14. Asset Retirement Obligations

Asset retirement obligations were estimated by management based on Epsilon’s net ownership interest in all wells and the gathering system, estimated costs to reclaim and abandon such assets and the estimated timing of the costs to be incurred in future periods, and the forecast risk free cost of capital. Epsilon has estimated the net present value of its total asset retirement obligations to be $2.9 million as at December 31, 2019 ($1.6 million at December 31, 2018) based on a total net future undiscounted liability of approximately $8.9 million ($21.5 million at December 31, 2018). Each year we review, and to the extent necessary, revise our asset retirement obligation estimates. During 2019 and 2018, we reviewed the actual abandonment costs with previous estimates. As a result, estimates of abandonment costs remained constant in 2019, but were updated at the end of 2018. Our overall liability increased due to the addition of new wells in both Pennsylvania and Oklahoma. From 2018 to 2019 our undiscounted liability decreased due to a decrease in the economic life of several of the wells in Pennsylvania. The life of the wells decreased due to the decrease in natural gas prices which caused the wells to be economically profitable for a shorter period of time. Due to the decrease in the life of the wells, there were fewer years of inflation affecting the plug and abandonment costs thereby lowering the estimate from December 31, 2018 to December 31, 2019.This was offset by the drilling of new wells which added to the liability. Even though the undiscounted liability decreased, the discounted liability shown below increased due to the effect of the discounting over time. The liability is spread over a shorter period so the ARO balance has increased at December 31, 2019 over the balance at December 31, 2018.

The following table presents the activity in Epsilon’s asset retirement obligations for the periods indicated:



	Year Ended		Year ended
		December 31,		December 31,
	2019		2018
Balance beginning of period	$	1,625,154	$	1,646,601
Liabilities from drilling of new wells		16,163		1,590
Change in estimates		1,153,740		(137,490)
Accretion		114,798		114,453
Balance end of period	$	2,909,855	$	1,625,154