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    Successful Farmins & Farmouts
    Successful Farmins & Farmouts
    Successful Farmins & Farmouts
    Ebook209 pages2 hours

    Successful Farmins & Farmouts

    By Peter Cockcroft and Dr. David Waghorn

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    About this ebook

    Successful Farmins & Farmouts describes in detail all the information an oil and gas professional needs to complete a successful farmout or farmin of projects ranging from early exploration opportunities through to mature producing fields. 

    The book includes a detailed checklist for data room managers and attendees, as well as a description of common pitfalls for both potential buyers and sellers. Key elements of the crucial Joint Operating Agreement, central to a successful farmin/farmout, are discussed with recommendations on how to draft an efficient and robust contract.

    A review of the economics of farmouts & farmins includes a method to determine the optimal risked percentage, with worked examples, at which to farmout or farmin to a petroleum opportunity.

    LanguageEnglish
    PublisherPeter Cockcroft
    Release dateSep 1, 2017
    ISBN9781386207450
    Successful Farmins & Farmouts

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      Book preview

      Successful Farmins & Farmouts - Peter Cockcroft

      SUCCESSFUL FARMINS & FARMOUTS

      For International Oil & Gas Professionals

      Peter Cockcroft

      &

      Dr. David Waghorn

      Successful Farmins & Farmouts

      Copyright © 2017 Peter Cockcroft & Dr. David Waghorn

      The scanning, uploading and electronic sharing of any part of this book without the permission of the publisher constitutes unlawful piracy and theft of the Author’s intellectual property.

      Thank you for your support of the authors’ rights

      The publisher is not responsible for websites (or their content) that are not owned by the publisher.

      1      OVERVIEW

      1.1      Introduction

      1.2      Acreage Acquisition

      1.3      Motives For Farming-Out

      1.4      Motives For Farming-In

      2      THE FARMOUT

      2.1      The Farmout Process

      2.2      Improving The Process

      2.3      Accessing The Market

      2.4      The Ideal Farmee

      2.5      Generation Of Technical Or Commercial Story

      2.6      Teaser (Flyer Or Information Brochure)

      2.7      Information Memorandum

      2.8      Data Rooms – Online And Physical

      2.8.1      The Data Room – Seller’s Perspective

      2.8.2      The Data Room – Buyer’s Perspective

      2.8.3      Physical Data Room

      2.8.4      Online Or Virtual Data Room

      2.9      Use Of An Outside Consultant

      3      JOINT VENTURES AND OPERATING AGREEMENTS

      3.1      Evolution Of Unincorporated Joint Ventures

      3.2      Joint Operating Agreements

      3.3      The Duration And Scope Of The JOA

      3.3.1      The Relationship Of The Parties To The JOA

      3.3.2      The Interests Of The Parties

      3.3.3      Liabilities Of The Parties

      3.4      The Operator

      3.4.1      Operator’s Additional Liabilities

      3.4.2      Conduct

      3.5      Administration And Procedure

      3.5.1      Protection Of Operational Interests

      3.5.2      Voting Pass Mark

      3.5.3      What Happens When We Add A Headcount Criterion On Top Of A Simple Percentage Vote?

      3.5.4      Control Of Expenditure

      3.5.5      Insurance And Litigation

      3.5.6      Non-Consent And Sole Risk

      3.5.7      Overhead Allocation

      3.5.8      Parent Company Overheads

      3.6      Protection Of Equities

      3.6.1      Fault/Default

      3.6.2      Assignment

      3.6.3      Withdrawal

      3.6.4      Abandonment

      3.6.5      Audit

      3.6.6      Use Of Independent Experts

      3.7      Miscellaneous Provisions

      3.7.1      Confidentiality, Public Announcements And Trading Rights

      3.7.2      Lifting Of Petroleum

      3.7.3      Force Majeure

      3.7.4      Applicable Law And Notices

      3.8      Definitions And Interpretations

      4      THE ROLE OF A NON OPERATING PARTNER

      4.1      How Much Work To Do?

      4.2      What Kind Of Work To Do?

      4.3      Information

      4.4      Opportunity For Training

      5      DEAL OPTIONS

      5.1      Promote Levels

      5.2      Farmout Obligations - Performance

      5.3      Seismic Options

      5.4      Multiple Well Agreements

      5.5      Substitute Wells

      5.6      Earn-Ins

      5.7      Operatorship And Contracting

      5.8      Assignment Of Interest

      5.8.1      Pre-Emption

      5.8.2      Timing Of Assignment

      5.9      Other Provisions Of Farmout Agreements

      5.9.1      Access To Data

      5.9.2      Representations And Warranties

      5.10      Turnkey Farmouts

      5.11      Development Farmouts

      6      EARNING AND SWAPS

      6.1      Sales And Swaps Of Acreage

      6.1.1      Give It Away

      6.1.2      Sell It

      6.1.3      Swap It

      7      ECONOMICS

      7.1      Single-Prospect Farmout

      7.1.1      Seller’s Point Of View

      7.1.2      Buyer’s Point Of View

      7.1.3      Multi Prospect Farmout

      7.1.4      Timing

      7.2      The Right To Walk Away

      7.2.1.1      No Right Granted:

      7.2.1.2      Granting Right:

      7.3      Options

      7.4      Taxes And Ring Fences

      7.4.1      Historic Tax Allowances

      7.4.2      Tax-On-Work Program Costs

      7.5      Government Approval

      7.6      Value That Someone Else Would Pay

      7.6.1      The Imputed Farmout Method: How It Works And Why It Is Best

      8      GEOLOGICAL CHECKLIST FOR THE EVALUATION OF FARMINS

      8.1      Desktop Literature Review

      8.2      Geotechnical

      8.3      Check List – Specific Factors

      8.4      Check List - General Factors

      9      PITFALLS

      9.1      Seller’s (Farmor’s) Pitfalls

      9.2      Buyer’s (Farmee’s) Pitfalls

      10      REFERENCES

      1      OVERVIEW

      1.1      Introduction

      The term farmout, in common with almost all the terms used in the international petroleum industry, has its origin in the United States. Apparently it originally referred to a practice prevalent whereby share croppers could earn a share in the proceeds of farmers’ crops by working on the farmers’ land.

      In the oil and gas industry, the term is normally applied to the situation where one or more parties acquire an interest in a license or concession, for a cash payment or in return for performing work for the party or parties disposing of the interest. It may involve the disposing party giving up all its interest, but more commonly that party will retain part of its interest in the license or concession.

      The party disposing of the interest will be described as the Farmor and the party acquiring the interest as the Farmee.

      If a farmout is undertaken during the exploration phase of an asset, typical obligations that the farmee agrees to undertake will include seismic acquisition and the drilling of exploration wells. Often the farmout work requirements are linked to the minimum work obligations of the underlying concession or contract area (to the extent permitted by the relevant governmental authority). The transfer of the interest in the contract area will often be affected once the farmee has fulfilled the obligations under the farmout agreement.

      In the appraisal phase, a farmout agreement will typically specify the drilling of appraisal wells and other appraisal activities. The transfer of the interest in the contract area is commonly effected either on the fulfillment of the obligations specified in the farmout agreement or upon signing/completion of the farmout agreement (following the receipt of any necessary government and other consents). Given the stage of the project, the farmee is likely to want the transfer of the interest to be completed before the fulfillment of the work obligations to ensure that it can participate fully in any development of a discovery and the decision-making under the JOA regarding any future development.

      Regarding farmouts that occur during the development phase of an asset, the farmee will often agree to assume responsibility for the obligations attaching to the interest being transferred and to cover the farmor’s share of the development costs until a particular point in time (e.g. first production). The farmout agreement may permit the farmee to recover its costs subsequently, through taking the farmor’s share of petroleum once production starts.

      1.2      Acreage Acquisition

      A prerequisite for exploration success is having a land or acreage position. It can be obtained from existing acreage allocated to another exploration company by the government or other regulatory authority.

      It can also be new acreage, obtained from the host government or its agent through a competitive licensing round. The term new should not be construed to mean unexplored. It may possibly be virgin territory, or it may have been explored previously, with less than commercial results at the time, and was returned to the Government. It could also have been the relinquished part of a block, i.e. still prospective, but handed back to the Government as part of a phased work program.

      The two acquisition methods, farming and earning can only be used when the existing holder (or partner) is seeking to dispose of a part of its interest in the acreage. A sale/purchase or a swap of a partial interest are the only methods an existing holder can use when seeking to dispose its interest (either in entirety or partially).

      1.3      Motives For Farming-Out

      1.      In countries where new acreage is dispensed by host governments in licensing rounds farmouts are a means of managing asset portfolios outside these bid rounds.

      2.      The cost-to-risk ratio of further exploration, appraisal or development of acreage may be significantly improved if the risks of the initial drilling can be transferred to, or shared with another party.

      3.      Allocated funds may not be sufficient to complete all the work one might wish to, or which one might be obliged to perform within a given timeframe.

      4.      Time pressure is also another driver, where acreage has to be drilled or relinquished (drill or drop). In these circumstances, there may be a very powerful argument in favor of bringing in another partner to share the load.

      5.      The seller lacks confidence. The prospects that have been identified on the acreage do not look very good. Perhaps another company will see things differently and may have enough confidence in its own interpretation of the acreage to drill a well.

      6.      The seller lacks expertise. The prospect may require deep-water drilling and completion abilities that the seller does not possess. It may be so environmentally sensitive that only a company with extensive public affairs skills could contemplate drilling. There are numerous similar circumstances, and in almost all cases, this farmout process will involve the seller ceding the operatorship to the buyer.

      7.      The seller and its partners lack cohesion. There is so much fighting and hostility in the technical and management committees that little gets achieved. A stymied group, say of two partners, say with 50% interest each may agree to farmout half of their interests, and hand over the operatorship, just to get some more action.

      8.      The seller may have more extensive infrastructure in the area (pipelines, a terminal, etc.) and may be keen to attract third-party tariff-paying users into these. Farming out second rank, but still attractive acreage in the vicinity may eventually result in a long term user who will have no choice but to pay the sellers tariff charges.

      9.      If the seller has production within the tax ring fence, and the buyer does not, then the seller may be able to gain a large monetary benefit from the abortive efforts of the buyer.

      10.      Strategic reasons – for example a large company that necessarily has high head office overheads, and needs higher reserves thresholds, may wish to sell all or part of their interests to a smaller company that may be more efficient in that particular locale.

      11.      The tax positions of the parties may differ

      12.      Some companies may want to capture additional value to a block by undertaking technical work to reduce the drilling risks, then farm out for a carry. This is a common practice for smaller E & P Companies who do not have the financial resources to complete a committed work program.

      13.      Farmin versus bidding takes some of the unknowns or risk out of acreage acquisition. i.e. if participating in a bid round one may not know if the bid will be successful, or the bid may be too high (winner’s curse). If farming in one already knows the terms/work programs, etc. Alternatively one may want to farmin once further technical work is complete, i.e. drilling risks minimized, quick turnaround, or shorter time investment capital tied up – may want to come in only months before the well is spudded.

      1.4      Motives For Farming-In

      1.      The buyer has money for exploration but no acreage.

      2.      The buyer has exploration knowledge that the seller lacks (maybe from nearby or analogous blocks).

      3.      The buyer has a particular core competency that the seller needs.

      4.      If the buyer has local infrastructure, it may be in a position to consummate attractive farmins using the implied threat that the seller on its own may encounter difficulty in accessing those facilities. Thus ownership of infrastructure can either be a motive to farm out or farm in!

      5.      Desire for operatorship.

      6.      Learning. In addition to increasing its technical knowledge, a company

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