US refiners are concerned that a recent Unocal Corp. patent case could exacerbate tight gasoline supplies this summer.
A federal appeals court has upheld a lower court's jury decision that granted Unocal the right to collect a 5.75¢/gal royalty on gasoline production that complies with California Phase 2 reformulated gasoline (RFG) specifications.
The jury awarded Unocal $91 million for patent infringement by five companies during a 5-month period in 1996 (OGJ, Apr. 3, 2000, Newsletter). Actual liabilities will be much higher than that. The companies are ARCO, Chevron USA Inc., ExxonMobil Corp., Shell Oil Products Co., and Texaco Refining & Marketing Inc.
Unocal said its 1994 patent may apply to a second phase of RFG formulation throughout the US. Other refiners are worried they could be sued for back royalties and penalties.
The patent applies to gasoline with an octane number of 90 octane and an rvp of 7 psi, so it mostly applies to RFG used during the summer. Refiners say the Unocal formula is close to that for RFG formulas that aren't subject to the patent.
Most refiners can blend around the patent when making regular RFG, but it is harder with premium grade, which has an octane rating above 92.
Ruling
Unocal said its "393" patent is for "nonobvious" gasoline compositions that substantially reduce air emissions with current refining technology and motor vehicles.
Roger Beach, Unocal chairman and CEO, said, "These compositions go beyond the California Phase II regulations and could have broad applications throughout the US."
Phil Verleger, president of PKVerleger LLC, said, "The jury's decision was surprising because of the precedent it set and because the royalty is approximately 100-200 times larger than any royalty ever negotiated or assessed in the oil industry."
Barry Lane, a Unocal spokesman, noted the court ruling covers only the five firms and 29.1% of California RFG produced during the period.
Lane said that, in 1988, Unocal notified a number of US refiners about its patent and offered to discuss licensing. None replied.
"We have indicated repeatedly that we are willing to discuss the scope of the patent claims with refiners and negotiate appropriate licensing terms," said Lane.
Reactions
Bob Slaughter, National Petrochemical & Refiners Association general counsel, said, "Several of our members have approached us with concerns that this could affect the supply of RFG II this summer.
"They're concerned that attempting to blend around the patent could cost them volume, and with the nation's concerns about energy supplies this year, we don't want to lose volume."
NPRA has not taken a position on the issue. Slaughter said that, because the patent case is in the courts, "the options look pretty limited" for any relief.
Majors are concerned that, even if they blend around the patent, gasoline is frequently traded and commingled in shipping. And if gasoline meeting the Unocal formulation is found in the tanks of one of their service stations, they could be held liable.
The problem is more immediate for gasoline importers and blenders. They already are negotiating with buyers on liabilities for an eventual 5.75¢/gal royalty.
Verleger said the uncertainty "has essentially frozen foreign trade in gasoline."