RE: Change13 Jul 2019 15:36
Structuring a farm-in opportunity
Where an upstream company is farming out its interests in a concession, the portion of the risk of uncertainty of outcome around the prospectivity of the opportunity, corresponding to the interest in the concession which is being farmed out passes from the farming-out party to the farming-in party. The balance struck between the parties to a farm-out agreement will reflect the point, relative to the schematic shown above, at which the sale and purchase of the concession interest is effected.
The level of uncertainty of outcome in respect of a concession will colour the economics of the farming-in party’s bid to farm-in, and the fiscal terms which it is prepared to offer as a condition of doing so. An under-appraised asset will generally result in a lower level of consideration being payable; and a reduced level of uncertainty of outcome relating to a concession (through a greater level of appraisal of that concession) should result in a higher level of consideration being paid as a condition of entry to the concession. Similarly, the degree of upside potential attached to a concession will condition a farming-out party’s expectations as to the value it can expect to achieve from divesting part of its interest in that concession. An appraised asset which shows potential may increase the expectations of the farming-out party whereas a concession interest entering the decommissioning and abandonment will offer little upside potential, consequently reducing the headline level of consideration that a farming-out party will expect to achieve from that interest.
The farming-in party will be keen to de-risk its investment in the concession through the amount of consideration which it pays, and the manner of the payment of that consideration to the farming-out party. The precise formulation adopted in a particular farm-out agreement will depend on the negotiating strength of the parties. Some of the ways in which the parties may try to manipulate the consideration structure to their benefit are examined in the paragraphs below.
https://www.lexology.com/library/detail.aspx?g=da423e16-5bba-4db1-9535-2e5867b5ccc6
Sign In
Follow the stocks
