FARMOUT AGREEMENT
(Providing for Multiple Wells with Production Required to Earn an Assignment)
FARMOR: (Name and Address)
FARMEE: (Name and Address)
NAME OF AREA/PROSPECT: This Farmout Agreement ("Agreement") is between Farmor and Farmee, shall be
effective on the date it is executed by Farmee as provided in Section 9.
1. EXHIBITS .
The following exhibits, if checked, are attached and shall be considered part of this
Agreement:
[ ]Exhibit A - General Terms and Conditions, which shall apply to this
Agreement except to the extent they are in conflict with the body of this
Agreement.
[ ] Exhibit B-1 - Descriptions of lands covered by this Agreement ("Farmout
Lands").
[ ] Exhibit B-2 - Lease Schedule describing oil and gas leases subject to this
Agreement.
[ ] Exhibit C - Accounting Procedures, used in calculating payout of the
Earning Well provided in Section 2.
[ ] Exhibit D - Tax Partnership Agreement.
[ ]Exhibit E - Operating Agreement.
[ ]Exhibit F - Geological Requirements.
[ ]Exhibit G - (Other Exhibits)
2. INITIAL EARNING WELL.
2.1 Well Specifications . Farmee shall drill a well, (the "Initial Earning Well"),
strictly in compliance with the following specifications:
(a) Location: (Describe Location)
(b) Spudding Deadline: (Specify Date)
(c) Required Depth: (Specify Depth)
(d) Completion/Plugging Deadline: (State Date)
2.2 Earned Assignment . As soon as practicable after Farmor is satisfied Farmee has
complied with all of its obligations under this Agreement with regard to the compl etion of the
Initial Earning Well as a producer of oil and/or gas in paying quantities, including t he foregoing
specifications, Farmor shall deliver to Farmee the following (check one or both assignments):
[ ] A drillsite acreage assignment as described in Section 2.3.
[ ] An additional acreage assignment as described in Section 2.4.
2.3 Drillsite Acreage Assignment . If a drillsite acreage assignment is earned under
Section 2.2 above, the assignment shall cover[ ] all [ ] an undivided ____%
of Farmor's right, title and interest in the Farmout Lands, subject to the reserved overridi ng
royalty interest described in Section 4 below, and subject to the following area and/or dept h
limitations (check appropriate limitations):
Area [ ] Limited to the "drilling unit" for the Initial Earning Well as defined
in paragraph 3.2 of Exhibit A; or
[ ] Limited to the following area: (Describe Area)
Depth [ ] Limited to the interval between the surface of the ground and 100
feet below the stratigraphic equivalent of the total depth drilled in
the Initial Earning Well; or
[ ] Limited to the following interval: (Describe Interval)
2.4 Additional Acreage Assignment . If an additional acreage assignment is earned
under Section 2.2 above, the assignment shall cover
[ ] all [ ] an undivided ____%
of Farmor's right, title and interest in the Farmout Lands not covered by the drillsite a creage
assignment described above, subject to the following area and/or depth limitations (c heck
appropriate limitations):
Area [ ] No area limitation.
[ ] Limited to the following area: (Describe Area)
Depth [ ] Limited to the interval between the surface of the ground and 100
feet below the stratigraphic equivalent of the total depth drilled in
the Initial Earning Well; or
[ ] Limited to the following interval: (Describe Interval)
3. ADDITIONAL EARNING WELLS 3.1 Farmee's Option . If the Initial Earning Well is completed as a producer of oil
and/or gas in paying quantities but Farmee does not earn all of the Farmout Lands, or as a dry
hole, Farmee shall have the additional right but not the obligation to (check appropria te
alternative):
[ ] Drill one Additional Earning Well.
[ ] Drill one or more Additional Earning Wells as a continuousoptional drilling program.
3.2 Well Specifications . Farmee shall drill each Additional Earning Well strictly in
accordance with the following well specifications:
(a) Location: (Describe Location)
(b) Spudding Deadline: (Specify Date)
(c) Required Depth: (Specify Depth)
(d) Completion/Plugging Deadline: (State Date)
3.3 Earned Assignments . As soon as practicable after Farmor is satisfied Farmee
has complied with all of its obligations under this Agreement with regard to completion of an
Additional Earning Well as a producer of oil and/or gas in paying quantities, including the
foregoing well specifications, Farmor shall deliver to Farmee the following (check one or bot h
assignments):
[ ] A drillsite acreage assignment as described in Section 3.4.
[ ] An additional acreage assignment as described in Section 3.5.
3.4 Drillsite Acreage Assignment . If a drillsite acreage assignment is earned under
Section 3.3 above, such assignment shall cover
[ ] all [ ] an undivided ____%
of Farmor's right, title and interest in the Farmout Lands, subject to the reserved overridi ng
royalty interest described in Section 4 below and subject to the following area and/ or depth
limitations (check appropriate limitations):
Area [ ] Limited to the "drilling unit" for the Initial Earning Well as defined
in paragraph 3.2 of Exhibit A; or
[ ] Limited to the following area: (Describe Area)
Depth [ ] Limited to the interval between the surface of the ground and 100
feet below the stratigraphic equivalent of the total depth drilled in
the Initial Earning Well; or
[ ] Limited to the following interval: (Describe Interval)
3.5 Additional Acreage Assignment . If an outside acreage assignment is earned
under Section 3.3 above, the assignment shall cover
[ ] all [ ] an undivided ____%
of Farmor's right, title and interest in the Farmout Lands not covered by the drillsite a creage
assignment described in Section 3.4 above, subject to the following area and/or depth limi tations
(check appropriate limitations):
Area [ ] No area limitation.
[ ] Limited to the following area: (Describe Area)
Depth [ ] Limited to the interval between the surface of the ground and 100
feet below the stratigraphic equivalent of the total depth drilled in
the Earning Well; or
[ ] Limited to the following interval: (Describe Interval)
4. RESERVED OVERRIDING ROYALTY INTEREST. 4.1 Reservation . In each drillsite acreage assignment by Farmor, Farmor shall
reserve an overriding royalty interest in production from the appropriate Earning Well equal to
(check appropriate alternative):
[ ] ____% of production if the Earning Well is an oil well, and ____% of
production if the Earning Well is a gas well, reduced in proportion to the assigned
interest and calculated in the manner provided in Exhibit A; or
[ ] the amount by which ____% of production, reduced in proportion to the
assigned interest, exceeds the sum of all royalties, overriding royalties and other
payments out of production which burden the assigned interest at the time the
drillsite acreage assignment is made.
4.2 Conversion. Check appropriate alternative:
[ ] Upon "payout" of each Earning Well, as defined in paragraph 4.3 of Exhibit A,
Farmor's reserved overriding royalty interest shall be convertible, at Farmor's
election, to an undivided working interest equal to ____% of the working interest
covered by the appropriate drillsite acreage assignment; or
[ ] Farmor's reserved overriding royalty interest shall not be convertible to a working interest.
5. OPERATING AGREEMENT .
If an Operating Agreement is attached as Exhibit E to this Agreement, it shal l be
executed at the time this Agreement is executed and shall become effecti ve if and when Farmor
and Farmee become co-owners of working interest in any of the Farmout Lands. The Operating
Agreement shall govern all operations on jointly-owned Farmout Lands, but shall be subject t o
this Agreement so that in the event of any conflict between the Operating Agreeme nt and this
Agreement, this Agreement shall be the governing Agreement.
6. DELAY RENTALS .
Until a lease included in the Farmout Lands is assigned in whole or in part to Farm ee,
Farmor shall be responsible for paying any and all delay rentals required to maintain the lease(s)
in effect and, within 30 days after receipt of an invoice from Farmor, Farmee shall prom ptly
reimburse Farmor for ____% of the delay rentals paid by Farmor. If Farmee fails to pay Farmor,
the balance of any unpaid delay rental invoice shall bear interest monthly at t he rate of 18% per
annum or the maximum contract rate permitted by the applicable usury laws in t he state in which
the Farmout Lands are located, whichever is the lesser, plus attorney's fees, court cost s and any
other costs in connection with the collection of the unpaid balance. After the lea se(s) has been
assigned in whole or in part to Farmee, the responsibility for making delay rental payme nts shall
belong to
[ ] Farmor [ ] Farmee
subject to ____% reimbursement by the other party upon receipt of an invoice as described
above. The party responsible for paying rentals shall not be liable to the other party for any loss
resulting from a good faith effort to properly make such payments.
7. NOTICES AND WELL INFORMATION .
7.1 General . All well data, information and notices to be given to Farmor as
provided in this Agreement shall be given as follows:
Farmor: (Name and Address) Farmee: (Name and Address)
Farmor or Farmee may change their address at any time by furnishing a written notic e of change
of address to the other party.
8. AGREEMENTS AFFECTING FARMOUT LANDS .
8.1 Farmee Bound . Except as may be otherwise provided in this Agreement, Farmee
shall be bound by any agreement which affects the Farmout Lands at the time of assi gnment to
Farmee. Farmor shall not be liable for its good faith failure to disclose the exist ence or effect of
any such agreement to Farmee, either in this Agreement or otherwise.
8.2 Other Agreements . Subject to the disclaimer of liability contained in Section 8.1
above, Farmor believes in good faith that the only other agreements affecting any interest to be
assigned to Farmee are the oil and gas leases described in Exhibit B and the following
agreements:
(Description of Other Agreements. If there are no Other Agreements, state “None.”)
9. EXECUTION. Duplicate originals of this Agreement are being signed. This Agreement
shall be null and void at Farmor's option if one of the duplicate originals of this Agreeme nt is not
signed by Farmee and returned to Farmor within ____ days after the date shown below Farmor's
signature.
FARMOR FARMEE
By: By:
Title: Title:
Date: Date:
EXHIBIT A
TO FARMOUT AGREEMENT
GENERAL TERMS AND CONDITIONS
TABLE OF CONTENTS
Paragraph Page
1. Title and Access to Farmout Lands
1.1 Title Information
1.2 Access by Farmee and Farmor
2. Conduct of Operations 2.1 Cost and Risk
2.2 Performance Standards
2.3 Federal Contract Requirements
2.4 Lease Obligations
2.5 Well Information
2.6 Confidentiality
2.7 Substitute Wells
2.8 Takeover by Farmor
2.9 Additional Wells After Earning Well
3. Earned Assignment 3.1 Scope of Assignment
3.2 Drilling Unit
3.3 Default by Farmee
4. Reserved Overriding Royalty Interest 4.1 Calculation and Payment
4.2 Monthly Statements
4.3 Conversion of Overriding Royalty Interest
4.4 Audits
5. Liability and Insurance 5.1 Relationship of Parties
5.2 Farmee's Indemnity
5.3 Required Insurance Coverage
5.4 Proof of Coverage
6. Option to Purchase or Process Production 6.1 Oil Production
6.2 Gas Production
6.3 Gas Processing
7. Assignments, Encumbrances and Restrictions
8. Reassignment Rights of Farmor 8.1 Termination or Cancellation of Leases
8.2 Abandonment of Wells
9. Renewals and Extensions
10. Term of Farmout Agreement
11. Miscellaneous 11.1 Taxes
11.2 Income Tax Provisions
11.3 Payments by Farmor
11.4 Division of Proceeds
11.5 Furnishing DataGENERAL TERMS AND CONDITIONS
1. Titles and Access to Farmout Lands .
1.1 Title Information. On written request by Farmee, Farmor shall make available to
Farmee copies of all title opinions, abstracts of title, and other title informa tion in Farmor's
possession with respect to the Farmout Lands. Providing such items shall not be construed as a
warranty or representation by Farmor of title or ownership. Any curative work or additional titl e
examination required by Farmee shall be conducted by Farmee at its sole cost and risk. On
request, Farmee shall provide Farmor with a copy of all curative work, title information, and title
opinions resulting from any additional title examinations conducted by Farmee.
1.2 Access by Farmee and Farmor . To the extent Farmor can authorize it, Farmee
and its contractors and subcontractors shall be entitled to exercise all of Farmor's rights of
ingress and egress pertaining to the Farmout Lands for the purpose of conducting operations.
Farmor shall advise Farmee of any unusual limitations or restrictions on ingress or egress, known
to Farmor, and Farmee and its contractors and subcontractors shall comply with such limita tions
or restrictions. During Farmee's operations Farmor and Farmor's representatives shall have
access at all times to the well-site, including the derrick floor, for the purpose of observation. All
information requested by Farmor concerning operations shall be promptly furnished by Farmee.
2. Conduct of Operations .
2.1 Cost and Risk. All operations conducted by Farmee shall be at Farmee's sole cost
and risk, and subject to the indemnity provisions of paragraph 5.2 below.
2.2 Performance Standards . All of Farmee's operations shall be conducted in a
diligent and workmanlike manner, and in accordance with all applicable federal, sta te and local
laws, regulations, and orders. Whether or not the Earning Well must be completed as a producer
of oil and/or gas in order to earn an assignment, Farmee shall use its best efforts, in ac cordance
with good oil and gas practice, to complete the well as a producer of oil and/or gas in paying
quantities. Farmee shall conduct such coring, logging, testing, fracing, and acidizing operati ons
as Farmor may reasonably request or as a prudent operator would conduct under the same or
similar circumstances. If the well cannot reasonably be completed as a producer of oil and/or
gas, Farmee shall promptly plug the well and perform all necessary surface restoration work.
Time is of the essence in Farmee's performance of all undertakings provided for in the
Agreement.
2.3 Federal Contract Requirements . If applicable, Farmee agrees to comply with the
requirements of all applicable Executive Orders governing Federal contractors, as well a s all
related rules, regulations and orders, and any amendments or additions of or to those rules and
orders. Farmee additionally agrees to supply Farmor all certificates required pursuant to any
applicable rules, regulations, and orders.
2.4 Lease Obligations . Except as otherwise provided in the body of the Farmout
Agreement, Farmee shall at its sole cost, risk, and expense comply with all of the express and
implied covenants and other obligations of the oil and gas leases covering the Farmout L ands,
including the payment of royalties, shut-in royalties, and delay rentals, and the cost of any
renewals or extensions of the leases.
2.5 Well Information . During Farmee's operations, Farmee shall promptly furnish
Farmor the following information pertaining to the Earning Well and any other well drill ed by
Farmee:
(a) Written notice of the exact time and date on which the well is spudded.
(b) A daily drilling report showing all formations encountered and the
depths at which those formations were encountered during the immediately preceding day, a nd
the well operations conducted during the immediately preceding day.(c) Written reports on all cuttings and cores taken in the well, along with
representative samples of the cuttings and cores, if requested by Farmor.
(d) Reasonable advance notice of any production tests, pressure tests, cores,
and logs to be run in the well so that Farmor may witness the operations. Written report of such
operations, when they are completed, shall be furnished to Farmor.
(e) Copies of all reports and other forms filed with any federal, state, or
local governmental authority concerning the well.
(f) A complete copy of the driller's log and a complete copy of all electrical
logs, on a scale of not less than 2 inches per 100 feet, from the bottom of the surface c asing to
the total depth of the well.
(g) Copies of all fluid analyses and other reports or information obtained
with respect to the well.
(h) Any other information specifically required by Farmor as part of this
Farmout Agreement.
2.6 Confidentiality . Without Farmor's prior written consent, Farmee shall not divulge
information obtained from Farmee's operations under the terms of this Agreement to any party
other than Farmor, any party owning an interest in the well, and the appropriate governmental
authority.
2.7 Substitute Wells . If Farmee has failed to earn an assignment under the terms of
this Agreement, either (i) because the original Earning Well failed to reac h the required depth as
a result of mechanical problems or impenetrable strata or other conditions in the hol e which
make further drilling impracticable, under generally accepted oil field practic es; or (ii) because
the original Earning Well was drilled to the required depth but it is not capable of producing in
paying quantities, Farmee shall have the option, but not the obligation, to drill one or more
substitute wells subject to the following provisions:
(a) Farmee shall give Farmor written notice describing the status of the well
and stating whether or not Farmee elects to drill a substitute well. This notice shall be given
while the drilling rig or completion unit is on the well, or within 10 days after its re lease. Failure
to timely make such an election shall be deemed to be an election by Farmee not to drill a
substitute well.
(b) If Farmee elects to drill a substitute well, Farmor shall advise Farmee
within 10 days after receipt of Farmee's notice, or within 72 hours if the rig is on location, to
either plug the original well or turn it over to Farmor as provided in paragraph 2.8 below, and t o
proceed with the substitute well as provided in paragraph 2.7(d) below.
(c) If Farmee elects not to drill a substitute well, or if Farmee has waived it s
right to do so as provided in paragraph 2.7(a) above, Farmor shall advise Farmee within 10 days
after receipt of Farmee's notice, or within 72 hours if the rig is on location, whether or not
Farmor elects to take over the well as provided in paragraph 2.8 below. If Farmor elects not to
take over the well or fails to make an election, Farmee shall promptly plug and abandon the well
and restore the surface. In either event, Farmee shall have no right to drill a substi tute well in
order to earn an assignment.
(d) Any substitute well drilled by Farmee shall be spudded within 30 days
after Farmee's election to drill it, at a mutually acceptable locati on, and the well shall be drilled,
tested, and completed or plugged and abandoned in accordance with all of the requirement s
specified for the original Earning Well, and with the same consequences. The substitut e well
shall be considered as the Earning Well for all purposes of this Agreement.
2.8 Takeover by Farmor . If Farmor elects to take over a well, the effective date of the
takeover shall be 72 hours after the date of Farmor's election to do so or when Farmor takes
actual custody of the well, whichever is earlier. If Farmor elects to takeover a well it shall own
Farmee's interest in the well and the related equipment, along with any and all interest Farmee
owns (or has a right to earn under other contracts or agreements) in the drilling unit for the well
taken over, excluding any other producing wells and related equipment in the drilling unit, and
excluding any depth intervals or formations which would not have been earned under this
Agreement. As soon as practicable after Farmor takes over the well, Farmee shall make an
assignment to Farmor, as may be necessary to evidence the foregoing, at which time Fa rmor
shall reimburse Farmee for the estimated salvage value of Farmee's salvable equipm ent in and on
the well, less estimated salvage costs. Farmee shall have no further rights or obliga tions under
this Agreement, except Farmee shall be liable for all actions which occurred pri or to the effective
date of the takeover.
2.9 Additional Wells After Earning Well . For the purpose of this paragraph, the term
"Earned Acreage" means that portion of the Farmout Lands, if any, in which Farmee has e arned
all of Farmor's interest, subject to an overriding royalty interest retained by Farmor in produc tion
from the Earning Well. The term "Additional Well" means each additional well Farmee drills or
participates in drilling on Earned Acreage or on the Earning Well's drilling unit aft er completion
of the Earning Well. As to each such Additional Well the following provisions shall apply:
(a) If Farmor's overriding royalty interest in the Earning Well is not
convertible at payout to a working interest as described in paragraph 4.3 below, or if the
overriding royalty interest was convertible but Farmor elected at payout not to convert, that
overriding royalty interest shall apply, without conversion rights, to the Additional Well i n the
same manner as that interest applies to the Earning Well.
(b) If Farmor's overriding royalty interest in the Earning Well is convertible
to a working interest as described in paragraph 4.3 below, but the Earning Well has not yet
reached payout, Farmee shall notify Farmor in writing of its intention to drill or parti cipate in
drilling the Additional Well at least 60 days before such drilling commences. Withi n 45 days
after receipt of such notice, Farmor shall advise Farmee in writing of Farmor's elec tion either: (i)
to have its overriding royalty interest, with conversion rights at payout, apply to the Addit ional
Well in the same manner (but with separate payout accounts) as the interest appli es to the
Earning Well; or, (ii) to participate as a working interest owner in the Additional Well from the
commencement of operations.
Farmor's election and the resulting consequences (including the calculation of
payout) shall apply separately to each Additional Well. If Farmor elects to part icipate in the
Additional Well as a working interest owner, Farmee shall promptly reassign to Farmor a ll of the
interest Farmor would otherwise have been entitled to receive upon payout of the Earni ng Well,
except: (i) Farmee's interest in the Earning Well itself and all equipment a ttributable to that well;
(ii) Farmee's interest in any previously drilled Additional Well (and equipment attribut able to
that well) in which Farmor elected an overriding royalty with conversion rights, but which has
not yet reached payout; and, (iii) Farmee's interests in any previously drilled Additional Well
(and related equipment) in which Farmor elected an overriding royalty with conversion rights,
and which has reached payout, but Farmor has not converted its overriding royalty interest to a
working interest. Reassignments by Farmee shall be free and clear of all royalties, overri ding
royalties, and other payments out of production, and all claims, liabilities, and other
encumbrances except those in existence as of the effective date of this Agreeme nt. If Farmor
elects to participate in the Additional Well as a working interest owner, as be tween Farmor and
Farmee, all operations shall be governed by the Operating Agreement provided for in the body of
this Agreement.
3. Earned Assignment.
3.1 Scope of Assignment . Any assignment of interest earned by Farmee shall be
subject to all of the provisions of the Agreement and all its Exhibits, whether or not a ny of the
provisions are recited in the assignment. Farmor shall retain all rights and intere sts not expressly
assigned to Farmee. Farmor expressly retains the right to use all or any part of the assigne d
Farmout Lands to explore, develop, and operate the Farmout Lands and other lands not assigned
to Farmee. The assignments shall be without warranty of title, express or implied, but the
assigned interest shall be free and clear of all royalties, overriding royalties and ot her such
payments out of production, except those in existence as of the effective date of the Agreement,
and any overriding royalty to be reserved by Farmor.
3.2 Drilling Unit . Whenever an assignment relates to the "drilling unit" for the
Earning Well, the term "drilling unit" is deemed to mean the area within the surface boundaries
of the drilling unit, spacing unit or proration unit, as the case may be, established or prescribed as
of the date of the Agreement by field rules or special order of the appropriate regulatory
authority for the objective reservoir to be tested or the reservoir in which the Ea rning Well is
completed, if other than the objective reservoir. In the absence of field rules or spe cial order, the
drilling unit shall be 160 acres if the Earning Well is completed as a gas wel l, and 40 acres if the
Earning Well is completed as an oil well, or is not completed as a producer of either oil or gas in
paying quantities. However, if the Earning Well is completed as a producer in a re servoir for
which a larger unit is subsequently established by field rules or special order within 120 days
after completion, the larger unit shall be considered the drilling unit for the Earning Well and any
previous assignment earned by Farmee shall be supplemented accordingly. For the purpose of
this Farmout Agreement, the meanings of the terms "oil well" and "gas well" shall be as defined
by law or by the appropriate regulatory authority. In the absence of such definitions, an oil wel l
shall be a well with an initial gas-oil ratio of less than 100,000 cubic feet per barrel, and a gas
well shall be a well with an initial gas-oil ratio of 100,000 cubic feet or more per barrel, based on
a 24-hour production test conducted by Farmee, and witnessed by Farmor, under normal
producing conditions and using standard lease separator facilities or equivalent testing
equipment.
3.3 Default by Farmee . If Farmee fails to spud the Earning Well within the deadline
established in this Agreement, this Farmout Agreement shall automatically termi nate without
notice, effective as of the date of the deadline. If Farmee defaults in the ti mely and proper
performance of any other obligation, Farmor shall have the right to terminate this Agreeme nt by
giving notice of termination to Farmee. Upon termination, Farmee shall have no further rights
except rights already earned, and, in addition to any other available legal or equi table remedies,
Farmor may elect to take over, pursuant to paragraph 2.8 above, any well which has not yet
satisfied the earning requirements of this Agreement.
4. Reserved Overriding Royalty Interest .
4.1 Calculation and Payment. Any overriding royalty interest reserved by Farmor in
an assignment of interest to Farmee shall be based on the volume of oil, gas, and other minerals
produced and saved from the Earning Well, reduced in proportion to the interest assigned. At
Farmor's option, exercised by written notice to Farmee, the overriding royalty interest shal l be
delivered in kind into Farmor's tanks or pipeline as produced, or paid monthly on the basis of the
gross value of production during the preceding calendar month. For the purpose of this Farmout
Agreement, "gross value" means the gross proceeds actually received by Farmee in an arm's
length sale of production, or, in the absence of an arm's length sale, the prevailing market value
of the production of the wellhead when produced. The overriding royalty interest shall be in
addition to any other royalty, overriding royalty interest, and payment out of production and free
and clear of all costs except applicable production or severance taxes and federal excise taxes.
4.2 Monthly Statements . If Farmor is granted the right to convert its overriding
royalty interest to a working interest, each overriding royalty interest payment by Farmee shall
be accompanied by a statement showing cumulatively, and for the month covered by the
statement, the following information in form and substance acceptable to Farmor:
(a) The Farmee's costs, which are the costs incurred by Farmee in drilling,
testing, reworking, completing, equipping, and operating the Earning Well as calculate d in
accordance with the accounting procedures provided for in "Exhibit C" to the Agreement, i nsofar
as those costs are attributable to the interest assigned to Farmee under this Agreement.
(b) The Farmee's revenue, which is the gross value of production as defined
in paragraph 4.1 above, less: (i) applicable production or severance taxes and any federal exci se
taxes; (ii) all royalties, overriding royalties, and other payments out of production which, a s of
the effective date of this Agreement, burden the interest assigned to Farmee; and, (i ii) the
overriding royalty interest reserved by Farmor. Where Farmor has taken its overriding royalty
interest in kind, the calculation of farmout revenue shall be made as though the ove rriding
royalty interest had been paid on the basis of the gross value of production, as defined above.4.3 Conversion of Overriding Royalty Interest . If and when the Farmee's revenue
equals the Farmee's costs, as shown by Farmee's monthly statements, the Earning Well shall be
considered as having achieved "payout" status. If Farmor is granted the right to convert its
reserved overriding royalty interest to a working interest, the Farmor may exercise that right by
written notice to Farmee within 60 days after receipt of Farmee's written advice to Farmor stating
that payout status has been achieved, accompanied by Farmee's monthly statements support ing
that advice. Within that 60 day period Farmee shall provide Farmor all pertinent we ll production
history and most recent test data, if any, and Farmor shall have the right to exerci se its
conversion privilege within 30 days after its receipt of all that data. Upon receipt of Farmor's
conversion notice, Farmee shall promptly reassign to Farmor the working interest Farmor is
entitled to receive, including an equivalent interest in the Earning Well a nd the equipment and all
subsequent production effective as of 7:00 a.m. of the day following the date of payout.
Farmor's overriding royalty shall be deemed to be extinguished. The reassignment of Farmor's
working interest shall be without warranty of title, express or implied, free and clear of all
royalties, overriding royalties, and other payments out of production, and all claims, li abilities
and other encumbrances except those in existence as of the effective date of this Agre ement.
This conversion of overriding royalty interest option shall apply in like manner to any other we ll
drilled on the Farmout Lands by Farmee in which Farmor has reserved a conversion option.
4.4 Audits . Upon written notice to Farmee, Farmor may, during normal business
hours, audit Farmee's books and records relating to overriding royalty payments and/or the
calculation of payout. Such audit rights may be exercised at any time while ove rriding royalties
are payable and for a period of 24 months after payout status has been achieved, despite a n
earlier termination of this Farmout Agreement.
5. Liability and Insurance .
5.1 Relationship of Parties. In performing its obligations, Farmee shall be an
independent contractor and not the agent of Farmor. Nothing in this Agreement shall be
construed as creating a partnership or otherwise establishing joint or collective liabil ity. The
relationship of the parties for federal and state income tax purposes shall be as se t forth in
Exhibit D to this Agreement (Tax Partnership Agreement). If no Exhibit D is attached t o this
Agreement, the relationship of the parties for federal and state income tax purposes sha ll be as
set forth in paragraph 11.2 below, and shall be effective from and after the effective date of this
Agreement.
5.2 Farmee's Indemnity . Farmee shall indemnify and hold harmless Farmor and its
employees and agents from all claims, demands, losses, and liabilities of every kind a nd
character arising out of Farmee's performance or failure to perform under this Agreement, or the
acts of or failure to act by Farmee's employees, agents, contractors and/or subcontractors.
5.3 Required Insurance Coverage . At all times while Farmee has the right to earn an
assignment of interest or is conducting operations on the Farmout Lands, Farmee shall mai ntain,
at its sole cost, the following insurance coverage for its operations:
(a) Worker's Compensation Insurance and Employer's Liability Insurance
with such limits as are specified by law in the jurisdiction in which the Farmout Lands are
located.
(b) Comprehensive General Public Liability Insurance, including
Contractual Liability coverage, with a combined single limit of $____ for bodily injury and
property damage.
(c) Automobile Liability Insurance with the same limits as prescribed above
for Comprehensive General Public Liability Insurance.
5.4 Proof of Coverage . Prior to the commencement of operations, Farmee shall
furnish Farmor one or more certificates signed by the insurance carrier or carriers showing, to
Farmor's satisfaction, that the required insurance coverage is in force and stating that the
coverage shall not be canceled or materially altered without at least 10 da ys advance written
notice to Farmor. A cancellation or material alteration, if not accompanied by new insurance
coverage satisfactory to Farmor, shall constitute a default by Farmee under paragraph 3.3 above.
Each certificate shall also contain a waiver by the insurance carrier of any right to be subrogated
to the rights of any claimant against Farmor or Farmor's employees and agents, except that the
carrier shall be subrogated to the rights of Farmee against Farmor with respect to any risk
expressly assumed by Farmor.
6. Option to Purchase or Process Production .
6.1 Oil Production. Farmor shall have a continuing option to purchase Farmee's share
of oil and liquid hydrocarbons produced and saved from the Farmout Lands through standard
lease separator facilities, to the extent the production is attributable to the interest assigned to
Farmee. The option may be exercised by Farmor at any time and from time to time while
production continues, by giving written notice to Farmee not less than 30 days before the date on
which Farmor's purchases are to commence. The price paid by Farmor for the production shall
be equal to the prevailing wellhead market price then being paid in the same field for production
of the same or similar grade and gravity, or if there is no prevailing price being paid in the same
field, the prevailing price being paid in the nearest field. Farmor may terminate its purchases by
giving written notice to Farmee not less than 30 days before the date of termination.
6.2 Gas Production . Farmor shall have the option to purchase Farmee's share of gas,
including casinghead gas, produced and saved from the Farmout Lands through standard lease
separator facilities, to the extent the production is attributable to the int erest assigned to Farmee.
When Farmee's gas becomes available for purchase initially, and at any time the reafter, Farmee
shall advise Farmor in writing and Farmor shall have 60 days thereafter to give Farmee writ ten
notice of Farmor's election to purchase the gas at the prevailing wellhead market price paid for
gas of the same or similar quantity and quality in the same field (or if there i s no price then
prevailing in the same field, then in the nearest field in which there is a pre vailing price) pursuant
to comparable purchase contracts entered into on the same or nearest preceding date as the date
of Farmor's election to purchase gas.
6.3 Gas Processing . If Farmor does not elect to purchase Farmee's share of gas under
paragraph 6.2 above, Farmor shall nevertheless have a continuing option to process Farmee's
share of gas, including casinghead gas, produced and saved through standard lease separator
facilities, to the extent the gas is attributable to the interest assigned t o Farmee, all in accordance
with the following provisions: (a) Farmor may exercise its option at any time, before or after
commencement of gas production, by giving written notice to Farmee not less than 60 days
before Farmor's processing is to begin. Any agreement made by Farmee for the sale of its gas
shall be made expressly subject to Farmor's processing option, whether or not exercised by
Farmor.
(b) If Farmor exercises its processing option, Farmor shall have the right to
remove any or all commercially liquefiable hydrocarbons from the gas before or after delive ry to
Farmee's gas purchaser, and to redeliver the residue gas to Farmee or its gas purchaser at the
tailgate of the gas processing plant.
(c) Farmor shall own all liquefiable hydrocarbons removed from the gas in
processing and shall bear all of the costs and risks thereof, but Farmor shall reimburse Farmee , or
its gas purchaser, for the BTU reduction caused by such processing, using either of the following
reimbursement methods, from time to time, at Farmor's sole discretion:
(i) The reimbursement shall be a cash payment equal to the BTU
reduction caused by processing, times the net price per BTU which Farmee would have
received for the gas under its gas sales contract if no such processing had occurred; or,
(ii) The reimbursement shall be a volume of residue gas having a
total BTU content equal to the BTU reduction caused by processing, delivered in kind to
Farmee, or its gas purchaser at the tailgate of the plant.
(d) Farmor's processing of gas and any in-kind reimbursement for the
processing shall not reduce the BTU content of gas delivered to Farmee or its gas purcha ser
below 950 BTU's per standard cubic foot, nor shall the pressure of such gas be reduced by more
than 50 pounds between the point it is delivered to Farmor for processing and the point it is
redelivered to Farmee or its gas purchaser.
7. Assignments, Encumbrances and Restrictions .
This Agreement shall be binding on the respective heirs, successors, and assigns of
Farmor and Farmee. Farmor may freely assign or encumber its interest at any time, but Farmee
shall not assign or encumber its interest without the prior written consent of Farmor, which
consent shall not be unreasonably withhold. Any attempt by Farmee to assign or encumber its
interest without Farmor's prior written consent shall constitute a default under paragraph 3.3
above. When an assignment or encumbrance is made, Farmee shall promptly furnish a copy to
Farmor. Any rights of reverter and the rights to reassignment retained by Farmor shall be
superior to all liens, encumbrances, debts, judgments, claims, overriding royalty interests, and
production payment burdens and other obligations created or incurred by Farmee and asserted
against any oil and gas lease that is the subject of this Agreement. Any interest in any oil and
gas lease included in the Farmout Lands reverting to Farmor or reassigned to Farmor shall be
free and clear of all such liens, encumbrances, debts, judgments, claims, overriding royalt y
interests, and production payment burdens and other obligations. Farmee agrees not to use, for
any promotion purposes or for the purpose of selling stock in any organization, and not to
advertise in any manner, Farmee's relationship with Farmor arising out of this Agreement.
8. Reassignment Rights of Farmor .
8.1 Termination or Cancellation of Leases . If at any time after an interest in any oil
and gas lease is assigned to Farmee, and Farmee elects to surrender its interest in the lease, or
allow the lease to expire by its terms, or subjects the lease to possible cance llation for failure to
comply with any express or implied covenant, Farmee shall notify Farmor in writing at l east 60
days before the intended date of surrender or expiration, or as soon as practicable in the e vent of
possible cancellation, and Farmor shall then have 30 days to notify Farmee in writing of
Farmor's election to reacquire such interest. If Farmor elects to reacquire the i nterest, Farmee
shall promptly assign it to Farmor free and clear of all royalties, overriding royalties interests,
and other payments out of production and any other lease burden, except those in existence as of
the effective date of this Agreement and except those to which Farmor has consented. Upon
such assignment, Farmor shall reimburse Farmee for Farmee's share of the estimated salvage
value of any salvable equipment in and on any wells covered by the assignment, less est imated
salvage costs. Farmor's failure to notify Farmee in writing shall be deemed an electi on to not
reacquire the interest.
8.2 Abandonment of Wells . Farmee shall not plug and abandon any Earning Well or
Additional Well drilled without giving Farmor written notice at least 30 days before the intended
plugging date. Farmor shall then have 15 days to notify Farmee in writing of Farmor's ele ction
to take over the well. Upon giving that notice, Farmor shall own Farmee's interest in the well
and the related equipment, along with any and all interest Farmee owns (or has a ri ght to earn
under other contracts or agreements) in the drilling unit for the well taken over, excludi ng any
other producing wells and related equipment in the drilling unit, and excluding any dept h
intervals or formations which would not have been earned under this Agreement. As soon as
practicable after that time, Farmee shall make such assignment to Farmor as may be necessary to
evidence the foregoing. At that time, Farmor shall reimburse Farmee for the estimat ed salvage
value of Farmee's salvable equipment in and on the well, less estimated salvage costs. Farmee
shall have no further rights or obligations under this Agreement, except Farmee shall be l iable
for all actions which occurred prior to the effective date of the takeover. Farmor's failure to
notify Farmee in writing shall be deemed an election by Farmor to not take over the well.
If Farmor's election to take over results in a diversity of ownership giving rise to a
commingling of production with uncommon ownership, in Farmee's storage tanks, Farmor shall
be responsible for and shall bear all cost of setting and connecting tanks and pipeline s for
production from the well taken over by Farmor.
9. Renewals and Extensions .
If any oil and gas lease included in the Farmout Lands is extended or renewed in whole
or in part by either party or their agents, during the term of the Agreement, this Agreement shall
apply to such extension or renewal to the same extent as it would have applied to t he original
lease. For this purpose, any new lease covering an interest originally included in t he Farmout
Lands and acquired within 90 days after the termination of the original lease shall be considered
an extension or renewal.
10. Term of Farmout Agreement .
The Farmout Agreement shall be in effect until such time as: (i) Farmee's rights to earn
an assignment of interest have expired without Farmee having earned an assignment; (ii) Fa rmee
has earned an assignment of interest and neither Farmee nor Farmor have any further rights or
obligations under the Agreement; or, (iii) this Agreement terminates pursuant to paragra ph 3.3
above as a consequence of Farmee's default.
11. Miscellaneous .
11.1 Taxes. Farmee shall pay when due all taxes, including, but not limited to, federal
excise taxes, and state and local ad valorem, occupation, severance, excise, privil ege or
regulatory taxes, now or hereafter lawfully assessed against Farmee's interest in the Farmout
Lands or the production attributable to Farmee's interest.
11.2 Income Tax Provisions . If this Agreement is or may be construed as creating a
partnership for federal or state income tax purposes, then, unless the parties expressly provide for
a tax partnership in this Agreement and Exhibit D to this Agreement, Farmee is authorized and
directed to execute and file on behalf of all parties an election to be exc luded from application of
the provisions of Subchapter K, Chapter 1, Subtitle A of the current United States Internal
Revenue Code, and any amendments, or to be excluded from application of any comparable
provisions of state law. Each party agrees to furnish such additional evidence of that ele ction as
may be necessary or proper.
11.3 Payments by Farmor . Farmor shall have the right to pay rentals, royalties, or
other payments which may become due under any oil and gas lease included in the Farmout
Lands, and Farmee agrees to reimburse Farmor for the full amount of those payments which
Farmor is not obligated to bear. Farmee shall pay interest on paid sums effective as of the date
of the payment by Farmor at the interest rate provided in the body of this Agreement.
11.4 Division of Proceeds . To make proper division of the proceeds from the sale of oil
and gas production from the Farmout Lands, Farmor shall have the right, but not the obligation,
to collect such proceeds. After deducting the overriding royalty or working interest to which it is
entitled, Farmor shall pay to Farmee its portion of the proceeds thus collected.
11.5 Furnishing Data . Each party has the affirmative duty to timely supply adequate
data to the other party when such data is necessary to comply with Federal, State or local
reporting requirements.
EXHIBIT B-1
TO FARMOUT AGREEMENT
DESCRIPTION OF FARMOUT LANDS
The Farmout Lands covered by the Farmout Agreement and in which Farmee shall have
the right to earn an Assignment under the terms of the Farmout Agreement are described a s
follows (check appropriate limitations):
Area: [ ] All lands covered by the oil and gas leases described on Exhibit B-2.
[ ] Limited to the following area: (Describe area)
Depth : [ ] All depths.
[ ] Limited to the following interval: (Describe depth)
EXHIBIT B-2
TO FARMOUT AGREEMENT
LEASE SCHEDULE
Lease No: County:
State:
Lessor:
Lessee:
Lands Covered:
Recording Information:
Lease No: County:
State:
Lessor:
Lessee:
Lands Covered:
Recording Information:
Lease No: County:
State:
Lessor:
Lessee:
Lands Covered:
Recording Information:
EXHIBIT C
TO FARMOUT AGREEMENT
ACCOUNTING PROCEDURES
The Accounting Procedure used in calculating payout of an Earning Well under the
Farmout Agreement shall be the same Accounting Procedure attached as Exhibit "C" to the
Operating Agreement, which is attached as Exhibit "E" to this Farmout Agreement.
EXHIBIT D
TO FARMOUT AGREEMENT
TAX PARTNERSHIP AGREEMENT
EXHIBIT E
TO FARMOUT AGREEMENT
OPERATING AGREEMENT
EXHIBIT F
TO FARMOUT AGREEMENT
GEOLOGICAL REQUIREMENTS
