IN THE UNITED STATED BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE IN RE: PACIFIC ENERGY RESOURCES LTD.

, et aL, Debtors. ) Chapter 11

) )

) ) Chase No. 9-10785(KJC) ) (Jointly Administered)

OBJECTION TO CURE AMOUNT The United States, on behalf of the Department of the Interior ("Interior"), through the Minerals Management Service ("MMS") and the Bureau of Land Management ("BLM"), hereby files this limited objection to the Debtors Notice to Counterparties to Executory Contracts and Unexpired Leases That May Be Assumed and Assigned ("Amended Notice") and proposed Cure Amount as set forth on Exhibit 1. Dkt. # 1014. In support of this objection, we show as follows: BACKGROUND 1. The Alaska Native Claims Settlement Act ("ANCSA"), 43 U.S.C. 1601 et seq., as amended, created two types of native corporations in Alaska: regional corporations and village corporations. Under the settlement, each type of corporation had the right to select certain lands in Alaska. 43 U.S.C. 1611. Village corporations received the surface rights to the lands they selected; the subsurface rights under village selections were conveyed to the regional corporations within whose area the village corporation was located. 43 U.S.C. 1613(e). The United States transferred ownership of the surface rights to the leased property at issue to the SalamatofNative Association (the village corporation); the subsurface rights were conveyed to the Cook Inlet Region Corporation (CIRI). Two wells, West Foreland # 1 and #2, sit on SalamatofNative Association land, the subsurface of which is owned by CIRI. -1-

2. Under the Native Allotment Act of 1906, as amended, 43 U.S.C. 270-1 to 270-3 (1970), repealed with a savings clause, 43 U.S.C. 1617 (1976), the United States conveyed two small parcels within the leased area to individual native Alaskans and retained oil and gas rights, and a right to royalties, from those allotments. These allotments were excluded from the Salamatof and CIRI conveyances. 3. At the time of transfer of the leased area to Salamatof, the United States, through the BLM administered Lease BLM-A-035014. Under Section 14(g) of ANCSA, 43 U.S.C. 1613(g), the BLM could have waived administration of the Lease at the time of conveyance of interests to Salamatof and CIRI, but did not to do so. Therefore, the BLM administers Lease BLM-A-035014 ("BLM/CIRI Lease"), even though portions of the leased land were not Federal property] 4. CIRI, through the BLM, leased to the Debtors the BLM/CIRI Lease. As Debtors acknowledge, pursuant to the OCSLA, the regulations enacted pursuant thereto, notices to lessees, the terms of the leases and other applicable provisions of law, in exchange for the benefits derived from these leases, the Debtors are obligated, inter alia, to pay royalties to the lessors. See Dkt. # 25. 5. Pursuant to the Federal Oil and Gas Royalty Management Act, 30 U.S.C. 170let seq. ("FOGMA") and its implementing regulations and executive orders, MMS is the agency responsible for collecting and disbursing revenue resulting from oil and gas leases on federal and Indian lands. This royalty collection system requires lessees or their designees to self-report their 1 On or about October 2, 2009, BLM, on behalf of the United States, transferred all of its right, title and interest in the BLM/CIRI Lease to the State of Alaska, but retained administration of the lease. -2-

production and compute and pay monies monthly according to the lease terms based on production occurring on the leases. All royalty payments made to the MMS are subject to audit and adjustment. 30 C.F.R. 206.50(c). 6. On September 10, 2009, this Court entered the Order Granting Alternative Motion of the Debtors for an Order Authorizing Abandonment of Certain Interests in Oil and Gas Properties in Alaska (Excluding Trading Bay) and Rejection of Executory Contracts Relating Thereto ("Abandonment Order"). Dkt. # 876. The properties abandoned included the BLM/CIRI lease. Abandonment Order, Exhibit A. 7. On October 14, 2009, the Debtors filed the Debtors Motion for an Order: (A) Vacating This Courts Abandonment Order in Part for Certain Alaska Assets and (B) Authorizing the Debtors to Sell Such Assets to Cook Inlet Energy, LLC ("Reconsideration and Sale Motion"). Dkt. # 998. Therein, the Debtors seek to assume and sell (assign), inter alia, the BLM/CIRI Lease. Exhibit 1 to Exhibit B to the Reconsideration and Sale Motion. 8. The Debtors cannot assume and assign, sell, exchange or otherwise transfer any interest in the BLM/CIRI Lease without the consent of the United States, that is, by complying with the transfer regulations at 43 C.F.R. Part 3100, Subpart 3106. The two major requirements are that the transferee shall post the required bond and that the United States shall not consent to the assignment of leases that have outstanding obligations. 43 CF.R. 31006.2 & 7-3. 9. The Debtors acknowledge that they have outstanding obligations. According to Exhibit 1 of the Amended Notice, Debtors assert that, "[a]s of October 13, 2009", the outstanding

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royalties, or Cure Amount, for the BLM/CIRI lease is $539,861.00? MMS filed a Proof of Claim for $ 538,171.85; and then an Amended Proof of Claim for $545,010.14. Subsequently, based upon additional information provided by Debtors, MMS computed the amount of pre- and post-petition royalties and interest due as of October 26, 2009. The amount due as of that date is $510,566.59.3 10. Although the Amended Notice .states that the Cure Amount for assumed contracts and leases will be paid at the time of closing the sale or as soon as reasonably practicable thereafter, Exhibit 1 contradicts this statement with respect to the BLM/CIRI Lease. Exhibit 1, while setting forth the Cure Amount as $539,861.00, also states that this Cure Amount includes "$500,000 escrowed funds." However, on information and belief, such funds have not been escrowed. Further, a footnote to a draft copy of Schedule 1 to the Purchase and Sale Agreement ("PSA") (provided by the Debtors on October 21, 2009), states that the Estimated Cure Amount of $536,064.00 "[i]ncludes $500,000 to be Deposited by Buyer at the Alaska Interests Closing into a segregated account for subsequent reconciliation and settlement with BLM." No provision is made for the difference. 11. The United States does not object to an escrow account for the full and correct Cure Amount, plus additional amounts sufficient to cover the royalties and interest accruing between October 26, 2009, and the effective date (approval by BLM) of the transfer of the BLM/CIRI Lease from the Debtors to the Buyer, 43 C.F.R. 3106.7-4, if the proper procedures for Exhibit 1 also lists the prepetiton amount due as $36,064.00 and the postpetition amount as.$3,797.00 which do not total $539,861. 3 This amount may be reduced as the Debtors continue to belatedly submit additional documentation, which must be verified by MMS. -4-

resolution of that amount due and owing are recognized. 12. Neither the Amended Notice, the Reconsideration and Sale Motion, nor the draft Schedule 1 recognize the required procedure for reconciling royalty determinations. The Amended Notice states that the any disputed Cure Amounts will be resolved by the Court at the Hearing. By suggesting an escrow account for the MMS royalty Cure Amount, the Debtors recognize that MMS has the authority and discretion to establish the reasonable value of production for royalty purposes under the statutes and lease terms, Marathon Oil Co. v. United States, 604 F. Supp. 1375 (D. Alaska 1985), affd., 807 F.2d (9th Cir. 1986), cert. denied, 480 U.S. 940 (1987); and its interpretation "is entitled to controlling weightunless it is plainly enoneous or inconsistent with the regulation[s]". Shoshone Indian Tribe v. Hodel, 903 F.2d 784, 787 (10th Cir. 1990); Udall v. Tallman, 380 U.S. 1, 16-17, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965) (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700 (1945)); Wilder v. Prokop, 846 F.2d 613,619 (10th Cir.1988). The MMS regulations at 30 C.F.R. 290.101, et seq., specify the procedure for resolving royalty determinations. Final decisions of the MMS with regard to royalties are subject to judicial review under the Administrative Procedure Act (APA), 5 U.S.C. 701-706. Accordingly, any dispute of the Cure Amount must be resolved through the MMS administrative process.

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For the foregoing reasons, the United States objects to the Debtors Cure Amount, and accordingly, the Debtors ability to assume and assign the BLM/CIRI Lease without full compliance with the BLM/MMS regulations. Dated: October 27, 2009

Respectfully submitted, TONY WEST Assistant Attorney General DAVID WEISS Acting United States Attorney ELLEN W. SLIGHTS (DE Bar No. 2782) Assistant United States Attorney 1007 Orange Street, Suite 700 P.O. Box 2046 Wilmington, Delaware 19899-2046

/s/E. Kathleen Shahan J. CHRISTOPHER KOHN TRACY WHITAKER E. KATHLEEN SHAHAN PAMELA D. HUFF Civil Division U.S. Department of Justice P.O. Box 875 Ben Franldin Station Washington, D.C. 20044-0875 (202) 307-0249 ATTORNEYS FOR THE UNITED STATES

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CERTIFICATE OF SERVICE I, E. Kathleen Shahan, hereby certify that on the 27th day of October 2009, I caused the foregoing Objection to Cure Amount to be served upon the entities identified on the attached service list by e-mail.

/s/E. Kathleen Shahan E. Kathleen Shahan

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SERVICE LIST Gerald A. Tywoniuk (g .tywoniuk@pacenergy,com) W. Winn (swinn@zolfocooper.com) Mark A. Cervi (mcervi@zolfocooper.com Robert L Lynd (robert.lynd@lazard.com) Ira D. Kharasch (ilcharasch@pszjlaw.com) Robert M. Saunders (rsaunders@pszjlaw.com) James A. ONeil (joneill@pszjlaw.com) Gregg Amber (gamber@rutan.com) Christy Parker (cparker@mtan.com) Anthony C. Marino (amarino@schullyroberts.com Fil Agusti (fagusti@steptoe.com) Seth E. Jacobson (seth.jacobson@skadden.com) Jeffrey S. Sabin (jeffery.sabin@bingham.com)
SCott

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