IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELA WARE

In re ) Chapter 11
PACIFIC ENERGY RESOURCES LTD., et al.,i ) Case No. 09-10785 (KJC)
) (Jointly Administered)

, --

) Debtors. ) Related to Docket No. 518

Hearing Date: September 1, 2009 at 10:00 a.m. prevailng Eastern time

OBJECTION OF THE DEBTORS TO COOK INLET REGION, INC.'S MOTION TO COMPEL PAYMENT OF ADMINISTRATIVE EXPENSES
The debtors and debtors in possession (together, the "Debtors") in the above-captioned
cases hereby object to the Motion to Compel Payment of Administrative Expenses (the
"Motion") fied by Cook Inlet Region, Inc. ("CIRI"). In support of

this objection, the Debtors

respectfully state as follows:

Preliminary Statement
1. As set forth in the Motion, CIRI is entitled to certain easement fees,

throughput fees and royalties payable by Pacific Energy Alaska Operating, LLC ("PEAO").
CIRI seeks immediate payment of the postpetition amounts owing on account of these
obligations.
2. The Debtors' position is simple: PEAO has paid CIRI all amounts that

have come due postpetition to date. In fact, as a result of accounting reconciliations based on

i The Debtors in these cases, along with the last four digits of each Debtor's federal tax identification number, are: Pacific Energy Resources Ltd. (3442); Petrocal Acquisition Corp. (6249); Pacific Energy Alaska Holdings LLC (tax J.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); San Pedro Bay Pipeline Company (1234); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The address for all of the Debtors is III W. Ocean Boulevard, Suite 1240, Long Beach, CA.

68773-002\DOCS _ SF:670 12. i

pricing information recently obtained from the State of Alaska, it has been determined that
PEAO has overpaid CIRI by over $22,740.83 on account of

its postpetition claims. (PEAO

intends to offset such overpayments against future amounts owing to CIRI.)

3. Hence, CIRI is not entitled to any additional administrative claims against

the Debtors and the Motion should be denied.

Backe:round
4. On March 9, 2009 (the "Petition Date"), the Debtors commenced these

cases by each filing a voluntary petition in this Court. The Debtors have continued in the
possession of their property and have continued to operate and manage their business as debtors
in possession pursuant to sections 1107(a) and 1108 of

the Bankptcy Code. No request has

been made for the appointment of a trustee or an examiner in these cases.

A. Description of the Debtors
5. The Debtors are a group of independent energy companies engaged in the

acquisition, development and exploitation of oil and gas properties in the western United States.

The Debtors' intent is to provide the operational focus necessary to their properties to exploit
their full potential, and are focused on applying their extensive engineering, operating, geologic,
and geophysical expertise to provide significant proved reserve and production growth.
B. The Debtors' Payment of CIRI's Administrative Expenses

6. The Debtors acknowledge that CIRI is entitled to certain easement fees,

throughput fees and royalties that continue to accrue postpetition with respect to PEAO's
operations in Alaska. Reduced to its simplest form, the amounts owed to CIRI fall into three

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distinct categories: (a) easement throughput; (b) easement annual fee; and (c) royalties under a
federal lease. Each of

these items is addressed separately below.

a. Easement Throughput. On August 6, 2009, PEAO paid CIRI the

sum of$570.86 on account of

post

petition easement throughput

owed as of June 2009. This amount was an overpayment by

$457.27 that PEAO intends to apply against $458.85 in estimated

throughput charges for July 2009. PEAO also estimates that the
sum of $8,483.63 is owed to CIRI for unpaid prepetition amounts

on account of easement throughput. As to the postpetition period,

PEAO is current on all amounts owed to CIRI.
b. Easement Annual Fee. CIRI acknowledges in the Motion that the

easement annual fee came due prepetition on January 1,2009.

Yet, CIRI seeks to pro-rate this fee on a monthly basis for the

postpetition period. The Debtors assert that the easement annual

fee is a prepetition obligation and is not entitled to administrative

status. Hence, PEAO has not paid any portion of such fee.
c. Royalties. On July 1,2009, July 27, 2009, and August 6, 2009,

PEAO paid CIRI the sum of$32,970.58, $19,022.41, and

$17,279.05, respectively, on account of post

petition royalty

obligations owed as of June 2009 that PEAO initially estimated at

$69,272.04. As a result of

recent reconciliations based on data

3

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made available by the State of Alaska, however, PEAO has determined that only $46,531.21 was owed to CIRI for this time

period. Hence, PEAO has overpaid CIRI by $22,740.83. PEAO

estimates that $9,121.04 wil be owed for July 2009 and intends to
offset this amount against PEAO's prior overpayment. PEAO also
estimates that the sum of $33,035.05 is owed to CIRI for

prepetition amounts owed on account of royalties. As to the

postpetition period, PEAO is current on all amounts owed to CIRI
(and indeed is entitled to a credit for prior overpayments).

Are:uments & Authorities

A. CIRI Has Failed to Carry Its Burden in EstablishiDl!: an Administrative Claim

7. The allowance of an administrative expense claim is codified in section

503(b) of

the Bankruptcy Code, which states in relevant part:

After notice and a hearing, there shall be allowed administrative expenses. . . including - (1 )(A) the actual, necessary costs and expenses of preserving the estate. . .
11 U.S.C. 503 (b)(1)(A).
8. The policy "behind granting administrative priority to the types of

expenses included under section 503(b)(1)(A) is to provide an incentive for creditors and others
to continue or commence doing business with an insolvent entity." 4 COLLIER ON BANKRUPTCY

~ 503.05(2), at 503-21 (15th ed. 2002); see also In re Commonwealth of Pennsylvania Dep 't of

Envtl. Resources, 178 F.3d 685,691 (3d. Cir. 1999) ("(T)hose who continue to transact business

4
68773-002\DOCS _ SF:670 1 2. i

with the debtor during the Chapter 11 case, and who would suffer financially as a result, are

entitled to priority over other creditors who have not affrmatively assumed such risk").
9. "For a debt to qualify as an administrative expense, it must satisfy a two-

prong test: (1) it must have arisen from a transaction with the estate and (2) it must have benefited the estates in some demonstrable way." In re Insilco Tech., Inc., 309 B.R. 111, 114
(Bankr. D. DeL. 2004) (citing Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl.

Energy, Inc.), 181 F.3d 527, 532-533 (3d Cir. 1999); In re Unidigital, Inc., 262 B.R. 283, 288
(Bankr. D. DeL. 2001)).

10. The claimant caries the "heavy burden of demonstrating that the costs and

fees for which it seeks payment provided an actual benefit to the estate and that such costs and
expenses were necessary to preserve the value of

the estate assets." O'Brien, 181 F.3d at 533

(emphasis added); see also In re Goody's Family Clothing, Inc., 401 B.R. 656, 663-664 (Bank.
D. DeL. 2009).

11.

Here, for the reasons outlined above, CIRI has failed to carry its burden of

establishing either an administrative claim in these cases beyond the amounts that PEAO has
already paid or cause to compel PEAO to pay any such claims on an expedited basis.
12. PEAO submits that it is current on all postpetition obligations to CIRI and,

indeed, has overpaid CIRI by over $22,740.83. The only material issue in dispute appears to be

the easement annual fee that came due prepetition. PEAO submits that this fee is a general
unsecured claim.

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68773-002\DOCS_SF:670 12. i

13. CIRI attempts to construe the easement anual fee as something akin to an

obligation under an unexpired lease that can be pro-rated for the postpetition period. An
easement, however, is not an unexpired lease of

nonresidential real property. Rather, it is a

conveyance of a distinct interest in real property. See, e.g., Kent's Run Partn., Ltd. v. Glosser,

323 B.R. 408,422 (W.D. Pa. 2005), aff'd, 174 Fed.Appx. 34 (3d Cir. 2006) ("An easement is an
"interest in the land owned by another person, consisting in the right to use or control the land, or
an area above or below it, for a specific limited purpose.") (citing BLACK'S LAW DICTIONARY
527 (7th ed. 1999)). Although section 365 of

the Bankptcy Code provides certain rights with

respect to "executory contracts" and "unexpired leases," the statute does not expressly cover
other vested interests in real property (i.e., easements), particularly those obtained through an
executed conveyance. Kent's Run Partn., 323 B.R. at 424.
14. Hence, while the Debtors acknowledge that CIRI may have a prepetition

claim against PEAO with respect to the unpaid easement annual fee, that is not a charge that can
be pro-rated or properly allowed as an administrative expense.
B. CIRI is Not Entitled to Immediate Payment of Any Allowed Administrative Claim

15. CIRI also has failed to establish its entitlement to immediate payment of
any allowed administrative claim.

16. Although administrative claims normally do not have to be paid until

effectiveness of a plan, it is within the Court's discretion to determine the timing of payment. In
re HQ Global Holdings, Inc., 282 B.R. 169, 173 (Bank. D. DeL. 2002); In re Goody's Family

6
68773-002\DOCS _ SF:670 12.1

Clothing, Inc., 392 B.R. 604,614 (Banr. D. DeL. 2008), aff'd, 401 B.R. 656 (D. DeL. 2009); In

re Global Home Prods., LLC, 2006 WL 3791955 at *3-4 (Ban. D. DeL. Dec. 21, 2006).
17. As stated by Judge Walrath in HQ Global:

The determination of the timing of payment of administrative expenses is a matter within the discretion of the bankptcy court. In making this determination, one of the chief factors courts
consider is bankptcy's goal of an orderly and equal distribution

among creditors and the need to prevent a race to the debtor's assets. Thus, distributions prior to confirmation of a plan are usually disallowed when the estate may not be able to pay all administrative expenses in fulL. Other factors include the particular needs of each administrative claimant and the length and expense
of

the case's administration.

282 B.R. at 173 (citations omitted).

18. "To qualify for exceptional immediate payment, a creditor must show that

there is a necessity to pay and not merely that the Debtor has the ability to pay." Global Home,
2006 WL 3791955 at *3 (quoting In re Continental Airlines, Inc., 146 B.R. 520,531 (Bankr. D.
DeL. 1992)).
19. In the instant case, there is no compellng basis to require immediate

payment of any administrative claim asserted by CIRI beyond those claims that PEAO has

already paid (and indeed overpaid). Moreover, the Debtors' lenders are likely to assert
superpriority claims and liens on the Debtors' assets senior to any CIRI administrative claim.

Conclusion
20. For the reasons set forth above, the Debtors request that the Court deny the

Motion, except as set forth herein.

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68773-002\DOCS _ SF:670 12. 1

Dated: August 25, 2009

P ACHULSKI STANG ZIEHL & JONES LLP

/
Ira D. arasch (CA Bar No.1 09084)

Jam E. O'Neil (DE Bar No. 4042) Maxim B. Litvak (CA Bar No. 215852) 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705
Telephone: (302) 652-4100

Facsimile: (302) 652-4400

Email: ikharasch(0pszjlaw.com

j oneil(0pszj law .com mlitvak(0pszj law.com

Counsel for the Debtors and Debtors in Possession

8
68773-002\DOCS_SF:67012.1

IN THE UNITED STATES BANKRUPTCY COURT

In re: )
STATE OF DELAWARE )
) ss:

FOR THE DISTRICT OF DELAWARE

Chapter 11

)
)

PACIFIC ENERGY RESOURCES LTD., et al., 1 )

Debtors. )

Case No. 09-10785 (KJC) (Jointly Administered)

AFFIDAVIT OF SERVICE

COUNTY OF NEW CASTLE )

Kathleen Forte Finlayson, being duly sworn according to law, deposes and says
that she is employed by the law firm of

Pachulski Stang Ziehl & Jones LLP, attorneys for the

Debtors in the above-captioned action, and that on the 25th day of August, 2009 she caused a
copy of

the following document(s) to be served upon the parties on the attached service lists in

the manner indicated:

Objection of the Debtors to Cook Inlet Region, Inc.'s

Motion to Compel Payment of Administrative Expenses

~009
Notar Pu ic
i

Kat leen Forte Finlayso

Sworn to ~cribed before

MARY E. CORCORAN NOTARY PUBLIC STATE OF DELAWARE
My commisson expires Nov. 4, 200

CommissI n Exp.: I rl1/cf

i The Debtors in these cases, along with the last four digits of each of the Debtors' federal tax
identification number, are: Pacific Energy Resources Ltd. (3442); Petrocal Acquisition Corp. (6249); Pacific Energy Alaska Holdings, LLC (tax J.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); San Pedro Bay Pipeline Company (1234); Cameros the Debtors is III W. Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The mailng address for all of
Ocean Boulevard, Suite 1240, Long Beach, CA 90802.

SPECIAL SERVICE LIST

AUGUST 25, 2009
Via Hand Delivery (counsel for Cook Inlet Region, Inc.) Eric Lopez Schnabel, Esquire Robert W. Mallard, Esquire Dorsey & Whitney (Delaware) LLP 1105 N. Market Street, Ste 1600 Wilmington, DE 19801

DOCS_DE: 1 524 1 7. 1

Pacific Energy Resources Ltd. Core Service List

Case No. 09-10785
Document No. 146442

05 - Hand Delivery
05 - Overnight Delivery

Hand Delivery (United States Attorney) Ellen W. Slights, Esq. United States Attorney's Offce District of Delaware
1007 N. Orange Street, Suite 700

Wilmington, DE 19801

Counsel for Debtors) Laura Davis Jones, Esquire James E. O'Neil, Esquire Kathleen P. Makowski, Esquire Pachulski Stang Ziehl & Jones LLP 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705
Interoffce Pouch to Los Angeles

Hand Delivery (Counsel to Offcial Committee of Unsecured Creditors) David B. Stratton, Esquire James C. Carignan, Esquire Pepper Hamilton LLP
Hercules Plaza, Suite 1500

1313 Market Street Wilmington, DE 19899

Hand Delivery (Counsel to DIP Administrative Agent) Don A. Beskrone, Esquire Ashby & Geddes, P.A. 500 Delaware Avenue Wilmington, DE 19801

Counsel for Debtors) Robert M. Saunders, Esquire Ira D. Kharasch, Esquire Scotta E. McFarland, Esquire Pachulski Stang Ziehl & Jones LLP
10100 Santa Monica Blvd., 11 th Floor

Los Angeles, CA 90067

Hand Delivery (United States Trustee) Joseph McMahon, Esquire Office of the United States Trustee J. Caleb Boggs Federal Building 844 North King Street, Suite 2207
Lockbox 35

Overnight Delivery (Counsel to Goldman Sachs, lAron & Company; DIP Administrative Agent) Jeffrey Sabin, Esquire Steven Wilamowsky, Esquire Scott K. Seamon, Esquire
Bingham McCutchen LLP

Wilmington, DE 19801
Hand Delivery (Copy Service)
Parcels, Inc.

399 Park Avenue New York, NY 10022

Vito i. DiMaio 230 N. Market Street Wilmington, DE 19801

Overnight Delivery (Counsel to PEA Collateral Agent, et al.) Seth E. Jacobson, Esquire Chris L. Dickerson, Esquire Skadden, Arps, Slate, Meagher & Flom LLP 333 West Wacker Drive, Suite 2100 Chicago, IL 60606

Overnight Delivery (Counsel to Official Committee of

Unsecured Creditors)

Francis J. Lawall, Esquire Pepper Hamilton LLP 3000 Two Logan Square Eighteenth & Arch Streets Philadelphia, P A 19103
Overnight Delivery (counsel to Official Committee of
Unsecured Creditors)

Filiberto Agusti, Esquire

Steven Reed, Esquire

Joshua Taylor, Esquire Steptoe & Johnson LLP 1330 Connecticut Avenue NW Washington, DC 20036 Overnight Delivery (counsel to Official Committee of
U nsecured Creditors)

Robbin Itkin, Esquire Katherine Piper, Esquire Kelly Frazier, Esquire Steptoe & Johnson LLP 2121 Avenue of the Stars, 28th Floor Los Angeles, CA 90067