Legal Definitions - back-in right

A back-in right is a specific contractual provision, commonly found in the oil and gas industry, that allows an original owner (the "assignor") of an oil and gas lease to regain a percentage of the operational rights and responsibilities (known as the "working interest") after the new owner (the "assignee") has recovered a pre-determined amount of their initial investment and operating costs from the production of oil or gas.

Essentially, it's a deferred ownership stake in the operational side of a project that "kicks in" once the party responsible for the initial development has reached a specific financial milestone, ensuring they recoup their significant upfront expenditures before sharing the full operational burden and reward.

• Example 1: Small Company Sells Lease to Large Developer

  Imagine a small independent exploration company, Desert Sands Energy, discovers a promising oil prospect but lacks the substantial capital needed for full-scale drilling and development. They decide to assign their lease rights to a larger, well-funded company, Global Petroleum Corp. As part of the agreement, Desert Sands Energy negotiates a 15% back-in right. This means that once Global Petroleum Corp has recovered all of its significant drilling, completion, and initial operating costs from the oil and gas produced, Desert Sands Energy will then acquire a 15% working interest. From that point forward, Desert Sands Energy will receive 15% of the future production (after royalties) but will also be responsible for 15% of all ongoing operational expenses for that portion of the lease.

• Example 2: Joint Venture Development

  Consider two energy companies, Frontier Drilling and Capital Ventures Inc., who jointly acquire a large oil and gas lease. Frontier Drilling has the technical expertise for exploration and drilling, while Capital Ventures Inc. provides the majority of the initial funding. They agree that Capital Ventures Inc. will fund the entire initial drilling and development phase. To protect Frontier Drilling's long-term interest and expertise contribution, they negotiate a 20% back-in right on the working interest. This right activates once Capital Ventures Inc. has recouped 120% of its initial investment in drilling and infrastructure from the sale of produced oil and gas. After this financial threshold is met, Frontier Drilling will then receive 20% of the net production and become responsible for 20% of all ongoing operational expenses for that portion of the lease.

• Example 3: Individual Investor with Mineral Rights

  An individual investor, Ms. Elena Rodriguez, owns the mineral rights beneath her family's ranch. Lacking the specialized knowledge and capital to develop these rights herself, she assigns them to a professional oil and gas development firm, Prairie Gold Exploration. In their agreement, Ms. Rodriguez includes a 10% back-in right. This provision stipulates that Prairie Gold Exploration must first recover all costs associated with exploration, drilling, and bringing the wells into production, plus an agreed-upon profit margin. Once Prairie Gold Exploration achieves this financial target, Ms. Rodriguez's 10% back-in right activates, granting her a 10% working interest. This means she will then receive 10% of the future production (after any existing royalties) but will also bear 10% of the ongoing operational costs, such as maintenance, pumping, and regulatory fees.