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Volumetric Production Payment, or VPP, is a type of forward contract used by oil and gas companies to receive payment for their expected future production before the oil and gas is actually produced. It is a mutually beneficial arrangement that allows oilfield companies to access needed capital, while allowing the investor to obtain a future stream of income that is tied to the commodity prices of oil and gas.
In the VPP arrangement, the investor pays a lump sum to the oil and gas producer in exchange for a fixed amount of oil or gas production. This amount is usually predetermined, and is usually a multiple of the current monthly production rate. For example, if a producer is currently producing 20 barrels of oil per month, the investor may agree to buy five times that amount or 100 barrels of oil, at the same price per barrel. The payment from the investor is called a volumetric production payment, as it is based on a specific quantity (volume) of production in the future.
The investor then enjoys the benefits of a guaranteed volume of production, at a set price, over a specific length of time, likely 5 to 10 years. Meanwhile, the oil and gas producer uses the lump sum to invest in new production equipment and other improvement projects. This type of financing frees up an oil and gas company’s cash flow, while providing a steady and predictable stream of income.
A VPP introduces less risk to the two parties involved. The investor is insured against rising oil and gas prices, and accommodates the current market risk while the producer is protected from price volatility and can benefit from rising prices. Furthermore, the producer also benefits from having a steady stream of income as they can reinvest the funds in their business.
Overall, VPPs represent a unique and innovative financing arrangement between a producer and investor, allowing for greater liquidity on both sides and reducing the risks of price swings. It is particularly appealing to smaller and mid-sized producers who have limited access to capital, providing them with a secure cash flow and allows them to avoid speculative investments.
In the VPP arrangement, the investor pays a lump sum to the oil and gas producer in exchange for a fixed amount of oil or gas production. This amount is usually predetermined, and is usually a multiple of the current monthly production rate. For example, if a producer is currently producing 20 barrels of oil per month, the investor may agree to buy five times that amount or 100 barrels of oil, at the same price per barrel. The payment from the investor is called a volumetric production payment, as it is based on a specific quantity (volume) of production in the future.
The investor then enjoys the benefits of a guaranteed volume of production, at a set price, over a specific length of time, likely 5 to 10 years. Meanwhile, the oil and gas producer uses the lump sum to invest in new production equipment and other improvement projects. This type of financing frees up an oil and gas company’s cash flow, while providing a steady and predictable stream of income.
A VPP introduces less risk to the two parties involved. The investor is insured against rising oil and gas prices, and accommodates the current market risk while the producer is protected from price volatility and can benefit from rising prices. Furthermore, the producer also benefits from having a steady stream of income as they can reinvest the funds in their business.
Overall, VPPs represent a unique and innovative financing arrangement between a producer and investor, allowing for greater liquidity on both sides and reducing the risks of price swings. It is particularly appealing to smaller and mid-sized producers who have limited access to capital, providing them with a secure cash flow and allows them to avoid speculative investments.