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.

BREAKING DOWN '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.

  1. Energy Derivatives

    A derivative instrument in which the underlying asset is based ...
  2. Commodity Swap

    A swap in which exchanged cash flows are dependent on the price ...
  3. Intercontinental Exchange - ICE

    A market based in Atlanta, Georgia that facilitates the electronic ...
  4. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  5. Limited Partnership - LP

    Two or more partners united to conduct a business jointly, and ...
  6. Capital Lease

    A lease considered to have the economic characteristics of asset ...
Related Articles
  1. Home & Auto

    Getting A Grip On The Cost Of Gas

    Feeling overwhelmed by rising oil prices? We offer some tips that will save you money.
  2. Home & Auto

    5 Investment Risks Created By Global Warming

    Climate-change deniers and believers alike would be wise to prepare for the worst.
  3. Active Trading

    Oil And Gas Industry Primer

    Before jumping into this hot sector, learn how these companies make their money.
  4. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  5. Active Trading

    Unearth Profits In Oil Exploration And Production

    Drill down into financial statements to tap into the right companies and let returns flow.
  6. Options & Futures

    The Biofuels Debate Heats Up

    Interest in these new energy sources is growing. Should you buy in?
  7. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  8. Economics

    Will Winter Affect the Price of Oil and Gas?

    Learn how heating oil and natural gas prices are affected during a harsh or mild winter and the EIA's prediction for heating consumption.
  9. Stock Analysis

    Deepwater Explorations That Had Profitable Results

    Learn how deepwater oil wells sometimes deliver large profits to the companies finding them, if the oil company drillers can overcome high fixed costs.
  10. Stock Analysis

    What Chevron Hopes to Find in its Exploration of the Great Australian Bight

    Learn about Chevron's agreements that allow the oil company to explore the Great Australian Bight and the state of current Australian oil projects.
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  3. Why do some oil refineries get tax exemptions?

    Oil refineries normally receive tax exemptions due to tax loopholes. The extracted fuel exemption, for example, one of the ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  6. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center