IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In Re: Chapter 11 PACIFIC ENERGY RESOURCES LTD.

et al., Debtors. [Re: Docket Nos. 545, 585, 623 and 641] CIRIS SUPPLEMENTAL OBJECTION TO THE DEBTORS MOTION FOR AN ORDER APPROVING SALE OF DEBTORS ALASKA ASSETS [NONTRADING BAY]AND ASSUMPTION AND ASSIGNMENT OF EXECUTORY CONTRACTS AND LEASES Cook Inlet Region, Inc. (CIRI) hereby supplements its (I) Limited Objection To The Debtors Motion For An Order Approving Sale Of Debtors Alaska Assets [NonTrading Bay], And (II) Limited Objection To The Amended Notice To Counterparties Re Executory Contracts And Unexpired Leases (the Preliminary Objection) (D.E. 641). Assumption of the CIRI Agreements 1 and assignment to the Buyers 2 of the non-Trading Bay assets is not appropriate unless and until (a) Pacific Energy Alaska Operating, LLC (PEAO) provides a full cure of all defaults, including payment defaults and confirmation that CIRI is recognized as an additional insured under all pre-existing occurrence-based policies as required by the CIRI Agreements; (b) Buyers provide Case No. 09-10785 (KJC) (Jointly Administered)

The CIRI Agreements were identified in the Limited Objection as Federal Lease, West Foreland Easement and Kustatan Easement. 2 Buyers are identified in the Notice of Auction Results for Alaska Assets and Date and Time of Sale Hearing filed by Debtors on July 22, 2009 (D.E. 652) as Ammadon Limited and Catherwood Limited, both British Virgin Islands-registered companies and Leostar Investments Ltd., as guarantor. It is anticipated that Buyers will create an acquisition entity, presumably an Alaska corporation, to be the actual Buyer, but such details have not yet been revealed.

complete and meaningful financial informationincluding financial information regarding its parent entity--so that a determination of adequate assurance of future performance can be made; (c) Buyers provide evidence that all insurance policies required under the CIRI Agreements are, on a going-forward basis, in place and CIRI is an additional insured; and (d) Buyer provides financial accommodation in the form of a parent (or appropriate solvent affiliate) guaranty of the obligations under the CIRI Agreements, or alternatively, letters of credit to cover future end-of-term or abandonment and environmental obligations. 1. Buyers are foreign entities that will create an acquisition vehicle to effect the

purchase and ownership of the non-Trading Bay assets. This special purpose entity will be the counter-party to the CIRI Agreements. This special purpose entity will likely be capitalized to the most limited extent possible to shield the parent and affiliate companies from any liability associated with the non-Trading Bay assets. This makes CIRI

vulnerable and insecure not only to the payment of the financial terms of the CIRI Agreements but more importantly to the much larger potential costs of statutory and contractual obligations at the end of the term of the CIRI Agreements (plugging and abandoning the gas wells and removal of the 17 miles of pipeline) and any environmental pollution liability. It can be safely assumed that Buyers will not adequately fund the acquisition vehicles to address these more costly elements. 2. To date, neither the Debtors nor the Buyers have provided CIRI with any

information on the finances of the acquisition entities or the parent, or any insights into the cash flow projections of their business plan. Moreover, to date there has been no

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analysis of the current environmental condition of the CIRI properties, no determination of whether there are any environmental problems associated with the CIRI properties, and no analysis of the cost of complying with the statutory and contractual removal and clean-up obligations. In short, there is absolutely zero evidence that would support a finding by this court of adequate assurance of future performance as required by 11 U.S.C. 365(f). PEAOs Cure Obligation 3. PEAO must cure all defaults. In addition to the cure of payment defaults, such

as gas royalties and pipeline through-put fees, PEAO must verify that CIRI is listed as an additional insured on all occurrence-based insurance policies as required by the CIRI Agreements. 3 Despite its on going obligation to do so during the term of the lease, PEAO has failed to provide CIRI with insurance certificates or other proof of insurance during its tenure as assignee of the West Foreland and Kustatan Easements. Accordingly, CIRI has no knowledge as to whether the required insurances (including pollution coverage and coverage for oil seepage) have been maintained and whether CIRI has been named as additional insured. Retention of such insurance coverage and

Enforcement of CIRIs right to be added as an additional insured is critical for CIRI to receive the benefit of its bargain under the CIRI Agreements. Enforcement of

compliance with material terms of an assumed contract has been recognized as paramount by the Third Circuit in the Fleming case. 4
3

Clearly, terms, relating to

See, for example, Article III(H) of the West Foreland General Agreement that was attached to the Declaration of Kim Cunningham filed earlier (D.E. 519). 4 In re Fleming Companies, Inc., 499 F. 3d 300, 305-6 (3d Cir. 2007) (a bankruptcy
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environmental liability protection are material to any entity in the oil and gas industry. Buyers Adequate Assurance of Future Performance 4. The Third Circuit addressed the issue of what constituted adequate

assurance of future performance in Cinicola v. Scharffenberger, 248 F. 3rd 110 (3rd Cir. 2001), wherein the court recognized the definition of adequate assurance as applied by the 5th Circuit in Richmond Leasing Co v. Capital Bank,, N.A. , 762 F.2d. 1303 (5th Cir. 1985) stating:

The Court of Appeals for the Fifth Circuit has fleshed out the definition of adequate assurance and concluded: [A]dequate assurance of future performance are not words of art; the legislative history of the [Bankruptcy] Code shows that they were intended to be given a practical, pragmatic construction. The phrase first appears in the legislation proposed by the Commission on Bankruptcy Laws.... The Commission Report explains the language adequate assurance of future performance as follows: The language is adopted from Uniform Commercial Code 2-609(1). What constitutes ... adequate assurance of future performance must be determined by consideration of the facts of the proposed assumption. Cf. Official Comment 4 to Uniform Commercial Code 2-609 (1972 Edition). It is not intended, however, that any non-debtor party should acquire greater rights in a case under the act than he has outside the act. Report of the Commission on Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d Cong., 1st Sess. Pt. II 156-57 (1973). Section 2-609 of the Uniform Commercial Code, from which the bankruptcy statute borrows its critical language, provides that when reasonable grounds for insecurity arise with respect to the performance of courtmust be sensitive to the rights of the non-debtor contracting partyand the policy requiring that the non-debtor receive the full benefit of his or her bargain. citing In re Joshua Slocum, Inc., 922 F. 2d 1081, 1091 (3d Cir. 1990)).
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either party, the other may in writing demand adequate assurance of future performance.... The Commentaries to the Code note that adequate assurance is to be defined by commercial rather than legal standards. Official Comment 3 to Uniform Commercial Code 2-609 (1972 Ed.). What constitutes adequate assurance is to be determined by factual conditions; the seller must exercise good faith and observe commercial standards; his satisfaction must be based upon reason and must not be arbitrary and capricious. Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309-10 (5th Cir.1985) (quoting In re Sapolin Paints, Inc., 5 B.R. 412, 420-21 (Bankr.E.D.N.Y.1980)); see also In re Carlisle Homes, Inc., 103 B.R. 524, 538 (Bankr.D.N.J.1988) (The phrase adequate assurance of future performance, adopted from section 2-609(1) of the Uniform Commercial Code, is to be given a practical, pragmatic construction based upon the facts and circumstances of each case. Although no single solution will satisfy every case, the required assurance will fall considerably short of an absolute guarantee of performance.) (citations omitted). 5 The 5th Circuit in Richmond Leasing Co. further stated: Courts have consistently determined whether a debtor offered adequate assurance of future performance by considering whether the debtors financial data indicated its ability to generate an income stream sufficient to meet its obligations, the general economic outlook in the debtors industry, and the presence of a guarantee. 6 5. Buyers must meet the adequate assurance standard since they will be receiving

the CIRI Agreements by assignment and the Debtors will be relieved of all duties. In order to allow CIRI, other parties in interest and the Court to understand the assurances offered by Buyers, Buyers must provide the following financial information: 1. A balance sheet for each Buyer (or sole Buyer if that is the structure) as of the closing date of the purchase of the non-Trading Bay assets;

5 6

Cinicola at 120. Richmond Leasing Co. at 1310.

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2. A 3 to 5-year financial pro forma projection for each Buyer (or sole Buyer if that is the structure) showing estimated revenues, expenses and cash flow assumptions during such operating period; 3. A description of the business and operations of the parent company (Leostar) and a current and complete balance sheet for the entity, together with the most recent audited financial statement for that entity; 4. An assessment of (a) the current condition of the 2 gas wells on CIRIs Federal Lease; (b) the anticipated cost of plugging and abandoning the 2 gas wells; (c) the current condition of the Kustatan and West McArthur River pipelines, (d) any existing environmental contamination to the underlying subsurface estate, and (e) the anticipated costs for removal and remediation of the subsurface estate in the event of a shut down of operations; 7 6. Until the foregoing financial data is provided, and the costs associated with

future statutory and contractual environmental obligations understood, it is impossible to determine whether CIRI is adequately assured of future performance by the Buyers. Such fundamental information is required by Richmond Leasing before the Court can make a reasoned assessment of the adequate assurance issue as to Buyers capability to meet the payment terms of the CIRI Agreements. CIRI is entitled to more than a mere trust us from the Buyers. 7. Moreover, CIRI is entitled to protection for the future removal and remediation

obligations under the CIRI Agreements (and mandated by statutes) and any environmental pollution occasioned by Buyers. Standards of commercial reasonableness dictate financial accommodation, given that the Buyers are British Virgin Island entities, and the anticipated U.S. acquisition vehicle(s) will have no financial or operational history in Alaska or the US and will have no other assets in the U.S. Under this The Federal Lease requires proper plugging of the gas wells at the end of the term or upon abandonment, and the Easements require removal of the pipelines.
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circumstance, Leostar Investments, Ltd. should be required to guarantee Buyers obligations under the CIRI Agreements (it is significant that the Notice of Sale identifies Leostar Investments, Ltd. as guarantor) 8 . Alternatively, CIRI would accept letters of credit and insurance (already required under the CIRI Agreements) in the following amounts to provide assurance of future performance: a. A $4 million letter of credit (or bond) to fund the estimated cost of plugging and abandoning the West Foreland #1 and #2 gas wells and to cover environmental clean up; b. A $2.5 million letter of credit (or bond) to fund the estimated cost of removing the 17 miles of pipeline and to cover environmental clean up; c. A letter of credit equal to the deductible under the environmental pollution coverage to be obtained by Buyers to cover the CIRI properties; and d. Initiate and maintain all insurance coverage, including environmental pollution coverage, as required by the CIRI Agreements; 8. These are reasonable requests to ensure that CIRI will not be left holding the

bag for end of term (or abandonment) removal, clean up and remediation costs, or any other environmental liability. 9. Accordingly, CIRI requests that this Court condition approval of the

Sale/Assumption Motion on the Buyers providing the financial information identified above, and also on Buyers agreement to put in place the financial accommodations to ensure that Buyers can adequately address the end of term and environmental costs. This approach is pragmatic and fulfills the dictates of commercial standards applicable to

It is critical to receive detailed financial information about Leostar Investments, Ltd. to make certain it is solvent and has a balance sheet capable of providing assurance that its guaranty will be meaningful. It may be that another of Buyers affiliates must provide the guaranty.
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section 365(f). Dated: July 31, 2009 DORSEY & WHITNEY (DELAWARE) LLP By: /s/ Robert W. Mallard Eric Lopez Schnabel, Esq. (DE # 3672) Robert W. Mallard, Esq. (DE # 4279) 1105 N. Market Street, Suite 1600 Wilmington, DE 19801 Tel: (302) 425-7171 Fax: (302) 425-7177 and Michael R. Mills, Esq. (Pro Hac Vice Pending) DORSEY & WHITNEY LLP 1031 West Fourth Avenue 600 Anchorage, AK 99501-5907 Counsel for Cook Inlet Region, Inc.

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ______________________________________ In re: ) Chapter 11 ) PACIFIC ENERGY RESOURCES LTD., et al., ) Case No. 09-10785 (KJC) ) Debtors. ) (Jointly Administered) ) _____________________________________ ) ) CERTIFICATE OF SERVICE I, Robert W. Mallard, Esq., hereby certify that on the 31st of July, 2009, that CIRIs Supplemental Objection To The Debtors Motion For An Order Approving Sale Of Debtors Alaska Assets [Non-Trading Bay]And Assumption And Assignment Of Executory Contracts And Leases, was served upon the parties on the attached service list in the manner indicated thereon. Dated: July 31, 2009 DORSEY & WHITNEY (DELAWARE) LLP /s/ Robert W. Mallard Robert W. Mallard (DE Bar No. 4279) 1105 North Market Street (16th Floor) Wilmington, Delaware 19801 Counsel for Cook Inlet Region, Inc.

Service List Pacific Energy Alaska Operating LLC Attn: Gerald A. Tywoniuk, CFO 111 W. Ocean Boulevard, Suite 1240 Long Beach, CA gtywoniuk@pacenergy.com Via E-Mail Zolfo Cooper LLC Attn: Scott W. Winn Mark A. Cervi 1166 Avenue of the Americas 24th Floor New York, NY swinn@zolfocooper.com mcervi@zolfocooper.com Via E-mail Lazard Freres & Co., LLC Attn: Robert L. Lynd 600 Travis, Suite 2300 Houston, TX 77002 robert.lynd@lazard.com Via E-mail Ira D. Kharasch Robert M. Saunders Pachulski Stang Ziehl & Jones LLP 10100 Santa Monica Blvd, 11th Floor Los Angeles, CA 90067-4100 ikharasch@pszjlaw.com rsaunders@pszjlaw.com Via E-mail James E. O'Neill Pachulski Stang Ziehl & Jones LLP 919 N. Market Street 17th Floor Wilmington, DE 19801 Via Hand Delivery Rutan & Tucker, LLP Attn: Gregg Amber Garett Sleichter 611 Anton Blvd., 14th Floor Costa Mesa, CA 92626 gamber@rutan.com gsleichter@rutan.com Via E-mail Schully, Roberts, Slattery & Marino, PLC Attn: Anthony C. Marino 1100 Pydras Street, Suite 1800 New Orleans, LA 70163 amarino@schullyroberts.com Via E-mail Steptoe & Johnson Attn: Fil Agusti 1330 Connecticut Ave., N.W. Washington, DC 20036 fagusti@steptoe.com Via E-mail Bingham McCutchen LLP Attn: Jeffrey S. Sabin 399 Park Avenue New York, NY 10022 jeffrey.sabin@bingham.com Via E-mail Skadden, Arps, Slate, Meagher & Flom LLP Attn: Seth E. Jacobson 333 West Wacker Drive Chicago, IL 60606 seth.jacobson@skadden.com Via E-mail Philip M. Abelson Dewey & LeBoeuf 1301 Avenue of the Americas New York, NY 10019-6092 pabelson@dl.com Via E-Mail