IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re:

) Chapter 11

PACIFIC ENERGY RESOURCES LTD., et a!., i

Debtor.

) Case No. 09-10785 (KJe) )

) Related Docket No. 1101

Hearing Date: April 19,2010 at 3:00 p.m.

OBJECTION OF DEBTORS TO MOTION OF MARATHON OIL ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE UNDER SECTION S03(b)(I)(A) (DOCKET NO. 1101) PURSUANT TO 11 D.S.C. S02(b) AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 3007
COMPANY FOR

The above-captioned debtors and debtors in possession (together, the "Debtors"

or "Movants") hereby fie this objection (the "Objection") pursuant to 11 U.S.c. 502(b) and
Federal Rule of

Bankuptcy Procedure 3007 (the "Bankruptcy Rules") to the Motion of

Marathon Oil Company for Allowance and Payment of Administrative Expense Under 11 U.S.c.
Section 503(b)(1 )(A) (Docket No. 1101) ("Claim 1101") filed by Marathon Oil Company

("Marathon" or "Claimant") on N ovem ber 5, 2009. Claim 1101 seeks the recovery of an
administrative expense of

"up to $11,060,000.00" (Claim 1101 at 3, line 11) by reason of

Debtors' asserted liability to Marathon for a 31.6% share of postpetition decommissioning and
maintenance obligations association with those interests of

Debtors in an oil and gas driling and

processing offshore platform (known as the Spurr Platform) and any related onshore facilities, oil
the Debtors' federal tax identification The Debtors in these cases, along with the last four digits of each of 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); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5468). The mailing address for all of the Debtors is 111 W. Ocean Boulevard, Suite 1240, Long Beach, CA 90802.

68773-002\DOCS_LA:217066.3

and gas drillng, development, production and processing facilities located in Cook Inlet, Alaska
(collectively, the "Spurr Facilities").

JURISDICTION
i. The Court has jurisdiction over this matter pursuant to 28 U.S.c. 157

and 1334. Venue is proper pursuant to 28 U.S.c. 1408 and 1409. This is a core proceeding
pursuant to 28 U.S.c. 157(b)(2)(B).

2. The statutory predicates for

the reliefrequested herein are 11 U.S.c.

502(b) and Federal Rule of

Bankruptcy Procedure 3007.

BACKGROUND
3. 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 1107(a) and 1108 of

the Bankruptcy Code. No request has

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

4. The Debtors are a group of independent energy companies that, prior to

the Petition Date, were engaged in the acquisition, development, and exploitation of oil and gas
properties in the western United States. As of the Petition Date, one of the Debtors, Pacific

Energy Alaska Operating LLC ("PEAO"), and Marathon shared working interests in the Spurr
Facilities. These properties were leased from the State of Alaska. As of

the Petition Date,

PEAO and Marathon each had a 50% working interest in the Spurr Facilities. Operations at the
Spurr Facilities ceased years prior to the Petition Date; only decommissioning remained to be

68773-002\DOCS _ LA:217066.3

done.
5. At all relevant times, Marathon was the operator of

the Spurr Facilities.

As of

the Petition Date, PEAO was a party to various contracts with Marathon setting forth the

relationship of

the parties with respect to the Spurr Facilities (the "Contracts"). Under the terms

of

the Contracts, PEAO's and Marathon's respective responsibilities for decommissioning

total

liabilities were no more than 31.6% as to PEAO, and at least 68.4% as to Marathon, of

costs.
6. Recognizing that there could be no conceivable value associated with the

long-defunct Spurr Facilities, the Debtors promptly moved on May 11,2009, to abandon their

interests therein (Docket No. 291) (the "Abandonment Motion"). Marathon objected to
abandonment on June 1, 2009 (Docket No. 371), and then insisted on a series of continuances to

which the Debtors agreed, provided that abandonment would be retroactive at least to the date of
the initial hearing on the Abandonment Motion of June 3, 2009.
7. On October 6,2009, this Court entered its order (Docket No. 975) (the

"Abandonment Order") authorizing and deeming Debtors to have abandoned their interests in the
Spurr Facilities and rejected the Contracts nunc pro tunc to June 3, 2009.

CLAIM 1101
8. On November 5, 2009, Marathon filed Claim 1101, which seeks to have

an estimated amount of "up to $11,600,000" allowed as an administrative expense based on

Debtors' asserted liability for at least 31.6% of

the costs associated with decommissioning the

Spurr Facilities. Marathon expects that such liabilities will range between $21,000,000 and

68773-002\DOCS _ LA:217066.3

$35,000,000 (i.e., $11,060,000 is 31.6% of

$35,000,000). As of

the filing of

Claim 1101,

Marathon had already incurred $2,450,731.07 for "Decommissioning and maintenance obligations" (Claim 1101 at 3, line 4); as a result, Marathon asserts that $774,431.02 (or 31.6%
of $2,450,731.07) of its claim has been liquidated (id. at 3 n.2).

RELIEF REQUESTED
9. Pursuant to section 502(b) of

the Bankruptcy Code and Bankrptcy Rule

3007, the Debtors object to Claim 1101 on three grounds. First, insofar as Claim 1101 is
asserted against any of

the Debtors other than PEAO, it is asserted against the wrong debtor

because only PEAO shared a working interest in the Spurr Facilities with Marathon and was a

party to the Contracts. Second, insofar as Claim 1101 asserts a claim for future
decommissioning expenses, Claim 1101 should be disallowed because it is a contingent claim of
a co-debtor under section 502( e) of the Bankruptcy Code. Third, Claim 1101 in its entirety is not

entitled to administrative priority because the amounts expended by Marathon have not benefited
the Debtors' estates, but solely Marathon itself. 2

BASIS FOR RELIEF

A. Claim 1101 Should Be Disallowed in Its Entirety Against All Debtors Other Than
PEAO 10. While Marathon conclusorily asserts in paragraph 10 of Claim 1101 that
"Each of the Decommissioning and maintenance obligations that were incurred by Marathon

were incurred while the Debtors owned the property or are a result of state law obligations that
2 Debtors reserve the right to subsequently and separately contest the amount of Claim i 101 should that prove
necessary.

68773-002\DOCS_LA:217066.3

the Debtors remain liable for despite abandonment" (at 4, lines 12-15, emphases added), it was
only PEAO that prior to the entry of

the Abandonment Order on October 6, 2009, shared a

working interest in the Spurr Facilities with Marathon and was a party to the Contracts.
Admittedly, all of

the Debtors joined in the Abandonment Motion; but this was expressly stated

to be "Out of an abundance of caution" (Abandonment Motion at 2 n.3) given that "the

Abandoned Assets belong to (PEAO)" (id.).
11. Accordingly, except as to PEAO, Claim 1101 is asserted against the

wrong Debtors and should be disallowed against such Debtors on that basis alone.
B. Claim 1101 Should Be Disallowed as to Future Decommissionin2; Expenses
12. Except as to $774,431.02 that Marathon alleges has been actually incurred

and represents PEAO's share of

expenses, Claim 1101 relates to estimatedfuture

decommissioning costs of "up to 11 ,600,000" (or $10,825,568.98) (the "Future Costs").

13. Section 502(e)(1)(B) of title 11 of

the United States Code (the

"Bankruptcy Code") provides in pertinent part:

(T)he court shall disallow any claim for reimbursement or
contribution of any entity that is liable with the debtor. .. to the

extent that - ...

(B) such claim for reimbursement or contribution is contingent at the time of allowance or disallowance of such claim for
reimbursement or contribution.

11 US.C. 502(e)(1)(B). "For a claim to be disallowed under section 502(e)(1)(B) of

the

Bankuptcy Code, the claimant must assert a (i) contingent claim, (ii) for reimbursement of a
debt, (iii) for which the debtors and the claimant are co-liable. All three elements must be

68773-002\DOCS_LA:2

7066.3

satisfied for the claim to be disallowed." In re RNI Wind Down Corp., 369 B.R. 174, 181
(Bankr. D. DeI. 2007) (citing In re Pinnacle Brands Inc. 259 B.R. 46, 55 (Bank. D. DeI. 2001)).

Further, section 502( e)(1 )(B) applies to postpetition claims as well as prepetition claims. Juniper
Dev. Group v. Kahn (In re Hemmingi.lIay Transport, Inc.), 993 F.2d 915, 930 (1 st Cir. 1993).
14. Here, the Future Costs portion of Claim 1101 should be disallowed under

section 502( e)(1 )(B) as the contingent claim of a co-debtor (Marathon) for another creditor (State

of Alaska). The State of Alaska (the "State") fied claim number 449 against PEAO and
amended claim number 465 against PERL,3 each of

which includes (among other claims)

unliquidated claims for decommissioning and abandonment liabilities of at least $40,000,000 to

$80,000,000 and contingent environmental claims. Although the Debtors believe that a portion
of

the State's claims have been satisfied through the sale of certain of PEAO's Alaska assets, the

State has informed the Debtors that it continues to assert all available claims. Hence, all three
elements (co-liability, contribution, and contingency) are met for disallowance of

the Future

Costs portion of Claim 1101 under section 502( e)( 1 )(B) of the Bankruptcy Code.

15. First, Marathon and PEAO are co-liable to the State for decommissioning

expenses associated with the Spurr Facilities. In Claim 1101, Marathon asserts at least two
sources (contract and statute) for Marathon's and PEAO's co-liability to the State for
decommissioning obligations associated with the Spurr Facilities. Claim 110 1 ~ 4.

Amended claim number 465 amended claim number 447 against PERL. In addition to claim number 449 against PEAO, the State fied claim number 448 against PEAO, which is an unliquidated claim for at least $4,000,000 for environmental clean-up.

68773 -002\DOCS _ LA:2

I 7066.3

16. Second, Marathon admits that it wil have a "contribution" claim against

PEAO for the unpaid share of costs associated with decommissioning the Spurr Facilities. Claim
1101 ~ 10 ("if Marathon completes the Decommissioning, then Marathon is entitled to

reimbursement from the Debtors because of indemnification and contribution liability that may
arise under Alaska law").

17. Third, Claim 1101 as to Future Costs is contingent and unliquidated.

Marathon has yet to incur or pay the Future Costs relating to decommissioning of the Spurr
Facilities.
18. The United States Bankruptcy Court for the District of Delaware has
found, in the context of section 503(3)(1 )(B), that "( a) claim is contingent where it 'has not yet

accrued and is ... dependent upon some future event that may never happen. ", RNI, 369 B.R. at
182. For instance, bankuptcy courts have concluded that environmental clean-up obligations are

contingent until actually incurred and funded. See, e.g., Norpak Corp. v, Eagle-Picher Indus.,

Inc. (In re Eagle-Picher Indus" Inc.), 177 B.R. 869, 871 (Bankr. S.D. Ohio 1995) (the debtor
remained obligated to a government for environmental clean-up even after paying a co-obligor because the co-obligor might not actually do the clean-up or the co-obligor might do the clean-up
in a way that the government did not find satisfactory), aff'd, 131 F.3d 1185 (6th Cir. 1997);
RNI, 369 B.R. at 190 (purpose of section 502( e)(1 )(B) is to preclude double payment and is

directed at the diffculty of administering an estate while contingent claims exist); In re APCO
Liquidating Trust, 370 B.R. 625, 636 (Bankr. D. DeI. 2007) (section 503(e)(1)(B) encourages

cleanup because contingent claim for contribution for debtor that is co-liable is disallowed unless

68773-002\DOCS _ LA:217066.3

amounts are incurred); In re Kaiser Group Int 'I, 289 B.R. 597, 608 (Bankr. D. DeI.

2003)(creditor's "claim must be disallowed (under section 502(e)(1)) to the extent that it seeks to
recover future costs."). See also Juniper Dev. Group v. Kahn (In re Hemmingway Transport,

Inc.), 126 B.R. 656, 662 (D. Mass. 1991) (unpaid future response costs are contingent within the
meaning of section 502( e)(1 )(B) notwithstanding that the co-liable creditor received an agency

notice letter naming it as a potentially responsible party), aff'd in relevant part, 993 F.2d 915,

930930 (1 st Cir. 1993); Syntex Corp. v. Charter Co. (In re Charter Co.), 862 F.2d 1500, 1504
(11th Cir. 1989) (section 502( e)(1 )(B) encourages clean-up under CERCLA because expenses

need to be paid for a claim to be allowed).

19. In APCO, Judge Shannon further elucidated the point as follows:

The law is clear that "(t)he contingency contemplated by (section) 502( e)(1 )(B) relates to both payment and liability." Therefore, a claimant's "claim is contingent until their liability is established... and the co-debtor has paid the creditor."

APCO Liquidating Trust, 370 B.R. at 636 (citations omitted). Plugging and abandonment
obligations in particular have been determined by at least one bankruptcy court as contingent

obligations until actually funded. In re Tri-Union Dev. Corp., 314 B.R. 611, 617 (Bankr. S.D.
Tex. 2004) ("Because the (government) has yet to call on any of

the respondents to fund the

P&A Obligations, the P&A Obligations remain unfunded, and are thus contingent as envisioned
by 502(e).").
20. Here, Marathon admits that the Future Costs portion of Claim 1101 have

not yet been incurred. Claim 110 1 ~ 6. The Future Costs portion of Claim 1101 is therefore

68773-002\DOCS_LA:217066.3

contingent. As the claim is also one for contribution (and reimbursement) for which PEAO is
co-liable, the Future Costs portion of Claim 1101 must be disallowed under section 502( e)(1 )(B).

C. Any Portion of Claim 1101 That Is Not Disallowed Should Be Reclassified As General Unsecured

21. At a minimum, the Court should reclassify Claim 1101 as general

unsecured. The allowance of an administrative expense claim is codified in section 503(b) of the

Bankptcy 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).
22. 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 Coller on Bankruptcy ~

503.05(2), at 503-21 (15th rev. ed. 2010) See Commonwealth of Pennsylvania Dep 't of Envtl

Resources v Tri-State Clinical Laboratories, 178 F.3d 685,691 (3d Cir. 1999) ("(T)hose who
continue to transact business 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").
23. For a debt to qualify as an administrative expense, it must satisfy a two-

prong test: "the claimant must establish that its expense arose (1) from a postpetition transaction

with the debtor and (2) that the transaction accorded an actual benefit to the estate." In re Insilco
Tech., Inc., 309 B.R. 111, 114 (Bankr. D. DeI. 2004) (citing Calpine Corp. v. O'Brien Envtl

68773-002\DOCS_LA:2

I 7066.3

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).
24. Under the express terms of section 503(b)(1)( a), for a postpetition liability

to be an administrative priority expense, it must be "actual" and "necessary." An actual expense

must have been paid and is not contingent. Hemmingway, 993 F.2d at 930. An expense is
"necessary" only to the extent that it benefits the estate. In re Garden Ridge Corp., 323 B.R.
136, 142 (Bankr. D. DeL. 2005) ("The value of the administrative claim is determined by the
amount of

post-petition benefit to the estate.") (citing In re CM Holdings, Inc., 264 B.R. 141,

149 (Bankr. D. DeL. 2000) (administrative expense claims are equitable in nature and are valued
at the amount of

benefit not necessarily by contract terms)).

25. The claimant carries 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 ofthe estate assets." 0 'Brien, 181 F.3d at 533
(emphasis added); see also Goody's Family Clothing Inc, v Mountaineer Property Co. II (In re

Goody's family Clothing, Inc.), 401 B.R. 656, 663-664 (Bankr. D. DeI. 2009). "Since the
affording of priority status to one creditor has an impact upon other creditors of

the debtor's

estate and conflicts with the goal of bankruptcy to provide creditors with an equal distribution of

a debtor's resources, ... administrative claims must be narrowly construed." In re Lease-a-Fleet,

Inc. 140 B.R. 840,844 (Bankr. E.D. Pa. 1992).
26. As the Third Circuit stated in 0 'Brien: "'For a claim in its entirety to be

entitled to first priority under (503(b)(1)(A)), the debt must arise from a transaction with the

68773-002\DOCS _ LA:2 i 7066.3

10

debtor-in-possession ... (and) the consideration supporting the right to payment (must be)
beneficial to the debtor-in-possession in the operation of

the business. ", 181 F.3d at 532-533.

27. Here, given that the Future Costs have yet to be spent, no "actual benefit"

has been afforded to PEAO's estate by that portion of

Claim 1101, which in

and of

itself

precludes such costs from being awarded administrative expense status. See Insilco, 309 B.R. at
114 n.8 (concluding that the mere fact costs had not been actually expended "alone could be a

sufficient ground upon which to deny administrative expense status to the... claim forfuture
investigation and

future remediation work").

28. Further, as noted by this Court in Insilco: "(i)n general, only those costs

incurred to cleanup property which an estate has an interest in or owns may qualify as
administrative expenses." 309 B.R. at 114. PEAO has no interest in the Spurr Facilities by
virtue of

the Abandonment Order. See In re Kent, 411 B.R. 743, 752 (Bankr. M.D. Fla. 2009)
the Bankruptcy ceases to be property of

(property that is abandoned under section 554 of

the

estate and rights to the property are treated as if no bankruptcy petition was filed).
29. As for the portion of Claim 1101 relating to past decommissioning costs,
the first element to establishing an administrative claim is that it must arise from a post

petition

transaction with the debtor. '''It is only when the debtor-in-possession's actions themselves. . .
give rise to a legal

liability that the claimant is entitled to the priority of a cost and expense of

administration. ", Bachman v, Commercial Fin. Servs. Inc, (In re Commercial Fin. Servs., Inc.),
246 F.3d 1291, 1294 (lOth Cir. 2001) (quoting Cramer v. Mammoth Mart, Inc, (In re Mammoth

Mart, Inc.), 536 F.2d 950, 954 (1 st Cir. 1976)). '''A debt is not entitled to priority simply

68773-002\DOCS _ LA:

2 I

7066.3

11

because the right to payment arises after the debtor in possession has begun managing the
estate. '" In re Mid-A

mer. Waste Sys., Inc" 228 B.R. 816, 821 (Bank. D. DeI. 1999).

30. The Debtors' estates took no action whatsoever on a postpetition basis to

incur the claims that Marathon now asserts as administrative expenses. Operations at the Spurr
Facilities ceased years prior to the Petition Date. Hence, the Debtors moved promptly to

abandon PEAO's interests therein. The Spurr Facilities have been a liability from the start of
this case and the Debtors have done nothing but try to abandon their interests therein as soon as
possible. The Spurr Facilities have provided no benefit, and never had the potential to provide
any benefit to these estates. Marathon is therefore not entitled to any administrative claims

relating to the Spurr Facilities, particularly for any charges that may have been incurred after
June 3, 2009, the effective date of

the Abandonment Order.

RESERVATION OF RIGHTS
31. The Movants expressly reserve the right to amend, modify or supplement

this Objection, and to file additional objections to any other claims (filed or not) that may be
asserted against the Debtors. Should one or more of

the grounds of objection stated in this

Objection be overruled, the Movants reserve their right to object to the Claimant's claims in this

bankruptcy case on any other ground that bankptcy and nonbankruptcy law permits.
32. Further, notwithstanding anything contained in this Objection shall be

construed as a waiver of any rights that Debtors or their estates may have (a) to bring avoidance
actions under the applicable sections of

the Bankuptcy Code, including, but not limited to, 11

68773-002\DOCS_LA:217066.3

12

U.S.C. 547, against Marathon, or (b) to exercise Debtor's rights of

setoff

against Marathon

relating to such avoidance actions.

WHEREFORE, the Movants respectfully request that the Court enter an order
disallowing or reclassifying Claim 1101 for the reasons set forth herein.

Dated: March 24, 2010

P ACHULSKI STANG ZIEHL & JONES LLP

..

* S
I a . Kharasch (CA Bar No.1 09084)

J es K.T. Hunter (CA Bar No. 73369)

Maxim B. Litvak (CA BarNo. 215852) James E. O'Neill (Bar No. 4042)
919 North Market Street, 17th Floor

P.O. Box 8705 Wilmington, DE 19899-8705 (Courier 19801)

Telephone: (302) 652-4100
Facsimile: (302) 652-4400

Email: ikharasch(gpszilaw.com
i hunter(gpszilaw .com

mlitvak(gpszi law.com
ioneil(gpszi law. com

Counsel for the Debtors and Debtors in Possession

68773-002\DOCS_LA:217066J

13

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELA WARE

In re:

) Chapter 11

PACIFIC ENERGY RESOURCES LTD., et aI., i

Debtor.

)
) Case No. 09-10785 (KJC) )
) Related Docket No.1 101

)
Hearing Date: April 19,201 Oat 3:00 p.m.

FOR

NOTICE OF HEARING ON MOTION OF MARATHON OIL COMPANY ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE UNDER 11 U.S.c. SECTION S03(b)(1)(A) rnOCKET NO. 11011

TO: The United States Trustee for the District of Delaware, all affected claimants, and all
parties on the Rule 2002 Service List.

The above captioned Debtors (the "Debtors") have filed the attached Objection to

Motion of Marathon Oil Company for Allowance and Payment of Administrative Expense
Under 11 U.S.c. Section 503(b)(1)(A) Docket No. 1101) Pursuant to 11 U.S.c. 502(b) and

Federal Rule of Bankruptcy Procedure 3007.

The hearing on the Motion of Marathon Oil Company for Allowance and

Payment of Administrative Expense Under 11 U.S.C. Section 503(b)(1)(A) (Docket No. 1101) is
scheduled to be held on April

19, 2010 at 3:00 p.m. (ET), in the courtroom of the Honorable

Kevin J. Carey, Judge of

the United States Bankuptcy Court for the District of

Delaware, 824 N.

Market Street, 5th Floor, Courtroom No.5, Wilmington, Delaware 19801.

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); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The mailing address for all of

the Debtors is

111 W. Ocean Boulevard, Suite 1240, Long Beach, CA 90802.

68773-002\DOCS_LA:216614.2

Dated: March 24,2010

P ACHULSKI STANG ZIEHL & JONES LLP

/l~ ~ 0J ki

Ira Kharasch (CA Bar No.1 09084)

Jame .T. Hunter (CA Bar No. 73369) Maxim B. Litvak (CA Bar No. 215852)
James E. O'Neil (Bar No. 4042)

919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705 (Courier 19801)
Telephone: (302) 652-4100
Facsimile: (302) 652-4400
Emai1: ikharasch(gpszilaw.com

ihunter(apszilaw.com
mli tvak(gpszi law .com

ioneil(gpszi law.com
Counsel for Debtors and Debtors in Possession

68773-002\DOCS_LA:216614.2