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#OG2050: Making innovation and collaboration work

Ross McKenzie is an associate at Burness Paull
Ross McKenzie is an associate at Burness Paull

Everyone involved in the North Sea oil and gas sector will look back whimsically to a time when production was more than three times what it now is.

Back then, untapped reserves considerably outweighed historic extraction and all involved in the industry could comfortably expect production to see out their careers.

Notwithstanding price volatility, there was no pressing need to innovate and find new and clever ways to extract oil more cost effectively. Production could be extracted from more accessible fields with trusted technology.

Those days are gone and the need for those involved in the oil & gas sector to come up with new ways to achieve cost-effective production from some of the most hostile environments on the planet has never been greater. If this challenge cannot be met, the existing estimates of 30-40 years of future production may look a little optimistic.

So what should we do? Sir Ian Wood’s Review focuses on critical technology issues ranging from improving exploration outcomes utilising new imaging and data evaluation technology to extending production reach through new deep water technology.

The UK Government needs to act urgently to encourage innovation and collaboration in the sector, by ensuring appropriate incentives are in place for companies prepared to take the risks inherent in innovation and collaboration.

But what are the challenges associated with innovation and collaboration?

Whilst many claim to innovate, we are all too aware of the inherent risk associated with straying from the well-worn path. Untried and untested technology could fail and there will also be concerns in areas such as finance, risk and safety.

Genuine collaboration can help to reduce or spread the risks but tricky legal issues can be thrown up. So, even as lawyers, we also need to look at how we can help companies to innovate and collaborate.

Membership organisations like Oil & Gas UK and ITF have done an excellent job in promoting both. However, it can often be difficult to get the right balance between investment and risk to achieve true collaboration between companies with competing interests.

Take the ownership of intellectual property. “Who owns what” can be a prickly subject if one company is providing the manpower for innovation and the other company is spending large sums of money.

They will both be expected to share existing know-how and confidential information. It is critical for such exchanges to be supported by effective contractual protection as our new Trade
Secrets Directive remains a couple of years away.

Careful consideration will need to be given to future registration of IP (through patent protection), renewal and protection costs can soon stack up and it is always best to first sort out and agree what level of input each party will have.

Typically the results of a project will be shared through licensing strategies. This will need to consider licensing strands for pre-existing technology, technology forming the focus of the development and also, often forgotten about, technology developed not directly the focus of development (sometimes called “sideground” IP).

In my experience, I have found that rights of use of IP following completion of a project are addressed early on in negotiations. What typically is overlooked (and can be a thorny issue to negotiate), are rights of use if a project ends badly.

Parties need to think about what would they expect to get in different circumstances and consider what penalties should come into play. Areas such as field of licence use, royalty payments and term of use can be tailored for each case.

Another area that can lead to drawn out negotiations is determining the outcome of collaboration. This can make it really hard for the companies involved to commit to strict obligations and warranties.

An investor will want to know what they are getting back and expectations can often be unrealistic. The scope of liabilities will also play a part in this critical stage.

These complex issues can lead to long and drawn out negotiations before collaboration can properly get off the ground. It puts many companies off the idea.

One solution might be for lawyers to establish a standardised guide on key negotiation areas, which could help smaller service companies achieve better results. This would streamline the process and assist in formulating a legal agreement more quickly and efficiently. This would be particularly helpful for IP licensing strategies.

There is no doubt that lawyers too must innovate and collaborate for the benefit of all involved in this industry both now and for the generation to come.

Ross McKenzie is an associate at Burness Paull advising on technology collaborations and IP licensing in the oil and gas sector.

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