Pricing licences for gas processing units

How technologies can be selected on the best licensing terms.

SAEID MOKHATAB, Gas Processing Consultant

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Article Summary

Gas processing plants embrace a set of main processing units including phase separation, gas sweetening, gas dehydration, hydrocarbon dew point control, and possibly natural gas liquids (NGL) extraction and/or gas liquefaction. Other support units such as sulphur recovery and tail gas treating are necessary to meet environmental requirements. If the gas contains liquid condensate, a condensate stabilisation unit is required. If the gas contains high levels of nitrogen (greater than around 5 mole%), nitrogen rejection is also required.

Know-how vs patent
Some processes in gas processing plants can be classified as ‘open art’, which is practical knowledge that is generally and readily accessible to the public for designing and supplying one or more plant units. In this case, the contractor may or may not provide a process guarantee.

Some other units, like those for NGL extraction and gas liquefaction, may require specific know-how, that is a body of knowledge confidentially held by a licensor in the form of methods, concepts, formulae, diagrams, drawings, technical specifications, operating instructions, and anything else that enables the licensee to implement the technology which is expected to deliver a competitive advantage, including efficient design and shorter project execution schedule. This requires a non-disclosure agreement to be inked before the technology is transferred, so that the confidentiality status of the know-how is thereby safeguarded.

In other words, the know-how is a trade secret, privately held, which the licensors actively prevent from being disclosed. Thus it is not generally known nor readily accessible for public use without permission of the intellectual property (IP) owner. Know-how does not necessarily have to be covered by patents. According to the World Intellectual Property Agency (WIPO), a patent is an exclusive right granted by governmental authorities for an invention, which may be a product or a process that provides a new way of doing something, or offers a new technical solution to a problem.  To obtain a patent, technical information about the invention must be disclosed to the public in a patent application. If granted, the patent owner is entitled to exclude others — in territories where the exclusive right has been permitted, and for a limited period of time, generally 20 years — from using or exploiting the patented invention.

It should be borne in mind that once a grant lapses, the patented invention becomes public knowledge and those skilled in the art can freely use that knowledge without permission of the licensor. For this reason, a patent cannot be renewed; it is a once-through concession.

To wrap up, know-how and patents are two opposite concepts: secrecy is the mark of the former, public knowledge the latter. Nevertheless, both require licensor consent for their use.

Repeated implementation of an invention enables a patent owner to accumulate skills, experiences, and further knowledge beyond what is disclosed in the patent. Therefore, the invention may be included as part of the know-how.

The difference between patent and know-how also reverberates in different legal frameworks. Indeed, the exclusivity right granted to a licensor is enforceable by law, which provides a high degree of protection. In addition to administrative penalties, a patent infringement may constitute grounds for criminal proceedings.

On the contrary, law provides only weak protection for a trade secret and is conditional on the proven implementation of proper organisational measures designed to safeguard the confidential nature of the know-how, and on proof that it has been fraudulently stolen.

The reason for substantial and differing legal arrangements between trade secrets and patents has to be sought in the promotion of scientific/technical progress by means of the dissemination of knowledge that governmental authorities pursue. Incidentally, note that trade secrets, by definition, do not prompt the progress of nations, thus they are less deserving of legal protection.

Licence agreements are the instrument by which a licensor, owner of the know-how, transfers technical information, whether patented or not, through specifications, drawings, operating instructions, and so on, to a licensee which obtains the rights of use of said technical information, whereby it can legitimately operate the plant with the agreed plate capacity when built in the location specified in the agreement.

It goes almost without saying that the use of the transferred information for replicating the plant in a different location, or for increasing the plant’s capacity, would be a fraud unless otherwise agreed in the licence agreement.

Licence pricing
From the above, it can be concluded that the intrinsic value of a licence is strictly related to the strength of the protection (secrecy and/or exclusivity) and to the benefits that a licensee can enjoy from the licensed technology against the risks from potentially inadequate protection of the rights licensed, patent infringement, and market uncertainties.

A licensor, on the other hand, by having spent resources in developing know-how and/or patents, may want, by licensing them out, to recoup part of the expenditure incurred on development in the shortest period of time, and to obtain remuneration. Payment may be in the form of a royalty or licence fee in consideration of the value it provides to the licensee.

Payments in the form of a fee (lump-sum royalty or licence fee) are frequently encountered in the gas processing industry. Licensors typically transfer to their licensees the know-how by means of process design packages or basic engineering design packages containing the information which enables skilled EPC contractors to build gas processing plants. Once the said documentation has been transmitted, and the guaranteed performance of the licensed process has been demonstrated, the licensor is no longer involved with the licensee.

Historically, the term ‘royalty’ originally designated the payment that the Crown demanded of its subjects for any exploitation of assets owned by the Crown. The payment of royalties was intended as an acknowledgement that the exploited property remained in the hands of the Crown, and the exploitation was by way of lease or franchise, not through sharing or transfer of ownership. Therefore, the royalty originally was a share of the proceeds. Royalties in the range of 1.0-3.0% on the sales value of the exploited product usually prevailed.

Today, some licensors still demand a flat 3.0% fee on plant capacity, or on the total plant cost estimate, regardless of competitive or substitute technologies, the profitability of the market, or the life cycle value of the technology. It goes without saying that this is an out-dated practice which sometimes brings unfair profit to the licensor or, at worst, loss of business for the licensee.

Sometimes, the licence fee (royalty) is linked to plant capacity by a more sophisticated correlation:

Licence fee (LF) = (Capital cost index)*f1*f2*k*(C)^0,62                                     [1]                                             

In Equation 1, C is the plant capacity; k factors in the costs incurred by a reference plant taken as a benchmark — typically a demonstration plant or the licensor’s industrial plant; f1 takes into consideration the presence of impurities in feedstocks, and hence this parameter factors in the greater complexity of the front-end process set up relative to a base case; f2 commands a premium when the plant configuration is enhanced against the reference plant. For example, in a natural gas processing plant, the integration of NGL recovery and a gas liquefaction plant may call for a higher licence fee.

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