17. Contingencies

Apache Lawsuit

On December 15, 2014, Apache filed a lawsuit against the Company, Apache Deepwater, L.L.C. vs. W&T Offshore, Inc., alleging that W&T breached the joint operating agreement related to, among other things, the abandonment of three deepwater wells in the Mississippi Canyon area of the Gulf of Mexico.  A trial court judgment was rendered from the U.S. District Court for the Southern District of Texas on May 31, 2017 directing the Company to pay Apache $49.5 million including prejudgment interest, attorney's fees and costs.  We unsuccessfully appealed that judgment through a process ending with the denial of a writ of certiorari to the United States Supreme Court.  A deposit of $49.5 million we made in June of 2017 with the registry of the court was distributed during 2019 pursuant to an agreement with Apache.

Due to funds being distributed during 2019, amounts previously recorded of $49.5 million in Other assets (long-term) and $49.5 million recorded in Other liabilities (long-term) on the Consolidated Balance Sheet as of December 31, 2018 were reversed during 2019 and interest income of $1.9 million was recorded in Interest expense, net on the Consolidated Statements of Operations in 2019. 

Appeal with ONRR

In 2009, we recognized allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems.  In 2010, the ONRR audited our calculations and support related to this usage fee, and in 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken.  We recorded a reduction to other revenue in 2010 to reflect this disallowance with the offset to a liability reserve; however, we disagree with the position taken by the ONRR.  We filed an appeal with the ONRR, which was denied in May 2014.  On June 17, 2014, we filed an appeal with the Interior Board of Land Appeals (“IBLA”) under the DOI.  On January 27, 2017, the IBLA affirmed the decision of the ONRR requiring W&T to pay approximately $4.7 million in additional royalties. We filed a motion for reconsideration of the IBLA decision on March 27, 2017.  Based on a statutory deadline, we filed an appeal of the IBLA decision on July 25, 2017 in the U.S. District Court for the Eastern District of Louisiana.  We were required to post a bond in the amount of $7.2 million and cash collateral of $6.9 million in order to appeal the IBLA decision.  On December 4, 2018, the IBLA denied our motion for reconsideration.  On February 4, 2019, we filed our first amended complaint, and the government has filed its Answer in the Administrative Record.  On July 9, 2019, we filed an Objection to the Administrative Record and Motion to Supplement the Administrative Record, asking the court to order the government to file a complete privilege log with the record.  Following a hearing on July 31, 2019, the Court ordered the government to file a complete privilege log.  In an Order dated December 18, 2019, the court ordered the government to produce certain contracts subject to a protective order and to produce the remaining documents in dispute to the court for in camera review.  Ultimately, the court upheld the government’s assertion of privilege and the parties commenced briefing on the merits.  At this point, both parties have filed cross-motions for summary judgment and opposition briefs. W&T has filed a Reply in support of its Motion for Summary Judgment and the government has in turn filed its Reply brief.  With briefing now completed, we are waiting for the district court’s ruling on the merits.   In January 2020, the cash collateral in the amount of $6.9 million securing the appeal bond in this matter was released to us. In compliance with the ONRR’s request for W&T to increase the surety posted in the appeal, the penal sum of the bond posted is currently $8.2 million.

Royalties-In-Kind (“RIK”)

 Under a program of the Minerals Management Service (“MMS”) (a Department of Interior ("DOI") agency and predecessor to the ONRR), royalties must be paid “in-kind” rather than in value from federal leases in the program.  The MMS added to the RIK program our lease at the East Cameron 373 field beginning in November 2001, where in some months we over delivered volumes of natural gas and under delivered volumes of natural gas in other months for royalties owed.  The MMS elected to terminate receiving royalties in-kind in October 2008, causing the imbalance to become fixed for accounting purposes.  The MMS ordered us to pay an amount based on its interpretation of the program and its calculations of amounts owed.  We disagreed with MMS’s interpretations and calculations and filed an appeal with the IBLA, of which the IBLA ruled in MMS’ favor.  We filed an appeal with the District Court of the Western District of Louisiana, who assigned the case to a magistrate to review and issue a ruling, and the District Court upheld the magistrate’s ruling on May 29, 2018.  We filed an appeal on July 24, 2018.  Part of the ruling was in favor of our position and part was in favor of MMS’ position.  We appealed the ruling to the U.S. Fifth Circuit Court of Appeals and the government filed a cross-appeal.  The Fifth Circuit issued its ruling on December 23, 2019, holding that, while the DOI has statutory authority to switch the method of royalty payment from volumes ("in-kind") to cash ("in value"), the "cashout" methodology that the DOI ordered W&T to implement was unenforceable because that methodology was a "substantive rule" that the DOI adopted in violation of the Administrative Procedure Act.  In addition, the Fifth Circuit held that the DOI's claim was unlawfully inflated because DOI improperly failed to give W&T credit for all royalty volumes delivered. The Fifth Circuit remanded the case to the district court to implement the court's decision on appeal.  Based on the combination of (i) the DOI's concessions concerning the scope of W&T's liability (e.g., that W&T is only liable for its working interest share of the royalty volumes at issue), and (ii) the Fifth Circuit's ruling, we estimate that the value of the DOI's claim against W&T is no greater than $250,000 and have adjusted the liability reserve for this matter as of December 31, 2020 to such amount.  

Notices of Proposed Civil Penalty Assessment

During 2020 and 2019, we did not pay any civil penalties to the BSEE related to Incidents of Noncompliance (“INCs”) at various offshore locations.  In January 2021, we executed a Settlement Agreement with the Bureau of Safety and Environmental Enforcement (“BSEE”) which resolved nine pending civil penalties issued by BSEE. The civil penalties pertained to INCs issued by BSEE alleging regulatory non-compliance at separate offshore locations on various dates between July 2012 and January 2018, with the proposed civil penalty amounts totaling $7.7 million.  Under the Settlement Agreement, W&T will pay a total of $720,000 in three annual installments, with the first installment due in March 2021.  In addition, W&T committed to implement a Safety Improvement Plan with various deliverables due over a period ending in 2022.

Royalties – “Unbundling” Initiative

The ONRR has publicly announced an “unbundling” initiative to revise the methodology employed by producers in determining the appropriate allowances for transportation and processing costs that are permitted to be deducted in determining royalties under Federal oil and gas leases.  The ONRR’s initiative requires re-computing allowable transportation and processing costs using revised guidance from the ONRR going back 84 months for every gas processing plant that processed our gas. In the second quarter of 2015, pursuant to the initiative, we received requests from the ONRR for additional data regarding our transportation and processing allowances on natural gas production related to a specific processing plant. We also received a preliminary determination notice from the ONRR asserting that our allocation of certain processing costs and plant fuel use at another processing plant was not allowed as deductions in the determination of royalties owed under Federal oil and gas leases. We have submitted revised calculations covering certain plants and time periods to the ONRR. As of the filing date of this Form 10-K, we have not received a response from the ONRR related to our submissions.  These open ONRR unbundling reviews, and any further similar reviews, could ultimately result in an order for payment of additional royalties under our Federal oil and gas leases for current and prior periods.  During 2020, 2019 and 2018, we paid $0.2 million, $0.4 million and $0.6 million, respectively, of additional royalties and expect to pay more in the future. We are not able to determine the range of any additional royalties or if such amounts would be material.

Supplemental Bonding Requirements by the BOEM

The BOEM requires that lessees demonstrate financial strength and reliability according to its regulations or provide acceptable financial assurances to satisfy lease obligations, including decommissioning activities on the OCS.  As of the filing date of this Form 10-K, the Company is in compliance with its financial assurance obligations to the BOEM and has no outstanding BOEM orders related to assurance obligations.  W&T and other offshore Gulf of Mexico producers may in the ordinary course receive future demands for financial assurances from the BOEM as the BOEM continues to reevaluate its requirements for financial assurances.

Surety Bond Issuers’ Collateral Requirements

The issuers of surety bonds in some cases have requested and received additional collateral related to surety bonds for plugging and abandonment activities. We may be required to post collateral at any time pursuant to the terms of our agreement with various sureties under our existing bonds, if they so demand at their discretion. We did not receive any such collateral demands from surety bond providers during 2020 or 2019.

Other Claims

We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business.  In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties.  In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold.  We are also subject to federal and state administrative proceedings conducted in the ordinary course of business including matters related to alleged royalty underpayments on certain federal-owned properties.  Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.