Legal Definitions - farmoutee

A farmoutee (sometimes called a farmee or farminee) refers to a company or individual in the oil and gas industry who receives a portion of an existing lease from another lessee. This transfer of rights, known as a "farmout agreement," is specifically granted for the purpose of drilling a well on the leased property. The farmoutee typically agrees to undertake the drilling operations and bear the associated costs and risks, often in exchange for a share of any oil or gas produced.

Here are some examples to illustrate the concept of a farmoutee:

• Example 1: Unused Lease Acreage

  Imagine a large oil and gas company, "MegaCorp," holds a vast lease covering thousands of acres. While they are actively drilling in some areas, other sections of their lease remain undeveloped due to resource constraints or a shift in strategic priorities. MegaCorp might enter into a farmout agreement with "Explorer Drilling Inc.," making Explorer Drilling Inc. the farmoutee. Under this agreement, Explorer Drilling Inc. receives the right to drill a well on a specific 160-acre parcel of MegaCorp's lease. Explorer Drilling Inc. will bear the costs of drilling, and if successful, will earn a share of the production from that well, while MegaCorp retains an overriding royalty interest or a back-in working interest after payout.

  This illustrates the term because Explorer Drilling Inc. is a sublessee receiving a portion of MegaCorp's lease specifically for the purpose of drilling a well.

• Example 2: Risk Sharing for a High-Cost Well

  "Deep Horizons LLC" has an oil and gas lease in an area known for very deep and expensive drilling. They want to explore a promising geological formation but the cost and risk of drilling the initial exploratory well are substantial. To mitigate this risk, Deep Horizons LLC enters into a farmout agreement with "Venture Energy Partners." Venture Energy Partners becomes the farmoutee, agreeing to drill the first well to a specified depth and bear 75% of the drilling costs. In return, if the well is successful, Venture Energy Partners will earn a 50% working interest in the well and the surrounding acreage.

  This demonstrates the term as Venture Energy Partners is granted rights to drill on Deep Horizons LLC's lease, taking on the drilling obligation and risk, thereby acting as the farmoutee.

• Example 3: Specialized Drilling Expertise

  "Legacy Fields Inc." holds a long-standing lease in an older oil field. They believe there's potential for new production using advanced horizontal drilling techniques, but they lack the specialized equipment and in-house expertise for such operations. Legacy Fields Inc. decides to farm out a specific section of their lease to "Precision Directional Drilling Co." Precision Directional Drilling Co. becomes the farmoutee, agreeing to drill a horizontal well using their specialized technology. They will fund the drilling and completion of this well, and in exchange, will earn a significant working interest in the well and the associated drilling unit once production begins.

  Here, Precision Directional Drilling Co. is the farmoutee because they are receiving a portion of Legacy Fields Inc.'s lease with the specific obligation to drill a well, leveraging their specialized skills.