Oil and gas price volatility is as much a part of the energy business as drill bits. Few predicted that the current down-cycle would be as long or as deep as it is proving to be. While global events could turn and prices improve, lower prices seem to be a reality for now. Lower prices impact the finances of everyone in the energy industry. Insolvencies, business failures, and bankruptcies are inevitable in this environment; and when they occur, they affect everyone, at all levels and in all aspects of the industry. Though industry participants can’t change the price of oil, they can protect their interests in other ways. In times like this, fortune favors the prepared.
Law360, New York (September 25, 2015) — Over the last five years, American shale production has more than tripled. Since last October, however, the oil and gas industry has trudged through a long and pronounced slump in crude oil prices in what has been termed the “Oil Bust of 2015.” Oil prices dropped below $40 a barrel last month for the first time in over six years, and major relief from this slump may be distant as EIA recently announced that it expects crude to average $59 per barrel in 2016.
This low-price environment has been unfavorable for most royalty owners, as low oil prices generally lead to proportionately low royalty payments. It has also lead to a slow-down in additional drilling and development activity as many oil and gas companies slashed budgets for 2015 and 2016. Drilling contractors have stored hundreds of rigs, and oil and gas companies have drastically reduced their workforces. A strong indicator of this slow-down can be found in the Texas Railroad Commission drilling statistics, showing 964 permits issued last month in Texas, compared with 2,440 in August of 2014. Read More »
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:
- The Duty Imposed;
- The Earning Barrier;
- The Interest to be Earned;
- Number of Wells to be Committed to the Agreement; and
- Timing of Issuance of Farmout Acreage.