In my experience, even when I was in the heavy construction industry, knowing what the other party really was after making the negotiations much easier. This is not always possible, but if we can closely assess our motivations and confidently assess the motivations of the other side, we rarely fight tooth and nail above any disposition and we can focus on what matters to each game. At the end of the day, we have better arrangements. In comes Goliath Oil Co., who arrived late to the game and was not able to rent your territory. Goliath has a lot of money and he wants, because his geologists agree that there is a lot of money to be made near you. Rather than wait for your leases to expire, Goliath chooses to contact you and offer to “manage” your interest in your work. It is willing to drill wells for you and pay for drilling (which is known as the “drilling port”), in exchange for allocating a percentage of your work interest. Another way to think about this is to get drilling services for which the consideration is more an assignment of work interest than cash. Farm agreements generally provide that the farmer assigns the defined quantum of interest in leases after farm-to-farm development: (1) drilling an oil and/or gas well to the defined depth or formation or (2) drilling an oil and/or gas well and obtaining economically viable production levels.  Farmout agreements are the second most common negotiated agreements in the oil and gas industry, behind oil and gas leasing.  For the farmer, the reasons for entering into a farmout agreement are the acquisition of production, the sharing of risks and the obtaining of geological information.
Farmes often enter into farm agreements to obtain a surface position, or because they have to employ underutilized personnel or share risks, or because they want to obtain geological information.  A farmout contract is an agreement with an operating interest rate holder (“Farmor”), in which the farmer agrees to assign work shares to the farm in exchange for certain contractual services. Typically, these services include drilling a well to a certain depth, at a certain location, within a certain period of time, and generally require that the well be commercially produced. After the delivery of this contractual benefit, farmee would have “deserved” a contract. This transfer comes after the completion of the benefits and is subject to the reserve of a prevailing royalty interest in favour of the farmer. As in all negotiations, understanding the interests and motivations of the other side is the key to effective negotiation and proper structuring of a comprehensive agreement. If you know, you can also understand the other party`s best alternative to the negotiated agreement. You will be able to better assess how far the other party will be willing to give and negotiate the terms of the farmout agreement. Below are the most common interests motivating farmors and farmees.