Asset Retirement Obligations
SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred (typically when the asset is installed at the production location). When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related properties, plants and equipment. Over time, the liability increases for the change in its present value, while the capitalized cost depreciates over the useful life of the related asset.
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (FIN 47). This Interpretation clarifies that an entity is required to recognize a liability for a legal obligation to perform asset retirement activities when the retirement is conditional on a future event and if the liability’s fair value can be reasonably estimated. We implemented FIN 47 effective December 31, 2005. Accordingly, there was no impact on income from continuing operations in 2005. Application of FIN 47 increased net properties, plants and equipment by $269 million, and increased asset retirement obligation liabilities by $417 million. The cumulative effect of this accounting change decreased 2005 net income by $88 million (after reduction of income taxes of $60 million).
We have numerous asset removal obligations that we are required to perform under law or contract once an asset is permanently taken out of service. Most of these obligations are not expected to be paid until several years, or decades, in the future and will be funded from general company resources at the time of removal. Our largest individual obligations involve removal and disposal of offshore oil and gas platforms around the world, oil and gas production facilities and pipelines in Alaska, and asbestos abatement at refineries.
SFAS No. 143 calls for measurements of asset retirement obligations to include, as a component of expected costs, an estimate of the price that a third party would demand, and could expect to receive, for bearing the uncertainties and unforeseeable circumstances inherent in the obligations, sometimes referred to as a market-risk premium. To date, the oil and gas industry has no examples of credit-worthy third parties who are willing to assume this type of risk, for a determinable price, on major oil and gas production facilities and pipelines. Therefore, because determining such a market-risk premium would be an arbitrary process, we excluded it from our SFAS No. 143 and FIN 47 estimates.
During 2006 and 2005, our overall asset retirement obligation changed as follows:
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Accrued Environmental Costs
Total environmental accruals at December 31, 2006 and 2005, were $1,062 million and $989 million, respectively. The 2006 increase in total accrued environmental costs is due to new accruals and accretion, partially offset by payments on accrued environmental costs.
We had accrued environmental costs of $646 million and $552 million at December 31, 2006 and 2005, respectively, primarily related to cleanup at domestic refineries and underground storage tanks at U.S. service stations, and remediation activities required by Canada and the state of Alaska at exploration and production sites. We had also accrued in Corporate and Other $306 million and $320 million of environmental costs associated with non-operating sites at December 31, 2006 and 2005, respectively. In addition, $110 million and $117 million were included at December 31, 2006 and 2005, respectively, where the company has been named a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act, or similar state laws. Accrued environmental liabilities will be paid over periods extending up to 30 years.
Because a large portion of the accrued environmental costs were acquired in various business combinations, they are discounted obligations. Expected expenditures for acquired environmental obligations are discounted using a weighted-average 5 percent discount factor, resulting in an accrued balance for acquired environmental liabilities of $756 million at December 31, 2006. The expected future undiscounted payments related to the portion of the accrued environmental costs that have been discounted are: $157 million in 2007, $123 million in 2008, $82 million in 2009, $63 million in 2010, $49 million in 2011, and $372 million for all future years after 2011.
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