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What is a farmout agreement in oil and gas?

Farmout agreements are common in the oil and gas industry. A farmout agreement is a contract in which an interest owner ( farmor ) agrees to assign interest to another party ( farmee ) in exchange for certain services. Once these services have been rendered, the farmee has earned what is known as an assignment.

How does a farmout agreement work?

A farmout is when a resource-producing property is outsourced for development to a third party or farmee. The farmee pays the owner (farmor) royalties on income generated from the outsourced activities. Farmouts are most common in natural resources exploration and extraction, such as with oil, gas, or minerals mining.