Volumetric Production Payment (VPP)
What Is Volumetric Production Payment?
A Volumetric Production Payment (VPP) is a type of structured investment that includes the owner of an oil or gas interest selling or borrowing money against a specific volume of production associated with that field or property. The investor or lender gets a stated month to month quota - frequently in raw output, which is then marketed by the VPP buyer - or, a predefined percentage of the month to month production accomplished at the given property.
Buyers could incorporate investment banks, hedge funds, energy companies, and insurance companies.
Grasping Volumetric Production Payment
A VPP structure is some of the time built as part of a pre-trade financing (PFX) package. PFX happens when a financial organization progresses funds to a borrower in view of proven volume of orders from buyers. The borrower, in this case, the oil producer, normally requires the funding to create and supply the oil and gas. The VPP is then used to repay the borrowing under the PFX arrangement. The credit quality of PFX will in general be better than other lending on the grounds that the cash flow created from the VPP is utilized to repay the PFX ahead of different creditors.
The VPP buyer needs to contributes no time or capital to the real production of the final result. Notwithstanding, numerous investors in these types of interests will hedge their expected receivables (the volumes spread out in the contract) through the derivatives market to safeguard against commodity risk or in any case lock in the expected profits.
A VPP deal permits the seller to hold full ownership of the property while adapting a portion of their capital investment. This ability to "cash out" a portion of the value of an oil field, for instance, permits the producer to invest in capital redesigns or repurchase shares. In the case where the owner of an oil and gas interest sells a specific volume production, rather than borrowing against it, this money can be utilized to repay other debt.
VPP Deal Details
A VPP deal is normally set to lapse after a certain time span or after a predetermined aggregate total volume of the commodity has been delivered. A VPP interest is considered a non-operating asset, similar to an eminence payment or loan repayment system. Under the eminence payment structure, on the off chance that the producer can't meet the supply quota for a given month (or anything that schedule is utilized), the neglected portion will be compensated for in the next cycle, etc until the buyer is made financially whole. Under the loan repayment structure, inability to make a payment would be viewed as default.
Features
- The investors, or buyers of a VPP, will generally be financial institutions or probably energy companies who are ensuring future delivery of oil or gas.
- The sellers in a VPP are oilfield companies or drillers that are able to monetize their capital investment while holding ownership of their property.
- Volumetric production payments (VPPs) are a method for changing over a portion of oil or gas production into a cash flow stream for investors.
