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Farmout Agreements: What Landmen Need to Know

May 13, 2016

While Farmout Agreements are very common for oil and gas companies, there is still no industry-wide adoption of any model form. With the lack of a consistent industry standard, every agreement requires in-depth analysis and a full investigation of terms before decisions can be made. This presents some challenges to organizations, and, in some cases, may actually limit the likelihood of an accord taking place.

The Oil and Gas Law Digest published an excellent article that examined the basics of Farmout Agreements and laid out a framework to help organizations analyze provision options and make confident decisions. Here are some key highlights from the piece.

Farmout Agreement Basics

The “Farmor,” the party that owns the leasehold interest and assigns the farmout, and the “Farmee” are the two parties involved in a Farmout Agreement. The Farmor consents to allow the Farmee to take over a working interest in exchange for contractually agreed terms and services. For example, Farmees may be expected to drill a well to a particular depth within a specific timeframe. It is common to stipulate that the project results in commercial production.

With contractual terms and services completed, the Farmee is legally adjudged to have “earned” the assignment. However, if the Farmor has a reservation of an overriding royalty interest, they can choose to convert the override into a segment of the working interest. That decision depends on whether or not the Farmor desires to share production expenses in exchange for a potentially larger return from the net revenue interest.

Motivating Interests

In any negotiation, knowledge of the other party’s motivations and interests is essential to structuring and completing a deal successfully. The following are some of the most prevalent factors motivating Farmees and Farmors:

Farmees:

  • Attain acreage quickly
  • Attain acreage without using up significant capital on lease-purchasing, or while avoiding lease operations altogether
  • Put underutilized personnel and equipment into service
  • Share risks associated with developing an area

Farmors:

  • Meet various lease requirements (continuous drilling obligations, primary terms, Pugh clause, etc.)
  • Drill a well
  • Monetize a neglected prospect
  • Share risk
  • Gain geological information as a result of farmee operations

Helping Landmen Make Faster, Easier, and Better Decisions

When each party can quickly narrow in on its priorities and accurately assess the other side’s motivations, a better agreement is sure to follow. iiExperts helps landmen seamlessly track records, manage data, and research chains of title across the country. We work with appraisal districts to provide complete, accurate and consistent information with cutting-edge title plant technology. To find out more about our services, please visit our homepage or contact us today.