What Is A Farmout Agreement
As in all negotiations, understanding the interests and motivations of the other side is the key to effective negotiation and proper structuring of a comprehensive agreement. If you know, you can also understand the other party`s best alternative to the negotiated agreement. You will be able to better assess how far the other party will be willing to give and negotiate the terms of the farmout agreement. Below are the most common interests motivating farmors and farmees. Agricultural agreements are one of the most widespread agreements in the oil and gas industry.  Thank Professor Lowe in particular for his excellent article on this subject, Analyzing Oil and Gas Farmout Agreements, Sw. L.J. 759 (1987). However, there is no widely accepted model. As such, they are very different.
Kanes Forms has provided several Farmout contract forms, but these have not been accepted as industry standard, and therefore each treaty farmout agreement must be fully analyzed and every term must be understood. This multi-part article will bring together commonalities and provide a framework for analyzing the various options for certain provisions. In June 2019, the oil and gas industry group, the Association of International Petroleum Negotiators (AIPN), released a revised version of its model from the international operating agreement. The publication of this new model agreement reflects the increasing sophistication and gradual development of the agricultural market. Farm agreements generally provide that the farmer assigns the defined quantum of interest in leases after farm-to-farm development: (1) drilling an oil and/or gas well to the defined depth or formation or (2) drilling an oil and/or gas well and obtaining economically viable production levels.  Farmout agreements are the second most common negotiated agreements in the oil and gas industry, behind oil and gas leasing.  For the farmer, the reasons for entering into a farmout agreement are the acquisition of production, the sharing of risks and the obtaining of geological information. Farmes often enter into farm agreements to obtain a surface position, or because they have to employ underutilized personnel or share risks, or because they want to obtain geological information.  In my experience, even when I was in the heavy construction industry, knowing what the other party really was after making the negotiations much easier. This is not always possible, but if we can closely assess our motivations and confidently assess the motivations of the other side, we rarely fight tooth and nail above any disposition and we can focus on what matters to each game. At the end of the day, we have better arrangements. A farm out contract acts as a kind of property purchase contract whereby a seller (the “farmer”) agrees to transfer part (but not all) of his share of an upstream asset to the buyer (the “Farmee”), in exchange for the buyer agreeing to take (or finance) work obligations such as the acquisition of seismic data or drilling equipment.
With respect to the oil and gas industry, the upstream “asset” that is transferred is generally an interest in a licence, a production-sharing contract or another concession granted by a government to a company to explore and produce oil and gas. Problems may arise in one of the potential transaction structures described above. If farmee starts paying before obtaining all the necessary consents from third parties and before the transaction is concluded, farmee may be entitled to a refund (depending on the circumstances) if the transaction is ultimately not concluded.