Quarterly report pursuant to Section 13 or 15(d)


6 Months Ended
Jun. 30, 2014

11.  Contingencies

Notice of Suspension and Debarment.  In November 2013, W&T Offshore, Inc., the Parent Company, received a Notice of Suspension and Proposed Debarment and a Notice of Clean Water Act Listing from the U.S. Environmental Protection Agency (the “EPA”).  The Notices were directed to only the Parent Company and do not name or apply to our wholly-owned subsidiaries.  The first Notice suspended the Parent Company and proposed a three year debarment from participation in future federal contracts, including future federal oil and gas leases, and assistance activities and renders the Parent Company ineligible to receive any federal contracts or approved subcontracts or to act as an agent or representative on behalf of another in such transaction, or receive certain federal benefits.  The second Notice provided a narrower prohibition on federal contracts or benefits for the Parent Company.  The Notices stemmed from the Parent Company’s previously disclosed plea agreement and corporate conviction on two criminal counts as described in Item 8, Financial Statements and Supplementary Data, in our Annual Report on Form 10-K for the year end December 31, 2013.  

The Notices prevented the Parent Company from obtaining federal oil and gas leases, whether at a future lease sale or an existing lease by assignment.  The Notices did not affect current or future drilling or production operations of the existing lease ownership of the Parent Company.

During the third quarter of 2014, the EPA Suspension and Debarment Official removed the suspension and proposed debarment and reinstated the Parent Company from the prohibition in the second Notice after the Parent Company filed submissions to contest the limitations in both Notices and to demonstrate that it corrected the violations and is a responsible operator.  See Note 12, Subsequent Events, regarding the lifting the suspension and proposed debarment received from the EPA on August 5, 2014.

Waiver concerning certain supplement bonding requirements from the Bureau of Ocean Energy Management (“BOEM”).  In November and December 2013, W&T Offshore, Inc. received letters from the BOEM claiming that it no longer qualified for a waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging, and abandonment liabilities. These letters pertain to the Parent Company’s prior supplemental bonding waiver.  Our wholly-owned subsidiary, Energy VI, is not exempt from supplemental bonding under BOEM’s procedures and therefore such wholly-owned subsidiary provides supplemental bonding for its plugging and abandonment liabilities. The supplemental bonding requirements are separate and distinct from the suspension and debarment issue described above.  The letters notified the Parent Company that it must provide supplemental bonding on certain of its offshore leases, rights of way and rights of use and easement in the Gulf of Mexico.  

In response, in January 2014, the Company filed a Petition for Stay Pending Appeal and Request for Interim Relief with the U.S. Department of Interior's Board of Land Appeals ("IBLA"). In addition, we provided additional information to the BOEM and had numerous discussions with the BOEM staff.  On May 8, 2014, an order was issued by the IBLA in which it set aside the November 2013 BOEM order and remanded the case to the BOEM for its consideration.  On May 16, 2014, the Parent Company was informed by the BOEM that under applicable federal regulations it now qualifies for a waiver of certain supplemental bonding requirements for potential offshore decommissioning liabilities (including plugging and abandonment).

Notification by ONRR of fine for non-compliance.  In December 2013 and January 2014, we were notified by the Office of Natural Resources Revenue (“ONRR”) of an underpayment of royalties on certain Federal offshore oil and gas leases that cumulatively approximated $30,000 over several years, which represents 0.0045% of royalty payments paid by us during the same period of the underpayment.  In March 2014, we received notice from the ONRR of a statutory fine of $2.3 million relative to such underpayment.  We believe the fine is excessive and extreme considering the circumstances and in relation to the amount of underpayment.  On April 23, 2014, we filed a request for a hearing on the record and a general denial of ONRR’s allegations contained in the notice.  We intend to contest the fine to the fullest extent possible.  The ultimate resolution may result in a waiver of the fine, a reduction of the fine, or payment of the full amount plus interest covering several years.  As no amount has been determined as more likely than any other within the range of possible resolutions, no amount has been accrued as of June 30, 2014 per authoritative guidance.  However, we cannot state with certainty that our estimate of the exposure is accurate concerning this matter.  

Insurance Claims.  During the fourth quarter of 2012, underwriters of W&T’s excess liability policies (“Excess Policies”) (Indemnity Insurance Company of North America, New York Marine & General Insurance Company, Navigators Insurance Company, XL Specialty Insurance Company and Liberty Mutual Insurance Co.) filed declaratory judgment actions in the United States District Court for the Southern District of Texas seeking a determination that our Excess Policies do not cover removal-of-wreck and debris claims arising from Hurricane Ike to the extent we have first exhausted the limits of our Energy Package (defined as certain insurance policies relating to our oil and gas properties which includes named windstorm coverage) with only removal-of-wreck and debris claims.  The court consolidated the various suits filed by the underwriters.  In January 2013, we filed a motion for summary judgment seeking the court’s determination that such Excess Policies do not require us to exhaust the limits of our Energy Package policies with only removal-of-wreck and debris claims.  In July 2013, the District Court ruled in favor of the underwriters, adopting their position that the Excess Policies cover removal-of-wreck and debris claims only to the extent the limits of our Energy Package policies have been exhausted with removal-of-wreck and debris claims.  We appealed the decision in the United States Court of Appeals for the Fifth Circuit and, in June 2014, the Court reversed the District Court’s ruling and ruled in our favor.  The underwriters filed three separate briefs requesting a rehearing or a certification to the Texas Supreme Court, all of which the Court denied.  As the limits of the Energy Package have been exhausted, we have filed and anticipate filing claims of up to approximately $46.3 million under the Excess Policies and ultimately expect to receive recovery of claims.  Removal-of-wreck costs are recorded in Oil and natural gas properties and equipment on the Condensed Consolidated Balance Sheets and recoveries from claims made on these Excess Policies will be recorded as reductions in this line item, which will reduce our future DD&A rate.

Royalties.  In 2009, the Company recognized $5.3 million in allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems.  In 2010, the ONRR audited the calculations and support related to this usage fee, and in the third quarter of 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken.  We recorded a reduction to other revenue of $4.7 million in the third quarter of 2010 to reflect this disallowance; however, we disagree with the position taken by the ONRR and we are pursuing our claim to resolve the matter.

Other Claims.  We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business.  In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties.  In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold.  We are also subject to federal and state administrative proceedings conducted in the ordinary course of business.  Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, we believe 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 our consolidated financial position, results of operations or liquidity.

Contingent Liability Recorded.  During the three and six months ended June 30, 2014, $0.4 million and $0.3 million of expenses recognized related to claims, complaints and fines.  During the three and six months ended June 30, 2013, expenses related to claims, complaints and fines were less than $0.1 million.  As of June 30, 2014 and December 31, 2013, we have recorded $0.5 million and $0.2 million, respectively, which are included in Accrued liabilities on the Condensed Consolidated Balance Sheets, for the loss contingencies matters in the normal course of business.