The tech advantage: Innovating efficiencies in uncertain times
Conventional wisdom tells us that in a climate of volatile and declining commodity prices, where profit through revenue growth can by no means be assured, smart producers concentrate on driving production efficiencies in order to control costs. The competitive advantage that can be achieved by proprietary production processes has long been understood and appreciated by the extractive resources sector. However it is also recognized that those advantages tend to now arise from innovative technologies, rather than traditional economies of scale.
Producers must innovate to stay profitable
Small increments in technique can differentiate successful producers operating in a low-margin environment. At its most simplistic, innovation does not have be to more than the refinement of existing extractive techniques over time. However, such incremental improvements may not rise to the level of patentability, or justify the costs of patenting. The market tends to ensure these competitive advantages do not exist. As a result, producers who want to maintain a semblance of competitive cost efficiency to the point where it can impact comparative performance must continually strive for innovation. This is especially true in any large scale hydrocarbon mining operation, such as coal mining or oil sands development.
Inventing creates opportunities
An entirely different level of opportunity exists for producers who create proprietary technologies or systems that can be protected as true inventions. A shining example of this is the oil sands industry, where more complex mining and extraction processes can create more opportunities. Once a producer protects its technology or process with a patent, it will enjoy a significant competitive advantage not only in achieving cost efficiencies, but more importantly by ensuring that its competitors are unable to reap the same benefits. Oil sands development is often discussed in these terms. Similar advantages are being realized in connection with diverse technologies such as remote mining, technologies that reduce energy consumption and innovative safety technologies to name a few.
New technology as a value-added
What is less evident, or at least less prominent in the financial planning of many operators, is the fact that increasingly, such technologies themselves represent significant value apart from the cost efficiencies and market protection generated by their deployment. In addition to ensuring any proprietary process is adequately protected as intellectual property, owners should strongly consider what other value add propositions might be available to strengthen their corporate balance sheets—and also ensure that the legal structure surrounding their intellectual property can accommodate a wider range of exploitation opportunities. The value proposition of innovative technologies is strengthened by investing in the right intellectual property protection strategies, and ensuring that ownership and exploitation rights are protected through agreements with any collaborators or suppliers involved in the development.
Monetizing technology
When the benefits of enhanced cash flow outweigh the competitive advantage as a result of a particular technology, one relatively simple manner in which to monetize that technology is to licence it to third parties. While extractive resources producers tend to be secretive about their processes, licensing and joint-venture arrangements with contractors and service providers do not necessarily attract a similar level of scepticism. From a legal structuring perspective, good strong patent protection, coupled with appropriate licensing, confidentiality and in apposite circumstances, joint-venture documentation is all that is needed to turn a difficult to value (and likely undervalued) line item in a balance sheet into an annuity style positive entry on an income statement.
The intrinsic value of proprietary technology should not be discounted as a basis on which to leverage potential financing options. With global financial markets currently exhibiting little certainty and even less liquidity, the dynamics of cash flow management and the cost of borrowing raise additional concerns for producers already dealing with flat commodity pricing and production cost challenges. For producers with valuable rights in proprietary technology, the prospect of generating further benefits in addition to the direct cost efficiency benefit from the technology itself is compelling. Properly protected and licensed intellectual property can be securitized to provide access to financing at a cost point that would be otherwise unachievable, or in some cases not merited at all.
For relatively little incremental legal cost and effort, the opportunities offered by properly protected, documented and valued proprietary technologies go far beyond simply their usage in the production processes that create them.
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