Slide Show (July 23).ppt - Contracts and Transfers by the Lessee Part 2 Farmout Agreement If close to the end of a leases primary term the lessee is not

Slide Show (July 23).ppt - Contracts and Transfers by the...

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Unformatted text preview: Contracts and Transfers by the Lessee Part 2 Farmout Agreement If, close to the end of a lease’s primary term, the lessee is not interested in drilling … … then the lessee (“farmor”) may assign a working interest in (“farm out”) leased acreage to an operator (“farmee”) in return for farmee agreeing to drill well(s) Farmout Agreement Farmee who complies with drilling obligation acquires working interest in drill site acreage Depending on terms of agreement, farmee may also be entitled to an interest in additional acreage or may be entitled to earn an interest in additional acreage by drilling on those acres Farmout Agreement Farmor reserves overriding royalty, which is convertible to share of the working interest if well pays out Farmor can “back-in” to the working interest Reasons for Farmout Agreement Farmor: 1. Maintain lease by securing production 2. Obtain expense-free interest in production 3. Acquire geological information 4. Comply with implied covenants (e.g., drilling protects against drainage) Reasons for Farmout Agreement Farmee: 1. Acquire acreage a. not otherwise available, or b. at a lower cost than otherwise possible 2. Keep workers & equipment employed Effects of Farmout Agreement Spread risks and costs of drilling Share ownership of developed property if farmee complies with terms of agreement Duty Imposed on Farmee Drilling * A condition to earn acreage? If so, no liability for failing to drill (farmee does not earn ownership in land) or * A covenant (promise)? If so, farmee liable for failing to drill breach of contract claim) * interest (farmor’s Damages for Breach of Contract 1. “Lost Royalty” Rule Farmor typically loses overriding when farmee fails to drill royalty Dollar amount awarded to farmor = Benefit promised – benefit received 2. Cost of drilling well Martin v. Darcy Sun Oil Company assigned a lease to Darcy, with a provision that the assignment would terminate unless “actual drilling of a well” had begun by August 10th The lease prohibited reassignment without Sun’s consent Martin v. Darcy On July 29th, Darcy agreed to assign his rights to Martin in exchange for Martin’s agreement to drill the well Darcy retained a 1/8th overriding royalty and was to receive an additional $1,500 if the well was completed as a producer and $3,500 if it was a dry hole Martin v. Darcy On August 4th, Martin notified Darcy that the deal was off because he did not have Sun’s consent On August 7th, Darcy furnished Martin with the consent from Sun, but Martin refused to drill Martin v. Darcy Assigned acreage reverted back to Sun, and later other persons completed dry hole on it Darcy sued Martin, seeking the $3,500 he would have received under the dry hole provision of their drilling agreement Martin v. Darcy Darcy also sought $3,000 in lost profits * Darcy’s 1/8th royalty was worth $6,000, and he would have sold an undivided half interest in it before the well was complete Martin v. Darcy Darcy awarded $3,500 (Martin had Sun’s consent in time to begin actual drilling) No additional amount was awarded to Darcy (Darcy not entitled to another $3,000 unless Martin was made aware at the time the contract was made that Darcy intended to sell part of his retained royalty) Actions Required of Farmee “Drill-to-Earn” Agreement Farmee must drill to a stated depth “Produce-to-Earn” Agreement Farmee completes well capable of producing in paying quantities * Include a deadline for completion, or provide instead for “diligent and continuous” drilling operations? Group 1: Beecherl, Biddy, Janowski, Jones, Reynolds, Swayne Group 2: Baley, Cisarik, Hartwell, Luna, Ray, Ruiz, Ticzon Group 3: Arteaga, Daneshvar, Griffin, Millard, Ponciroli, Sembrick Group 4: Babaturk, Caton, Hayes, Le, Renier, Riffert, Uhl Group 5: Anderson, Deleon, Gelsomini, Nehikuere, Notari, West Group 6: Anon, Davis, Graybill, Miller, Partridge, Speed, Trevino Group 7: Aguilera, Dieste, Finnegan, Nieto, Norton, Thomas Group 8: Ashby, Cole, Hale, Maxwell, Quinn, Scott Group Exercise Landowner, in leasing the area covered by the agreement, had reserved a 3/16ths royalty The original lessee, Reata Oil Co., assigned the lease in its entirety to Sabine Exploration Co., and reserved a 1/16th overriding royalty in itself (Reata) The farmout agreement is between Sabine and Uvalde Drilling Co. Sabine has reserved an overriding royalty of 1/16th of production until payout, at which time Sabine will be entitled to a 50% working interest Group Exercise Farmout Agreement: “This agreement is subject to all existing lease burdens, overrides, and payments out of production relating to area covered by this Agreement, which obligations you (farmee) agree to assume” Group Exercise What proportion of production is Uvalde entitled to before payout? What proportions of production are Sabine and Uvalde each entitled to after payout? ...
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