What Is Volumetric Production Payment?
Let me explain what a Volumetric Production Payment, or VPP, really is. It's a structured investment where the owner of an oil or gas interest sells or borrows money against a specific volume of production from that field or property. As the investor or lender, you receive a stated monthly quota—often in raw output that you then market yourself—or a specified percentage of the monthly production from the property.
You might be an investment bank, hedge fund, energy company, or insurance company looking to buy into these deals.
Key Takeaways
Understand that VPPs are essentially a method to turn a portion of oil or gas production into a steady cash flow stream for investors. If you're the buyer, you're likely a financial institution or energy company securing future deliveries of oil or gas. On the seller side, these are oilfield companies or drillers who monetize their capital investments while keeping full ownership of their properties.
Understanding Volumetric Production Payment
A VPP can be part of a pre-export financing package, where a financial institution advances funds based on proven orders from buyers. Here, the oil producer borrows to produce and supply the oil and gas, then uses the VPP to repay that borrowing. This setup gives pre-export financing better credit quality because the VPP cash flow repays it before other creditors.
As the VPP buyer, you don't put in any time or capital for the actual production. But many investors like you will hedge your expected receivables—the volumes in the contract—through the derivatives market to guard against commodity risks or secure profits.
For the seller, a VPP lets you keep full ownership while cashing out some value from the oil field. You can use that money for capital upgrades, share repurchases, or, if it's a sale rather than a loan, to pay off other debts.
VPP Deal Details
These deals typically expire after a set time or once a specified total volume of the commodity is delivered. Consider a VPP interest as a non-operating asset, similar to a royalty payment or loan repayment. In the royalty structure, if the producer misses the monthly quota, the shortfall carries over to the next period until you're made whole financially. In the loan structure, missing a payment counts as a default.
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