5. Asset Retirement Obligations

Pursuant to GAAP, an asset retirement obligation associated with the retirement of a tangible long-lived asset is required to be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset.  The cost of the tangible asset, including the initially recognized ARO, is depleted such that the cost of the ARO is recognized over the useful life of the asset.  The fair value of the ARO is measured using expected cash outflows associated with the ARO, discounted at our credit-adjusted risk-free rate when the liability is initially recorded.  Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.

The following is a reconciliation of our ARO liability (in thousands):

During 2014, we increased our ARO on an overall basis primarily due to revisions, acquisitions and accretion of discount.  Revisions increased ARO on a net basis primarily attributable to: a) increases at certain non-operated properties, b) regulation interpretations issued by the Bureau of Safety and Environmental Enforcement (“BSEE”), which increased the amount of work involved, c) revisions to third-party contractor estimated prices for certain work on wells and structures, d) revisions accelerating the timing of planned work for certain wells and e) revisions for certain wells that are taking longer to complete the plugging and abandonment work than previously estimated due to operational issues.  Increases related to acquisitions include the increase in our ownership interest at Fairway, the acquisition of the Woodside Properties and other minor acquisitions.  Partially offsetting these were decreases for the plug and abandonment work performed during the year and the disposition of certain properties.  

During 2013, we reduced our ARO on an overall basis primarily due to the plug and abandonment work performed during the year.  In addition, the disposition of certain properties, as described in Note 2, reduced our ARO.  The acquisition of the Callon Properties and drilling activity caused ARO to increase.  Revisions that increased ARO on a net basis primarily attributable to: a) regulation interpretations issued by the BSEE, which increased the amount of work involved, b) revisions to third-party contractor estimated prices for certain work on wells and structures, c) revisions accelerating the timing of planned work for certain wells and d) revisions for certain wells that took longer to complete the plugging and abandonment work than previously estimated due to operational issues.  In addition, increases were made for certain locations affected by Hurricane Ike and increases in estimates were made for certain non-operated properties.