environmental laws and regulations. We also maintain insurance coverage for environmental matters
which we believe is customary in the industry, but we are not fully insured against all environmental
risks. There can be no assurance that current or future local, state or federal rules and regulations will
not require us to spend material amounts to comply with such rules and regulations.
Plugging, Abandonment and Remediation Obligations.
Consistent with normal industry practices,
substantially all of our oil and gas leases require that, upon termination of economic production, the
working interest owners plug and abandon non-producing wellbores, remove tanks, production
equipment and flow lines and restore the wellsite. Typically, when producing oil and gas assets are
purchased, the purchaser assumes the obligation to plug and abandon wells that are part of such
assets. However, in some instances, we have received an indemnity with respect to those costs. We
cannot be assured that we will be able to collect on these indemnities.
We estimate our 2012 cash expenditures related to plugging, abandonment and remediation will
be approximately $7.7 million. At the Point Arguello Unit, offshore California, the companies from which
we purchased our interests retained responsibility for the majority of the abandonment costs, including:
(1) removing, dismantling and disposing of the existing offshore platforms; (2) removing and disposing
of all existing pipelines; and (3) removing, dismantling, disposing and remediating all existing onshore
facilities. We are responsible for our 69.3% share of other abandonment costs which primarily consist
of well bore abandonments, conductor removals and site cleanup and preparation. Although our
offshore California properties have a shorter reserve life, third parties have retained the majority of the
obligations for abandoning these properties.
In connection with the sale of certain properties offshore California in December 2004, we retained
the responsibility for certain abandonment costs, including removing, dismantling and disposing of the
existing offshore platforms. The present value of such abandonment costs, $82.6 million ($145.2
million undiscounted), is included in our asset retirement obligation as reflected on our balance sheet.
In addition, we agreed to guarantee the performance of the purchaser with respect to the remaining
abandonment obligations related to the properties (approximately $86.1 million). To secure its
abandonment obligations, the purchaser of the properties is required to periodically deposit funds into
an escrow account. At December 31, 2011, the escrow account had a balance of $17.7 million. The fair
value of our guarantee at December 31, 2011, $0.7 million, considers the payment/performance risk of
the purchaser and is included in other long-term liabilities in our balance sheet.
Operating Risks and Insurance Coverage
. Our operations are subject to all of the risks normally
incident to the exploration for and the production of oil and gas, including well blowouts, cratering,
explosions, oil spills, releases of gas or well fluids, fires, pollution and releases of toxic gas, each of
which could result in damage to or destruction of oil and gas wells, production facilities or other
property or injury to persons. Our operations in California, including transportation of oil by pipelines
within the city and county of Los Angeles, are especially susceptible to damage from earthquakes and
involve increased risks of personal injury, property damage and marketing interruptions because of the
population density of southern California. We maintain coverage for earthquake damages in California
but this coverage may not provide for the full effect of damages that could occur and we may be
subject to additional liabilities. Although we maintain insurance coverage considered to be customary
in the industry, we are not fully insured against all risks, either because insurance is not available or
because of high premium costs. We are self-insured for named windstorms in the Gulf of Mexico. The
occurrence of a significant event that is not fully insured against could have a material adverse effect
on our financial position. Our insurance does not cover every potential risk associated with operating
our pipelines, including the potential loss of significant revenues. Consistent with insurance coverage
generally available to the industry, our insurance policies provide limited coverage for losses or
liabilities relating to pollution, with broader coverage for sudden and accidental occurrences.
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