Asset Retirement Obligation (Notes) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset Retirement Obligation Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset Retirement Obligation |
ASSET RETIREMENT OBLIGATION
A component of the consideration the Company paid to purchase the GIGS assets from Energy XXI LTD in June 2015, was the assumption of the seller’s asset retirement obligation (“ARO”) associated with such assets. This obligation existed prior to the purchase of the GIGS assets and we assumed the seller's responsibility. The ARO represents the estimated costs of decommissioning the GIGS pipelines and onshore oil receiving and separation facilities in Grand Isle, Louisiana at retirement. In accordance with ASC 410-20, Asset Retirement Obligations, we recognized an ARO on the acquisition date as if that obligation was incurred on that date. The estimated fair value of the GIGS ARO on the date of acquisition, was $12.2 million.
The liability was initially measured using estimates of current costs to decommission the asset, which under ASC 410-20 represents fair value, and is subsequently adjusted for ARO accretion expense and changes in the amount or timing of the estimated cash flows. Offshore pipelines were estimated as though they were decommissioned in place for federal waters and as though they were removed in state waters. In accordance with state and federal requirements, the pipelines are pigged, flushed with ends cut, plugged and buried. Onshore estimates include complete removal of the facility. The piping and tanks are cleaned of hydrocarbons. All surface piping, tanks, equipment, concrete and gravel are dismantled and removed to three feet below the ground surface. Concrete and gravel are removed and the site is graded to a smooth contour. In future periods, the liability will be adjusted for ARO accretion expense and changes in the amount or timing of the estimated future cash flows. Fair value is based on subjective estimates and assumptions, which are inherently subject to significant uncertainties which are beyond our control. These assumptions represent Level 3 inputs, as further discussed in Note 2. A corresponding asset retirement cost has been capitalized as part of the carrying amount of the related long-lived assets and will be amortized over the assets’ remaining useful lives. The useful lives of most pipeline systems are primarily derived from available supply resources and ultimate consumption of those resources by end users. Variables can affect the remaining lives of the assets which preclude us from making a reasonable estimate of the asset retirement obligation. Indeterminate asset retirement obligation costs will be recognized in the period in which sufficient information exists to reasonably estimate potential settlement dates and methods.
In periods subsequent to the initial measurement of an ARO, we recognize period-to-period changes in the liability resulting from either (a) the passage of time or (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Consequently, the ARO has been accreted for the change in present value due to the passage of time. For the three months ended September 30, 2015 and 2014, $170 thousand and $0 of ARO accretion expense was recorded, respectively. For the nine months ended September 30, 2015 and 2014, $170 thousand and $0 of ARO accretion expense was recorded, respectively.
The following table is a reconciliation of the asset retirement obligation as of September 30, 2015:
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