casemark/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].