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A farm out contract acts as a kind of property purchase contract whereby a seller (the “farmer”) agrees to transfer part (but not all) of his share of an upstream asset to the buyer (the “Farmee”), in exchange for the buyer agreeing to take (or finance) work obligations such as the acquisition of seismic data or drilling equipment. With respect to the oil and gas industry, the upstream “asset” that is transferred is generally an interest in a licence, a production-sharing contract or another concession granted by a government to a company to explore and produce oil and gas. A key issue with respect to the structure and negotiation of farm-out agreements is the date of the transfer of legal ownership to the farmer`s assets to the farm and the type of consideration granted by farmee in exchange for this shareholding in the asset. Just like a “Choose you own adventure” book, each farmout can have a completely different ending. If you are not careful in selecting and trading your set of options and alternatives, the end may not always be happy. With careful reflection and attention to detail, without losing sight of the whole, understanding the impact of any option and other option on the outcome of the other provisions, your story can end happily for both parties, which is the ultimate goal of a farmout — paving the way for future mutual cooperation in the joint operations of the project. The optional adjustment system was short in model-FOA 2019. While Article 3.8 provides for the establishment of the interim cost table and recognizes the potential for adjustment after completion, the article does not provide details on how such an adjustment should be prepared, calculated, paid for or resolved if it depends on the details of the trade agreement. The FOA 2019 model features a user-friendly format that has been improved to work with the 2012 AIPN Model JOA joint operating contract.
The new version contains more form and substance on the provisions relating to warranty, compensation and termination and offers new options and new alternatives to better adapt the user experience. If such an authorization is not obtained before the transfer of farmout interests, the transfer is usually cancelled and, in many cases, the issuing instrument is also terminated. The requirement to obtain government authorization for a transfer should be carefully considered by the parties. In some legal systems such as Nigeria, the conditional transfer agreement under a farmout system could even be seen as a violation of the government`s right to grant authorisation and jeopardize the financial instrument. Nevertheless, the FOA 2019 model is only a model – a starting point from which the parties can begin to develop their agreement. Model forms must be commercially and legally adapted for each project and jurisdiction in which the form is used. The FOA 2019 model contains optional provisions for audit fees and an adjustment based on the accounting date. The reference to the review of the article 3.7 common account refers to the audit provisions contained in a joint enterprise agreement, assuming that the JOA-TYPE AIPN test provisions would apply.
Where a joint enterprise agreement has not been reached or the joint enterprise agreement does not reflect the same conditions of joint verification as the JOA model, the parties must review the appropriate audit provisions.