Environmental liability and asset retirement obligations*

Abstract

Oil companies, partnerships and entities developed for the exploration and/or production of hydrocarbons typically invest for a reasonably certain period of time, with the assets projected to have little or no value at the end of their life cycle.

Historically, production facilities were decommissioned as cost effectively as possible, with limited consideration of the cost of this practice being factored into the initial costs or operating budgets, and the salvage value of the scrap metal was applied to cover the cost of the demolition.

Today, most oil and gas producers are required to account for the estimated future cost of dismantling and removing facilities and equipment, as well as restoring land to its previous condition. The estimated costs for future dismantling, removal and restoration are different to other costs associated with the acquisition and use of productive assets.

The impact of potential environmental expenses associated with these practices typically occurs after an asset has ceased production. Planning for environmental costs for asset retirement obligations (AROs) is ideally conducted during the asset’s operating life. This is so that compliance costs and other operating expenses are recorded consistently in conformance with accounting policies and regulations. Tentatively identified AROs include: asbestos, batteries, PCB transformers, underground or above ground storage tanks, well abandonment, waste impoundments, mercury and other components of an active producing facility.

Operators need to identify specific performance requirements that may impose obligations on their organisation. Federal, state and local requirements need be considered, as they apply to specific operating conditions.