Asset Retirement Obligation

9 Months Ended

Sep. 30, 2016

8. ASSET RETIREMENT OBLIGATION

We recognize the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it is incurred if a reasonable estimate of fair value can be made. Each period, we accrete the ARO to its then present value. The associated asset retirement cost (“ARC”) is capitalized as part of the carrying amount of our oil and natural gas properties, equipment and facilities. Subsequently, the ARC is depreciated using a systematic and rational method over the asset’s useful life. The AROs recorded by us relate to the plugging and abandonment of oil and natural gas wells, and decommissioning of oil and natural gas gathering and other facilities.

Inherent in the fair value calculation of ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions result in adjustments to the recorded fair value of the existing ARO, a corresponding adjustment is made to the ARC capitalized as part of the oil and natural gas property balance.

The following table is a reconciliation of the ARO (in thousands):



	September 30,		December 31,
	2016		2015
Asset retirement obligation, beginning balance	$	20,364	$	17,031
Liabilities added from acquisitions		—		3,634
Sold		(6,512)		(58)
Revisions to cost estimates		(1,313)		(1,156)
Settlements		(142)		(186)
Accretion expense		901		1,099
Asset retirement obligation, ending balance	$	13,298	$	20,364

Additional AROs increase the liability associated with new oil and natural gas wells and other facilities as these obligations are incurred. Actual expenditures for abandonments of oil and natural gas wells and other facilities reduce the liability for AROs. As of September 30, 2016 and December 31, 2015, there were no significant expenditures for abandonments and there were no assets legally restricted for purposes of settling existing AROs. During the quarter ended September 30, 2016, obligations were sold as part of the Mid-Continent Divestiture that significantly lowered the Partnership’s future abandonment expenses. During the year ended December 31, 2015, revisions were made to the ARO liability based on recent costs incurred on abandoned wells, which were lower on average than originally projected.