IN THE UNITED STATES BANKRUPTCY COURT

In re: )

FOR THE DISTRICT OF DELA WARE

Chapter 11

PACIFIC ENERGY RESOURCES LTD., et aI., i )

Debtors. ))
)

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

Related Docket No. 298

OBJECTION OF THE DEBTORS TO MOTION OF UNION OIL COMPANY OF CALIFORNIA TO COMPEL IMMEDIATE ASSUMPTION OR REJECTION OF CERTAIN EXECUTORY CONTRACTS
The debtors and debtors in possession (the "Debtors") in the above-captioned chapter 11

cases (the "Cases") hereby object to the Motion to Compel Immediate Assumption or Rejection

of Certain Executory Contracts (the "Motion") filed by Union Oil Company of California
("Union"). In support of

this objection, the Debtors respectfully state as follows:

Preliminary Statement
1. As stated in the Motion, Union and Pacific Energy Alaska Operating, LLC

("PEAO") share working interests in certain oil and gas leases with the State of Alaska in an area
commonly referred to as "Trading Bay." Union is the designated operator for purposes of

these

properties. (As a result of recent volcanic activity in the area, Union has ceased oil production at
Trading Bay for the time being.)

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) ("PERL"); Petrocal Acquisition Corp. (6249); Pacific Energy

Alaska Holdings, LLC (tax I.D. # not available) ("PEAH"); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021) ("PEAO"); San Pedro Bay Pipeline Company (1234); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5463). ThemailngaddressforalloftheDebtorsislllW.OceanBoulevard.Suite 1240,
Long Beach, CA.

68773-002\DOCS _ SF:65508.3

2. By the Motion, Union seeks to compel the Debtors (or specifically,

PEAO) 2 to assume or reject various agreements relating to the Debtors' interests at Trading Bay
by no later than June 26,2009.3 The Motion also appears to cover the Debtors' rights in the

underlying state leases relating to Trading Bay. Union previously took the position in its fiings
in these Cases that working interests in oil and gas leases are interests in land under applicable

Alaska law. The Debtors agree that interests in oil and gas leases are in the nature of real
property rights that canot be assumed or rejected under section 365 of

the Banptcy Code.

3. To the extent that the remaining agreements addressed by the Motion are

construed as executory contracts, the Debtors urge the Court to deny the Motion because the Debtors may need additional time (beyond June 26) to determine whether to assume or reject

those contracts. The Debtors would not oppose a deadline of August 4,2009. As set forth
below, it may be that the Debtors wil not need this much time to determine whether to assume

or reject the contracts with Union. Indeed, there is a possibility that the Debtors wil seek to
abandon their interests in Trading Bay in the near term, which would effectively moot the relief

sought in the Motion. However, the Debtors should not be faced with an unreasonably short
deadline of June 26 by which to actually effectuate an assumption or rejection of

the Trading

Bay agreements.

2 For the sake simplicity and to avoid confusion, this objection generally refers to the Debtors, rather than PEAO. To the extent the matters at issue herein are determined to be limited to PEAO, references to the Debtors shall be construed as references solely to PEAO, as appropriate.
3 This is the current deadline imposed under the Debtors' postpetition loan agreement to fie a sale motion and/or

sale procedures motion in these Cases, but the Debtors are currently involved in discussions with the lenders about adjusting this date.

2
68773-002\DOCS _ SF:65508.3

4. It bears mention in this context that these Cases are less than three

months' old. The Debtors continue to have exclusivity to propose a plan of

reorganization and

have yet to conclude a sales process. To date, the Debtors have received one indication of
interest with respect to Trading Bay. Although the Debtors are continuing negotiations with this
potential buyer, the Debtors may seek to abandon their interests in Trading Bay absent material
progress on a sale agreement.
5. In the meantime, whether the Debtors reject the agreements at issue or

maintain the status quo pending the outcome of

the sale process, Union wil be in precisely the

today. As set forth more fully below, rejection means that

same position in which it finds itself

Union (as operator and majority owner) wil continue to incur the same costs associated with
operating Trading Bay as it does today, without reaping any of

the benefits from having stepped

into the Debtors' position given that all oil production at Trading Bay ceased weeks ago. Even if
normal operations were to resume in the future, Union wil be protected because the Debtors' share of oil revenues wil be set aside into a segregated account, as previously ordered by this

Cour.
6. Under these circumstances, it would be premature and counter-productive

to force the Debtors to assume or reject the Trading Bay agreements by June 26, 2009. The
Debtors should be given adequate time (at least until August 4,2009) to decide whether to
assume or reject their agreements with Union.

3
68773-002\DOCS _ SF:65508.3

Back2round
7. On March 9, 2009 (the "Petition Date"), the Debtors commenced these

cases by each fiing 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 11 07(a) and 1108 of

the Banptcy Code. No request has

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

A. Description of the Debtors
8. 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' Relationship With Union
9. As mentioned above, Trading Bay consists oftwelve offshore oil and gas

leases with the State of Alaska dating from the early 1960s (together, the "Trading Bay Leases").

The Trading Bay Leases cover an area located in Cook Inlet, Alaska. Eleven of the Trading Bay
Leases have been unitized into a single unit commonly referred to as the Trading Bay Unit. The
remaining Trading Bay Lease stands alone and is commonly referred to as the Trading Bay

Field. The Trading Bay Unit consists of 17,859 gross developed acres with four offshore

4
68773-002\DOCS _ SF:65508.3

platforms and sixty-six producing wells. The Trading Bay Field consists of3,280 developed
acres with one offshore platform and twenty-five producing wells.4
10. Separate and apart from the Trading Bay Leases, the relationship between

the Debtors and Union is governed by various agreements that are listed in the Motion (together,
the ''Trading Bay Agreements") consisting of: (a) the Unit Operating Agreement - Trading Bay

Unit, (b) the Trading Bay Field Joint Operating Agreement, (c) the Unit Agreement for the
Development and Operation of the Trading Bay Unit Area, State of Alaska, (d) the

Unocal/Forest Oil Alignment Agreement, Trading Bay Field/Trading Bay Unit, (e) the Trading

Bay Facilties Agreement, and (f) the Fuel Gas Supply Agreement.

11. Through various assignments that have taken place over the years, the
Debtors (by and through PEAO) and Union are co-lessees under the Trading Bay Leases. The
Debtors have a 46.8% working interest and Union has a 53.2% working interest in each of

the
these properties. All of

properties in Trading Bay. Union is also the operator of each of

the

production from Trading Bay is typically sold to a single customer on a monthly basis, Tesoro

Alaska Company or an affiiate ("Tesoro"). As a result of recent volcanic activity in the area,
Union has suspended oil production at Trading Bay. For oil deliveries that have occurred since the Petition Date, Tesoro was directed by the Court to pay the Debtors the sum of$3,946,033.62
(plus any other amounts owed) on account of

the Debtors' share of oil production attributable to

Trading Bay and these funds are currently held by the Debtors in a segregated account.

4 The acreage totals for the Trading Bay Unit and Trading Bay Field in the above paragraph have been updated from prior fiings by the Debtors in these Cases.
5
68773-002\DOCS _ SF:65508.3

12. As operator and consistent with the Trading Bay Agreements, Union is

responsible for all operational activities at Trading Bay. Union allocates a portion of

the

revenues and the costs of production to the Debtors based upon their working interest in Trading

Bay. There are ongoing disputes with Union as to the propriety of certain operational expenses.
According to Union, the Debtors have accrued and unpaid prepetition and postpetition expenses
(net of production) on account of their working interests in Trading Bay totaling in excess of $31

millon. Since the Petition Date, the Debtors have not paid the expenses charged by Union with
respect to operations at Trading Bay. The Debtors believe that the expenses that Union
continues to incur are excessive, especially in light of the fact that oil production at Trading Bay
has been suspended.

13. Taken together, the Debtors' interests in the Trading Bay Leases and the
Trading Bay Agreements are included within the assets that the Debtors are currently marketing
with the assistance of

their investment baners at Lazard Frres & Co., LLC ("Lazard"). Lazard

was retained in these Cases for the express purpose of sellng the Debtors' assets in Alaska.

Over the last month, Lazard has communicated the opportnity to numerous prospective buyers,
sent out marketing materials, and coordinated the creation of a data-room for buyers to conduct
due diligence on the Debtors' assets.
14. To date, the Debtors have received one expression of

interest that includes

the Trading Bay assets, but no definitive binding agreements have been reached. Although the
Debtors are continuing to negotiate terms with this prospective bidder, the Debtors may seek to
abandon their interests in Trading Bay absent material progress on a sale agreement.
6
68773-002\DOCS _ SF:65508.3

Ar2uments & Authorities

15. Pursuant to section 365(d)(2) of

the Bankptcy Code, a debtor may

assume or reject an executory contract or unexpired lease of residential real property or of

personal property "at any time before the confirmation of a plan. . .." 11 U.S.C. 365(d)(2).

However, on request of any party to such contract, the court "may order the trustee to determine
within a specified period of

time whether to assume or reject such contract or lease." Id.

16. Generally, the debtor must be given adequate time to make its

determination on whether to assume or reject an executory contract. As stated by Judge Walrath

in In re Physician Health Corp., 262 B.R. 290 (Bank. D. DeL. 2001):

Permitting the debtor to make its decision as late as the plan confirmation date enables the debtor to carefully evaluate the possible benefits and burdens of an executory contract. It is vitally important to all interested parties that the debtor make a prudent assumption or rejection decision.

Physician Health, 262 B.R. at 292.

17. In those instances where a party to a contract requests that the debtor

decide earlier than the plan confirmation date to assume or reject the contract, "the cour must
balance the interests of the contracting pary against the interests of

the debtor and its estate." Id.

factors, including: (a) the nature of

The court's decision should be driven by a number of

the

interests at stake, (b) the balance of the hur to the litigants, ( c) the good to be achieved, (d) the

safeguards afforded those litigants, and (e) whether the action to be taken is so in derogation of

Congress' scheme that the court may be said to be arbitrary. In re G-I Holdings, Inc., 308 B.R.
196,213 (Ban. D.NJ. 2004) (citations omitted). The most important consideration, however,

7
68773-002\DOCS _ SF:65508.3

consistent with the broad purpose of chapter 11, is "to permit the successful rehabilitation of
debtors." Id. (quoting NLRB v. Bildisco & Bildisco, 465 U.S. 513,104 S.Ct. 1188 (1984)).

18. Where a party seeks to shorten the debtor's statutory period to assume or
reject an executory contract, the burden is squarely on the movant to demonstrate cause. In re

Dana Corp., 350 B.R. 144, 147 (Banr. S.D.N.Y. 2006) (citing In re Republic Tech. Intl, LLC,
267 B.R. 548,554 (Bankr. S.D. Ohio 2001)).
19. Here, for the reasons outlined below, Union has failed to cary its burden

of establishing cause to compel the Debtors to assume or reject the Trading Bay Leases and the
Trading Bay Agreements on an expedited basis.
A. The Tradin2 Bav Leases Cannot be Assumed or Rejected Under 11 U.S.c. 365
20. The Trading Bay Leases are not executory contracts that can be assumed

or rejected under section 365 of

the Banptcy Code. Union is careful in limiting the relief

sought in the Motion to an order compellng the Debtors to assume or reject "certain executory
contracts." Notably, section 365(d)(2) of

the Bankrptcy Code does not authorize the Court to

compel the Debtors to assume or reject an "unexpired lease of nonresidential real property,"
which is addressed separately under section 365(d)(4) of

the Bankptcy Code.5 Section

365(d)(2) is limited by its terms to "executory contracts" and "unexpired leases of

residential real

property or of

personal property." Perhaps recognizing that the Trading Bay Leases are not

5 The Debtors intend to fie a separate motion to extend the deadline for assumption or rejection of

the Debtors'

various unexpired nonresidential real propert leases, which include certain oil and gas leases. However, the Debtors wil fie this motion out of an abundance of caution and without admitting that oil and gas leases constitute nonresidential real propert for purposes of section 365(d)(4) of the Bankruptcy Code. unexpired leases of
8
68773-002\DOCS _SF: 65508.3

nonresidential real property or personal property, Union attempts to lump the Trading Bay

Leases within the scope of executory contracts, which they clearly are not.
21. As Union admitted in prior filings in these Cases, the Debtors' working
interests in Trading Bay constitute an interest in land under applicable Alaska law. See Motion
of Union Oil Company of Californ ia

for Relieffrom Automatic Stay (Docket No. 100), dated

March 23, 2009, at page 8-9 (citing Aleut Corp. v. Stewart Petroleum, 5 A.B.R. 376 (Bank.

Alaska 1998). Real property assets do not constitute executory contracts, or for that matter
unexpired leases of

nonresidential real property, that can be assumed or rejected. Hence, to the

extent that the Motion extends to the Trading Bay Leases, it should be denied on the basis that
section 365(d)(2) of

the Banptcy Code simply does not apply.

B. The Interests of the Estates Strongly Outweigh Union's Request to Compel

Assumption or Rejection of the Tradin2 Bav A2reements

22. The Debtors do not admit that the Trading Bay Agreements are

necessarily executory contracts, but even if they are, the balance of harm raised by the Motion
clearly weighs in favor of the Debtors. If

the Debtors were prematurely required to assume or

reject the Trading Bay Agreements, the Debtors would be prevented from having an adequate

opportunity to conclude their ongoing sale process involving the Trading Bay assets. It may be
the case that the Debtors decide in the near future to abandon their interests in Trading Bay, but there should be no firm deadline of June 26 imposed on the Debtors right now to effectuate that

decision. The Debtors are willng to commit to a deadline of August 4, 2009 by which they
would either assume or reiect the Trading Bay Agreements.

9
68773-002\DOCS _ SF:65508.3

23. Union's requested deadline of June 26 is paricularly unreasonable given

that these Cases are at an early stage. The Debtors retain exclusivity and have yet to obtain final
approval of

their debtor-in-possession financing facility. In the interim, the Debtors (with the

assistance of Lazard) have been actively proceeding with a sales and marketing process. To
date, one bidder has expressed an interest in the Debtors' interests in Trading Bay. Although the
Debtors are continuing negotiations with this prospective buyer, the Debtors may seek to

abandon their interests in Trading Bay absent material progress on a sale agreement. Whatever
happens, the Debtors submit that a deadline of June 26 for these estates to actually assume or
reject the Trading Bay Agreements is unreasonable short.
24. Even from Union's perspective, denial of

the Motion wil not be

prejudiciaL. Whether the Debtors reject the Trading Bay Agreements on June 26 or August 4,
Union (as operator and majority owner) wil be in the same unenviable spot of

having to

continue to bear the cost of subsidizing operations at Trading Bay. This is paricularly painful
now that oil production has been suspended as a result of

volcanic activity.6 However, there is

nothing that the Debtors can do to alleviate this harm except to successfully transfer their
interests in Trading Bay to a wiling and solvent buyer. Rejection of

the Trading Bay

Agreements on an expedited basis wil not minimize Union's cash bur one way or the other.
25. Moreover, Union's assertion that the Debtors have accrued significant
liabilities to Union prior to the Petition Date on account of

unpaid allocated operational expenses

is irrelevant as a matter of law. Even assuming arguendo that the Debtors breached the Trading
6 To the extent that oil production at Trading Bay resumes in the futue, Union wil be protected by virte of Court's prior order requiring the Debtors to segregate their share of

the

the proceeds realized therefrom.

10
68773-002\DOCS _ SF:65 508.3

Bay Agreements prepetition, this is "not a legally cognizable reason to compel the Debtors to

decide whether to assume or reject (those) agreement(s)." Physician Health, 262 B.R. at 294.
Some cours have even have held that "a post-petition breach of an executory contract is not

sufficient cause to compel a debtor to assume or reject the contract before confirmation." Id. at

294 n.2 (citing In re El Paso Refinery, L.P., 220 B.R. 37,44 (Bank. W.D. Tex. 1998)). The
Debtors also dispute the charges assessed by Union as of the Petition Date and the expenses that
Union continues to incur notwithstanding the cessation of oil production activities.7

26. In sum, Union has failed to carry its burden of establishing cause to
shorten the Debtors' opportunity to assume or reject the Trading Bay Agreements. The Debtors
should be given at least until August 4, 2009 to conclude the sale process and determine how to

proceed. It may be that the Debtors will be in a position to act much sooner than that, but there
is no need to impose a looming deadline on these estates, especially given that Union's position

wil remain unchanged either way.

Conclusion
27. For the reasons set forth above, the Debtors urge the Cour to deny the

Motion.

7 Union has also fied a motion to compel the Debtors to pay approximately $8.8 milion in asserted administrative

expenses incured by Union from operations at Trading Bay. The Debtors are fiing concurrently herewith a separate objection to such motion.
11
68773-002\DOCS _ SF:65508.3

Dated: May 29, 2009

PACHULSKI STANG ZIEHL & JONES LLP

C#-,3 4 '6
arNo.109084)
James E. O'Neil (D r 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~pszjlaw.com

joneil~pszjlaw.com
mlitvak~pszj law.com
Counsel for the Debtors and Debtors in Possession

12
68773-002\DOCS _ SF:65508.3

IN THE UNITED STATES BANKRUPTCY COURT

In re: )
STATE OF

FOR THE DISTRICT OF DELA WARE

Chapter 11

)
)

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

Debtors. )
DELAWARE )
) ss:

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
May, 2009 she caused a copy of

the above-captioned action, and that on the 29th day of

the

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

indicated:

Debtors' Objection to Motion of Union Oil Company of California to Compel

Immediate Assumption or Reecti0l-:;;: ~:~

Kath en Forte Finlayso /

MARY E. CORCORA NOTARY PUBLIC STATE OF DELAWAR

11/4/cf ,

My commiss expires Nov. 4, 20

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 I.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); San Pedro Bay Pipeline Company (1234); Cameros the Debtors is i i i W. Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The mailing address for all of
Ocean Boulevard, Suite 1240, Long Beach, CA 90802.

SPECIAL SERVICE LIST

MAY 29, 2009

1 - Hand Delivery 2 - First Class Mail

Via Hand Delivery

(counsel to Union Oil) Norman M. Monhait, Esquire Rosenthal, Monhait & Goddess, P.a. 919 N. Market Street, Ste 1401 Wilmington, DE 19801

Via First Class Mail (counsel to Union Oil) Cabot Christianson, Esquire Christianson & Spraker
911 West 8th Avenue, Ste 201

Anchorage, AK 99501

Via First Class Mail (counsel to Union Oil) Richard L. Epling, Esquire David A. Crichlow, Esquire Pilsbury Winthrop Shaw Pittman LLP 1540 Broadway New York, NY 10036

DOCS_DE: 148791.

Pacific Energy Resources Ltd. Core Service List

Case No. 09-10785
Document No. 146442

04 - Hand Delivery
05 - First Class Mail

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

Wilmington, DE 19801
Hand Delivery (Counsel to Official Committee of
Unsecured Creditors)

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

David B. Stratton, Esquire James C. Carignan, Esquire Pepper Hamilton LLP

Hercules Plaza, Suite 1500

1313 Market Street Wilmington, DE 19899

Interoffice Pouch to Los Angeles 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

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

Wilmington, DE 19801

Los Angeles, CA 90067

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

First Class Mail

(Counsel to Goldman Sachs, J.Aron & Company; DIP Administrative Agent) Jeffrey Sabin, Esquire Steven Wilamowsky, Esquire Scott K. Seamon, Esquire Bingham McCutchen LLP 399 Park Avenue New York, NY 10022

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

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

First Class Mail

(Counsel to PEA Collateral Agent, et al.) Seth E. Jacobson, Esquire Chris L. Dickerson, Esquire
Skadden, Ars, Slate, Meagher & Flom LLP

333 West Wacker Drive, Suite 2100 Chicago, IL 60606

First Class Mail

(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

First Class Mail (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

First Class Mail (counsel to Official Committee of

Unsecured Creditors)

Robbin Itkin, Esquire Katherine Piper, Esquire Kelly Frazier, Esquire Steptoe & Johnson LLP
2121 Avenue of

the Stars, 28th Floor

Los Angeles, CA 90067