Asset Retirement Obligations

12 Months Ended

Dec. 31, 2012

Asset Retirement Obligations

9. Asset Retirement Obligations

The Company follows accounting for asset retirement obligations (“ARO”) in accordance with ASC 410, Asset Retirement and Environmental Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it was incurred if a reasonable estimate of fair value can be made. The Company’s ARO primarily represents the estimated present value of the amounts expected to be incurred to plug, abandon and remediate producing and shut-in wells at the end of their productive lives in accordance with applicable state and federal laws. The Company determines the estimated fair value of its ARO by calculating the present value of estimated cash flows related to plugging and abandonment liabilities. The significant inputs used to calculate such liabilities include estimates of costs to be incurred, the Company’s credit adjusted discount rates, inflation rates and estimated dates of abandonment. The ARO is accreted to its present value each period and the capitalized asset retirement costs are amortized using the unit of production method.

A reconciliation of the Company’s ARO for the years ended December 31, 2011 and 2012 is as follows:

	2011			2012
Balance, beginning of year	$	—		$	653,240
Liabilities incurred upon acquisition of properties		639,176			—
Liabilities assumed by buyer of properties		—			(16,411	)
Liabilities settled		—			(81,007	)
Accretion expense		14,064			35,621
Revisions of prior estimates		—			55,825
Balance, end of year		653,240			647,268
Less current asset retirement obligations		(15,398	)		(78,140	)
Long-term asset retirement obligations	$	637,842		$	569,128