A farm out agreement is a business agreement between two companies in the oil and gas industry. In this agreement, the owner of an oil or gas lease known as the “farmor” or “assignor” agrees to give a percentage of the lease to a second company known as the “farmee” or “assignee”.
The farm out agreement enables the assignee to explore and exploit the minerals in the lease, and in return, pay the farmer or assignor a certain sum or percentage of the profits earned. The farm out agreement is a common business practice in the oil and gas industry, especially in instances where the farmer or assignor does not have the capital and technical expertise to explore and exploit the minerals in the lease.
The farm out agreement is a legally binding contract that outlines the terms and conditions of the lease, including the rights, obligations, and responsibilities of the assignor and assignee. The agreement must outline the specific mineral rights, the extent of the lease, and the duration of the lease.
The farmor or assignor must provide detailed information about the lease to the farmee or assignee, including geological data, drilling information, and all necessary permits. The assignee must carry out due diligence before entering into the farm out agreement to ensure that the leasehold has commercial potential.
The farm out agreement can provide several benefits to both parties involved. For the farmer or assignor, the arrangement enables them to monetize their leasehold and earn passive income from the exploitation of minerals. It also enables them to share the risks and costs associated with mineral exploration and exploitation.
For the farmee or assignee, the arrangement enables them to access mineral reserves that they otherwise would not have been able to explore or exploit. It also enables them to reduce the risk and cost of mineral exploration by sharing the costs and risks with the farmer or assignor.
In conclusion, a farm out agreement is a legally binding contract between a farmer or assignor and a farmee or assignee in the oil and gas industry. The agreement enables assignees to explore and exploit mineral reserves under the farmers` or assignors` lease in exchange for a percentage of the profits earned. The farm out agreement is a common business practice in the industry, providing benefits to both parties.