UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: PACIFIC ENERGY RESOURCES LTD., et al. Debtors.

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Chapter 11 Case No. 09-10785 (KJC) (Jointly Administered)

Hearing Date: May 1, 2009 at 1:00 p.m. (ET) Committee Objection Deadline: April 24, 2009 at 4:00 p.m. (ET)

OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO APPLICATION OF DEBTORS FOR AN ORDER AUTHORIZING RETENTION OF MILLSTREAM ENERGY, LLC AS CONSULTANT AND ASSUMPTION OF PREPETITION CONSULTING AGREEMENT AS AMENDED POST-PETITION [Dkt. No. 158] The Official Committee of Unsecured Creditors (the Committee) of the abovecaptioned debtors and debtors-in-possession (the Debtors),1 by and through its undersigned counsel of record, hereby submits this objection (the Objection) to the Application of Debtors For an Order Authorizing Retention of Millstream Energy, LLC as Consultant and Assumption of Prepetition Consulting Agreement as Amended Post-Petition [Dkt. No. 158] (the Application).2 In support of this Objection, the Committee hereby states the following: PRELIMINARY STATEMENT The Committee does not generally object to the Debtors retention of Millstream Energy, LLC (Millstream) as internal engineer and reserves coordinator in connection with the proposed sale of the Debtors oil and gas assets. The Committee does object, however, to (a) the proposed retention of Millstream to provide services duplicative of those already being provided to the Debtors by Lazard Frres & Co. LLC (Lazard), Albrecht & Associates, Inc.
The Debtors in these chapter 11 cases are: Pacific Energy Resources Ltd., Petrocal Acquisition Corp., Pacific Energy Alaska Holdings, LLC, Carneros Acquisition Corp., Pacific Energy Alaska Operating LLC, San Pedro Bay Pipeline Company, Carneros Energy, Inc., and Gotland Oil, Inc.
2 1

Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the

Application.

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(Albrecht), and Zolfo Cooper Management, LLC (Zolfo), (b) the payment of success fees to Millstream, when the Debtors are already proposing to pay various success fees related to the sale of the Debtors assets to Lazard, Albrecht and Zolfo, and (c) the proposed payment of prepetition amounts due to Millstream through the assumption and assignment of the Consulting Agreement. As set forth in more detail below, it is the Committees position that Millstream should be retained on a hourly basis, as is customary in this industry, for its services, which services should be strictly limited so as to avoid any duplication with the services being provided by the Debtors other professionals. The Debtors have provided no justification for the payment of additional success fees to yet another professional in this case this time an engineer. BACKGROUND I. The Debtors Bankruptcy Cases 1. On March 8, 2009 (the Petition Date), Pacific Energy Resources Ltd. (PERL)

and certain of its domestic subsidiaries each filed voluntary petitions (the Chapter 11 Cases) for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. 101, et. seq. (the Bankruptcy Code). 2. On March 12, 2009, PERL filed a concomitant petition for relief in Canada (the

Canadian Proceeding) under the Companies Creditors Arrangement Act (the CCAA). On March 12, 2009, the Supreme Court of British Columbia entered an order which recognized the Chapter 11 Cases as a foreign proceeding under the CCAA. 3. Each of the Debtors continues to operate its businesses and manage its properties

as a debtor-in-possession pursuant to Section 1107(a) and 1108 of the Bankruptcy Code, and PERL continues to operate its business and manage its properties in the Canadian Proceeding. No trustee or examiner has been appointed in these cases.

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4.

The Debtors cases have been consolidated for procedural purposes and are being

jointly administered pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules). 5. On March 19, 2009, the Office of the United States Trustee for the District of

Delaware (the U.S. Trustee) appointed the Committee. II. The Proposed Millstream Retention 6. On April 8, 2009, the Debtors filed the Application to retain Millstream as

internal engineer and reserves coordinator in connection with the proposed sale of the Debtors oil and gas assets or any refinancing in these Chapter 11 Cases, and to assume the Consulting Agreement, which was entered into only a couple months prior to the Petition Date. Millstreams services to the Debtors are proposed to include, among other things, providing technical and financial evaluation services to the Debtors in connection with their divestiture and/or refinancing efforts. See Consulting Agt., at Exh. A. The technical services proposed to be provided by Millstream, include, but are not limited to, reservoir engineering, economic evaluations, budget reviews, participation in operational meetings, and project management. See Id. 7. follows: (a) (b) An hourly fee of $300 per hour. If either or both of PERL or PEAO (together the Companies) consummate a Sale Transaction,3 Millstream shall be paid a fee (the Sale Transaction Fee) as follows: The Application proposes to compensate Millstream for services rendered as

As used in the Consulting Agreement and the Application, the term Sale Transaction means: any transaction or series of transactions involving (a) an acquisition, merger, consolidation, or other business combination pursuant to which the business or assets of the Debtors are, directly or indirectly, combined with another company; (b) the acquisition, directly or indirectly, by a buyer or buyers (which term shall include a group of persons as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), of equity interests or options, or any combination thereof constituting a majority of the then outstanding stock of PERL or possessing a majority of

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(1) (2)

In the event of any Sale Transaction involving the Beta Assets the fee shall be $75,000. In the event of any Sale Transaction involving the Alaska Assets the fee shall be 1% of the Aggregate Consideration,4 subject to a minimum fee of $50,000 and a maximum fee of $425,000. In the event of a Sale Transaction involving all or substantially all of the assets or equity interests of the Companies (a Whole Company Sale), the total fee, subject to the minimum fee of $125,000, shall be the sum of the fees based on the fee set forth above for each of the Beta Assets and the Alaska Assets. The Aggregate Consideration shall be the value allocated to each in the definitive purchase and sale agreement(s) relating to such transaction, or, if no such value is allocated, as mutually agreed in good faith by the Company and Consultant. For example, if the total Aggregate Consideration received as a result of a Whole Company Sale is $240,000,000 and $40,000,000 is allocated to the Alaska Assets and $200,000,000 is allocated to the Beta Assets, the total fees shall be $475,000 - $75,000 attributable to the Beta Assets and $400,000 attributable to the Alaska Assets ($40,000,000 times 1.0%). Furthermore, if a third-party offer, bid or proposal with respect to a Sale Transaction is received and either or both of the Companies ultimately enter into an Existing Stakeholder Deal,5 such transaction

(3)

(4)

the then outstanding voting power of either or both of the Companies, except for any acquisition of such equity interests or options resulting from a credit bid of the Companies secured lenders; (c) any other purchase or acquisition, directly or indirectly, by a buyer or buyers of significant assets, securities or other interests of the Debtors or (d) the formation of a joint venture or partnership with the [sic] either of both of the Companies or direct investment in either or both of the Companies for the purpose of effecting a transfer of an interest in either or both of the Companies to a third party. See Amendment to Consulting Agt., at fn. 2.
4

As used in the Consulting Agreement, Aggregate Consideration means means (x) the total amount of cash and the fair market value (on the date of payment) of all of the property paid and payable (including amounts paid into escrow) in connection with the Sale Transaction (or any related transaction), including amounts paid and payable in respect of convertible securities, preferred equity securities, warrants, stock appreciation rights, option or similar rights, whether or not vested, plus (y) the principal amount of all indebtedness for borrowed money or other liabilities of the Company or relevant Company entity, as applicable, as set forth on the most recent balance sheet, or, in case of the sale of assets, all indebtedness for borrowed money or other liabilities (including any payables) assumed by the third party. If the Aggregate Consideration is subject to increase by contingent payments related to future events, the portion of our fee relating thereto shall be calculated by us in good faith and paid to us upon consummation of the Sale Transaction.

See Amendment to Consulting Agt., at fn. 5. Existing Stakeholder Deal as used in the Consulting Agreement means any transaction described in the definition of Sales in which any holders of debt securities or obligations of either or both of the Companies exchange or convert any portion of such securities or obligations for equity interests or assets or other interests. See Amendment to Consulting Agt., at fn. 6.
5

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shall be deemed to be a Sale Transaction and Consultant shall be paid the Sales Transaction Fee on consummation thereof. (c) If either or both of the Companies raises and closes new or additional equity investments of at lease $100,000,000, Millstream shall receive a fee of $500,000 (the New Equity Fee).

See Amendment to Consulting Agt., at 1 and 2.

8.

Further, the Consulting Agreement provides for the reimbursement of

Millstreams other reasonable fees and expenses. See Original Consulting Agt., at 4. The Application also states that Millstream is owed approximately $20,550 for prepetition services provided to the Debtors. See Application, at 38. Therefore, the Debtors propose to assume, as amended, the Consulting Agreement and to pay Millstream the prepetition amounts due pursuant to Section 365 of the Bankruptcy Code. See Id. OBJECTION A. 9. Millstreams Services and Compensation Must Be Limited. The scope of the services that Millstream is to provide to the Debtors appears to

be largely duplicative of the services already proposed to be provided by Albrecht and Lazard. Albrecht has been retained to act as the Debtors agent in the sale of the Debtors California oil and gas properties (and related assets) which comprise a significant portion of the Debtors valuable assets. Similarly, Lazard has been retained for, among other things, assisting with identifying and evaluating candidates for a potential sale of the Debtors assets, and advising the Debtors in connection with negotiations regarding any such sale. Meanwhile, the Debtors now propose to retain Millstream for, among other things, formulating strategic options and plans, identifying and contacting potential buyers, developing marketing materials, organizing datarooms, and making presentations. See Original Consulting Agt., at Exh. A (emphasis added). Thus, it appears that the Debtors now propose to retain Millstream to perform essentially the same sale-related services that are already proposed to be provided by Lazard and Albrecht. 10. Moreover, the Debtors have already proposed that Albrecht and Lazard be paid

significant success fees for their efforts, to which the Committee has objected. Now, the Debtors

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propose to pay even more success fees to Millstream, including sale transaction fees of up to $500,000 and a New Equity Fee of $500,000. 11. Millstream is not proposed to be retained as the Debtors investment banker for

that the Debtors have proposed to retain Lazard. Millstream is not proposed to be retained as the Debtors sales agent for that the Debtors have proposed to retain Albrecht. Instead, the Debtors, themselves, have described Millstream as necessary because, Mr. Clemans, the individual engineer that will be performing all services on behalf of Millstream, will act as the internal reservoir engineer and reserves coordinator in connection with the sale of the Debtors Beta Assets and Alaska Assets and any refinancing efforts undertaken by the Debtors. See Application, at 23. However, the Consulting Agreement proposes that Millstream will provide services related to the Debtors proposed sales that include typical investment banking services, including identifying and contacting potential buyers, organizing data rooms, and developing marketing materials. See Original Consulting Agt., at Exh. A. This is far beyond the appropriate scope of Millstreams services as the Debtors internal reservoir engineer and is duplicative of the services that are already proposed to be provided by Lazard and Albrecht. 12. Moreover, under the Application, it appears that Millstream would be entitled to a

sale transaction fee, even when it is Lazard or Albrecht that connect the ultimate buyer with the Debtors and perform services regarding such sale. Further, Millstream could ultimately be entitled to the New Equity Fee, under the current engagement scheme, even if there is a refinancing orchestrated by Lazard and Zolfo. In light of the proposed retentions of Lazard and Albrecht to run the Debtors sale process and Lazard and Zolfo to pursue any financial restructuring of the Debtors, the Debtors have provided absolutely no basis for the payment of any success fees to Millstream in these Chapter 11 Cases. Indeed, it is not customary in this industry to pay an internal reservoir engineer any success or other incentive fee for his efforts because such a fee can potentially taint the objectivity of the engineer in performing his reserve analyses.

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13.

Accordingly, the Committee objects to the duplicative and unnecessary services

and success fees proposed with respect to Millstreams retention, and submits that (a) Millstreams services should be strictly limited to providing the Debtors with consulting services as the Debtors internal reservoir engineer and reserves coordinator, and should not include any investment banking, solicitation or other marketing-related services with respect to the potential sale of the Debtors assets or any refinancing of the Debtors, and (b) Millstream should be entitled to its hourly fee only and should not be entitled to any success fees. B. 14. The Debtors Request to Pay Millstream Prepetition Amounts Due Should be Denied. In order for the Debtors to retain a professional, such professional must be

disinterested under the Bankruptcy Code. See 11 U.S.C. 327. As the Third Circuit has explained: Under Section 101(14), a disinterested person must be a person who is not a creditor. The Code defines the term creditor as meaning any entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor, 11 U.S.C. 101(10)(A), and the commencement of each of the debtors chapter 11 cases constituted an order for relief. See 11 U.S.C. 301. These provisions, taken together, unambiguously forbid a debtor in possession from retaining a prepetition creditor to assist it in the execution of its Title 11 duties. U.S. Trustee v. Price Waterhouse, 19 F.3d 138, 141 (3d Cir. 1994); see also In re Pillowtex, Inc., 303 F.3d 246, 253 (3d Cir. 2002) (citing cases wherein courts have required professionals to waive their prepetition claims prior to being retained to ensure disinterestedness). 15. In the instant case, the Debtors propose to retain Millstream despite the fact that

Millstream is owed $20,550 in prepetition fees and expenses. Instead of requiring Millstream to waive the prepetition amounts owed to ensure that Millstream is not a creditor of the Debtors under Section 101(14) of the Bankruptcy Code, the Debtors propose to assume Millstreams prepetition Consulting Agreement that was entered into only a couple months prior to the Petition Date, as amended post-petition, and to pay Millstream the prepetition amounts due in

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addition to the already excessive success fees proposed to be paid to Millstream. There is no justification for this disparate treatment of Millstream as a professional in these cases. 16. The Committee objects to the Debtors attempt to bypass the disinterestedness

requirements of the Bankruptcy Code and to pay prepetition amounts due to Millstream in this manner. Millstream should be retained on an hourly basis pursuant to an engagement agreement under Section 327(a) of the Bankruptcy Code, similar to the Debtors other advisors. Further, Millstream should be required to waive any prepetition amounts due prior to its retention in these cases to ensure that it is not a creditor of the Debtors estates. CONCLUSION For the reasons set forth above, the Committee respectfully requests that this Court enter an order denying the relief requested in the Application as currently proposed, or in the alternative modifying the terms of the proposed retention of Millstream as detailed above; and granting such other relief as this Court deems just, equitable and appropriate.

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