|9 Months Ended
Sep. 30, 2022
|Notes to Financial Statements
NOTE 12 — CONTINGENCIES
Appeal with the Office of Natural Resources Revenue (“ONRR”) – In 2009, W&T recognized allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through subsea pipeline systems owned by the Company. In 2010, the ONRR audited calculations and support related to this usage fee, and in 2010, ONRR notified the Company that they had disallowed approximately $4.7 million of the reductions taken. The Company recorded a reduction to other revenue in 2010 to reflect this disallowance with the offset to a liability reserve; however, the Company disagrees with the position taken by the ONRR. W&T filed an appeal with the ONRR, which ultimately led to the Company posting a bond in the amount of $7.2 million and cash collateral of $6.9 million with the surety in order to appeal the Interior Board of Land Appeals decision. The cash collateral held by the surety was subsequently returned to the Company during the first quarter of 2020. The Company has continued to pursue its legal rights and, at present, the case is in front of the U.S. District Court for the Eastern District of Louisiana where both parties have filed cross-motions for summary judgment and opposition briefs. W&T has filed a Reply in support of its Motion for Summary Judgment and the government has in turn filed its Reply brief. With briefing now completed, the Company is waiting for the district court’s ruling on the merits. In compliance with the ONRR’s request for W&T to periodically increase the surety posted in the appeal to cover pre- and post-judgement interest, the sum of the bond posted is $8.2 million as of September 30, 2022.
Civil Penalties – In January 2021, W&T executed a Settlement Agreement with the Bureau of Safety and Environmental Enforcement (“BSEE”) which resolved nine pending civil penalties issued by BSEE. The civil penalties pertained to Incidents of Non-Compliance (“INC”) issued by BSEE alleging regulatory non-compliance at separate offshore locations on various dates between July 2012 and January 2018, with the proposed civil penalty amounts totaling $7.7 million. Under the Settlement Agreement, W&T will pay a total of $720,000 in three annual installments. The first and second installments were paid in March 2021 and March 2022, respectively. In addition, W&T committed to implement a Safety Improvement Plan with various deliverables due over a period ending in 2022, which is on schedule to be completed before the deadline. Additionally in October 2022, BSEE issued a civil penalty assessment for approximately $24,000 for an INC that occurred at one of the Company’s properties in 2021.
Retained Liabilities Related to Divested Property Interests – The Company may be subject to retained liabilities with respect to certain divested property interests by operation of law. For example, recent historical declines in commodity prices created an environment where there is an increased risk that owners and/or operators of interests purchased from the Company may no longer be able to satisfy plugging or abandonment obligations that attach to those interests. In that event, due to operation of law, W&T may be required to assume plugging or abandonment obligations for those interests. During 2021, as a result of the declaration of bankruptcy by a third party that is the indirect successor in title to certain offshore interests that were previously divested by the Company, W&T recorded a loss contingency accrual related to the anticipated cost to decommission certain wells, pipelines, and production facilities for which the Company may receive decommissioning orders from BSEE. W&T no longer owns these assets nor are they related to current operations. W&T intends to seek contribution from other parties that owned an interest in the facilities. As of September 30, 2022, W&T estimates that the Company’s potential liability to fund decommissioning of previously divested property interests is $4.9 million, which has been accrued as a loss contingency.
AAIT Litigation – In August 2022, the Company’s primary information technology service provider, All About IT, Inc. (“AAIT”), notified the Company of its intention to cease providing services to the Company by September 2, 2022. The Company has begun the process of moving certain of these services within the Company and transitioning the remaining services to new service providers (the “transition process”). On August 19, 2022, the Company filed in the District Court of Harris County, Texas a petition for a temporary restraining order, temporary injunction, and permanent injunction seeking, among other things, to restrain AAIT from ceasing to provide services to the Company until the transition process is complete. On September 14, 2022, AAIT removed the matter to the United States District Court for the Southern District of Texas. On September 16, 2022, the Company and AAIT mutually agreed to the terms of an agreed order of the court providing for a temporary injunction for a period of a minimum of 60 days from the date of the order and up to a maximum of 120 days at the Company’s option, during which AAIT would continue to provide information technology services to the Company and assist with the transition process. By agreement of the parties, the agreed order also provided for the appointment of Hon. Gregg J. Costa (Ret.) as an independent adjudicator to assist in adjudicating ongoing disputes between the parties.
Other Claims – W&T is a party to various pending or threatened claims and complaints seeking damages or other remedies concerning commercial operations and other matters in the ordinary course of its business. In addition, claims or contingencies may arise related to matters occurring prior to the Company’s acquisition of properties or related to matters occurring subsequent to the Company’s sale of properties. In certain cases, W&T has indemnified the sellers of properties acquired, and in other cases, W&T has indemnified the buyers of properties sold. The Company is also subject to federal and state administrative proceedings conducted in the ordinary course of business including matters related to alleged royalty underpayments on certain federal-owned properties. Although W&T can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have, the Company believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.