Production payment interest definition
/What is a Production Payment Interest?
A production payment interest is the right to receive revenue from oil and gas production, where the right reverts back to the interest from which it was created after a certain amount of production volume or revenue is reached. An organization obtains a production payment interest when it purchases a percentage of the proved reserves of a field.
Advantages of a Production Payment Interest
A production payment interest is useful for the party purchasing it, since it provides a reasonably assured return on investment. It is also useful for the producer, who obtains up-front cash to pay from the production operation; this can reduce the producer’s need for other forms of funding, such as debt or an equity interest.
Accounting for a Production Payment Interest
A payment made to the holder of a production payment interest is recorded as it is received or becomes a receivable.