5. Asset Retirement Obligations

Asset retirement obligations associated with the retirement of tangible long-lived assets are 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 2015, we decreased our ARO on an overall basis primarily due to plug and abandonment work performed during 2015, partially offset by increases from accretion.  Revisions were basically flat as some service providers reduced their costs of goods and services, some service provider costs remained flat and some service provider costs estimates were increased, all of which were incorporated into our estimates.  In addition, revisions were made for scope changes and on the estimates of timing of when the work will be performed.  Liability increases from acquisitions and wells drilled were basically offset by reductions from dispositions.  

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.