Recent Significant Cases Affecting Farmout Agreements

Abstract

As this author observed in 1987, farmors' and farmees' mutual interest in maximizing available tax benefits causes the structure of farmout agreements to be very much the same, or at least fall into discernable patterns. Farmout substantive provisions, however, vary widely. The difference in substantive provisions results in part from the different goals that farmors and farmees seek when they enter into agreements. In part, the differences are reflexive; once one encounters a problem, one drafts to avoid it in the future. In part, also, the differences show the creativity of American businessmen and their lawyers in deal-making.

The cases reviewed in this article illustrate that the transactional costs of drafting, administering and litigating farmout agreements is high. Farmout agreements are susceptible to orderly analysis, and over the years many distinguished commentators have written to suggest particular approaches to that analysis. Is it not time for the industry and its lawyers to try again to develop model forms?

Keywords: Farmout Agreements, Oil and Gas, Minerals, Contracts, Operating Agreements