A farmout agreement is used when the "farmor" agrees to assign acreage to the "farmee" in return for the "farmee" performing specified drilling and testing obligations, with the "farmor" also reserving an interest in the acreage assigned and in the production from the wells drilled by the second company.
Farmout Agreement - Short Form
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Multi-State
Control #:
US-OG-224
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Word;
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Key Concepts & Definitions
Farmout Agreement Short Form: A farmout agreement short form is a simplified legal document used in the energy industry, primarily oil and gas, where one party (the farmor) agrees to transfer a part or all of its interest in a lease to another party (the farmee), in exchange for completing certain contractual obligations, typically related to drilling activities or geological services.
Step-by-Step Guide
- Identify the Parties: Clearly define who the farmor and the farmee are, including full legal names and contact information.
- Define the Interest: Specify what percentage of interest is being transferred. Include details of the lease and its geographical specifics.
- Outline the Obligations: List in detail the obligations the farmee must fulfill, typically including drilling or geological services, and set specific timelines.
- Draft Compensation Terms: Describe any compensation or exchange, such as a direct payment or completion of agreed-upon activities, generally related to the operations of the lease.
- Legal Provisions: Include clauses on dispute resolution, termination conditions, and any state-specific legal requirements. Engaging a legal professional is advised.
- Signatures: Ensure the document is signed and dated by all parties involved, and notarized if necessary.
Risk Analysis
- Non-fulfillment Risk: The risk that the farmee may not complete the contractual work required which can lead to legal disputes.
- Market Fluctuation Risk: Economic and market conditions can change, impacting the value and benefit of the agreement.
- Environmental Risks: Drilling operations involve significant environmental concerns that might lead to regulatory actions or fines.
- Legal Compliance: Ensuring compliance with local, state, and federal laws is crucial and any oversight might lead to legal penalties.
Key Takeaways
Efficiency and Clarity: Farmout agreements are essential for sharing risks and responsibilities in large-scale energy projects. Preparing a clear and concise farmout agreement short form helps in reducing misunderstandings and legal conflicts, ensuring both parties are aware of their commitments and expectations.
Pros & Cons
- Pros:
- Allows resource sharing and risk mitigation.
- Can accelerate project timelines by involving additional parties.
- Enables the farmor to retain a stake in the potential upside without additional capital expenditure.
- Cons:
- Potential for non-fulfillment of contractual obligations by the farmee.
- Dependence on the farmee's technical capability and financial stability.
- Legal and environmental risks that could affect both parties.
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FAQ
An oil and gas farmout agreement is an agreement by the owner of an oil and gas lease (the farmor) to assign all or part of the working interest in that lease to another party (the farmee), who agrees to drill a well and do testing on the property in exchange for the opportunity to earn a formal assignment of
1. n. Oil and Gas Business The point at which all costs of leasing, exploring, drilling and operating have been recovered from production of a well or wells as defined by contractual agreement.
Ordinarily, the Farmor has already undertaken some exploration, and seeks another party to share the costs of undertaking further exploration or completing it.Often, Farm-in/Farm-out Agreements specify that more than one interest (or percentage) is transferred at various stages of exploration.
'Farm-in' expenditure is incurred when an entity in this line of business acquires a PI from another entity(s) in oil/gas block(s) and becomes part of the PSC entered into with the Central Government.
Farm-In Agreement means an agreement whereby a Person agrees, among other things, to pay all or a share of the drilling, completion or other expenses of one or more wells or perform the drilling, completion or other operation on such well or wells as all or a part of the consideration provided in exchange for an
The farm-down model, otherwise known as asset rotation or build-sell-operate, involves utilities selling stakes in green power assets to institutional investors seeking long-term, stable yield. In the case of renewable energy, revenues for such projects have, until now, been underpinned by guaranteed subsidies.
The farm-down model, otherwise known as asset rotation or build-sell-operate, involves utilities selling stakes in green power assets to institutional investors seeking long-term, stable yield. In the case of renewable energy, revenues for such projects have, until now, been underpinned by guaranteed subsidies.