Keeping a lid on trade secrets
Refinements in fracturing technologies are expanding the technique's potential, but as energy companies work on further developments, Jonathan Ball, Barclay Nicholson, Jayme Partridge and Mark Sajewycz* argue they need to be mindful of protecting their intellectual property assets in order to remain competitive
Without doubt, hydraulic fracturing (fracking) to extract gas from shale formations has assumed immense significance in the global energy industry, for good reason: the technique has unlocked vast gas reserves. In a 2011 report, for example, the US Energy Information Administration (EIA) estimated the global technically recoverable resources of shale gas to be 6,622 trillion cubic feet (cf).
Hydraulic fracturing is used to extract the gas from tight formations. Put simply, water, sand and various additives - the frac fluid - are pumped at high pressure down the well bore into the shale formation, fracturing the fissures and releasing the gas, which can then flow up the well bore.
Although the basic technology behind fracking is not new (shale gas was first extracted as a usable fuel in the US in the early 19th century, with the first hydraulic fracturing process to extract it put into use in the US in the 1940s), continued innovation and technological advances are of huge importance to the industry. Innovation is needed to enable extraction from deeper or more complex shale fields. It is also necessary to overcome environmental challenges, particularly as shale-gas extraction moves into new geographies with complex environmental challenges. Finally, the drop in oil prices further drives the need for technological advances aimed at finding cost efficiencies and savings in shale-gas extraction.
As the core technology is not new, a lot of the innovations are incremental improvement to long-established processes. So what are industry stakeholders doing to protect the valuable intellectual property assets they are developing and to maintain their competitive edge?
It is certainly true that, with regard to one area of innovation in fracking, companies have long guarded the secrets of the compositions of their frac fluids, protecting them under the laws of confidentiality as 'trade secrets'. These mixes are the result of very extensive and expensive research and development. Although certain disclosures of the compositions of the frac fluids are required for environmental protection purposes, much of the detailed specifications of the fluids remains protected.
So what about patent protection? A granted patent provides the owner with a 20-year monopoly over the claimed invention, so can be hugely valuable, either by excluding competitors from use of the invention to give the patentee the competitive edge, or to be exploited -licensed - in return for a revenue stream. In return for the 20-year monopoly on the technology that the state grants the patentee, the patentee must however publish full particulars of the technology claimed in the patent. Hence, at least anecdotally, there has traditionally appeared to be a reluctance to file patents over incremental changes to fluid formulations and the like. But does the patent office data support this anecdotal reluctance?
The answers seems to be, largely, no. There has in fact been a dramatic increase in patenting of the full range of technologies in the sector.
James Brown, a leading energy sector patent prosecution attorney from Murgitroyd based in Aberdeen and well-placed to see first-hand what the industry is patenting in the UK and Europe, says he is seeing a number of technology areas being heavily patented just now in relation to shale and fracking technology. These include innovations to enable systems to withstand ever higher pressures and temperatures (such as new higher-rated packers and plugs), new tools that can initiate the next fracture in the well in new ways and patents related to new steps applied in running fracking operations. He adds that since 2010 there has been a doubling of patents filed in relation to frac fluids, notwithstanding that a number of companies in the industry appear to continue to prefer to keep their fluid mixes a trade secret. With the steadily reducing oil price he also expects to start seeing new technologies coming across his desk focused on further reducing the cost of fracking operations.
As hydraulic fracturing opens up previously unrecoverable reserves from both old and new fields, and due to the increasing importance of technology in exploiting unconventional resources, the view from the US is that it is becoming more crucial for companies not only to develop technology but to understand how to protect their ability to use and to monetise technology.
This has led directly to a significant increase in the number of hydraulic fracturing-related patents in the US.
In 2013, more than 700 patent applications for various aspects of hydraulic fracturing were filed in the US, a significant increase from the 550 applications filed the previous year. Many of the patents concern technology that has enabled oil and gas companies to improve drastically their production capabilities.
Patent applications filed in Canada for hydraulic fracturing technologies have also risen dramatically. There have been year-on- year increases of 54%, 11%, and 33% since 2010 (the 2013 filing numbers are pro-rated from June 2013). While some of the applications cover frac fluid patents, by far the predominant growth in patenting has been in downhole tool technologies.
So the patenting data certainly supports the proposition that there has been a very significant upswing in patenting in the sector, and that patents are becoming the favoured tool for protecting hydraulic fracturing innovation. There is increasingly heavy use of the patent system in a wide range of fracking technologies, including downhole tool technology, and, albeit perhaps to a lesser extent, innovations in frac fluid compositions.
One issue that does need to be watched carefully within any patenting strategy in shale fracking is that field testing (other than on a strictly confidential and controlled basis) before patent filing can be fatal to patentability. However, the position is not necessarily clear cut. In some circumstances, illustrated by two Canadian cases, it may not be fatal to patentability, even without a non-disclosure agreement, such as when the testing can be considered experimental (see Varco Canada Ltd v Pason Systems Corporation, 2013 FC 750), or when industry practice creates a reasonable expectation of confidentiality (see Corlac Inc v Weatherford Canada Ltd, 2011 FCA 228). The uncertainties of the position (particularly in different jurisdictions) serves to emphasise that very careful coordination and control is required around field testing so that potentially valuable patent rights are not lost.
Moving on from the development and acquisition of intellectual property rights in the sector, which has dramatically increased over recent years, the question arises as to whether we are seeing a consequential upswing in intellectual property enforcement activities in the sector.
Certainly in the US, where the fracking industry is mature, the increasing number of hydraulic fracturing patents has resulted in a significant rise in the number of patent disputes. This not only includes patent and trade secrets disputes concerning the core process technologies themselves, fluid mixes, and so on, but also technology in the support infrastructure surrounding it, such as intellectual property rights in onshore pipe technology for example.
Outside the US
The Canadian federal court has also seen significant amounts of patent enforcement activity in hydraulic fracturing over recent years, which is no surprise given the growing importance and scale of shale fracking in Canada.
As one would expect, outside of North America, both by virtue of the comparative youth of the industry and, possibly overall lower levels of IP litigation in general, we have seen limited IP enforcement activities in the sector so far. Anecdotally we are seeing and hearing of enforcement activities, particularly with regard to trade secrets assertions, arising in the UK as fracking develops there, but little by way of large scale court battles.
Almost certainly as operations commence in earnest in these other jurisdictions outside of North America, with the increase in the size of patent portfolios among some of the major players, we do expect to see in time a significant upswing in enforcement activities and patent court litigation.
Industry stakeholders need to be prepared for what could become a hotly contested IP enforcement arena not just in the fracking heartlands of North America, but in other key shale geographies such as the UK. Having a clear, global and coherent IP strategy will be critical to maintaining a competitive advantage and protecting investment in this dynamic field.
Jonathan Ball, Barclay Nicholson, Jayme Partridge and Mark Sajewycz are partners at global legal practice Norton Rose Fulbright