What are Farm-Ins and Farm-Outs?

Oil and natural gas are two of the most important resources that are used in energy production today. To produce the required heat and power, massive amounts of these resources need to be removed from the earth each day. Once oil or natural gas are found on a piece of land, a company will either purchase the land outright, or simply purchase the right to drill on the land to acquire the resources.

Performing the actual drilling can be quite time consuming and expensive. To help make it more practical for companies to complete this work, there are a number of different types of legal agreements that can be used. Two of the most popular options are known as farm-ins and farm-outs. Whether you are a company that drills for natural resources, or you search for and discover new source locations for these resources, these two options are very important.

What is a Farm-In?

A farm-in is an agreement between two operators, one of which owns the interest in a piece of land where oil or gas has been discovered. The current owner of the interest makes the agreement in order to offset the costs associated with drilling, developing, or otherwise removing the resources from the land. The company that acquires the rights to do the actual drilling benefits from access to a proven source of oil or natural gas without having to discover it themselves. 

What is a Farm-Out?

A farm out is a type of agreement where a party that has a working interest to a gas and oil lease will grant that interest to another party. The other party will then be contractually obligated to meet specific conditions, such as setting up a drill in a specific location, drilling to an agreed upon depth, etc. The agreement will also include time frames by which these activities must be completed. The owner of the interest in this lease can assign either all their interest to the other party, or only a portion of it.

A Detailed Arrangement

In both of these types of legal agreements, the parties involved must be on the same page regarding exactly what will take place. In the drilling industry, the devil is truly in the details, which is why having a properly written contract is critical for both farm-ins and farm-outs. If you are considering either of these options, or you have other questions regarding the legal rights to drilling for oil or natural gas, please contact Robertson & Williams, Attorneys & Counselors at Law. We will be happy to go over your specific situation and help you to determine the best path forward.

The following two tabs change content below.

Robertson & Williams

Robertson & Williams is experienced in a wide range of practice areas and is proud to provide personal attention to clients and obtain desired results.

Latest posts by Robertson & Williams (see all)