Farm-out agreements—key terms
Produced in partnership with Anna Nerush of Haynes Boone

The following Energy practice note produced in partnership with Anna Nerush of Haynes Boone provides comprehensive and up to date legal information covering:

  • Farm-out agreements—key terms
  • Scope
  • Consideration
  • Cash
  • Drill to Earn
  • Assignment and conditionality
  • Default and reassignment
  • Warranties, representations, indemnities and pre-completion undertakings
  • Governing law and dispute resolution
  • Model form agreements

Farm-out agreements—key terms

Scope

A farm-out is, in effect, a mechanism pursuant to which the owner of a participating interest in certain oil and gas assets (the Farmor) agrees to divest a percentage of its participating interest (the Assigned Interest) under a production sharing contract (the PSC) (or another host government agreement granting rights to hydrocarbons), to a third party (the Farmee), but instead of a cash consideration typical in a traditional sale, in a farm-out, the consideration is likely to be a combination of cash and fulfilment of certain work program obligations. Farming out provides the Farmor an opportunity to bring in a partner not only to recover its past costs invested in the project, or to share the financial burden going forward, but also to provide technical support and capabilities, which may not be otherwise available, as well as to share risk and potential uplift associated with an exploration asset.

A farm-out agreement (the FOA) incorporates many characteristics of a traditional sale and purchase agreement, such as limitations on liability, pre-completion undertakings, warranties and indemnities and third-party claims, with the key differentiating factor being the mechanics relating to consideration and transfer of title.

This Practice Note addresses some of the key commercial issues arising in a farm-out of an oil and gas licence within its exploration phase, which is when licence holders typically seek farm-out partners.

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