Common Contracts
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Something Old, Something New: The Evolving Farmout AgreementMarch 29th, 2010
The three most important instruments for oil and gas development have been and continue to be the oil and gas lease, the joint operating agreement, and the farmout agreement. Of the three, the lease is by far the most senior,1 and it has received the most analysis by commentators and the courts. However, as Professor John Lowe notes in his compre- hensive article on farmout agreements,2 since the end of World War II, the oil and gas farmout has become nearly as important as the oil and gas lease. He believes this is in part a reaction to the increased risks and costs of deeper drilling and the proliferation of small oil companies anx- ious to make deals with their larger brethren.3 This article will define a farmout agreement, review the basis for its structure (the goals of the parties and applicable tax law), and identify its key characteristics. It will then address selected issues involving farmouts, with an emphasis on recent cases. Finally, it will consider the evolution of the f
