POLÍTICAS DE TIC’S

Most farmout agreements contain provisions requiring the farmee to give notice of its intention to abandon a well that it is drilling or operating, and allowing the farmor to elect to take over operations. The reason for aban- donment and takeover provisions is that commencement of drilling operations or production is a substantial potential benefit to the farmor, which the farmor does not want to lose because of premature abandonment by the farmee. Abandonment and takeover provisions give the farmor a second chance to drill or operate the farmed-out property.

The abandonment clause commonly provides that the farmee has the right to abandon, if the farmee gives notice of its intent to abandon.357

354. For example:

Assignee hereby assumes and agrees to comply with all obligations and covenants, express or implied, imposed upon the lessee in the herein above identified Leases or contained in any intermediate assignments thereof insofar as concerns the interests and premises included in this Partial Assignment, and agrees to indemnify and save harmless Assignor from any risk, liability or expense of whatsoever kind accruing thereunder from and after the effective date hereof.

355. A farmout may well be classified as a sublease because of the rights that the farmor retains. See Klein & Burke, supra note 3, at 486–88. If so, the farmor may remain liable to its original lessor for breach by the farmee on a theory of privity of estate despite the language found in most oil and gas leases relieving the lessee of liability to the lessor after assignment of its interest.

356. See supra text accompanying notes 259–62.

357. The following provisions of § 5.1 of the draft AAPL Form 635 farmout agreement are typical:

In the event any farmout well is completed as non-productive of oil or gas, or as one not capable of producing oil and/or gas in paying quantities or ceases production, farmee shall immediately give farmor written notice of the proposed plugging and abandonment. Farmor shall have thirty (30) days after receipt of such written notice within which to elect to take over the well for the purpose of conducting additional operations as it desires; except that if a drilling rig is on location, notice to plug and abandon may be given by telephone and farmor’s response shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays. In the event farmor fails to

When this approach is taken, the clause usually gives the farmor a specific period of time after receipt of notice within which to express its consent or to elect to take over. Consent is implied after the time has run.

The farmee should note carefully the timing and procedures set forth for notice, because failure to comply will likely result in liability.358 In addition, the farmee will prefer that the takeover provisions relieve it of liability for the cost of rig time and plugging. Also, the farmee will want payment for the value of salvageable equipment that it leaves in the hole or on the lease after a takeover by the farmor.359 The farmor must examine the notice provisions carefully to insure that it has adequate time to make a decision about taking over the well, and that it can man an operation it takes over within the time provided.

advise farmee of its respective election within the predescribed period of time, then such well shall be plugged and abandoned by farmee in accordance with the terms hereof. Farmor shall have the right to take over such well using so far as necessary, at farmor’s expense, the tools and workmen of farmee. Farmor shall pay reasonable salvage value of material and equipment in and on said well, less the cost of salvaging same and acquire said well for its own use and purposes.

The preceding language might not give the farmor the right to take over a well that the farmee abandoned before completion, for example, a well that the farmee abandoned under the escape provisions of the farmout agreement. The following language would avoid that limitation:

Neither the Earning Test Well nor any Substitute Well shall be abandoned without the prior written consent of farmor first had and obtained or without forty-eight (48) hours prior notice having been given by farmee to farmor. Farmor may elect within said forty-eight hour period to examine and make tests of said Earning Test Well or a Substitute Well at its sole cost and risk. Farmor may within said forty-eight hour period or prior to the conclusion of its tests, whichever occurs later, but in no event later than three days after its receipt of notice from farmee, elect to take over from the farmor, said Earning Test Well or a Substitute Well so examined . . . .

358. Cf. Gladys Belle Oil Co. v. Turner, 12 S.W.2d 847, 848–49 (Tex. Civ. App.— Austin 1929, writ ref’d) (oil company held liable for a failure to reassign lease as contract required). See infra text accompanying notes 362–65. Proof of damages would be difficult, since a well that the farmee decides to abandon probably has little demonstrable market value. Arguably, however, a court might measure the damage as the cost of drilling a well to the depth at which the farmee abandoned operations. See Fite v. Miller, 196 La. 876, 200 So. 285, 289–90 (1940); Ardizonne v. Archer, 72 Okla. 70, 178 P. 263, 265–66 (1919).