Outsourcing Asset Retirement Obligation Calculations

By Dave Loucks and Darren Bush

Oil and gas companies are always looking for ways to streamline their operations to gain efficiencies and maximize profits. Oil and gas Outsourcing solutions provide a reliable and cost-cutting option that offers a host of benefits, including predictable budgeting costs, reduced headcount, improved efficiency and improved profitability, to name a few. At a time when efficiencies are a must, outsourcing is a perfect solution that provides reliability and continuity.

Traditionally, we see outsourcing for daily activities – i.e., joint interest billing (JIB), revenue and payables -- but the calculations that need to be done to comply with generally accepted accounting principles (GAAP) also can be outsourced. Outsourcing calculations facilitate audits as they are set up in a repeatable, easy-to-review, recalculable solution.

The asset retirement obligation (ARO) calculation is complicated and time-consuming. Specifically, the calculation uses a company’s estimate of an inflation rate, cost to plug and abandon in today’s dollars, and an estimated life of the asset to arrive at a future cash outflow amount. That future value is then discounted by the company’s estimate of the credit adjusted risk free rate back to the balance sheet date and then accreted up over time to the future value. The calculation gets more complicated when changes to inflation rate, cost and life impact future cash outflow. This required math has seen companies create cumbersome spreadsheets that are hard to program, review and audit.

Each of the variables need to be documented to show the reasonableness of the estimate. Time should be invested to understand the impact of the changes to variables in the ARO calculation individually and in combination to arrive at the future cash outflow. Communication between the operations group and the accounting function is key to get the best data.

Opportune’s proprietary software application, Assent 143 , is used by over 160 companies, with some clients using it for over a decade. With clients ranging from offshore operators to companies that have over 30,000 wells in all the major U.S. basins, we have unique insight into the questions that should be asked to get the best ARO calculation a company can estimate. In addition to licensing Assent 143, a company can outsource the ARO calculation to Opportune. The benefits of outsourcing ARO calculations include:

  • Experts to talk to your operational personnel to get the data needed
  • Improving work efficiencies by outsourcing activities that you don’t do every day, which saves time and money
  • Roll forward of activity in easy reviewable, recalculable and auditable format
  • Repeatable math used in Assent 143 for any change of variables
  • Allows company to allocate time and resources to concentrate on more valuable activities
We’re Here To Help

Always working in the best interests of clients, Opportune has the industry experience needed to assist with your oil and gas outsourcing needs, best practice expertise and high-quality technology necessary to function as a full-service back office. Clients rely on Opportune’s deep oil and gas operational expertise and knowledge, so they are able to focus on other internal business functions. If you need a team of experienced energy consultants to provide comprehensive solutions to your oil and gas transactional process and reporting challenges, contact Opportune’s experts today.

For more information, please call Dave Loucks at 303-606-7578 or email him at dloucks@opportune.com.

About the Authors:

Dave Loucks is a Director in the Complex Financial Reporting group at Opportune where he is primarily responsible for assisting clients with financial reporting for oil and gas operations. Dave is one of the country’s foremost experts regarding the reporting for asset retirement obligations (ARO) and the standardized measure of oil and gas (SMOG). Dave and his team developed and now implement our proprietary Assent 143 (ARO) and Assent SMOG (oil and gas disclosures) software applications for Opportune clients, which are the only applications of their kind available in the market. Additionally, Dave works with the Petroleum Development Institute (PDI) at the University of North Texas to instruct classes on the determination and presentation of hydrocarbon reserves for financial reporting purposes. Prior to joining Opportune, Dave spent 14 years in public accounting, where he managed the audit engagements of clients in the energy and software industries. He also was the CFO of an INC 500 software company from 1998 to 2000.

Darren Busch is a Manager in Opportune’s Process and Technology practice. Darren has over 18 years of experience in the computer industry that spans many areas, including consulting, application development, database design, network engineering and systems integration. In addition to the oil and gas industry, Darren has worked in several other industries, including telecom, healthcare and the newspaper industry.

Dave Loucks

DirectorOpportune LLP

Darren Busch

Manager Opportune LLP

want more industry insights? subscribe below

By submitting this form, you are granting: Opportune LLP, 711 Louisiana Street, Houston, TX, 77002, permission to email you. You may unsubscribe via the link found at the bottom of every email. (See our Email Privacy Policy (http://constantcontact.com/legal/privacy-statement) for details.) Emails are serviced by Constant Contact.