Volumetric Production Payment - VPP

Definition of 'Volumetric Production Payment - VPP'


A type of structured investment that involves the owner of an oil and gas interest selling a specific volume production in that field or property. The investor receives a stated monthly quota – often in raw output, which is then marketed by the VPP buyer – or a specified percentage of the monthly production achieved at the given property.

A VPP deal is typically set to expire after a certain length of time or after a specified aggregate total volume of the commodity has been delivered. A VPP interest is considered a non-operating asset, akin to a royalty-payment system. If the producer can't meet the supply quota for a given month (or whatever schedule is used), the unmet portion will be made up for in the next cycle, and so on until the buyer is made financially whole.

Buyers could include investment banks, hedge funds, energy companies and insurance companies.

Investopedia explains 'Volumetric Production Payment - VPP'


The buyer does not have to contribute any time or capital to the actual production of the end product. However, many investors in these types of interests will hedge their expected receivables (the volumes laid out in the contract) via the derivatives market to protect against commodity risk or otherwise lock in the expected profits.

A VPP deal allows the seller to retain full ownership of the property while monetizing some of their capital investment. This ability to "cash out" some of the value of an oil field, for example, allows the seller to invest in capital upgrades, pay down debt or repurchase shares.

The VPP investor will typically perform strong due diligence both initially and on an ongoing basis, having inspections done of the site while constantly analyzing production reports to ensure that the contract's terms are being met.



comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific benchmark, such as a SPDR. Unlike actively managed ETFs, passive ETFs are not managed by a fund manager on a daily basis.
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
Trading Center