5. Asset Retirement Obligations

Pursuant to the Asset Retirement and Environmental Obligations topic of the Codification, 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).

Each year (or more often if conditions warrant) we review and, to the extent necessary, revise our ARO estimates. During 2011, we reduced our ARO by $60.0 million for the plug and abandonment work performed during the year (including $23.0 million to plug and abandon wells and facilities damaged by Hurricane Ike). Offsetting this decrease were the acquisitions of properties, including the Yellow Rose Properties and the Fairway Properties, which increased our obligations by $8.2 million. In addition, revisions were made related to Hurricane Ike, which increased the liability by $4.7 million. Other estimates were increased by $19.2 million primarily attributable to changes in estimates for non-operated properties and accelerating the expected timing of performing the work.

During 2010, we reduced our ARO by $87.2 million for the plug and abandonment work performed during the year (including $62.9 million to plug and abandon wells and facilities damaged by Hurricane Ike). Offsetting this decrease were the acquisitions of properties, including the properties from Total and Shell, which increased our obligations by $24.5 million. In addition, revisions were made related to Hurricane Ike which increased the liability by $42.0 million and there was an $18.7 million increase related to a change in regulation, which accelerated the decommissioning of wells and platforms. Other estimates were increased by $20.4 million primarily due to an increase in the scope of work and time required to complete the work for non-operated and operated properties and changes to estimates in useful lives.