Legal Definitions - farmout agreement

A farmout agreement is a contract in the oil and gas industry where the owner of an oil-and-gas lease (the farmor) agrees to assign a portion of the lease to another party (the farmee) in exchange for drilling and testing operations on the lease. The farmor benefits by either securing production or obtaining an interest in production without costs, while the farmee gains access to acreage that is not otherwise available or at a lower cost. This agreement can also keep people and equipment employed.

For example, if a company owns an oil-and-gas lease but does not have the resources to drill and test the area, they can enter into a farmout agreement with another company that has the resources. The second company will perform the drilling and testing operations and, in return, will receive a portion of the lease.