I am taking some courses in petroleum land management and am surveying landmen to get their opinions on farmout agreements. If you work as a landman I’d love to hear your responses to the below questions. Thank you!
What is a farmout?
If you have ever farmed out acreage, what was your motivating factor? Or why do oil companies farmout acreage?
Do you use standard terms when negotiating a farmout?
What terms are most often used?
What are the best terms you have ever received in a farmout or best terms you have ever heard of being used in a farmout?
In the oil and gas industry, a farmout agreement is a contract where one party (the farmor) transfers a portion of their interest in an oil and gas lease to another party (the farmee) in return for drilling or other work on the property. The farmee typically agrees to drill or perform work to earn a working interest in the lease.
2.companies farm out acreage for any number of reasons. Their budget doesn’t support drilling in this acreage. This acreage may not be a priority. Think of it like a monopoly board. The farmor is interested in the oranges and reds , but they get an offer on the greens (pacific etc). This is not in their geographical area.
The farmor is willing to let the farmee risk their capital to prove or disprove the viability of the Green acreage tracts.
Terms or standards in a farmout: a) drill a well or complete a well in paying quantities to earn the acreage; b) must drill by a certain date. Especially helpful if leases are expiring; c) any formation or a specific depth; d) does farmout receive an overriding royalty interest.
Rarely see “farmouts” these days, atleast from what Ive seen in the areas that I own in covering Oklahoma, Texas, North Dakota and Wyoming. Seems like most people use 3 year wellbore term assignments these days. In the 80’s I bought 20, 80-160 acre vertical wells where the companies went bankrupt. I did farmouts on all but 5 of them as I didnt have the capital to drill new wells, so my experiences arent what you are looking for as they are outdated, but anywhoo my answers below.
see tim’s answer
I didnt have the money to cover drilling costs
Im not sure what standard terms are or if there is such a thing, I had a convertible ORRI that would become WI upon payout.
In todays world, it seems the most often used terms used are 3 year wellbore assignments or atleast in the areas that I own in.
Best terms I ever recieved, was the difference btw 87.5% and 75% with carried drilling costs and option to convert and participate in future wells.
Good luck on your project/assignment and whenever you get done with your paper, would love to read it if you care to share it with the board!