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Scope

A farm-out is, in effect, a mechanism pursuant to which the owner of a participating interest in certain oil and gas assets (the Farmor) agrees to divest a percentage of its participating interest (the Assigned Interest) under a production sharing contract (the PSC) (or another host government agreement granting rights to Hydrocarbons), to a third party (the Farmee), but instead of a cash consideration typical in a traditional sale, in a farm-out, the consideration is likely to be a combination of cash and fulfilment of certain work program obligations. Farming out provides the Farmor an opportunity to bring in a partner not only to recover its past Costs invested in the project, or to share the financial burden going forward, but also to provide technical support and capabilities, which may not be otherwise available, as well as to share risk and potential uplift associated with an exploration asset.

A farm-out agreement (the FOA) incorporates many characteristics of a traditional sale and purchase agreement, such as limitations on liability, Pre-completion undertakings, warranties and indemnities and third-party