Challenges of Estimating Future Liabilities of Asset Retirement Obligations in Upstream Oil and Gas: A Literature Review

Summary

Estimating asset retirement obligations (AROs) in the upstream oil and gas sector is a complex and critical issue, driven by the need to account for long-term liabilities associated with decommissioning infrastructures, such as offshore platforms and wells. This literature review examines the multifaceted challenges involved in predicting future ARO liabilities, focusing on the technical, financial, regulatory, and environmental uncertainties that complicate accurate estimation. The review explores key accounting frameworks, including International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP), which guide the recognition and measurement of AROs, and highlights the significant impact of regulatory changes, fluctuating commodity prices and evolving environmental standards on cost predictions. Environmental factors, such as climate change and ecosystem sensitivity, further exacerbate the difficulty of estimating decommissioning costs, while technological advancements offer both opportunities and uncertainties. In addition, the review assesses financial considerations, including discount rate assumptions and currency fluctuations, which introduce variability in financial reporting and risk assessment.

This review identifies key strategies to mitigate risks associated with ARO underestimation, such as scenario analysis, collaborative decommissioning efforts, and strengthening internal controls. It also highlights the importance of incorporating environmental, social, and governance (ESG) criteria and investing in technological research and development. Finally, the review emphasizes the need for future research on advanced decommissioning technologies, cross-industry comparisons, and enhanced financial instruments to address the growing complexity of ARO estimation in the upstream oil and gas industry.