Farmout Agreements: Key Decisions and Negotiation Points


As I stated in my Part One of my Farmout Agreement Series, farmout agreements can be somewhat less “straight-forward” than other common oil and gas agreements.  Contracts, Leases, JOA’s, for example, are each highly standardized and have one or more publishers of highly-adopted forms.  Farmout Agreements, on the other hand, range from mere one-page letter agreements to highly formalized and lengthy contracts, prepared and negotiated over several rounds of back and forth red-lining.  An attorney cannot simply turn to his form books (or form folder for the tech savvy), and is unlikely to find any comprehensive checklists for drafting the agreement.

While there is no standardized form, a standard set of terminology has certainly developed that will guide most decisions, negotiations, and drafting exercises.  Below, we’ll consider several of the most crucial provisions of a farmout agreement, including:

  1. The Duty Imposed;
  2. The Earning Barrier;
  3. The Interest to be Earned;
  4. Number of Wells to be Committed to the Agreement; and
  5. Timing of Issuance of Farmout Acreage.

Read More »


Non-Participating Royalty Interests – A Simple Concept with Complex Rules

I had an excellent time this week presenting to the Houston Association of Lease and Title Analysts on February 25, 2014, at the Houston Petroleum Club.  It was a great turnout, as I believe we had almost 250 attendees.  We covered the basics of NPRI’s, before diving into some of the more complex resulting rules, such as ratification, community leasing, and some complications created by Horizontal Drilling.

I’ve included a copy of my powerpoint presentation below please contact me if you’d like a copy of this presentation.  Thank you very much to HALTA for having me, and thank you to everyone that attended.  Please don’t hesitate to shoot me an email with any questions or comments.

Also, note that I’ll be publishing a follow-up article in the ALTA Magazine soon, and will also be presenting at the 29th Annual NALTA Conference in Nashville.

Photo some rights reserved by djonesphoto


Where the Use of Forms Goes Wrong

The Proliferation of Forms:

The wide-spread use of forms in the oil and gas industry has created nothing short of a revolution in allowing land professionals to expedite the process of putting complex agreements in place.  Additionally, this “forms culture” has dramatically helped to ensure excellent quality legal drafting and coverage of legal concepts in a continuously developing and complex legal regime — oil and gas law.

One example of such a widely used form is the Model Form Joint Operating Agreement published by the AAPL. Additionally, several publishers have created their own version of the ubiquitous “Producer’s 88” oil and gas lease form (which, on an unrelated note, has caused great confusion due to the same name being used for a wide variety of lease forms).  The Association of International Petroleum Negotiators have also developed several forms for use in the oilpatch.  As one last example, Kanes Forms has published a wide variety of forms, such as affidavits, mineral and surface deeds, assignments, and various agreements for use in the oil and gas industry.

But is this widespread reliance on forms purely positive?  If not, then what are some of the major landmines to be aware of?

Where Are Forms Inadequate?

One of the first lessons I learned back when I was drafting and negotiating agreements in the construction industry was this: forms are a great starting place, but they shouldn’t be used blindly.   The exact same principal applies in Oil and Gas.  Some of the reasons for this include: Read More »


Mineral Liens: Collecting Unpaid Debt for Oilfield Service Companies

Purpose and Application of Mineral Liens

Everyone in the construction industry is intimately familiar with the “Mechanic’s Lien,” which gives a security interest in the title to real property (and sometimes personal property) to those who have supplied materials or labor to improve the property.  In some jurisdictions, the liens are broken down further into sub-groups, such as the the “Materialman’s Lien,” “Construction Lien,” “Supplier’s Lien,” or “Laborer’s Lien.”  But one lesser known type of lien can be crucial to oilfield service companies in collecting on debts owed to them: the Mineral Lien.

Liens are similar to a sort of mortgage or deed of trust on the property, acting like a cloud on title, and having the effect of hooking the owner into paying you for your services or labor before selling, financing, or refinancing the property.  Mineral Liens were designed specifically for companies like oilfield service companies, to give them an easier route to collecting their debts, and receiving money rightfully owed to them. Read More »


Dirty Tricks & Cheap Moves in the Oilpatch

High risk, high reward.  We in the oil and gas industry have been toughened; have been forced to learn to traverse the risk, and to reap the rewards.  Heck, oil and gas exploration and production is practically as synonymous with the “American Dream” as we can get.  The plentiful rewards that lie at the end of a successful oil and gas venture lead many into an epic journey fueled by palpable ambition and great effort.  We’ve all heard amazing tales tracing the paths of the oil and gas trailblazers, the ones who got lucky, and those who were willing to sacrifice to get there (if not, see “The Prize“).  But every possible path to high reward is guarded by a common vault-door: acceptance of high risk.

Unfortunately, as these stories show us, this risk to reward balance can and has lead many to lying, cheating, dishonesty, half-truths and otherwise misleading conversations, deals and agreements (again, see “The Prize”). However, this is all directly in conflict with the prevailing “unspoken rule” in the oil and gas business: honesty and fair dealing.  Call it what you will, “old boys club,” “gentlemen’s business,” “good ol’ boys,” etc.  The oil and gas industry is undeniably all about the relationships you have built, and the trust and rapport you have developed.

Nevertheless, in helping my clients negotiate and close all sorts of deals and resolve various disputes, I have inevitably ran across several “dirty tricks” and “cheap moves.”  The following is an explanation of some of these dirty or cheap oil and gas negotiation tactics, how to avoid them, and suggestions for responding when the tactics are spotted.
Read More »


Farmout Agreements: The Basics, Negotiations and Motivations

Farmout Agreements are one of the most widely used agreements in the oil and gas industry.[1]Special thanks to Professor Lowe for his excellent article on this subject, Analyzing Oil and Gas Farmout Agreements, Sw. L.J. 759 (1987). However, there is no largely adopted model form.  As such, they vary a great deal.  Kanes Forms has provided several Farmout Agreement Forms, but these have not been adopted as an industry standard, and so every farmout agreement approached must be fully analyzed and every term must be understood. This multi-part article will summarize the common ground, and provide a framework for analyzing the various options for certain provisions. Read More »

Footnotes   [ + ]


Misconception: Farmouts vs. JOA’s

I think we can all agree that one challenge facing every oil and gas attorney and landman is navigating the high degree of complexity involved in almost everything we do.   However, I truly believe that everything can be broken down into much simpler concepts.  We can and must be able to see the forest for the trees.  But why aren’t more people doing this?  The days of lawyers impressing people with overdone legalese and selling their services by convincing people the law is too complex to understand is gone!  As Allison Shields over at Legal Ease said “if you can’t express what you do for your clients in simple terms – without legalese or other jargon – maybe you’re not so sure yourself how you can help them.”

That being said, I wanted to briefly touch on a serious misconception I have heard a few times recently and was recently discussed with a friend at NAPE Rockies. One thing I strive to do is break down the complexities of the theories and frameworks into no-nonsense explanations.  The misconception pertains to Farmout Agreements and Joint Operating Agreements.  When do you find each?  What scenarios?  What are the cost, risk, and profit sharing mechanisms found under each?

Read More »


Terminology Behind Federal Leasing

“Common” Oil and Gas Law

As time passes, the “academic minds” have recognized more and more that Oil and Gas Law is not simply a mixture of advanced property law and advanced contract law.  To the contrary, the advent and progression of the energy era as well as continued advancement into non-conventional plays has seen the formation of a robust energy culture, so sophisticated and business savvy that its typical negotiations have become forms, those forms became largely standardized, and has allowed a body of case law to envelope its every detail to the point that a new body of law has emerged: oil and gas law. [1]See Bruce M. Kramer, “Property and Oil and Gas Don’t Mix: The Mangling of Common Law Property Concepts,” 33 Washburn LJ 540 (1993). Read More »

Footnotes   [ + ]


Types of Title Opinions

One question I believe everyone should clearly define is “what is the scope and purpose of the opinion I’m requesting / preparing / reviewing?”  Opinions can be long or short, detailed or brief, can be written to deliver pristine title or marketable title, or can be long or short, limited in scope or quite thorough, and the requirements can be written comprehensively or in a way that will allow curative strategies to be wholly developed in-house. There is practically no end to the number of variations that can be developed.  However, what follows is a description of the main categories of oil and gas title opinions that are typically encountered:

Read More »


Texas: Failure to Offer a Will for Probate

The Issue:

Probate is the process of validating a will and thereafter administering the estate of a deceased person according to the will’s terms. There are different probate law attorneys all over the world, for example, there are Texas Probate Law firms as well as this probate attorney Tampa too! As title attorneys and landmen often see, people frequently fail to offer Wills for probate. Perhaps the existence of a Will is discovered in an affidavit of heirship, or a recital in a later instrument. Perhaps the reason the parties failed to offer the Will was they didn’t realize they needed to do so, or perhaps it was because the will could not be found. As we’ll discuss in this article, the discovery of an unprobated will requires landmen and title attorneys to perform a certain level of due diligence, and the reason the parties failed to offer the Will for probate will have a substantial effect. Understanding how to protecting your assets in this kind of situation can save you a lot of headache in the future. Read More »

© Copyright 2012-2018, McGinnis Lochridge LLP. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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Note: When choosing facebook or google, alerts will be sent to the email listed in that account.
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!