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Mark Sajewycz
Norton Rose OR

Canadian oil and gas resources are attracting foreign investment. This is, at least in part, due to the fact that there are relatively few oil and gas reserves in the world where private sector investment is permitted, and the Canadian reserves fall within this category.

Notably, Chinese oil companies have recently acquired interests in various Canadian oil & gas projects, having been seemingly attracted to Canada’s stable political climate and the production reliability of Canadian resources. Earlier this year, Chinese state-owned CNOOC spent $2.1 billion acquiring bankrupt OPTI Canada, whose main asset has been a 35 percent working interest in Nexen’s Long Lake oil sands project. In 2010, Sinopec, also a Chinese state-controlled oil company, purchased an interest in Syncrude for $4.6 billion, and this followed on the heels of PetroChina’s purchase of a $1.7 billion stake in Athabasca Oil Sands Corp in 2009. Sinopec is also a financial backer of Enbridge’s proposed Northern Gateway pipeline project, which is intended to connect Alberta’s oil sands to the British Columbia coast, so as to facilitate supply of crude oil to the Pacific Rim.

The inherent value of the resources present in the oil sands reserves can only partially explain the value of the upgraded crude oil product that derives from these reserves. As the bituminous oil sands are processed, value is added by technology which contributes to the conversion of the oil sands resource to a useable crude oil product. Such technology may include advances in an in-situ or surface mining extraction technology, or a downstream upgrading technology.

Such technology may become valuable to a business organization, if steps are taken to prevent competitors from accessing and using that technology.  By doing so, the business organization may enjoy competitive advantages over its competitors, by virtue of the fact that such business organization would be the only industry player to be able to use and exploit the technology.  The exclusive rights to use and exploit technology are generally described by the term “intellectual property”.

Technologies being used in any oil sands operation, and their associated intellectual property rights, are important considerations for any business organization making an investment in the oil sands. Intellectual property associated with oil sands-related technology can provide competitive advantages and add value to the business organization, when the business organization enjoys rights to the intellectual property. This is because such intellectual property provides rights to block competitors from making or using oil sands-related technology upon which the intellectual property is based. In parallel, business organizations should be mindful of competitors’ intellectual property, which can prevent them from doing business, or at least make it more difficult to conduct business.

Distinguishing Patents from Trade Secrets

Technology-related intellectual property generally takes the form of either patents or trade secrets.

Patents are derived from legislation and granted by governmental authorities for inventions that are novel and non-obvious over pre-existing technologies. Patents are jurisdictional in nature, in that separate applications for patent grant must be made in each jurisdiction where patent protection is intended to be secured. In order to obtain a Canadian patent covering an oil sands-related technology, an application for patent grant must be filed with the Canadian Intellectual Property Office. Typically, a patent application is usually drafted and filed by patent professionals known as “patent agents”, who are familiar with this process and have passed qualifying examinations. A patent application must, generally, include a description of the technology that embodies the invention, and this must be sufficient to enable a person of ordinary skill in the art to make and use the invention. As well, the application must include one or more “claims”.  Basically, a claim is a sentence providing a broad characterizations of the inventive concept embodied by the technology.

In order for there to be patent infringement (see below), the infringing activity must be capable of being described by the claim.  If patent protection covering this same technology is desired in other countries, separate applications must be filed in these other countries with the respective authority that is administering the patent system in that country. Patents are of limited duration, typically providing protection for a period of 20 years from the filing of the application for patent grant. Patents are granted for inventions found to be novel and non-obvious over “prior art”. Generally speaking, prior art consists of pre-existing technologies that are in the public domain.

Once granted, the owner of a patent is provided with an exclusive right to make, use, and sell the invention, embodied by the technology, that is covered by the patent. If a competitor decides to use and exploit the patented invention (ie. infringe the patent), the patent owner can exercise these exclusive rights by taking legal action versus the infringing competitor. If, in the legal action, the patent owner is able to successfully prove that the competitor is infringing the patent, the patent owner is entitled to damages suffered as a result of the patent infringement, as well as a court order requiring the infringing competitor to cease the infringing activity. Unless such legal action is taken and followed through to successful completion, an infringing competitor cannot be forced to stop the infringing activity. Having said that, the threat of these consequences could influence the infringing competitor into early settlement with the owner, in some instances without even the patent owner having to initiate a legal proceeding. As well, also with regard to the looming threat of these consequences, a competitor may choose to avoid the infringing activity altogether. In this respect, the mere existence of a patent may have a chilling effect on competitor behaviour, causing competitors to avoid adopting the patented technology, so as to avoid business disruptions that would follow an infringement claim, or even the threat of an infringement claim, by the patent owner.

Trade secrets, on the other hand, arise without engaging any administrative process. Trade secrets operate by denying competitors information that is necessary to access and use the technology. In order for a trade secret to be operative, the owner of the trade secret must take steps to prevent dissemination of the trade secret information to the public. The duration of trade secret protection is, potentially, perpetual. However, once the trade secret information becomes public, and irrespective of how this happened, the trade secret, and its inherent value, become permanently extinguished.

Patents and trade secrets are incompatible. The innovator of the technology must, as a practical matter, choose between the two intellectual property protection vehicles. This is because, patents, by their very nature, are public documents which disclose information about the invention-embodying technology, which is antithetical to the survival of any trade secret protection.

Impressed on these considerations is the fact that, by maintaining trade secret protection, an innovator becomes vulnerable, in some jurisdictions (including Canada) to becoming blocked from using their innovative technology by a later-innovating competitor who develops the same technology (but later in time, after the earlier innovator) and chooses to file for and secure patent protection. This is because the earlier innovator’s technology, being maintained a trade secret and, therefore, being non-public, does not function as prior art to block patenting efforts by the later innovator. The risk of the earlier innovator becoming blocked from using its technology is somewhat tempered by the fact that the later-innovator will only be able to exercise its patent rights versus the earlier innovator upon detection of the earlier innovator’s use of the technology, and the likelihood of detection becomes somewhat muted when the earlier innovator’s use of the technology is being maintained secret.  Nevertheless, the risk is there.

Assessing the Strength of Your IP

For companies looking at investing in oil sands operations, it is important to conduct proper due diligence into the technology being used. This would mitigate the risk of incorrect valuation of the potential investment.

Prior to investing, it would be useful to confirm the scope of intellectual property associated with the oil sands-related technology, as the strength of associated intellectual property affects the value of the potential investment. The strength of the associated intellectual property defines the extent to which the technology provides the oil sands operation with a competitive advantage.  Its strength also affects the potential revenue which could be earned from the licensing of the technology with which it is associated. The potential licensing value for oil sands-related technology is demonstrated by Petrobank’s efforts at commercializing its  “Toe to Heel Air Injection” (“THAI”) process. Developed for in-situ extraction of bitumen from Alberta’s oil sands, Petrobank is attempting to license its THAI process technology, globally, to the heavy oil sector.

It would also be useful to assess whether there are any patents, owned by competitors, which could block the use of technology in the oil sands operation. As described above, use of technology, that infringes a patent, can be blocked by the patent owner.  The threat of being blocked from using technology could force the oil sands operator to substitute infringing technology with a non-infringing, and likely inferior, technology. Alternatively, the infringing technology use could continue, but the infringing operator would pay royalties to the patent owner in return for this privilege. Either way, infringing technology use could cause business disruption and increase the cost of doing business. In this respect, potential patent infringement issues discount business valuation, thereby affecting investment decisions.

Sharing the Risks of IP Development

Apart from the oil sands, Canada possesses significant shale gas reserves which presently remain largely undeveloped. Foreign business organizations may play an important role in such development. Looking into the future, technology, and associated intellectual property, are likely to be important drivers in the development of shale gas resources in Canada. There are significant risks associated with such development, and such development is more likely to be successful if such risks are shared across different business organizations.

Like the oil sands, shale gas reserves are “unconventional reserves”, in that they exist in geological formations which render them difficult to extract. Novel and innovative technologies will need to be developed to lower extraction costs and create a business case for the exploitation of these shale gas reserves. To share the risks and costs associated with such technology development, Canadian gas companies may look to partnering with foreign business organizations, and especially those from countries, such as China, with their own significant shale gas reserves and a vested interest in developing a cost efficient extraction technology. Such partnerships would appear to make sense, in that they could facilitate the creation and exploitation of technology across a greater volume of shale gas reserves, thereby spreading the risks and costs of technology development across a wider asset pool.

Upon developing such technology, it will be ever more important to intelligently use patents and/or trade secrets to block competitors from accessing and using the developed technology, so as to enjoy the competitive advantages associated with the exclusivity of using the developed technology. Otherwise, free-riding competitors will be able to use the developed technology without having incurred the significant costs of development, and thereby more likely able to charge lower prices in the marketplace and thereby make it more difficult for the original innovators to do business.