UNITED STATES BANKRUPTCY COURT 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)

FEE AUDITORS FINAL REPORT REGARDING INTERIM FEE APPLICATION OF JENSEN LUNNEY MACINNES LAW CORP. AND TODD McMAHON, INC., FOR THE FIFTH INTERIM PERIOD This is the final report of Warren H. Smith & Associates, P.C., acting in its capacity as fee auditor in the above-captioned bankruptcy proceedings, regarding the Fee Application of Jensen Lunney MacInnes Law Corporation and Todd McMahon, Inc., for the Fifth Interim Period (the Application). BACKGROUND 1. Jensen Lunny MacInnes Law Corporation (JLM) was retained as Canadian counsel

to the debtors-in-possession and Todd McMahon, Inc. (McMahon), was appointed monitor by the British Columbia Supreme Court. In the Application, JLM seeks approval of fees totaling $24,512.501 and costs totaling $4,239.80 for its services from October 1, 2009, through June 30, 2010 (the Application Period2), and McMahon seeks approval of fees totaling $15,750.00 and costs totaling $0.00 for its services from October 1, 2009, through June 30, 2010.

Except where otherwise noted, all amounts for fees, expenses, and taxes are in Canadian

dollars. The fifth interim period is March 1, 2010 through May 31, 2010. However, for reasons unknown, JLM and McMahons Application covers the time frame of October 1, 2009 through June 30, 2010. Thus, this report encompasses this time frame.
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2

2.

In conducting this audit and reaching the conclusions and recommendations

contained herein, we reviewed in detail the Application in its entirety, including each of the time and expense entries included in the exhibits to the Application, for compliance with Local Rule 2016-2 of the Local Rules of the United States Bankruptcy Court for the District of Delaware, Amended Effective February 1, 2010, and the United States Trustee Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed Under 11 U.S.C. 330, Issued January 30, 1996 (the Guidelines), as well as for consistency with precedent established in the United States Bankruptcy Court for the District of Delaware, the United States District Court for the District of Delaware, and the Third Circuit Court of Appeals. We served on JLM an initial report based on our review, and received a response from JLM, portions of which response are quoted herein. DISCUSSION 3. 16/OCT/09 03/DEC/09 In our initial report, we noted several instances of lumping, such as the following: HRC 2.30 HRC 2.30 $920 Review proofs of claim; review materials and amendments; review orders; $920 Review materials; prepare for hearing; emails to and from K. Finlayson and S. McFarland;

Local Rule 2016-2 provides that Activity descriptions shall not be lumped each activity shall have a separate description and a time allotment. Similarly, Guideline II.D.5 provides that Time entries should be kept contemporaneously with the services rendered in time periods of tenths of an hour. Services should be noted in detail and not combined or "lumped" together, with each service showing a separate time entry; however, tasks performed in a project which total a de minimis amount of time can be combined or lumped together if they do not exceed .5 hours on a daily aggregate. We asked JLM to advise all timekeepers to comply with these rules in the future. JLM provided the following response: All timekeepers will be advised to comply with the rules with respect to lumping.
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JLM apologizes if it has transgressed that rule. We appreciate this response. 4. In our initial report, we noted that the Application states that JLM customarily

charges $0.35 per page for photocopying but now realizes that the maximum permissible charge is $0.10 per page. Thus, we calculate the appropriate reduction to be $795.75. Additionally, it appears that copy charges are disbursements on which a 5% Federal Goods and Services Tax is charged, so it appears that a further reduction of $39.79 is warranted. We asked JLM to confirm these reductions or explain otherwise. JLM provided the following response: JLM agrees that there should be a reduction of $795.75 in photocopying, and of GST in the amount of $39.79. JLM's computer program automatically generates a charge of $0.35 and JLM's Fourth Interim Fee Application recognizes, in paragraph 8, that a deduction would be necessary and JLM voluntarily agrees to the reduction. We appreciate this response and recommend a reduction of $835.54 in expenses. 5. 10/NOV/09 12/NOV/09 17/NOV/09 17/NOV/09 27/NOV/09 07/DEC/09 08/DEC/09 14/DEC/09 16/DEC/09 17/DEC/09 18/DEC/09 In our initial report, we noted several inadequately detailed time entries for JLM: HRC HRC HRC HRC HRC HRC HRC HRC HRC HRC HRC 2.00 1.00 0.60 2.00 2.00 0.80 1.00 2.50 2.00 1.00 0.60 $800 $400 $240 $800 $800 $320 $400 $1,000 $800 $400 $240 Review material; Review orders; Review documents; Prepare application; Prepare material; Review materials; Preparation for and attendance at hearing; Draft application; Prepare materials; Draft order; Revise order;

We were unable to determine from the context which hearings, materials, etc. the time entries referred to. We asked JLM to provide a further description of the indicated activities. JLM provided a response that is attached hereto as Response Exhibit 1. We accept this response and have no objection to the associated fees.
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6. McMahon: Oct 16/09 Oct 20/09 Oct 21/09 Oct 22/09

In our initial report, we noted several inadequately detailed time entries for

RGM RGM RGM RGM

6.00 6.00 6.00 3.00

$2,100 $2,100 $2,100 $1,050

Report writing Report writing Report writing Report review counsel

We asked JLM to provide a further description of these activities indicating the nature of this written report. JLM provided the following response: Reference is made to paragraph 5. The Monitor's report had to be completed before the application referred to therein was brought. It was completed during the month of October, and filed November 2, 2009, resulting in counsel beginning to work on the matter in November. The Monitor's time entries all relate to the drafting of that report. We accept this response and have no objection to the associated fees. 7. In our initial report, we noted two time entries that appear to be redundant of each

other, as they appear to indicate that the same document was received and reviewed twice: 01/FEB10 03/FEB10 DT DT 0.30 0.30 $22.50 $22.50 Receipt and review of fee auditors initial report for 2nd interim period Receipt and review of initial report from fee auditor

We asked JLM to explain these entries or confirm that one is redundant of the other. JLM provided the following response: JLM is unable to say whether the two time entries are redundant. However, they both appear, on simply reading them, to relate to the same thing, and JLM is content to have one of them withdrawn. We appreciate this response and recommend a reduction of $22.50 in fees. 8. In our initial report, we noted two time entries that appear to reflect administrative

tasks that may not constitute billable professional services: 10/DEC/09 HRC 0.50 $200 Memo to accounting department;

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11/DEC/09

HRC 0.70

$280

Revise memo to accounting department, regarding accounts; telephone call to Monitor;

We asked JLM to explain these entries. JLM provided the following response: The memo referred to on the 10th of December and 11th of December, to the accounting department was a memo regarding the outcome of the quarterly fee application of the 8th of December, 2009 in these proceedings. Certain specific deductions were made to JLM's account for particular items such as photocopying, or to certain time entries charged by particular lawyers. Funds in partial payment of the accounts had already, however, been received and applied to some of the items disallowed by normal default applications. Funds received are automatically applied by JLM's accounting program, for example, to disbursements first. The purpose of the memo was to ensure that the results of the hearing were properly reflected in the books of account of JLM. In other words, it was important that the specific items reduced by this Honourable Court should also be reduced on a line item basis in the books of account of JLM, rather than on a global lump sum basis and all reductions had therefore to be properly allocated. As Mr. Clark (HRC) alone attended on the hearing by telephone and was the only person familiar with the results of it, it is appropriate that he should have prepared the advice and the memo to the accounting department implementing its result, and also that he should have discussed those matters with the Monitor. We appreciate this response but nonetheless believe that these activities are administrative activities rather than compensable professional services. We accordingly recommend a reduction of $480.00 in fees. 9. In our initial report, we noted a number of time entries reflecting activities relating

to the preparation of and prosecution of JLMs fee applications, with associated fees totaling $7,225.00. HRCs time entries for November 17 and December 14, 2009 (which are cited in paragraph 5 above and involve a total of $1,800 in fees) may also relate to fee application preparation. This amount is relatively high when compared to the total fees ($40,262.50) requested by JLM and McMahon for the Application Period. We asked JLM to explain why these fees should be considered reasonable. JLM provided a response that is attached hereto as Response Exhibit 2.

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We appreciate this response. Reviewing the activity descriptions, we do not see any clearly unreasonable expenditures of time but are nonetheless concerned by the proportion of fees attributable to these activities in the aggregate. Accordingly, we will not recommend any reduction at this time but may re-evaluate this issue in the context of the final fee application. CONCLUSION 10. Thus, we recommend approval of fees in the amount of $24,010.00 ($24,512.50

minus $502.50) and expenses in the amount of $3,404.26 ($4,239.80 minus $835.54) for JLMs services for the Application Period and fees in the amount of $15,750.00 and expenses in the amount of $0 for McMahons services for the Application Period .

Respectfully submitted, WARREN H. SMITH & ASSOCIATES, P.C.

By: Warren H. Smith Texas State Bar No. 18757050 325 N. St. Paul Street, Suite 1250 Republic Center Dallas, Texas 75201 214-698-3868 214-722-0081 (fax) whsmith@whsmithlaw.com FEE AUDITOR

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CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing document has been served via First-Class United States mail to the attached service list on this 23rd day of December 2010.

Warren H. Smith

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SERVICE LIST Notice Parties The Applicant H.C. Ritchie Clark, Q.C. P.O. Box 12077 Suite 2550, 555 West Hastings Street Vancouver, BC V6B 4N5 United States Trustee Office of the United States Trustee 844 N. King Street, Room 2207 Lock Box 35 Wilmington, DE 19801 Counsel to the Debtors Laura Davis Jones, Esq. Ira D. Kharasch, Esq. Scotta E. McFarland, Esq. Robert M. Saunders, Esq. James E. ONeill, Esq. Kathleen P. Makowski, Esq. Pachulski Stang Ziehl & LLP 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington DE 19899-8705 Counsel to the Debtors Ian S. Fredericks, Esq. Skadden Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 Special Counsel to the Debtors Penelope Parmes, Esq. Rutan & Tucker, LLP 611 Anton Boulevard 14th Floor Costa Mesa, CA 92626 Canadian Counsel to the Debtors Jensen Lunny MacInnes Law Corp. H.C. Ritchie Clark, Q.C. P.O. Box 12077 Suite 2550 555 West Hastings Street Vancouver, BC V6B 4N5 Engineering Consultant to the Debtors Mark A. Clemans Millstream Energy, LLC 4918 Menlo Park Drive Sugarland, TX 77479 Special Oil and Gas Transactional Counsel to the Debtors Anthony C. Marino, Esq. Schully, Roberts, Slattery & Marino PLC Energy Centre 1100 Poydras Street, Suite 1800, New Orleans, LA 70163 Financial Advisor to the Debtors Curtis A. McClam Deloitte Financial Advisory Services LLP 350 South Grand Ave, Ste. 200 Los Angeles, CA 90071 Financial Advisor to the Debtors John Rutherford Lazard Freres & Co. LLC 30 Rockefeller Plaza, 61st Floor New York, NY 10020

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Co-Counsel to the Official Committee of Unsecured Creditors David B. Stratton, Esq. James C. Carignan, Esq. Pepper Hamilton LLP Hercules Plaza, Suite 1500 1313 Market Street Wilmington, DE 19899 Co-Counsel to the Official Committee of Unsecured Creditors Filiberto Agusti, Esq. Steven Reed, Esq. Joshua Taylor, Esq. Steptoe & Johnson LLP 1330 Connecticut Avenue NW Washington, DC 20036

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Response Exhibit 1 Entries for the 7th of December, 2009 and 8th of December, 2009 relate to the telephone Hearing with respect to, among other things, JLM's second quarterly fee application on December 8th, in these proceedings. Those entries are: 07 Dec 09 08 Dec 09 0.80 1.00 Review materials Preparation for and attendance at hearing

All other time entries referred to in paragraph 5 relate to an application which was to have been brought within the Companies Creditors Arrangement Act proceedings in British Columbia. The stay order initially obtained in British Columbia expired on September 9, 2009. No proofs of claim were received by the court appointed Monitor, no threats of litigation were made to the company, and no one entered an appearance in the Canadian proceedings. Given the dim prospects of a successful reorganization which emerged in August of 2009, a decision was made not to apply at that time to extend the Canadian stay. By October of 2009 however, the company was hopeful that it might be able to structure some form of minimal compromise, particularly one that would see it emerge from the bankruptcy proceedings, admittedly without assets but also without debt, and it was hopeful of being able to resume trading and possibly acquire a new business opportunity, so that its shareholders could potentially, achieve some return down the road. The one aspect of the company's business which is clearly tied to Canada is its share structure. It trades on a Canadian Stock Exchange and the majority of its shareholders are Canadian. It was thought necessary, therefore, to position the company, within the Companies Creditors Arrangement Act proceedings so that it would have the ability to effect such a compromise, pursuant to the British Columbia Business Corporations Act and the Companies Creditors Arrangement Act as part of any overall plan approved in these proceedings. That necessitated reactivation of the proceedings and extension or renewal of the stay. In the interim period between the obtaining of the initial stay order in the Companies Creditors Arrangement Act proceedings and October of 2009, however, there had been significant amendments to the Companies Creditors Arrangements Act, and there had been significant activity in the U.S. proceedings. Moreover, in anticipation of involving the shareholders in the Canadian process, proofs of claim forms had to be settled and a proof of claim scheme with appropriate claim deadlines settled as well. The original proceedings had been commenced and the initial Order obtained prior to the significant amendments to the Companies Creditors Arrangement Act and there was some additional care and consideration required to deal properly with the amendments to the legislation, as relevant to the application to be brought in the existing action.
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Such an application could not be brought without a further report from the Monitor being filed. In the first place, the Initial Order had charged the Monitor with reporting, from time to time, as necessary, to the Court. As well, it is the most invariable practice of the British Columbia Court to look to the Monitor for assistance and comment in updating the status of the companies when significant applications are brought. That is in fact, one aspect of the role of the Monitor under the Companies Creditors Arrangement Act. The Monitor had not filed a report since its initial report in April 2009 subsequent to the Interim Stay Order. Accordingly, the Monitor was engaged to and required to file a further report with the Court as being necessary in connection with the contemplated application. That report was filed on November 2, 2009. A copy was electronically filed in these proceedings. The time entries of 10, 12, 17 and 27 of November and 14, 16, 17 and 18 of December, all relate to preparing material for that application and considering the various complicated issues that entailed. Ultimately the company determined that an inability to obtain audited financial statements, despite the clean slate which it hoped to receive from the bankruptcy process, would prevent it from relisting or retrading and counsel were instructed not to proceed with the application. The company remained slightly at risk due to not having a stay in the Canadian proceedings, but the lack of interest in those proceedings made that risk of a small enough magnitude that it was felt, as it had been felt in August, that there was no necessity to apply for a further stay once the motivation of a potential relisting or retrading by way of a compromise involving the shareholders had disappeared. While the application was not proceeded with, the time was spent on matters and activities which were proper to undertake and which JLM was instructed to undertake.

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Response Exhibit 2 The time entries for November 17th and December 14th do not involve the fee applications, as discussed with respect to paragraph 5 above. JLM is unsure of what items the fee Monitor is totalling in order to arrive at a total of $7,225.00. JLM is of the view that $6,747.50 of these accounts is the amount relating to the preparation, review and prosecution of various fee applications. It is pointed out that those charges relate to the receipt and review of other fee applications as well, and covers the preparation of three separate fee applications for JLM: the third monthly, the second quarterly, and the fourth monthly. The fees are, possibly, somewhat higher than might be incurred by American counsel engaged in a similar exercise for the following reasons: 1. Canadian counsel is not as experienced as American counsel in preparing and prosecuting these applications and may be, therefore, somewhat slower and more ponderous; In addition, as alluded to in paragraph 17 of JLM's Fourth Interim fee application, JLM's computerized timekeeping program does not permit the segregation of services on a file into tasks. Task groupings are mandatory in these proceedings. Accordingly, that segregation has to be done manually. This cannot be done by accounting personnel as they are not familiar with the involvement of the various lawyers and staff in the file and cannot decide how the activities should be properly segregated. The most appropriate person to do that was Mr. Clark, who had conduct of the matter. Moreover, as that task segregation had to be sworn to be accurate, considerable care had to be taken in that allocation.

2.

3.

JLM has attempted to address the significant cost of preparing fee applications by not submitting very many of them. It has, for example, submitted only two quarterly fee applications. This application, itself, covers a period of nine months. While that may have had the effect of increasing the amount of time spent on preparing each application, the total of fees charged, for the preparation of fee applications over the course of the file was likely significantly reduced by reducing the number of such fee applications.

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