What is ‘Farmout’

Farmout is the assignment of part or all of an oil, natural gas or mineral interest to a third party. The interest may be in any agreed-upon form, such as exploration blocks or drilling acerage. The third party, called the “farmee,” pays the farmor a sum of money up front for the interest and also commits to spending money to perform a specific activity related to the interest, such as operating oil exploration blocks, funding expenditures, testing or drilling. Income generated from the farmee’s activities will partly go to the farmor and partly go to the farmee in percentages determined by the agreement.

Explaining ‘Farmout’

A company may decide to enter into a farmout agreement with a third party if it wants to maintain its interest but wants to reduce its risk or doesn’t have the money to undertake the operations that are desirable for that interest. Farmout agreements give farmees a potential profit opportunity that they would not otherwise have access to. Government approval may be necessary before a farmout deal can be finalized.

Further Reading

  • Farmout valuation using exotic real options – [PDF]
  • Wealth effects of farmout arrangements in the oil and gas industry – [PDF]
  • Lease Operatorships and Farmouts: Changing the Oil Production Scenario in Trinidad's Land-Based Fields – [PDF]
  • The Economics of Farm-Outs (includes associated papers 21635 and 21888) – [PDF]
  • Selected Topics Regarding the Taxation of Oil and Gas Farmout Transactions – [PDF]
  • Analysis helps determine farm-in fractional interest – [PDF]
  • Watchdog on a leash [Audit Victoria, controlled by a government appointed Board will farm out government auditing work to private sector firms, leaving Ches … – [PDF]
  • The rise of the virtual state – [PDF]
  • A simplified utility framework for the analysis of financial risk – [PDF]