What is a volumetric production payment?
Production volume payment (VPP) is a financial arrangement that usually occurs in the oil and gas industry. The property owner sells part of the future commodity production for preliminary cash payment. The buyer receives a fixed percentage of actual commodity production, determined monthly quantity or equivalent monetary value. The contract on the volume production of the payment agreement may expire after the specified length or when the agreed amount of the commodity or its value has been delivered to the buyer. Such an arrangement allows manufacturing companies to acquire capital and at the same time maintain a property share of real estate.
VPP is composed of working interests in one or more characteristics. The work interest is the right to use the property and obtain all production income after the payment of the license fees. In most cases, the owner of the employment interest raises the rights to the mineral from another party with the promise to pay license fees and accepts the full cost of development and operation. The non -operating interest may ownerhand over to investors in a bulky payment agreement.
As in other financing structures, the seller must deliver a specified amount of the commodity or its equivalent values within the set time frame. The limitation of real estate transfer may apply to the seller as well as the requirements for increased capital expenditure on real estate that operates debt. The seller is usually responsible only for operating costs, but also for all legal risks and potential obligations in the environment of real estate.
Common VPP investors include investment banks, energy companies or hedge funds. Investors receive a prevailing license interest in set properties that may include sites that are currently developing or developing. License fees interest provides investor Percentage Comodity Earned or Age Accepts get out of The Start their publicÉ, security costs for production, paid owner of work interest. Buyers continue to expose the risk of price fluctuations, but most investors in the volume production payment cover the risk related to the entry into the provision of commodity prices with other parties.
Investors into VPP can enter commodity exchange as a hedge against price fluctuations. This is often used in oil production, where the payment can be based on the average commodity price in a certain period than at the market price. Other energy derivatives such as options and futures contracts offer similar protection. However, the primary risk in agreement on payment payment is that the investment is based on the accuracy of the prognosis of third -party production.