and technology is, as with the rest of the industry, truly international. Evaluating strategy for one geographic market must take into account approaches in other markets. Cross-market collaborations and transactions can create both issues and opportunities in other markets. Companies also need to take a 360˚ of strategy and assessment across markets and recognize that new financial techniques and transactional structures around IP can facilitate the sharing and allocation of financial and other risk,” Dodd says.
There is a corresponding change in how companies are seeking to protect their IP, according to Greg Porter, a partner and patent and trade secret law specialist at Andrews Kurth.
“A typical filing strategy in the industry used to involve filing first in the home country with Patent Cooperation Treaty (PCT) and non-PCT filings one year later. Multiple inventions might be included in one filing with the most commercially valuable pursued first and then follow-ups. The typical time for a patent to be granted via this route is almost 38 months,” Porter says.
“An alternative strategy now involves filing a Track One application in the US which can achieve one or more patents issued within six months. Although more expensive, the early patent increases potential for early stage investors and private equity. If a Track One application does not achieve a patent then trade secret protection can be evaluated as an alternative, again creating opportunity for earlier stage investors and private equity.”
The more competitive market will inevitably translate into more IP lawsuits and related disputes. Although the numbers in the US remain low, the trend is upwards, with six US energy patent cases between 1995–2000, 11 in 2001–2006, and 12 between 2007-2012.
“The energy industries currently rank 14th out of the 20 major technology industries in terms of patent litigation, but we can reasonably expect this to change in an increasingly competitive market where IP is traded as a commodity separate from the traditional products and services,” Porter says. “Part of protecting against such litigation will involve strong employee and confidentiality agreements, maintaining a robust patent portfolio and carrying out cost effective freedom to operate searches and clearances.”
With regard to the Middle East, there are two main routes for technology protection via patent. A single Gulf Cooperation Council (covering Qatar, Saudi Arabia, Bahrain, Kuwait, Oman, and UAE) application filed in parallel to an international PCT application is the most cost effective but pursuing a national filing route at each of the national patent offices following the international PCT route offers a second chance but is more expensive.
Wider IP protections can also be achieved throughout the region, especially in relation to brands. Industrial designs can mostly be protected in the region but the weakest safeguards exist in relation to software and copyright law in Qatar, Iraq and Iran.
There has been a steady rise in annual patent filing numbers in the GCC countries, from 57 in 1998, to 2198 in 2013 – illustrating the fact that companies increasingly see the value of protecting IP in the Middle East. Of the 23,000 applications filed between 1998 and 2013, only 5% were filed by residents but that balance may well be starting to shift.
Saudi Aramco’s track record provides a case in point. It has been steadily increasing its number of patent filings over the past decade, from 49 in 2004, to a record 373 worldwide patent filings in 2013, suggesting a marked increase in research and design spend and consequent focus on IP value and protection.
Fraser, who has spent more than a decade assisting companies in monetising their IP and know how in the Middle East, believes that the region’s technology requirements raise questions relevant to the industry as a whole.
“The region’s technology needs are evolving fast and the question companies in the market, or those wishing to enter it, need to ask themselves is whether their IP strategy is fit for purpose. However, this is not just a regional concern. The dynamics of the energy IP market are moving towards those of the major international technology markets and the energy sector needs to review and adapt accordingly. If technology is what generates value for your business you need to be thinking about whether your strategies and safeguards are adequate,” Fraser concludes.