Chesapeake Energy 2015 Annual Report Download - page 133

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Volumetric Production Payments
From time to time, we have sold certain of our producing assets located in more mature producing regions through
the sale of VPPs. A VPP is a limited-term overriding royalty interest in oil and natural gas reserves that (i) entitles the
purchaser to receive scheduled production volumes over a period of time from specific lease interests; (ii) is free and
clear of all associated future production costs and capital expenditures; (iii) is nonrecourse to the seller (i.e., the
purchaser’s only recourse is to the reserves acquired); (iv) transfers title of the reserves to the purchaser; and (v) allows
the seller to retain all production beyond the specified volumes, if any, after the scheduled production volumes have
been delivered. For all of our VPP transactions, we novated to each of the respective VPP buyers hedges that covered
all VPP volumes sold. If contractually scheduled volumes exceed the actual volumes produced from the VPP wellbores
that are attributable to the ORRI conveyed, either the shortfall will be made up from future production from these
wellbores (or, at our option, from our retained interest in the wellbores) through an adjustment mechanism, or the initial
term of the VPP will be extended until all scheduled volumes, to the extent produced, are delivered from the VPP
wellbores to the VPP buyer. We retain drilling rights on the properties below currently producing intervals and outside
of producing wellbores.
As the operator of the properties from which the VPP volumes have been sold, we bear the cost of producing
the reserves attributable to these interests, which we include as a component of production expenses and production
taxes in our consolidated statements of operations in the periods these costs are incurred. As with all non-expense-
bearing royalty interests, volumes conveyed in a VPP transaction are excluded from our estimated proved reserves;
however, the estimated production expenses and taxes associated with VPP volumes expected to be delivered in
future periods are included as a reduction of the future net cash flows attributable to our proved reserves for purposes
of determining our full cost ceiling test for impairment purposes and in determining our standardized measure. Pursuant
to SEC guidelines, the estimates used for purposes of determining the cost center ceiling and the standardized measure
are based on current costs. Our commitment to bear the costs on any future production of VPP volumes is not reflected
as a liability on our balance sheet. The costs that will apply in the future will depend on the actual production volumes
as well as the production costs and taxes in effect during the periods in which the production actually occurs, which
could differ materially from our current and historical costs, and production may not occur at the times or in the quantities
projected, or at all.
For accounting purposes, cash proceeds from the sale of VPPs were reflected as a reduction of oil and natural
gas properties with no gain or loss recognized, and our proved reserves were reduced accordingly. We have also
committed to purchase natural gas and liquids associated with our VPP transactions. Production purchased under
these arrangements is based on market prices at the time of production, and the purchased natural gas and liquids
are resold at market prices.
As of December 31, 2015, our outstanding VPPs consisted of the following:
Volume Sold
VPP # Date of VPP Location Proceeds Oil Natural
Gas NGL Total
($ in millions) (mmbbl) (bcf) (mmbbl) (bcfe)
10 March 2012 Anadarko Basin Granite
Wash $ 744 3.0 87 9.2 160
9 May 2011 Mid-Continent 853 1.7 138 4.8 177
4 December 2008 Anadarko and Arkoma
Basins 412 0.5 95 — 98
3 August 2008 Anadarko Basin 600 — 93 — 93
2 May 2008 Texas, Oklahoma and
Kansas 622 — 94 — 94
1 December 2007 Kentucky and West
Virginia 1,100 — 208 — 208
$ 4,331 5.2 715 14.0 830