When looking at innovation in the oil and gas industry, there is a conventional wisdom in our line of work that patenting activity is largely dictated by oil price. The belief is that:
“As oil prices decrease, patent filing activity falls and patent enforcement activity increases”.
The logic behind this belief is that a lower oil price leads to lower company earnings and capital expenditure and, consequently, to reduced R&D spending. Oil companies then look to maintain or grow market share by enforcing the patents they already have. They favour enforcement over innovation.
The reverse is also said to be true when oil prices increase.
Does this ‘wisdom’ still apply?
No doubt this conventional wisdom was born from an element of truth, but does it still apply to today’s oil and gas industry? Looking at the annual number of European patent publications relating to oil and gas well drilling technologies in the past 30 years, we can get an approximation of overall patenting activity in the sector and see how this tallies with changes in the annual oil price:
Based on the above patenting data, the answer seems to be an emphatic “no”.
Loose correlation in the 20th century
If you squint hard enough at the above chart, patenting activity and the oil price appear to have been loosely correlated in the final years of the last century. Neither varies wildly during this period, but when the oil price moves, patenting activity tends to follow, albeit with a delay of two or three years. This may easily be explained by the time required for patent applications to progress to publication and grant. For this period at least, the old adage about patenting activity seems to hold true.
As the oil price soared from 2003 to its pre-recession peak in 2008, one might have expected patenting activity also to have increased. However, patenting activity was at best static during this period and, if anything, fell slightly despite the booming oil price. So while earnings increased and global capital markets expanded, oil companies seem to have reduced their R&D activities. There goes the relationship.
However, since then, there has been a remarkable resurgence in patenting activity.
Following the 2008 peak in commodity prices, the price of oil plummeted as a result of the financial crisis, rose to new highs in 2011-2012, and subsequently fell again to sub-$50 per barrel in 2016. Despite this turmoil in the price of oil, the change in patenting activity has been entirely one way: up. The growth in patenting activity has been so stellar since 2007/2008 that the number of European patent publications in 2016 was over three times the amount seen in any year prior to the recession. But what is behind this growth?
Comparing the protagonists in 2016 to those in 2006 indicates two sources of growth in patenting activity. The first is that the number of companies seeking patent protection for oil and gas well drilling technologies has doubled from 2006 to 2016. The second is that the top patent filers are applying for many more patents than in the past. For example, Halliburton, which is top of the tables in both 2006 and 2016 had over five times the number of patent publications in 2016 when compared to 2006.
Operators and service companies in the upstream oil and gas industry face a huge number of technical challenges which cannot be solved without an ongoing commitment to innovation. Technical advancements are required to enable extraction from previously inaccessible sources, to allow working in deeper water and more remote locations, to increase recovery rates, to extend the life of existing fields, and to ensure that operations run safely and with minimal environmental impact.
Oil and gas companies seem to have recognised that innovation is key to meeting these challenges.
Sustained low oil price
This culture of innovation within the oil and gas industry has not only developed despite low oil prices, but one could argue that the low oil price has actually contributed to the growth of patenting activity.
As oil companies brace themselves for a sustained period of low oil prices, targets for the cost of extraction have been slashed. BP, for example, is targeting a break-even price of $35-40 a barrel by 2021; down from a target of $60 for this year. Such extreme cost-cutting cannot be achieved by force of will alone. Innovation will be central to maximising operational efficiency and reducing costs to meet these ambitious targets.
Those with an edge in innovation will find it easier to stay ahead of the competition.
Making use of the patent system
In addition to an increased focus on innovation, companies must also make use of the patent system to protect those innovations and maximise their benefit. Obtaining patent protection enables companies to prevent others from sharing the competitive advantage of their innovations and to generate income through licensing. Those who fail to do so risk giving up their technological advantage to others for free. A broad patent portfolio can also serve as a useful deterrent to others looking to enforce their own patents.
This leads onto another important aspect of the patent system: the patents of others.
While the significant increase in patenting activity indicates a positive change in the importance of innovation, it also presents a challenge: as the number of patents increases, so too does the risk of infringement. Awareness of the patent activities of competitors can be a useful tool to reduce the risk of expensive and disruptive infringement actions, either by seeking a licence or by developing alternative solutions to avoid infringement. So, your use of the patent system should be two-fold. Continually seek patent protection for innovations, and pay close attention to the patenting activities of others.
As for the conventional wisdom, the sustained growth in patenting activity in the past decade seems to have laid to rest the idea that innovation and oil price are tied at the hip. Instead, innovation and patenting has become a clear focus for many companies in the oil and gas sector despite, and perhaps because of, the low oil price.
This trend in patenting growth shows no signs of stopping. If you wish to grow or retain your competitive position you should follow the trend. Innovate and prosper, regardless of the oil price.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.