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HMRC internal manual

Oil Taxation Manual

PRT: unitisations and re-determinations - farm outs - outline

A disposal of all, or a part, of an interest in a production licence is often referred to as a farmout. Consideration received for such a disposal can consist of:

  1. Cash for the purchase of an individual participator’s licence interest(s) or
  2. The increasing interest party (farmer-in or farmee) undertaking a work programme at his own expense, e.g. drilling a further exploration or appraisal well on the block in question, for the benefit of all participators on the licence in question. In such a situation the increasing interest party would acquire a proportionate share of each of the other participators’ (reducing interest parties) interests or
  3. The increasing interest party agrees to bear part or all of one or more reducing interest party’s share(s) of expenditure on the licence. As part of the agreement the increasing interest party may also acquire a retained share of production until an aggregate amount has been received.

The consideration provided by the farmer-in may also include the grant to the farmer-out of:

  1. A right to receive a royalty - a royalty interest.
  2. A net profit interest - a payment out of production relating to the acquired interest.

The grant of such rights has no PRT effect. If a field is developed liability rests with the farmer-in as he is the participator who holds the licence which gives rise to the oil won. The farmer-in is, however, treated as having disposed of the oil to the farmer-out in a sale not at arms length - see OTA75\Sch3\Para6(2).