How Are You Transferring Your Interest? Farm Out Agreements vs. Upstream Sale & Purchase Agreements
Eduardo G. Pereira and Aaron Koenck, LL.M. 
The upstream oil and gas industry has several different contractual agreements. These are designed to accomplish specific tasks in the parties' often expensive and complicated endeavors to produce and sell oil and gas. Transferring rights and obligations are usually done through either a Farm-out Agreement (FOA) or an Upstream Sale and Purchase Agreement/ Purchase and Sale Agreement (SPA/PSA). Both of these agreements, jointly referred to here as Transferring Agreements (TA), have the goal of minimizing risks and converting acreage into cash flow.
What is the purpose of TAs?
Transferring Agreements are used to transfer ownership of certain oil and gas assets or stock in a company that has these assets. The upstream TA focuses on the exploration and production of hydrocarbons activities. On the other hand, midstream TAs concentrate on the transportation of oil and gas and other associated activities.
Simply stated, the TA is an agreement that contains the terms and conditions of a particular transaction and each party's contractual obligations arising out of the deal. In many ways, the TA is a standard contract in which complexity depends on the complexity of the object of the contract. Like standard contracts, it includes the terms necessary to complete the contract, such as the purchase price and a closing date. Consideration, as required in common law contracts, might be given in the form of cash, work, debt or shares. In the upstream business environment, it is most often cash or work. Because of the complexity and value of these transactions, TAs often contain several negotiated protections for the parties involved while providing a legal framework to complete the sale of assets or company stock. Apart from the primary considerations discussed above, this agreement will typically contain provisions that outline representations, warranties, indemnities, restrictive covenants, condition precedents, completion documents, dispute resolution, governing law and confidentiality, among others. Some of these are “boiler plate” provisions. While all of these provisions are important to understand, we will highlight the warranties, indemnities, and conditions precedent provisions here.
Warranties are statements of facts made by a seller in the TA relating to aspects of the assets or acreage being sold to the buyer. If a warranty subsequently proves to be untrue and the value of the company is reduced, the buyer may have a claim for breach of warranty. There is often a materiality condition to reduce potential post-closing litigation. Further, either party may agree to indemnify the other party for certain risks if they manifest into a payable liability lastly. In contrast, the parties can agree to simultaneously sign to complete a deal there way reason to condition an obligation on an act or condition becoming a reality before action is required by another party. This is a condition precedent and is very important in understanding farm-out agreements below. There are several condition precedents that may be seen in Upstream TAs. These may include (1) a party securing financing for the deal, (2) regulatory approval to assign that acreage, and (3) possibly antitrust approval and (4) board approval. These special provisions all have the goal of limiting both business and legal risks for parties involved in the transaction. Next, we will turn our attention to what is often called a sister agreement of the SPA/PSA and FOA.
How are these agreements the same?
These agreements are similar in both their provisions and objectives. As alluded to before, these agreements both seek to transfer interest in an acreage and/or target company to another party. Motives, such as a need for cash, lack of expertise, and/or risk reductions are common to both agreements. Furthermore, they generally contain the same provisions such as definitions, consideration, obligations of the parties, confidentiality, representations, warranties, indemnity, dispute resolution and governing law. All of these are added to reduce or limit transactional risks. Both will even likely contain conditions precedent for the deal to finalize the deal.
How do these agreements differ?
Although they are fairly similar it is possible to argue that they have minor distinctions (at least from practical point of view). Firstly, consideration is typically given by cash under a SPA while a FOA’s consideration is commonly via work commitments and/or payments directly with the relevant host government even though some upfront cash payment may occur. Secondly, the retained interest might differ as well. Typically, SPAs lead to an entire divestment of the asset(s) while FOAs tend to deal with partial divestment. Thirdly, timing might present another distinction. Typically, SPAs entail a transfer of interest upon completion date while FOA might be able to assign the interest upon government approval signature even though it can be reverted if completion does not materialize. Lastly, the timing of assignment might vary as well. Typically, a FOA’s might occur during the exploration phase while the SPA tends to occur later on. Finally, possibly the main distinction is the fact that a FOA is commonly developed for an asset transfer while SPAs are mostly developed for a corporate transfer. Nevertheless, it is possible to design FOAs and SPAs with similar terms and conditions that make such distinctions quite subtle.
The Farm-Out Agreement and Sale and Purchase Agreement are indeed sister agreements. They seek to monetize acreage through the transfer to another party that is presumably willing to develop that acreage and contain many of the same provisions. However, distinction between them might be fairly minor as both agreements could be designed in a similar manner. Nevertheless, the main possible distinction is the fact that in FOAs focus is the asset and in SPAs the target is the company along with its assets.
 This article is based on Pereira G. E., Lewis J. M., “Conditions Precedent in Farmout Agreements – An Overview”, International Review of Law, Volume 2018, Issue 2&3. For a more in depth discussion on this topic please refer to this source and the sources cited within.