Legal Definitions - farmor

A farmor (also known as a farmoutor) is a party in an oil and gas exploration and production agreement, specifically a "farmout agreement." This is the party who holds an existing oil and gas lease and agrees to transfer a portion of their interest in that lease to another company (known as the farmee or farmoutee). In return for this transfer, the farmee commits to performing specific development activities, such as drilling a well, on the leased property. The farmor typically retains a continuing interest in the property, often in the form of an overriding royalty interest or a right to a share of production after the farmee has recovered their costs.

• Example 1: Developing Undeveloped Acreage
  "Mid-Continent Energy Co." holds a vast oil and gas lease in Oklahoma, but a significant portion of it remains undeveloped due to capital constraints. To unlock the potential of this acreage without incurring all the upfront costs, Mid-Continent Energy Co. enters into a farmout agreement with "Drill Deep Inc." Mid-Continent Energy Co. (the farmor) assigns a 70% working interest in a specific 1,280-acre block of their lease to Drill Deep Inc. In exchange, Drill Deep Inc. agrees to drill two exploratory wells to a specified depth within 18 months. If successful, Mid-Continent Energy Co. retains a 30% working interest and an overriding royalty interest on all production from those wells.

  Explanation: Mid-Continent Energy Co. is the farmor because they are the original leaseholder who is transferring a portion of their lease interest to Drill Deep Inc. This transfer is made in exchange for Drill Deep Inc. undertaking the drilling obligations, which helps Mid-Continent Energy Co. develop their lease without bearing all the financial risk.

• Example 2: Targeting a Deeper Formation
  "Legacy Oil & Gas" has been successfully producing oil from a shallow formation on their lease for many years. Geologic studies suggest there might be significant reserves in a much deeper, untested formation below their current production zone, but drilling to that depth requires specialized and expensive equipment that Legacy Oil & Gas does not possess. They decide to "farm out" the deeper rights. Legacy Oil & Gas (the farmor) assigns 100% of the working interest in the rights below 8,000 feet to "Deep Earth Explorers," a company known for its expertise in deep drilling. Deep Earth Explorers commits to drilling one deep well and completing it if productive. Legacy Oil & Gas retains an overriding royalty interest on all production from the deeper formation.

  Explanation: Legacy Oil & Gas acts as the farmor because they are the original lease owner who is transferring a specific portion of their lease rights (the deeper geological zones) to Deep Earth Explorers. This transfer is made in exchange for Deep Earth Explorers performing the costly and specialized drilling operations that Legacy Oil & Gas was not equipped to undertake.

• Example 3: Satisfying Lease Maintenance Requirements
  "Frontier Resources LLC" holds a large oil and gas lease that includes a "continuous development" clause, meaning they must drill a certain number of wells or maintain production across the entire lease to prevent undeveloped portions from expiring. A section of their lease is nearing its expiration date due to a lack of recent drilling activity. To avoid losing this valuable acreage, Frontier Resources LLC (the farmor) enters into a farmout agreement with "Pioneer Drilling Co." Frontier Resources LLC assigns a 95% working interest in the undeveloped 640 acres to Pioneer Drilling Co. Pioneer Drilling Co. commits to drilling two wells on that acreage within the next year, thereby satisfying the lease's continuous development clause and preserving Frontier Resources LLC's remaining interest in the broader lease. Frontier Resources LLC retains a 5% working interest and an overriding royalty.

  Explanation: Frontier Resources LLC is the farmor because they are the original leaseholder who is transferring an interest in their lease to Pioneer Drilling Co. This transfer is made in exchange for Pioneer Drilling Co. performing the drilling activities necessary to maintain the lease, which directly benefits Frontier Resources LLC by preventing the lease from expiring and allowing them to retain a valuable interest.