By: Nigel Bankes
PDF Version: Relationship Between a Farmout Agreement and a Joint Operating Agreement
Case Commented On: Apache North Sea Ltd v Euroil Exploration Ltd [2019] EWHC 3241 (Comm) (England and Wales)
Under the terms of a farmout agreement, the farmor, the holder of a working interest in an oil and gas property (i.e. a lease, licence, concession or other form of agreement), affords the farmee an opportunity to earn a share of that working interest in return for performing a work obligation – typically the drilling of a well. In some cases (sometimes termed a farmout and participation agreement) the farmee earns an interest by contributing a share of the costs of a drilling operation to be conducted by the farmor itself rather than the farmee. It is standard practice in either case to attach a joint operating agreement (JOA) to the farmout agreement to address the legal relationship between the farmor and farmee (and perhaps other parties) once the farmee has earned its interest. It is crucial to do this since, once the farmee has earned, the farmor and farmee will then be co-owners of the lease or licence etc, i.e. they will be holders of an undivided interest in that property as tenants in common. But until the farmee earns, the parties are not co-owners. One issue that the parties need to address as clearly as possible in these arrangements is the applicability of the JOA before the farmee has earned. Perhaps a working hypothesis might be that the JOA is of no application until the point of earning since the JOA is fundamentally concerned with co-ownership. However, there is frequently a lot of detail in the JOA that the parties may want to incorporate or make reference to during earning and this may be especially the case where the farmout is better characterized as a farmout and participation agreement rather than a pure farmout where the earning well is drilled at the sole cost, risk and expense of the farmee.