1.
n. [Oil and Gas Business]
A contractual agreement with an owner who holds a working interest in an
oil and gas lease to assign all or part of that interest to another party in exchange for fulfilling contractually specified conditions. The farmout agreement often stipulates that the other party must drill a well to a certain depth, at a specified location, within a certain time frame; furthermore, the well typically must be completed as a commercial producer to earn an
assignment. The assignor of the interest usually reserves a specified overriding
royalty interest, with the option to convert the
overriding royalty interest to a specified working interest upon
payout of drilling and
production expenses, otherwise known as a
back-in after payout (BIAPO).