Farmout Agreement Depending on terms of agreement farmee that complies with

Farmout agreement depending on terms of agreement

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Farmout Agreement Depending on terms of agreement, farmee that complies with drilling obligation also may be: 1. entitled to an interest in additional acreage or 2. entitled to earn an interest in additional acreage by drilling on those acres
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Farmout Agreement Farmor reserves overriding royalty , which is convertible to working interest if well pays out * Farmor can “back-in to working interest
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WIIFM? Farmor : 1. Maintains lease by securing production 2. Obtains expense-free interest in production 3. Acquires geological information 4. Complies with implied covenants (e.g., drilling protects against drainage)
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WIIFM? Farmee : 1. Acquires acreage a. not otherwise available and/or b. at lower cost than otherwise possible 2. Keeps workers & equipment employed
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Effects of Farmout Spread costs and risks of drilling Share ownership of developed property if farmee complies with terms of agreement
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Duty Imposed on Farmee Drilling: * A condition to earn acreage? If so, no liability for failing to drill (farmee does not earn ownership interest in land) or * A covenant (promise)? If so, farmee liable for failing to drill (farmor’s breach of contract claim)
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Damages for Breach of Contract Farmor receives: 1. Difference between value of benefit promised and value of benefit received and 2. Cost of drilling well
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What Do You Think? Landowner, in leasing acreage subsequently covered by farmout agreement, had reserved 3/16ths royalty Lessee, Reata Oil Co., assigned entire lease to Sabine Exploration Co., and reserved 1/16th overriding royalty Sabine entered into farmout agreement with Uvalde Drilling Co., and reserved overriding royalty of 1/16th of production until payout, at which time Sabine entitled to 50% working interest
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What Do You Think? Farmout Agreement: “This agreement is subject to all existing lease burdens, overrides, and payments out of production relating to acreage covered by this Agreement, which obligations you (farmee) agree to assume”
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What Do You Think? 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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Operating Agreements Drilling and development are expensive * Shale plays * Secondary recovery techniques Joint operations * Risks and costs shared
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Operating Agreements Contracts among working interest owners * Joint operations - Define rights and responsibilities - Address initial drilling, additional development, operations, and accounting procedures
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Key Provisions 1. Appointment of Operator a. Authority b. Liability 2. Initial Drilling a. Operating Decisions b. Costs 3. Additional Development
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