A farmout agreement is a common legal contract in the oil and gas industry, which allows a company to acquire drilling rights or ownership of a lease from another company. This type of agreement is often used to reduce exploration and development risks, share costs, and increase production efficiency.
If you are interested in learning more about farmout agreements, this article will provide you with an example of a typical farmout agreement to give you an idea of what it entails.
Introduction
This agreement has been made and entered into between XYZ Energy Inc., the farmee, and ABC Drilling Company, the farmer, on the date of October 1st, 2021.
Article 1: Defined Terms
The agreement defines certain terms that will be used throughout the document. These include:
a) Farmee – the company that acquires the right to explore, develop, and produce hydrocarbons from the leased property.
b) Farmer – the company that owns or operates a lease on the property and transfers the rights to the farmee.
c) Leasehold – the land, lease rights, equipment, and other assets included in the farmout agreement.
d) Working interest – the percentage of ownership in the leasehold.
e) Net revenue interest – the percentage of revenue that the farmee receives after deducting production and operating costs.
Article 2: Farmout and Assignment
The farmer agrees to assign and transfer to the farmee, and the farmee agrees to accept, a certain percentage of the working interest and net revenue interest in the leasehold. The assignment will be subject to the terms and conditions of the farmout agreement, and the farmee will have the right to explore, develop, and produce the hydrocarbons on the leased property.
Article 3: Consideration
The farmee agrees to pay the farmer an agreed amount of cash or other consideration. The payment may be made in installments, and the amount and timing of payment will be specified in the agreement.
Article 4: Term and Termination
The farmout agreement will have a specified term, which may be extended upon mutual agreement. The agreement may also be terminated under certain circumstances, such as a breach of contract or bankruptcy.
Article 5: Operatorship
The farmer will continue to serve as the operator of the leasehold unless the parties agree otherwise. The farmee will have the right to oversee and direct the operations on the leased property, subject to the terms and conditions of the lease.
Conclusion
Farmout agreements are common in the oil and gas industry and are used to reduce exploration and development risks, share costs, and increase production efficiency. This article provides an example of a typical farmout agreement, including the defined terms, farmout and assignment, consideration, term and termination, and operatorship. If you are interested in pursuing a farmout agreement, it is important to consult with legal and financial experts to ensure that you are entering into a fair and advantageous contract.