Farmout agreements generally provide that the farmor assigns to the farm the defined level of interest for leases when the farm is completed: (1) drilling for oil and/or gas drilling at the defined depth or formation, or (2) drilling for oil and/or gas drilling and achieving commercially viable levels of production.  The Farmout agreements are the second most negotiated agreements in the oil and gas industry after the lease of oil and gas.  For the farm, one of the reasons for entering into a farmout agreement is the acquisition of production, the sharing of risks and the obtaining of geological information. Farms often enter into farmout agreements to obtain a surface position, because they have to use unused personnel or share risks, or because they want geological information.  Farm-out agreements do not usually consist of a contractual vacuum. When there is more than one owner of an asset, they usually settle their relationship with that asset under a joint venture agreement. Farm-out agreements should take into account these joint management agreements (as well as current legislation and all other relevant contracts) and interact with them in an appropriate manner in order to avoid inconsistencies and minimise the risk of litigation. Other trends in farm-out agreements, including risk allocation The parties also wish to check whether retrocession and/or compensation for infringement is not sufficient in the case of transactions for which the producer agrees to transfer ownership of the asset concerned to the producer, but before all work obligations are fulfilled (or paid). Both of these drugs can lead to complications. Liability and quantification of damages related to non-compliance with or financing of work obligations under farm-out agreements can give rise to complex disputes, such as those that abounded between Dana Petroleum and Woodside in connection with the drilling of exploration drilling off the kenyan coast, but were eventually settled through an out-of-court action. In the event of a further transfer of the asset, state and third party consents may be required, retrocession conditions may be agreed, and pre-emptive or other similar rights held by other partner companies may be taken into account, which could frustrate the implementation of the proposed remedy.
In the oil and gas industry, a farmout contract is an agreement entered into by the owner of one or more mineral leases, known as “Farmor”, and by another who wishes to obtain a percentage of the ownership of this lease or leases in exchange for a provision of services called “farmeee”. The typical service described in the Farmout agreements is the drilling of one or more oil and/or gas drills. A farmout agreement is different from a traditional transaction between two oil and gas leasing companies, since the main consideration is the provision of services and not the mere exchange of money.  Some farm-out agreements contain one or the other of these agreements, possibly with other forms of counterparty. Farmout agreements are effective risk management tools for small oil companies….