Farmout Agreement

Farmout Agreement

Drafts a recordable farmout agreement defining earning obligations, earned interests, and post-earn operations for U.S. oil and gas properties.

Prerequisites

Collect before drafting:

• Parties: names, entity types, formation jurisdictions, addresses, signing authority
• Leases: schedule with recording data, current WI/​NRI, all burdens
• Contract area: legal description, map, depth/​formation limits
• Earning terms: well count, location, depth/​formation, commencement deadline, completion standard, dry hole rules, substitute well rules
• Costs: pre-earn allocation (typically 100% Farmee), post-earn sharing
• JOA: form, version year, operator designation, negotiated deviations
• AMI (if applicable): boundaries, term, offer mechanics, exclusions
• Title: examination window, title standard, cure timeline, remedies
• Regulatory: state-specific filing and recording requirements

Workflow

1. Validate Inputs

Confirm before drafting:

• Contract area description and exhibit references
• WI/​NRI math reconciled with all burdens
• Earning well location and depth criteria specified
• Deadlines and force majeure triggers defined
• Operator and JOA form/​version identified

2. Build Exhibits

3. Draft Agreement Sections

Draft in this order:

4. Key Clause Templates

Earning Obligation. Farmee shall drill [one] Earning Well on [Legal Description/​Exhibit C] to a minimum [TVD/​MD] of [depth] or to the [formation], commencing no later than [date]. "Commence" means [spud/​move rig/​construct location]. Completion by [date]; "complete" means [reach TD/​run casing/​complete for production/​first production in paying quantities]. Dry hole reaching required depth and testing target formation [does/​does not] satisfy the obligation. Lost well due to [mechanical failure/​conditions beyond control]: Farmee may drill substitute within [time] on [same unit/​approved location].

Interest Earned. Upon satisfaction of the Earning Obligation, Farmor assigns Farmee []% WI and []% NRI in the Contract Area, subject to Exhibit A burdens. If Farmor cannot convey stated NRI: (a) proportionate reduction; (b) Farmor cure within [__] days; or (c) terminate as to affected lands.

Reassignment/​Reversion. Failure to timely commence or complete: all rights revert to Farmor; Farmee plugs and abandons, restores surface per law and lease. Post-earning surrender with no producing wells: reassign to Farmor within [__] days using Exhibit F.

Title Examination and Cure. Farmee examines title within [] days of Effective Date. Standard: [defensible/​marketable] title. Written defects within [] days after examination; Farmor has [__] days to cure. Uncured: proportionate reduction, Farmee cure at expense with offset, or terminate as to affected lands.

5. Final Checks

• WI/​NRI reconciled with burdens; proportionate reduction mechanics included
• Commencement and Completion defined with objective milestones
• Dry hole treatment and substitute well rights stated
• JOA conflict clause and effective date confirmed
• Recordable acknowledgments and notary blocks included

Pitfalls

• Default to "defensible title" unless client explicitly requires marketable title.
• Reconcile WI/​NRI against all burdens — silent NRI shortfalls create disputes.
• Farmout controls over JOA on conflicts; always specify JOA form/​version year.
• Record full agreement or memorandum — decide early; include recordable acknowledgments either way.
• Allocate environmental liability by period of ownership/​operation.
• Disclaim geology/​production representations — include "as is, where is" language.
• State-specific requirements vary — verify regulatory filings and recording formalities; mark uncertain items as [VERIFY].