By Hugh Fraser, Andrews Kurth
Intelligent Energy Law is a key element of the continuing progression of “Intelligent Energy” solutions and innovations. It can be defined as the strategic planning and application of international law and contracts to maximize investment returns on advanced technology and know-how through the creation, acquisition, commercialization and protection of intellectual property.
The Challenges and Drivers for Energy Technology
As we stand at the beginning of 2016, the challenges and drivers of energy technology are sharply in focus. A downward slide in oil prices from US$115 to US$28 in one year; high exploration and production costs; mature reservoirs; “difficult” petroleum – heavy oil, sour gas, and unconventional gas; reservoirs in ultra-deepwater and harsh environments; cyber security; and the impacts of global warming and climate change.
The industry has continually risen and responded to these challenges: key manifestations include game changing technologies such as horizontal drilling; hydraulic fracturing; advanced seismic technology; drillships, floating production, storage and offloading vessels (“FPSOs”) and remotely operated vehicles (“ROVs”); liquified natural gas (“LNG”) and floating LNG; subsea production systems; advanced completion and intervention tools; artificial lift and enhanced oil recovery; automation, advanced control systems and digital systems; and carbon capture, storage and utilization. This list is by no means complete.
Intelligent Energy Law
Intelligent Energy Law is a key element of the continuing progression of “Intelligent Energy” solutions and innovations. It can be defined as the strategic planning and application of international law and contracts to maximize investment returns on advanced technology and know-how through the creation, acquisition, commercialization and protection of intellectual property (IP) assets.
IP assets may have different definitional nuances in the United States (US), European Union (EU) and other jurisdictions but in an international energy context they will typically comprise trade secrets; patentable new inventions and improvements (including utility models); copyright (or similar rights) in the likes of engineering drawings, computer software, technical manuals and databases; industrial designs rights; and trade marks in brands and logos. Although it may be difficult if not impossible to put a dollar value on the component parts of a company’s IP assets, their combination, integration and deployment with the know-how of high value specialist personnel under strategically-minded leadership and results-driven management teams will comprise the lion’s share of a business’s corporate value and competitive edge.
Leaders and managers in the energy sector are focused on the maximization of the commercial benefits arising from IP assets while IP lawyers are focused on the successful creation, acquisition, commercialization and protection of IP assets in line with their clients’ goals and objectives. IP Assets can be created and acquired by common law, statute, contract or registration; they can be commercialized by sale or licensing; and in some cases they need to be protected (or challenged) by litigation. However, the legal challenges associated with creating, acquiring, commercializing and protecting IP assets constantly evolve. The challenges can range from competition in ownerships claims, willful or unwitting IP infringements, poaching, industrial espionage, hacking, reverse engineering and the activities of patent “trolls” and these can all contribute to a form of corporate warfare where IP assets and their benefits are being fought over. Although one party may, ultimately, have clear line of sight on the valid legal entitlement to the prize in a particular case, the cost/benefit dynamics of enforcing its position may not be commercially justifiable, especially where protracted dispute resolution and uncertain enforcement processes are at play.
The international community is responding to these challenges and this is manifested in a complex inter-play of international organizations and their treaties and agreements and national legal regimes, highly developed in the US and EU and increasingly so in other key economies such as Brazil, China, Russia, India and the Gulf Co-Operation Council (GCC) states in the Middle East, where much of the world’s petroleum reserves are located.
The World Intellectual Property Organization (WIPO)
The World Intellectual Property Organization (WIPO), founded in 1967 and based in Geneva, Switzerland, is “the global forum for intellectual property services, policy and co-operation”. It is an agency of the United Nations (UN) that works with 188 member states, almost all of the 193 member nations of the UN. Its mission is “to lead the development of a balanced and effective international intellectual property system that enables innovation and creativity for the benefit of all”. Its mandate, governing bodies and procedures are set out in the WIPO Convention.
WIPO provides a range of international services for protecting intellectual property in multi-jurisdictions and resolving disputes outside national courts. The Patent Cooperation Treaty (PCT) permits applicants to file one international patent application thereby simultaneously seeking protection for an invention in 148 countries throughout the world (including the two most recent signatories, namely Iran and Saudi Arabia). The Madrid System is a one stop solution for registering and managing trademarks in the territories of up to 96 members. The Hague System for the International Registration of Industrial Designs permits an applicant to register up to 100 designs in over 64 territories through filing one single international application. The WIPO Arbitration and Mediation Center provides a forum to resolve internet domain name disputes without the need for court litigation, including the Uniform Domain Name Dispute Resolution Policy (UDRP), under which the WIPO Center has processed over 30,000 cases.
The World Trade Organization and the Agreement on Trade Related Aspects of Intellectual Property Rights
Also pivotal in the formulation of the international regulatory framework is the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) launched in 1994 and also based in Geneva, following on from the General Agreement on Trade and Tariffs (GATT) which was initiated in 1948. The WTO is “the only global organization dealing with the rule of trade between nations. At its heart are the WTO Agreements, negotiated and signed by the bulk of the world’s trading nations and ratified by their parliaments. The goal is to help producers of goods and services, exporters, and importers to conduct their business”. Since November of this year it has 162 member countries.
TRIPS sets down the minimum standards for the different forms of IP protection which member nations must implement and enforce. The goal of TRIPS is “to ensure that the protection and enforcement of IP rights would contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations”.
The UN WIPO and WTO TRIPS initiatives are separate and distinct but they do need to be considered in tandem if a holistic strategic picture of the legal and commercial trends and the drivers of those trends are to be properly mapped. Of huge assistance is the WIPO Lex free global database which tracks the IP treaties and the laws of 195 countries against which the roll out of TRIPS may be measured.
International Energy Agency and the Bridge Scenario on Climate Change
A third major player is the International Energy Agency (IEA), established in 1974, in the wake of the “oil shock” which saw the oil price quadruple in the wake of the 1973 war in the Middle East. The IEA currently has 29 members including the US, Japan, most EU members, Korea, Australia, Canada, Turkey and Japan. The IEA is focused on its members’ interests in security of supply and research and analysis into reliable, affordable and clean energy dynamics; in some ways it serves as a counter balance to the Organization of Petroleum Exporting Countries (OPEC). However, as Bob Stembridge, senior IP Analyst at Thomson Reuters stated in the State of Innovation Report of 2015: “[…] the main activity that contributes to greenhouse gases is the combustion of fossil fuels, including coal, natural gas and oil, for transportation and energy. Yet governments continue to respond to pressures for cheaper energy in the short term, which everybody wants. When cheaper energy demands fracking for fuel under our feet or the Arctic pole, it becomes more and more difficult to keep a consensus on the way we find and use energy both today and in the longer term”. That report also quotes the U.S. Environmental Protection Agency’s sobering finding that global greenhouse gas emissions have risen by 35% since 1990. The IEA has issued its World Energy Outlook Special Report on Energy and Climate Change in June 2015 ahead of the 21st Conference of the Parties (COP21) being held in Paris in December 2015. The commitment of the world’s major players to Intended Nationally Determined Contributions (INDCs) at COP21 is seen as critical if the target of restricting global warming to two degrees centigrade is to be achieved.
The IEA has proposed a “Bridge Scenario” which, it claims, could deliver a peak in energy-related emissions by 2020, relying solely on proven technologies and without changing economic development prospects of any region by virtue of five key initiatives: increased energy efficiency; the progressive reduction and phasing out of inefficient coal-fired power plants; phasing out fossil fuel subsidies by 2030; reducing methane emissions in oil and gas production; and increasing investment in renewable energy technologies from US$270 million in 2014 to US$400 billion in 2030. In the word of the IEA: “these measures have profound implications for the global energy mix, putting a brake on growth in oil and coal use within the next five years and further boosting renewables”. This lays down the gauntlet for the oil industry but stresses the dynamic opportunities for the gas sector and for those players focused on energy efficiency, methane reduction and capture, and renewables technologies. In the wake of COP21, the petroleum sector can expect radical legal and regulatory developments to allow the Bridge Scenario to be built and to cross the turbulent and troubled “waters” which lie below.
The United States of Innovation
Within the international framework set down by WIPO and TRIPs, a number of trends can be identified from the analysis of recent patent awards, IP litigation and legislative and policy initiatives in key jurisdictions. The WIPO IP facts and Figures 2014 Report identifies the scale of modern IP protection: there are 9.45 million patents, 2.29 million utility models, 26.3 million trade marks and 2.98 million industrial design rights in force as at the end of 2013. The US benefits most from this intangible asset pool with an estimated net international receipts (inward receipts less outward payments) of over US$90 billion of royalties and fees.
The effects of recent litigation and patent reform efforts in the US have sought to counter speculation and concerns that the US could lose its global leadership in IP. The rapid rise of “patent trolls”, parties who acquire and maintain patent rights for the sole objective of seeking income, sparked new legislation in the US in 2011 to prohibit abusive use of what is effectively a government authorised monopoly right in technology. The America Invents Act of that year introduced a Patent Trials and Appeals Board which is authorized to receive a fast track and cost effective system for any party to challenge any claim of any US patent. Further legislative changes being mooted in the Innovation Act and Patent Act pending in the US Congress are: the shifting of fees so that the loser of a patent litigation generally will meet the costs of the winner; customer stay protections which would allow a manufacturer to protect its customers from direct infringement actions; increased pleading standards; limitations on the ability to use “shell” companies to front claims and enhanced powers for the Federal Trade Commission to take action against issuers of abusive demand letters. On the other hand, some commentators argue that these reforms will weaken the US patent system, which is fundamental to a large swathe of the US economy, and that more directly targeted action against the “trolls” is what is needed.
At this point it is very difficult to interpret litigation trends in the US. The number of patent actions filed in 2014 declined for the first time since 2009: there were 5,700 cases filed, which shows a decrease by 13% from 2013. From 2009-2013 the number of patent cases filed grew to 24%. The decline in 2014 may be influenced by the 2014 Supreme Court case Alice Corp. v. CLS Bank, which limited the ability to obtain and assert software patents. However, litigation rates in the early months of 2015 were high, which increases doubts that the case will have substantial long-term effects on litigation numbers. There has long been a very high correlation between patents granted and patent cases filed. The number of patents granted grew by 14% last year even as litigation declined. Despite this discrepancy, the correlation remains very high.
There is other evidence to suggest that the US has little to fear in losing its IP crown, at least in the short term. The WIPO IP Facts and Figures 2014 Report found that of the 9.45 million patents in force, 26% were in the USA, followed by Japan with 19%. China for the first time has crossed the threshold of one million patents and 85% of the 2.29 million utility models 85% were attributable to China. The 2014 Report of the Director General to the WIPO Assemblies reported that of the 205,300 PCT patent applications in 2013, the USA accounted for 57,239 with Japan following at 43,918. China was well back in third place with 21,516 but had overtaken Germany with 17,927. Korea took fifth place with 12,386 ahead of France with 7,899. The remaining Top 10 nations were the United Kingdom (UK), Switzerland, Netherlands and Sweden, all with under 5,000 PCT applications.
The US can also take comfort that of Thomson Reuters’s Top 100 Global Innovators of 2014, 35% are US companies, although Japan has 39%; Europe (dominated by France, Switzerland and Germany) has 18%; and the rest of the world has only 8% including only one Chinese company, Huawei. Sadly, the UK and Norway are not represented, which is surprising considering the North Sea oil and gas industry’s reputation for innovation in subsea technology, and particularly the likes of Shell and Statoil’s patent performances. If Thomson Reuters’s results are to be accepted, then the conclusion has to be that, while China and South Korea score highly in the quantitative scoreboard, it remains the US, Japan and Europe which has the highest qualitative marks for the meantime.
The Rise of China
While the perception of US technology and investment in IP is secure in global terms, China remains, to some, a hotbed of disrespect for IP. However, according to the Thomson Reuters’s State of Innovation Report of 2015, in an energy context, there were 24,158 patents awarded to the oil and gas sector in 2014. China beat the pack and has made extremely impressive strides in its patent awards: three of the top five patent grantees were Sinopec with 1946 new patents, followed by PetroChina with 1520, and China National Offshore Oilfield Corporation with 384; the USA’s Halliburton (783) and Schlumberger (448) were in third and fourth place. According to Thomson Reuter’s research: “Sinopec innovation is focused downstream on everything from crude oil fractionation and cracking to produce heavy oil/diesel fractions to synthesis of petrochemicals such as polymers, aromatic compounds, alcohols, aldehydes, and acids. Similarly, PetroChina is focused upstream on the discovery, exploration, drilling, extraction, well-head processing, and pipeline technologies. Whether up- or down- stream, they are in the business of navigating both streams to get the most out of the natural resources far below”.
The key legal developments in China were highlighted in the Chinese State Council’s “Action for Deepening the Implementation of National IP Strategies” issued in December 2014. This report highlights the objectives and methodologies for building China’s intellectual property assets in the five years to 2020. These include new rights for employees who generate new patented inventions for their employers, a new trademark law and the establishment of specialized IP courts. Indeed, it was a major landmark when WIPO opened its Chinese office in Beijing in July 2014. In addition to the three million or so Chinese patents and utility models in existence, 7.2 million of the world’s 26.3 million trademarks are Chinese, as are 1.2 million of the global three million registered industrial designs. If criticisms remain of the Chinese approach to foreign IP, their commitment to investment in their indigenous IP is very clear.
The United Courts of Europe
Meanwhile, in the European Union (EU), the introduction of an Agreement on the Unified Patent Court (the UPC Agreement”) seeks to maintain Europe’s competitive position in IP by creating a Unified Patent Court (UPC) which will have exclusive jurisdiction for litigation relating to European patents. The UPC will comprise a Court of First Instance, a Court of Appeal and a Registry. The Court of First Instance will have a central division with its seat in Paris, two sections in London and Munich, and local and regional divisions in EU member states. A Court of Appeal will be located in Luxembourg. The UPC initiative is set to address a current system where national courts and authorities of the contracting states of the European Patent Convention decide on the infringement and validity of European patents. This generates a lack of consistency in approach in terms of damages awards, costs, timelines and predictability of legal cases.
By way of explanation, the European Patent Convention of 1973 (EPC) introduced the European Patent Organization, the European Patents Office and the concept of European patents, obtainable under a harmonized process via a single patent application at the European Patent Office in Munich (or one of its branches). A European patent may be obtained directly under the EPC system or via a PCT application, with the PCT application entering a European regional phase during which the European procedural steps are applied. Indeed, twelve EPC contracting states including France and the Netherlands have closed off their national patent route via the PCT system, meaning that a PCT applicant must use the European phase and obtain a European patent to secure patent protection in their territory. The most recent state to adopt this stance was Lithuania in September 2014.
The UPC Agreement was signed by 25 EU Member States on 19 February 2013. It will need to be ratified by at least 13 states, including France, Germany and the UK to enter into force. All the signatory states have committed to establish the new court and a preparatory committee under the presidency of Paul Van Beukering of the Netherlands is currently at work on five major workstreams for the establishment of the UPC: the legal framework, financial aspects, information technology, facilities and human resources. However, this is by no means a fast track process and a transitional period of seven years during which parties will have the right to opt out of the UPC system is currently envisaged. Could this be another disappointing sign that legal systems struggle to keep pace with the rate of innovation and that Europe’s multi-state processes serve as a handicap in the global IP race?
The State of Global Petroleum
Perhaps the biggest headline drawn from the State of Innovation Report 2015 was not whether China can supplant the US as petroleum IP king or whether Europe is in long term IP decline, but the laggard performance of the oil and gas sector against its peer groups. The report found that the 24,158 oil and gas sector patents in 2014 comprised only 2% of all patent awards: this was the lowest but one industrial sector of the 12 sectors reviewed, and lagged far behind the 380,325 information technology patents (30%), 161,739 telecommunication patents (13%) and 153,872 patents in the automotive sector (12%). In the same context, Jack Spath, the President of the Society of Petroleum Engineers in 2014, reminded the petroleum technology community in his closing address at the Annual Technology Conference and Exhibition in Amsterdam in October 2014 that the petroleum industry has one of the lowest percentages of investment in research and development relative to gross revenues.
Topically, the Middle East region hosts some of the driving forces seeking to redress this shortfall. As “low tech, easy oil” fades from memory, the emphasis is on technology transfer, in-country value and investment in know-how and training. Saudi Aramco was awarded 99 patents in 2014 and has a ring of technology offices in key strategic locations including Houston and Aberdeen. Saudi Arabia is home to the GCC Patents Office, offering a European style multi-territory patent filing system for Saudi Arabia, the United Arab Emirates, Oman, Kuwait, Qatar and Bahrain. The United Arab Emirates was recognised in the Global Innovation Index of 2014 as a leading player in technology joint ventures and the country is host to the International Renewable Energy Agency and the MASDAR future energy initiative, both being core components of the Abu Dhabi 2030 strategic vision for the economy. Qatar was also recognised in that index for the level of enrolment in its universities; and Oman has turned around a seemingly unrelenting reduction in oil production to return to almost 1 million barrels per day production and is recognised as a leading global player in the deployment of enhanced oil recovery techniques. Finally, Iran’s pending return to the international petroleum market will add a new dynamic to technology transfer and indigenous innovation in the region.
Aside from China, the other BRIC countries of Brazil, Russia and India have not yet emerged with major scores on the petroleum innovation board despite accounting for 22% of the world’s 7.4 billion population, 16% of global oil production and 18% of natural gas production. Brazil’s ongoing opportunities in the deepwater, Russia’s Arctic petroleum future and India’s sheer scale of projected energy demand growth all indicate that their involvement and contribution to petroleum technology development must surely expand materially. However, extremely low shares of patent awards are currently recorded by Africa and Latin America and this indicates a long haul to a distant horizon in these cases.
A Strategic Approach to Intelligent
So, in the context of the current trajectory of technology driver trends, the WIPO/TRIPS legal framework, the climate change challenges and the relative state of innovation in the global petroleum sector and other industries, how can a strategic approach to intelligent energy law be deployed as part of a business’s competitive edge? There are, perhaps, four key elements:
Firstly, the widening out of the “internationalization” process means that the creation, acquisition, commercialization and protection of intellectual assets must be planned and implemented with a global perspective and with full awareness of the prevailing laws in all applicable locations, including those emerging territories where future revenue streams can be anticipated – thinking and acting locally or regionally no longer works.
Second, an integrated management information system must be in place to identify, capture and protect new intellectual property assets being created within an organization, to register and map out the business’s IP assets in an auditable format, and to monitor third party infringements.
Third, tailored contractual arrangements confirming ownership and commercialization rights must be in place with all key parties with whom the business interfaces: including clients, joint venture partners, suppliers, employees and consultants. These contracts must be fit for purpose, especially where complex international jurisdictional and enforcement challenges will arise in the events of disputes.
Fourth, a market intelligence system must be in place to track the arrivals of new competing or synergetic technologies within the energy sector; and technologies in other sectors which may be capable of migration to the petroleum sector; and special emphasis must be placed on developing or identifying acquirable technologies which contribute to energy efficiency, emissions reductions and cost reduction/affordable energy.
There is certainly no copyright in the optimum methodology and execution strategy for rolling out any business’s Intelligent Energy Law competitive edge positioning but if the above four pillars of strength are in place then the chances of a successful commercial and risk-managed approach will be enhanced significantly.