VQ » Topics » Note 6-Asset Retirement Obligation

This excerpt taken from the VQ 8-K filed Jun 14, 2006.

Note 6—Asset Retirement Obligation

        The Company follows SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires that the fair value of a liability for an asset's retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost is capitalized as part of the carrying value of the long-lived asset. Subsequently, the asset retirement cost is amortized to expense over the useful life of the asset. The asset retirement obligation recorded relates to the expected plugging and abandonment costs of oil and natural gas wells and the removal of pipeline, compressor and related production facilities. As a result of the acquisition of oil and natural gas properties from TDC on October 1, 2004, the Company recorded a current asset retirement obligation of $531,000, a long-term retirement obligation of $6,711,000 and an increase to oil and natural gas properties of $7,242,000 based on the present value of the obligation. The present value of the retirement obligation will be accreted to full value over the remaining useful life of the Company's oil and natural gas properties and production facilities. As of December 31, 2004 and 2005, the Company had $906,000 and $467,000, respectively, classified in other assets for restricted cash and bonds pledged for the future plugging and abandonment of its oil and natural gas wells and related production facilities.

    Successor

        The changes to the Company's asset retirement obligation from Inception to December 31, 2004 and for the year ended December 31, 2005 are summarized as follows (in thousands):

Asset retirement obligation liability recognized at Inception (October 1, 2004)   $ 7,242  
  Accretion expense     132  
   
 
Asset retirement obligation at December 31, 2004     7,374  
  Additions for new wells drilled     187  
  Accretion expense     526  
  Cash settlements for wells plugged and abandoned     (375 )
  Deletions for wells sold     (960 )
  Revisions to estimates     2,032  
   
 
Asset retirement obligation at December 31, 2005   $ 8,784  
   
 

        The current portion of asset retirement obligations of $537,000 and $968,000 at December 31, 2004 and 2005, respectively, is classified with accounts payable and accrued liabilities.

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    Predecessor

        The adoption of SFAS 143 on January 1, 2003 resulted in the Predecessor recording a net-of-tax cumulative effect of change in accounting principle loss of $11,460,000, a current asset retirement obligation of $11,512,000, a long-term asset retirement obligation of $12,589,000 and an increase to oil and natural gas properties of $12,641,000.

        The changes to the Predecessor's asset retirement obligation for the year ended December 31, 2003 and for the nine months ended September 30, 2004 are summarized as follows (in thousands):

Balance at December 31, 2002   $  
  Liability recognized upon adoption of SFAS 143     24,101  
  Additions for new wells drilled     22  
  Accretion expense     3,047  
  Cash settlements for wells plugged and abandoned     (8,478 )
  Revisions to estimates     1,418  
   
 
Balance at December 31, 2003     20,110  
  Accretion expense     1,942  
  Cash settlements for wells plugged and abandoned     (1,270 )
  Revisions to estimates     (51 )
   
 
Balance at September 30, 2004   $ 20,731  
   
 
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