Introduction
At the end of 2025, Chevron carried $15.0 billion of asset retirement obligations on its balance sheet, most of it for decommissioning wells, equipment and facilities at its oil and gas fields once production ends. None of that money will be spent soon, and much of it not for decades. But the obligation is legally binding today, so US generally accepted accounting principles (US GAAP) require it to be recorded today, together with the cost of the asset that created it.
- Asset retirement obligation
A legal obligation, under Accounting Standards Codification (ASC) 410-20, to retire a tangible long-lived asset at the end of its life, such as plugging an oil well, decommissioning a nuclear plant, reclaiming a mine or removing a leasehold fit-out. It is recorded at fair value when incurred, usually measured as the present value of the expected settlement costs.
Recording and Accreting the Obligation
When the obligation arises, typically when an asset is built or acquired, the company estimates the expected cost of retirement and discounts it at a credit-adjusted risk-free rate. It records that present value as a liability and adds the same amount to the carrying amount of the asset, as part of the cost basis described in PP&E capitalization and cost basis. Deloitte's overview of ASC 410-20 describes the two charges that follow:
- Accretion: the liability grows each year toward the expected settlement cost, as the discount unwinds. Accretion is reported as an operating expense, not as interest.
- Depreciation: the retirement cost added to the asset is depreciated over the asset's useful life, along with the rest of its cost.
Suppose a company builds a facility that must be dismantled in 20 years at an expected cost of $1,000. Discounted at 6%, the obligation is $312, so the company records a $312 liability and adds $312 to the facility. In the first year, accretion is about $19, 6% of the liability, and depreciation of the retirement cost is about $16, a twentieth of $312. Over the 20 years, the liability accretes to $1,000, and the total charged to income, accretion plus depreciation, equals the full retirement cost.
Changes in Estimates and Settlement
When estimates change, the liability and the asset are both adjusted: upward revisions are measured at the current credit-adjusted rate, downward revisions at the rate used when the obligation was first recorded. When the work is done, the cash paid settles the liability, and any difference from the recorded amount is a gain or loss on settlement.
Chevron's Obligations
Chevron's 2025 annual report shows how the balance moves from year to year:
| Line item | 2024 | 2025 |
|---|---|---|
| Balance at January 1 | 13,833 | 12,667 |
| Liabilities assumed in acquisition | 0 | 1,682 |
| Liabilities incurred | 83 | 186 |
| Liabilities settled | (2,083) | (1,109) |
| Reduction due to asset sales | (171) | (458) |
| Accretion expense | 588 | 617 |
| Revisions in estimated cash flows | 417 | 1,403 |
| Balance at December 31 | 12,667 | 14,988 |
Source: Chevron 2025 Form 10-K. The 2025 acquisition line relates to the acquisition of Hess. Revisions mainly reflect higher cost estimates and scope changes for decommissioning wells, equipment and facilities.
Two lines stand out. Revisions in estimated cash flows added $1.4 billion in 2025, as decommissioning costs rose, a reminder that the balance depends on cost estimates that can move sharply. And liabilities settled shows the cash actually spent on retirement each year, which runs through operating cash flow even though the liability was recorded long before.
How Bankers Treat Retirement Obligations
In valuation, a large asset retirement obligation is usually treated as a debt-like item: a future cash outflow, not captured in forecast free cash flow, that reduces equity value. Practice varies: some bankers deduct the after-tax balance sheet amount from enterprise value, others model the retirement spending explicitly in the cash flows. Using both counts it twice. Accretion is non-cash and is often added back to earnings before interest, taxes, depreciation and amortization (EBITDA) in company and credit agreement definitions, so check how the measure is defined before comparing peers. The wider set of such adjustments is covered in the equity value to enterprise value bridge.
