Battles for supremacy in the $680 billion oil and gas industry are moving from the hardhats and steel-toed boots of the drilling rig to the Brooks Brothers suits of law firms representing the biggest patent holders.
Schlumberger Ltd. (SLB), Halliburton Co. (HAL) and Baker Hughes Inc. (BHI), the world’s largest oil service providers, secured a total of 1,257 patents last year, more than twice the annual number of a decade earlier. In the past three years, Exxon Mobil Corp. (XOM) doubled its revenue from technology it licenses to others.
The impulse to patent harks to Silicon Valley as companies stake their claims to new techniques and equipment for hydraulic fracturing, automated drilling and computer software that helps find and reach oil and gas deposits. As research and development expenses rise, stronger patent defense is part of the arsenal energy companies deploy to win or maintain market share, said Bart Showalter, a partner at Baker Botts in Dallas.
“More patents issued means more staking out territory and exclusivity under a patent portfolio, which leads to more patent litigation,” Showalter said. “There’s big money involved in this.”
The world’s four largest oilfield service providers spent a combined $21.8 billion on research and development since 1997, according to Barclays Capital. Patent protection gives companies exclusive rights to use or sell their technology, and to sue if someone else copies it.
Baker Hughes was granted 368 patents last year, compared to 138 in 2002. During the same period, Schlumberger patents rose to 588 from 235. Halliburton’s patents rose 80 percent to 301.
Among the oilfield innovations that have won protection in the past few years: lasers to help drill wells, wired drill pipe for high-speed data transfer, and a subsea “glider” robot that delivers gear to the seafloor.
The patent race may lead to a swell of litigation as the energy industry follows a pattern established by smartphone manufacturers, said Dean Becker, chief executive officer of ICAP Patent Brokerage, the world’s largest. At least a dozen lawsuits have been filed in federal courts over the past year including two pitting the world’s largest service companies against one another.
“This is the beginning of a tsunami to come,” he said. “You’ve got a big marketplace for people to figure out how to fit in.”
Acacia Research Corp. (ACTG), a patent-licensing company that made waves in the technology world for its litigation and consolidation of patent portfolios, is now taking aim at the energy industry.
Acacia announced its expansion into energy earlier this year and hired Schlumberger’s former chief patent lawyer, Charlotte Rutherford. Rutherford is a 30-year veteran of the oil patch who began her career as a research and development engineer at Royal Dutch Shell Plc.
Based in Newport Beach, California, Acacia works with smaller companies and inventors to buy, sell and license patents.
“There are many patent owners out there, whether it’s the smaller or bigger players, who don’t know how to monetize their patents,” she said, describing Acacia’s role as that of an orchestra conductor. “It’s up to me to figure out where the value is, how they all come together and work together to create lots of money.”
K&L Gates LLP law firm has been hiring lawyers and expanding its energy practice in general, with an added focus on intellectual property, or IP, litigation.
“That’s an area that’s becoming more litigious and in the next five to 10 years might be the next smartphone wars,” said Susan Jackson in Charlotte, North Carolina, who co-heads the IP group at K&L. “It’s hard to know exactly how large it will be, but it’s definitely an area that we anticipate more.”
Oil explorers and producers around the world are expected to boost annual spending 10 percent this year to a record $678 billion, according to Barclays Capital.
Halliburton and its competitors have continuously increased their research and technology budgets to meet the rising demands of the industry, said Clive Menezes, Halliburton’s vice president and chief patent counsel.
“As a result of this investment, it is prudent for these companies to correspondingly increase their intellectual property spend in order to protect the new technology and equipment that is being developed,” Menezes said in a statement. While Halliburton has been filing patents and protecting them since the 1920s, “the magnitude has changed.” he said.
Halliburton was awarded more than $35 million in damages after winning a federal trial in Dallas in February 2012 against Weatherford International Ltd. (WFT) over a patented tool used in well bores.
Schlumberger sued Baker Hughes in a federal court in Houston in December, accusing its rival of infringing four patents and breaking a 2009 pledge to resolve patent fights amicably. WesternGeco, a unit of Schlumberger, was awarded $105.9 million a year ago after a federal jury in Houston said that Ion Geophysical Corp. infringed a patent for equipment that provides underwater seismic data.
Schlumberger and Baker Hughes declined to comment about their patent strategy. David Eglinton, a spokesman for Exxon, declined comment about defending the company’s intellectual property, while saying “technology is ExxonMobil’s lifeblood.”
A “moat” is developing between larger companies able to develop, patent and protect their own technology, and smaller competitors that lack such resources, James West, an analyst at Barclays Capital in New York, said in a phone interview.
“It’s a very expensive game,”John Keville, a partner at Winston & Strawn in Houston, who handles patent cases for Schlumberger, said in a phone interview. “You’ve got a lot of area to cover internationally, and that gets expensive in a hurry in the patent world.”