Withdrawal agreements are very popular with small oil and gas producers who own or have rights to expensive or difficult-to-exploit oil fields. One company that frequently uses this type of agreement is Kosmos Energy (NYSE: KOS). Kosmos has the right to land off the coast of Ghana, but the costs and risks of developing these resources are high because they are underwater. Performing the actual drilling can be time-consuming and expensive. To make it more convenient for companies to complete this work, there are a number of different types of legal agreements that can be used. Two of the most popular options are known as farm-ins and farm-outs. Whether you are a company that drills for natural resources or you are looking for and discovering new source locations for these resources, these two options are very important. The previous year, the Company and geoPetro Resources Company (“GeoPetro”) of San Francisco, California, entered into an Agricultural Exit Agreement (“FOA”) effective January 1, 2000. In accordance with the FOA, the Company leased 40% of its 100% undivided stake in each Indonesian property (5i, 5ii) and provided pro-rated security in each of the operating subsidiaries so that GeoPetro would have a 40% interest in each property at closing. Farmout is the transfer of part or all of an oil, gas or mineral interest to a third party for development.
Interest can be paid in any agreed form, for example. B, in exploration blocks or drilling areas. The third party, called a “farmer”, pays the “farmer” a sum of money in advance for interest and also agrees to spend money to perform a specific interest-related activity, such as . B exploitation of oil exploration blocks, financing costs, testing or drilling. The income from the farmer`s activities is due to him partly in the form of a royalty and partly in the form of a percentage fixed in the agreement. A company may decide to enter into a withdrawal agreement with a third party if it wishes to maintain its interest in an exploration block or drilling surface, but wants to reduce its risk or does not have the money to carry out the desirable operations in this regard. Farm exit agreements give farmers a potential profit opportunity that they would otherwise not have access to. Government approval may be required before an agricultural exit agreement can be concluded.
Farmout agreements are one of the most widely used agreements in the oil and gas industry. [1] Special thanks to Professor Lowe for his excellent paper on this topic, Analyzing Oil and Gas Farmout Agreements, Sw. L.J. 759 (1987). However, there is no widely accepted form template. As such, they vary greatly. Kanes Forms has provided several Farmout agreement forms, but these have not been adopted as an industry standard, and therefore every farmout agreement addressed must be fully analyzed and every term included. This multi-part article summarizes the similarities and provides a framework for analyzing the different options for specific provisions. A farmout agreement differs from its sister agreement, the Purchase and Sale Agreement (PSA), in that the PSA provides for an exchange of money or debt for the immediate transfer of assets, while the farmout agreement provides for an exchange of services for an asset transfer. In addition, the transfer often takes place at a later date, by . B on the day the “income barrier” was reached.
[5] Farmout agreements are common in the oil and gas industry. A Farmout Agreement is a contract in which an interest holder (“Farmor”) agrees to assign interest to another party (“Farmee”) in exchange for certain services. As soon as these services were provided, the farmer received a so-called order. The transfer, which is a royalty, is also known as a convertible waiver, which means that the farmer can convert this waiver into a portion of the labor interest after payment. The decision to convert or not depends on the farmer`s willingness to share the cost of production in exchange for a possible higher yield. If a farmer wants to avoid the risks associated with cost-sharing, they will not convert the replacement. However, if a Farmor is satisfied with the cost of the project, they convert the replacement. All this information is included in the Farmout agreement.
Agreements and obligations arising from the documents referred to in Article 8.01 (a) and (b) shall survive and be enforceable only to the extent necessary to facilitate the performance of this Settlement Agreement, any other closing document or belin Trust`s farm agreement. To reduce these risks, Kosmos “manages” its land to third parties such as Hess (HES), Tullow Oil and BP. In this way, these offshore blocks can be developed and generate cash flow for all parties involved. A farmer like Hess assumes the obligation to develop the field and in return has the right to sell the oil produced there. Kosmos as a farmer receives a license fee from Hess for the supply of the cultivated area and natural resource. Agricultural exit agreements work because the farmoder usually receives a royalty once the field is developed and produces oil or gas, with the possibility of converting the royalty back into some labor interest in the block after paying the drilling and production costs incurred by the farmer. This type of option is commonly referred to as return after withdrawal (BIAPO). When two companies sign a farm agreement, the tax regime is signed in advance with the local authorities. Usually, the farm operations agreement has no effect on this tax system, but in practice, a government may try to review this tax regime if it sees a large corporation taking over the management of a project on a small business through the farm agreement. An agricultural exit is a type of agreement in which a party who has a working interest in a gas and oil lease gives that interest to another party.
The other party is then contractually bound to meet certain conditions, such as. B, installation of a drill at a certain location, drilling to an agreed depth, etc. The agreement will also include timelines within which these activities must be completed. The holder of the interest in this lease may assign either all of its interests to the other party or only a portion thereof. Negotiations usually take place before the conclusion of an agricultural exit agreement. When negotiating the terms of a farmout agreement, it is necessary to understand the motivations and interests of the other party. This understanding gives each party an idea of what needs to be included in the agreement for it to work. In addition, it is important for each party to know what needs to be included in the agreement in order to reach the implementation phase of the agreement. Each party usually has at least one or two conditions that it insists on including in the agreement.
Identifying these requirements avoids unnecessary delays and ensures that the agreement does not collapse. Other reasons to identify each party`s motivations include: A farm-in is an agreement between two operators, one of whom holds a stake in land on which oil or gas has been discovered. The current owner of the interest enters into the agreement to offset the costs associated with drilling, developing or removing resources from the land. The company that acquires the rights to the actual wells has access to a proven oil or natural gas well without having to discover it itself. In my experience, even when I was working in the heavy construction industry, negotiations made it much easier to know what the other party really was. This is not always possible, but if we can refine our motivations and confidently evaluate the motivations on the other side, we rarely fight tooth and nail on each fate and can focus on what is really important for each game. At the end of the day, we have better deals. In both types of legal agreements, the parties involved must be on the same page as to what exactly will happen. In the drilling industry, the devil is really in the details, which is why a properly written contract is crucial for farm-ins and farm-outs. If you are considering any of these options or have any other questions about legal rights for oil or gas drilling, please contact Robertson & Williams, Lawyers and Legal Advisors.
We are happy to respond to your specific situation and help you find the best way forward. Farmout agreements are effective risk management tools for small oil companies. Without them, some oil fields would simply remain underdeveloped due to the high risks to which each individual operator is exposed. In the oil and gas industry, a farmout agreement is an agreement entered into by the owner of one or more mining leases, the so-called “Farmor”, and another company that wishes to obtain a percentage of ownership of that lease or leases in exchange for the provision of services, the so-called “Farmee”. The typical service described in farmout agreements is to drill one or more oil and/or gas wells. A farmout agreement is different from a traditional transaction between two oil and gas tenants because the main consideration is the provision of services and not the mere exchange of money. [1] Farmout agreements generally provide that the farmor transfers to the farmee the level of interest defined in the lease(s) once the farmee is completed: (1) drilling an oil and/or gas well at the defined depth or formation, or (2) drilling an oil and/or gas well and achieving commercially viable production levels. [2] Farmout agreements are the second most negotiated agreements in the oil and gas industry after oil and gas leasing. [3] For the farmer, the reasons for entering into an agricultural exit agreement include obtaining production, risk sharing and obtaining geological information. .