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

| Exhibit | Content |
|---------|---------|
| A | Lease schedule with recording data and WI/NRI by lease |
| B | Legal description and contract area map |
| C | Earning well location (plat or coordinates) |
| D | JOA form and any addenda |
| E | AMI map and description (if used) |
| F | Form of Assignment and Bill of Sale |
| G | Memorandum of Farmout (if recording summary only) |

### 3. Draft Agreement Sections

Draft in this order:

| Section | Must Include |
|---------|-------------|
| Parties and Recitals | Purpose, prior LOI/term sheet status, intent to earn |
| Definitions | Contract Area, Earning Well, Earning Date, Commencement, Completion, WI, NRI, AMI |
| Grant/Farmout | Interest to be earned, burdened WI/NRI, title standard |
| Lands/Depths | Horizontal and vertical limits, formation scope |
| Earning Obligations | Well count, location, depth, deadlines, reporting, force majeure |
| Cost Allocation | Pre-earn costs, post-earn sharing, payout triggers |
| JOA Integration | Form/version, operator, conflict clause |
| Title Examination | Access, defect notice, cure period, remedies |
| AMI | Area, term, offer mechanics, exclusions |
| Reassignment/Reversion | Failure to earn, surrender after earning, P&A duties |
| Regulatory/Recording | Filing responsibilities, recordable form, memo vs full |
| Reps/Warranties | Defensible title, authority, no undisclosed burdens |
| Indemnity/Insurance | Operational liability allocation, environmental split |
| Miscellaneous | Governing law, venue, notices, assignment limits, counterparts |

### 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].