Oil and Gas Contract Review…
Joint ventures in the oil and gas sector in Nigeria are relatively common as it is an easy way for businesses to put together their expertise and assets to carry out a common project, which would have been difficult for just a party to carry out on its own.
The Federal Government on the 2nd of July 2012 signed an agreement with an American and Nigerian joint venture group, Vulcan Petroleum Resources Limited and Petroleum Refining and Strategic Reserve Limited, for the construction of six modular refineries.
The six refineries, which are estimated to gulp $4.5bn (N697.5bn), will have a combined capacity of refining 180,000 barrels of oil per day.
A key area that is often ignored by joint venture participants is intellectual property in Joint Ventures, such as patents, trade secrets, research, software (the subject of copyright), and trade-marks.
Intellectual Property in Joint Ventures becomes a valuable asset to the oil and gas companies involved in a Joint Venture when the parties are aware of the potential issues related to intellectual property and its value. It is even more valuable when it is registered and steps are taken to prevent competitors from accessing and using it for free, more value is derived when the owner of such Intellectual Property actively seeks to commercialise his intellectual assets by synergising with companies willing to use his Intellectual Assets for a fee in exchange for a license.
Intellectual Property in Oil and Gas Joint Ventures/Operating Agreements
The basic types of Intellectual property prevalent in the oil and gas sector are the following; Patents, Trademarks, Copyrights, Trade Secrets and Others like brands, Know-How, Know – Who and Professional Credentials & Credibility.
What is a Joint Venture/Operating Agreement?
A joint venture is an association of corporations or other legal entities who agree by contract to engage in a common undertaking for joint profit. Typically in Nigeria the Joint Venture is usually between Nigeria and the Oil Majors. The NNPC represents the interest of the government in the joint ventures.
The JOA regulates the relationship between the parties, including funding by the partners. In addition a Memorandum of Understanding (MOU) governs fiscal matters.
The parties to a joint venture (ventures) contribute money, intellectual property and other assets to producing oil and gas from a given acreage.
Challenges of the JOA
Problems include poor funding, due mainly to the government’s inability to meet up with its obligations. It is also affected by supposedly inflated operating costs and other socio economic challenges that often lead to youth restiveness in the host communities that threaten or even disrupt production.
Intellectual Property Issues in Joint Ventures in Nigeria
Most times when reviewing Joint Venture Agreements in Nigeria, Intellectual property issues are given scant mention or totally swept under the carpet.
At the outset of a joint venture the venturers usually have intellectual property that they have developed, own or license and which they intend to contribute to the joint venture.
There is a clear need to clearly identify what intellectual property the ventures own, what they intend to share or contribute to the joint venture.
The venturers need to envisage possible improvements and then agree on who will own improvements to prior intellectual property and fresh intellectual property that emerges while the joint venture is on, who will protect that intellectual property and how it will be shared among the venturers.
IP management when JV is terminated
What will happen to the intellectual property when the joint venture is complete or if it is terminated?
Pitfalls Unique to Joint Ventures
Lack of clarity as regards who owns the intellectual property contributed to the project, improvements on such intellectual property or new property that is developed may lead to ownership disputes that can be costly, lengthy and freeze a profitable project.
Employees acting on behalf of the joint venture / one of the venturers.
Ambiguity over when employees are acting on behalf of the joint venture or one of the venturers. In intellectual property it blurs the line of ownership. Intellectual property created in the course of employment is typically owned by the employer, if it is not clear who the employee/contractor is acting for at the time of creation it may be unclear who owns the intellectual property. Contractors may own their intellectual property unless they have expressly agreed to assign it.
Joint venture parties should account for profits via collection and distribution mechanisms after joint venture ends
Intellectual property created in the joint venture may continue to generate revenue after the project is concluded, for example by way of licenses to third parties.
Prepare for the costs associated with protecting intellectual property.
Part of any good Intellectual Property protection strategy for Joint Ventures in Nigeria should include some budget to properly commercialise their IP in other to maximise profit and a willingness to fight any IP infringers and the proper identification of the party with such responsibility possibly the operator.
Failure to determine who will manage that process and how the costs will be shared can lead to costly disputes.
Global Best Practices
Include Intellectual Property Terms in the Joint Venture Agreement
Oil and Gas industry has ceased to be a commodity based industry; it is now a knowledge based industry with innovations flying at the speed of light.
For this country to become self-sustaining and eventual become a global energy leader, rather than a mere exporter of un-refined crude, it will take concerted efforts and concrete funding of annual research to billions of dollars.
Some oil and Gas companies in Nigeria are, for example, are probably using technologies that came out of the 1980s or even earlier. We can’t keep using 30-year-old recovery process technologies, three bit cones have been invented by Baker Hughes and yes, horizontal well drilling and hydraulic fracturing has/will probably come to stay even here in Nigeria. We don’t drive 30-year-old cars, ride in 30-year old buses or fly 30-year-old planes (I may be wrong considering the recent mind boggling revelations rocking the Aviation Industry, God help us!)
It is this simple be prudent include Intellectual Property Terms in the Joint Venture Agreement! The joint venture agreement must consider intellectual property contributions, ownership, development, and protection at the very least. Intellectual property is a little complex but valuable and venturers should recruit Legal counsel in-house who understands the subtle differences in the law pertaining to patents, trade secrets, industrial designs, copyright and trade-mark. Agreements covering ownership for one type of intellectual property may not apply to another type and different issues can have long term impact on the protection/ commercialisation of certain types of intellectual property.
A Possible Paradigm Shift
This writer sees a future where research and innovation will play an increasingly important role in the Nigerian energy industry with more joint ventures being formed to capitalize/commercialise new innovations or to pool resources to create new solutions as distinct from the age old reason of developing oil acreage.
Intellectual Property Management Plan/IP Management Unit for the Joint Venture
From the onset of the Joint Venture intellectual property should be part of the contract review and negotiation process. Progress reports on the joint venture should include updates on intellectual property with an individual/team designated to manage the intellectual property of the venture to ensure it is appropriated in compliance with the joint venture agreement.
Clearer Employee Roles
Clearer job descriptions, reducing the number of employees with responsibilities to the joint venture and one of the venturers, having employees work in different offices and use think line computers to separate their roles, or having intellectual property created by employees been held by a separate entity.
Jointly owned Special Purpose Vehicle to own JV I. P.
Joint ventures can create a legal entity that the venturers control to hold all of the intellectual property of the joint venture.
That entity will license the intellectual property to the various venturers and applicable third parties, be responsible for managing and commercializing the intellectual property namely patents, trade-marks, industrial design or copyright registrations and control the flow of trade secret information and manage its protection.
Proliferation of Illegal refineries
This is evidence that refining fuel is not rocket science and that there is an abundance of local talents that have blazed the trail in the area of refinery of crude oil.
Gestapo tactics and lengthy criminal prosecution is not the most effective means of getting rid of illegal refineries, am sure you all already know that.
Illegal refineries evidence of unsatisfied demand
It shows that there is demand for refined products Government and oil marketers are possibly not meeting it.
Alert Nigerians to the dangers of counterfeit/adulterated petroleum products.
Hopefully so they can avoid it.
Carrot and stick approach to Illegal refineries; while government most times goes on the offensive against illegal refineries with Gestapo raids and criminal prosecution, it might be wiser to take a mixed approach.
Flood the market with original petroleum products!
Government needs to ensure that petroleum products get to every nook and cranny of Nigeria.
Charge with Gestapo raids/legal action at some illegal refiners
But also seek ways to cooperate with others through employment in lieu of prosecution, licensing and informal franchising, and Government can even appropriate ideas from other illegal refiners, let’s face it, refining crude is just boiling crude oil.
Recruit some of the creek refiners into our JV
For every illegal refiner you successfully put down, like 10 others come up to replace him because there is a gap in between supply and demand of petroleum products in remote areas and other inaccessible areas and refining technology is basic technology.
These guys have refined crude oil using elementary equipment, with some training in present day technologies and the proper equipment they would do more in government employment, besides that might be a more workable solution to stopping crude oil theft and illegal refineries.
Licence Some …
Why not licence some of the Illegal refiners (pirates) and make their work benefit Nigeria.
Government can come to some form of arrangement with them which makes the “production cost advantage” that their peers have totally useless. This means Nigeria will “have” multiple refineries set up at no cost and Government will still get its license fees.
In a sense it’s just like franchising, but with unwilling parties that have to be persuaded and sometimes coerced.
Engage “born again Illegal refiners”
Government needs to recruit some former illegal refiners to be partners. The pirates -turned-licensees/employees/responsible citizens can and should be enlisted to help take on the remaining illegal refiners.
“Pirating the Pirates”
Government can also “emulate the illegal refiners “, illegal refiners are possibly innovative and have come up with processes and invention useful for refining petroleum products, rather than abruptly destroying these locally made innovations, government should locate and possibly document their inventions with the hope of refining and patenting same with the possibility of commercialisation after refinement.
Eventual Change of Strategy?
Government can only license so many illegal refiners s and they have to be willing or encouraged to be willing, leaving out the obstinate few.
Understand the Nigerian marketplace
It is important to have an understanding of the Nigerian marketplace and its culture before going in all guns blazing down the strong arm tactics that our government is so famous for.
This can be costly, time consuming, not to mention ineffective. You shut down one illegal refinery and others spring up. You can win on the pages of newspapers, but it does not take long for new illegal refineries to be built in even more remote locations and with the same crude implements that are so readily available.
Let brute force be the last card…
A willingness to work with the locals and the middle men by enlisting their support to combat the more horrific types of illegal refiners down the line will be a useful tool in stamping out crude oil bunkering in Nigeria.
Building the value of Oil and Gas Companies with Intellectual Property Registration and Enforcement Strategies
The Nigerian Experience
Some Nigerian companies have been awarded oil blocs and entered into joint ventures with established oil majors, but found themselves holding the short end of the stick after being schemed out of the equation by the supposed technical partners. The recent victims range from the “M” company to the one promoted by the relative of a late former first lady.
Consequences of Failing to Protect Trade secrets/other Intellectual property
Intellectual Property Theft — Practical steps must be taken to protect IP and trade secrets concerning the oil bloc to prevent its removal by staff and the technical partner in violation of company policy and its being used in such a way that violates this policy and prejudices the original grantee of the oil bloc.
Non-compete contracts with Technical Partners
More importantly they need to use a viable mix of non-compete contracts, agreed damages clauses and effective trade secret protection to prevent their technical partners from gathering information about their oil bloc and later scheming to get same awarded to it with the resultant litany of court cases stretching across natural boundaries.
Above all get appropriate referrals companies are like humans their reputations precedes them. Be warned!
Non-Compete Enforcement —Our Indigenous Oil and Gas companies need to get serious with using non-compete contracts with employees to ensure that present and former workers are not collaborating with competitors or using private company information or trade secrets at another company. However the enforcement of the best written non-compete agreements can be difficult.
Network Breach — In the oil and gas industry protection of intellectual property is essential to the success of the business; network testing is fundamental aspect in preventing theft of the intellectual property. A lot of the oil and gas business can be found in electronically stored information, which can easily be downloaded and removed with a flash drive.
Simply owning intellectual property rights does not generate money!
To produce income the owners of these rights must exploit them financially through various types of commercial agreements including but not limited to licensing arrangements and/or assignments of rights.
In a sense, all of these commercial agreements are an attempt to turn intellectual property into intellectual capital that will then increase your cash flow
Copyright © 2012
Megathos Law Practice
Okay let’s get started…
Your thoughts anyone?