Publications

When acquiring an oil and gas interest in a farmout opportunity offering, the terms of compensation to farmor reflect the value of the acquired interest to Farmee and can take many forms, such as upfront and deferred cash payment, carry of farmor in the future work program, performance based on bonuses, etc. The great uncertainty of the economic outcome of the future work program makes it difficult to value the farmin opportunity and therefore the compensation of farmor. To conclude a mutually acceptable farmout deal will therefore often require an inclusion of future related compensation parameters, of which each party can have his own view making the farmout terms attractive to him. Conventional farmout terms could involve a cash payment to farmor, carry of a portion or all of farmor’s share of costs (e.g., to drill a well) with a cap of, say, $20 MM, carry of farmor in development with a cap, that is a function of oil price, payment of a bonus or bonuses to farmor based on cumulative production, etc. This paper reports a novel set of compensations to farmor recently employed by our company to secure a farmin deal under very competitive conditions. The compensations to farmor were tied to the price of LNG and the official reserves agreed in PoD (Plan of Development). The structure of these compensations will allow farmor and farmee to determine their separate optimistic or pessimistic assumptions about future LNG prices and likely PoD’ed reserves and feel comfortable that they got a “good” deal. Farmout terminology: A farmout is the assignment of part or all of an oil, natural gas or mineral interest to a third party. The assignor is called the “farmor” and the assignee is called the “farmee”.