Asset Retirement Obligation (ARO) refers to the financial responsibility a company has for removing and restoring facilities, such as oil wells and pipelines, once they reach the end of their useful life.
When companies operate in the oil and gas sector they install equipment and facilities to extract and transport resources. However, these assets have a limited lifespan and will eventually need to be dismantled or retired. The process of retiring these assets involves cleaning up the site, plugging wells, and restoring the land to its original condition.
ARO is an accounting concept that ensures companies set aside funds over time to cover the future costs of decommissioning and restoring these facilities. This helps companies manage their financial responsibilities and ensures that they have the necessary funds when it’s time to retire and remove the assets.