Yours, Mine, and Ours--Documenting the Farmout Transaction
 Managing Exploration Risk
The business of exploring for oil and gas is unquestionably one of the most exciting businesses around. Many factors contribute to this excitement, but perhaps the greatest single factor is that the oil and gas explorationist's main competition is mother nature. From origination of the prospect idea, to drilling the initial well to test the idea, geologists, geophysicists, and engineers pool their collective talents in an effort to “outsmart” mother nature and get her to share some of the energy resources we need to sustain our world economy. Although technological advances have helped improve our industry's drilling success rate, the exploration business remains a challenging and sometimes cruel business that is not for the faint of heart.
Most exploration and production (E&P) companies attempt to manage this “exploration risk” in two ways. First, the companies hire the most talented people they can find and equip them with the most advanced exploration tools they can afford. Without a doubt, the key ingredient for success in the E&P business is having a creative group of “exploration-minded” people that work together as a team to generate exploration opportunities. [16-3] The second method E&P companies use to deal with exploration risk is to establish an exploration venture and share the risk with one or more other parties. This chapte
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