To reduce these risks, Kosmos “closes” its surface to third parties such as Hess (HES), Tullow Oil and BP. This will help develop these offshore blocks and generate cash flow for all participants. A farm like Hess is committed to developing the field and in turn has the right to sell oil produced there. Kosmos, as a farmer, earns a license payment from Hess for the supply of the surface and natural resource. While the farm out agreement may contain a clause granting the farmer the right to manage concession interest, this requires both careful definition and agreement between the farmer and the farm. However, the Joint Operating Agreement (JAA) plays a key role in safeguarding the interests of the parties and serves as compensation for the farm-out agreement. In these cases, “the JOA is settling the relationship between the two parties,” rockhopper Exploration Egypt country manager Samir Abdelmoaty said in an exclusive interview with Egypt Oil-Gas. In essence, the JOA is a complementary phase for agriculture in a concession area which, if not formulated correctly, can lead to serious problems. In the joint operating agreement, the vote of interest between the partners is a cornerstone of the success of the farm out process.
A company may decide to enter into a farmout agreement with a third party if it wishes to maintain its interest in an exploration block or drilling surface, but wishes to reduce its risk or does not have the money to carry out the necessary transactions for those interests. Farm agreements give producers a chance to win that they would not otherwise have access to. Government approval may be required before a farmout agreement can be reached. Farm out agreements are used in the oil and gas industry around the world. They take their name from historical practices in the agricultural sector, where agricultural work would give a person a legal or beneficial interest to that country. Farm-out agreements are often subject to English law, New York law or the jurisdictional laws in which the assets are located. Farmout agreements are very popular with small oil and gas producers who own or own oil deposits, which are expensive or difficult to develop. One company that frequently uses this type of arrangement is Kosmos Energy (NYSE: KOS).