Volumetric Production Payments

6 Months Ended

Jun. 30, 2011

Volumetric Production Payments

Volumetric Production Payments

NOTE M.  Volumetric Production Payments

The Company's remaining VPP represents a limited-term overriding royalty interest in oil reserves that: (i) entitles the purchaser to receive 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 associated with the reserves, (iii) is nonrecourse to the Company (i.e., the purchaser's only recourse is to the reserves acquired), (iv) transfer title of the reserves to the purchaser and (v) allow the Company to retain the remaining reserves after the VPP's volumetric quantities have been delivered.

At the inception of the VPP agreement, the Company (i) removed the proved reserves associated with the VPP, (ii) recognized VPP proceeds as deferred revenue which are being amortized on a unit-of-production basis to oil revenues over the remaining term of the VPP, (iii) retained responsibility for 100 percent of the production costs and capital costs related to VPP interests and (iv) no longer recognizes production associated with the VPP volumes.

The following table provides information about changes in the deferred revenue carrying values of the Company's VPP for the six months ended June 30, 2011 (in thousands):

Deferred revenue at December 31, 2010	$	87,020
Less: 2011 amortization		(22,290	)
Deferred revenue at June 30, 2011	$	64,730

The remaining deferred revenue amounts will be recognized in oil revenues in the consolidated statements of operations as noted below, assuming the related VPP production volumes are delivered as scheduled (in thousands):

Remaining 2011	$	22,659
2012	$	42,071