Note 7 - Asset Retirement Obligation

6 Months Ended

Jun. 30, 2013

Asset Retirement Obligation Disclosure [Abstract]

Asset Retirement Obligation Disclosure [Text Block]

Note 7 — Asset Retirement Obligation

An obligation related to the future plug and abandonment of the producing oil wells in the Corvina and Albacora fields and the Pampa la Gallina well in Block XIX has been recorded in accordance with the provisions of ASC Topic 410, “Asset Retirement and Environmental Obligations.” ASC 410-20 requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted using the units of production method. Should either the estimated life or the estimated abandonment costs of a property change materially upon the Company’s periodic review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using the Company’s credit-adjusted-risk-free rate. The carrying value of the ARO is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost.

Activity related to the Company’s ARO for the six months ended June 30, 2013 and the year ended December 31, 2012 is as follows:

	June 30, 2013		December 31, 2012
	(in thousands)
ARO as of the beginning of the period	$	2,708	$	1,304
Liabilities settled during period		-		(2,093	)
Accretion expense		114		89
Revisions in estimates during period		-		3,408
ARO as of the end of the period	$	2,822	$	2,708

The 2012 revisions in estimates are due to the shift in timing of cash flows associated with expected payment of the ARO liability.  As the Company revised the estimated costs in 2012, the present value of the liabilities was adjusted and, as a result, the Company adjusted both the liability and capitalized asset by approximately $3.4 million, in accordance with ASC Topic 410.

Liabilities settled in 2012 include $2.1 million related to the sale of a 49% participating interest in Block Z-1.