Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies

12. Commitments and Contingencies

The following table sets forth our significant commitments as of December 31, 2011, by category, for the next five years and thereafter:

	Minimum				Firm
	Rental		Drilling		Transportation
Year	Commitments		Commitments		Commitments
2012	$	3,120	$	23,820	$	10,255
2013		2,283		59		8,805
2014		1,737		-		6,137
2015		1,628		-		5,137
2016		1,456		-		4,271
Thereafter		1,963		-		30,957
Total	$	12,187	$	23,879	$	65,562

Rental Commitments

Operating lease rental expense in the years ended December 31, 2011, 2010 and 2009 was $11.4 million, $14.8 million and $18.0 million, respectively, related primarily to field equipment, office equipment and office leases.

Drilling Commitments

We have agreements to purchase oil and gas well drilling services from third parties with original terms of up to three years. The agreements include early termination provisions that would require us to pay penalties if we terminate the agreements prior to the end of their original terms. The amount of penalty is based on the number of days remaining in the contractual term and declines as time passes. As of December 31, 2011, the penalty amount would have been $14.1 million if we had terminated our agreements on that date.

Firm Transportation Commitments

We have entered into contracts that provide firm transportation capacity rights for specified volumes per day on various pipeline systems with terms that range from one to 15 years. The contracts require us to pay transportation demand charges regardless of the amount of pipeline capacity we use. We may sell excess capacity to third parties at our discretion.

Legal

We are involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, our management believes that these claims will not have a material effect on our financial position, results of operations or cash flows. During 2011, we recorded a $0.2 million reserve for litigation attributable to certain properties that were previously sold. This litigation was settled in January 2012 for the recorded amount. During 2010, we established a $0.9 million reserve for a litigation matter pertaining to certain properties that remains outstanding as of December 31, 2011. During 2010, we also established a $0.5 million reserve for a sales tax audit contingency, which was ultimately resolved during 2011 for $0.3 million.

Environmental Compliance

Extensive federal, state and local laws govern oil and natural gas operations, regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and enforce such laws that are often difficult and costly to comply with and which carry substantial administrative, civil and even criminal penalties for failure to comply. Some laws, rules and regulations relating to protection of the environment may, in certain circumstances, impose “strict liability” for environmental contamination, rendering a person liable for environmental and natural resource damages and cleanup costs without regard to negligence or fault on the part of such person. Other laws, rules and regulations may restrict the rate of oil and natural gas production below the rate that would otherwise exist or even prohibit exploration or production activities in sensitive areas. In addition, state laws often require some form of remedial action to prevent pollution from former operations, such as plugging of abandoned wells. As of December 31, 2011, we have recorded AROs of $6.3 million attributable to these activities. The regulatory burden on the oil and natural gas industry increases its cost of doing business and consequently affects its profitability. These laws, rules and regulations affect our operations, as well as the oil and gas exploration and production industry in general. We believe that we are in substantial compliance with current applicable environmental laws, rules and regulations and that continued compliance with existing requirements will not have a material impact on our financial condition or results of operations. Nevertheless, changes in existing environmental laws or the adoption of new environmental laws, including any significant limitation on the use of hydraulic fracturing, have the potential to adversely affect our operations.