IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In Re: Chapter 11 PACIFIC ENERGY RESOURCES LTD.

et al., Debtors. [Re: Docket No. 456] COOK INLET REGION, INC.S OBJECTION TO DEBTORS ALTERNATIVE MOTION 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 Cook Inlet Region, Inc. (CIRI) by its undersigned counsel, hereby files its objection to the Debtors Alternative Motion 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 (the Motion) (Docket No. 456). Debtorsspecifically Pacific Energy Alaska Operating, LLC (PEAO), which is a party to several contracts with CIRIhas failed to meet the standards for abandoning gas wells and pipelines with undoubtedly harmful environmental contamination issues as well as shut in and shut down issues. PEAO has not provided sufficient evidentiary proof that abandonment is justified. Further, contrary to earlier representations, Debtors have not paid the post-petition royalties and easement through-put fees due CIRI. Debtors represented to CIRI and the Court at the July 1, 2009 hearing that it would pay current all such post-petition amounts due as a condition of the extension of time to assume or reject the agreements. In support of its objection, CIRI respectfully represents as follows. Case No. 09-10785 (KJC) (Jointly Administered)

Introduction 1. CIRI is a party to various contracts and leases with the Debtor granting land use

rights to Debtors on property located on the west side of Cook Inlet in Alaskapart of the non-Trading Bay assets. Two of the agreements involve approximately 17 miles of subsurface pipelines, one covers 807 acres of land that has been under lease for oil and gas exploration or production operations by Debtors and their predecessors since 1958, on which there are currently 2 producing gas wells. Without taking steps even to

determine the existence of potential environmental hazards on these properties (let alone steps to mitigate them), the Debtors seek to summarily abandon these assets, leaving CIRI, and the public, holding the bag for hazards that exist on the property. CIRI objects to the Motion with respect to those lands in which CIRI has an interest. PEAO has not completed an investigation of the affected CIRI property to determine the scope of the environmental damage or cost of clean up necessary to avoid imminent harm to the public. PEAO should not be allowed to abandon the property until the Court has had the benefit of an appropriate investigation of the condition of the property and has fully evaluated the following factors to determine whether abandonment is appropriate: (1) the imminence of danger to the public health and safety in the event of abandonment; (2) the extent of probable harm; (3) the amount and type of hazardous waste which may be present on this property; (4) the cost to bring the property into compliance with environmental laws; and (5) the amount and type of funds available for cleanup. Finally, even if abandonment is determined to be the appropriate course of action, estate funds should be placed into escrow to address any environmental hazards presented with regard

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to the CIRI properties. Background 2. PEAO, along with seven affiliated companies, filed a voluntary petition under

chapter 11 of the Bankruptcy Code on March 9, 2009 (Petition Date). PEAOs case is jointly administered with the affiliated companies under case number 09-10785, which was filed by Pacific Energy Resources, Ltd., PEAOs parent company. 3. At the time of the bankruptcy filing, CIRI and PEAO were parties to the below

described contracts and leases. Copies of the contracts and leases were previously filed with the Court as exhibits to the Affidavit of Kim Cunningham in Support of Cook Inlet Region, Inc.'s Motion to Compel Payment of Administrative Claim filed on June 30, 2009 (Docket No. 519). These contracts and leases include specific obligations with regard to decommissioning and remediation. Although the Debtors have stated in their Motion that they have pledged nearly $8.0 million in cash to secure the Debtors decommissioning and other payment obligations to the state and federal governments, little or none of that money is designated for clean-up or remediation on CIRI lands. 4. A. CIRI has the following contracts with PEAO: West Foreland Easement: Pipeline

CIRI, Salamatof Native Association, Inc. (Salamatof) and Stewart Petroleum Company (Stewart) executed an agreement on January 1, 1990 titled West Foreland General Agreement along with associated Surface and Subsurface Access Easements. 1 Under the Agreement, CIRI and Salamatof agreed to grant surface and subsurface easements to Stewart for
1

CIRI, as an Alaska Native regional corporation, owns the subsurface land rights, and Salamatof, as the Alaska Native village corporation, owns the surface land rights. Easements and use agreements were needed from both CIRI and Salamatof for Debtors (and predecessors) to maintain pipelines for the Alaska oil and gas projects.
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directional drilling of an exploratory well and possible development wells through CIRIs subsurface estate. On March 31, 1995, CIRI also granted a Subsurface Pipeline Easement to Stewart on the same land. This Pipeline Easement was granted in conjunction with and subject to the terms of the earlier General Agreement (collectively the West Foreland Easement). PEAO acquired its rights in the West Foreland Easement through subsequent assignments. B. Kustatan Easement: Pipelines

On October 28, 2002, CIRI and Forest Oil Corporation (Forest) entered into an agreement titled Kustatan to Trading Bay Subsurface Easement Agreement for land situated on the west side of Cook Inlet at West Forelands, Alaska (Kustatan Easement). PEAO is a successor-in-interest by assignment of the Kustatan Easement. The Kustatan Easement allows PEAO to utilize CIRIs subsurface estate for oil, water and gas pipelines, and to lay power and communication cables from the Osprey platform offshore in the Redoubt Unit across CIRIs onshore subsurface estate beginning at the mean high tide line adjacent to the Kustatan Production Facility and extending north to the Trading Bay Production Facility (Kustatan Pipelines). The gas portion of the Kustatan Pipelines connects to a gas line previously constructed from and through oil and gas Lease A035017 to the West McArthur River Unit Production Facility. The Kustatan Easement also allowed Forest to construct an access road along the Kustatan Pipelines over CIRIs subsurface estate. The Kustatan Easement runs adjacent to the West Foreland Easement described above. C. Federal Lease A-035017: 2 gas wells

CIRI is also the owner of approximately 807 acres of land on the west side of Cook Inlet, Alaska, designated as Federal Lease A-035017. This property was acquired by CIRI from the United States Bureau of Land Management in 1982. At the time of transfer to CIRI, the land was subject to a 1958 Offer to Lease and Lease for Oil and Gas originally granted in favor of Ralph H. Cottis (Federal Lease). PEAO acquired its Lessee rights through subsequent assignments. The Federal Lease includes land upon which PEAO has two operating gas wells, West Forelands #1 and #2. These wells produce approximately 20,000MMbtu of gas per month with a monthly sales value of $153,000, based upon the April, 2009 MMS-2014 Report of Sales and Remittance produced by PEAO on a monthly basis. 2

The MMS report provides the basis for calculating the monthly royalty due CIRI. PEAO has failed to provide all MMS forms for the post-petition period and to pay CIRI.
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5.

Collectively, the West Foreland and Kustatan Easements contain 17 miles of

pipelines (including subsurface oil pipelines), some of which have been in use for almost 10 years, and the Federal Lease includes 807 acres of land on which oil and gas exploration and/or production activities have occurred for more than 50 years. PEAO (and other Debtors, including PERL) have statutory and contractual environmental clean up liability for all past and current activities on the affected CIRI property. Each of the agreements in question includes affirmative obligations on the part of the Lessee to ensure that environmental contamination is properly monitored and remediated. For example, the West Foreland General Agreement requires the lessee, where appropriate, to perform baseline environmental studies or assessments and monitoring programs to ensure environmental compliance. 3 Similarly, the West Foreland Easement provides that prior to abandonment, the lessee must produce an environmental audit performed by a third party approved by CIRI and paid for by the [Lessee], which shall certify that the pipeline, as well as the area encompassed by [the] subsurface easement, are and will remain in an environmentally safe and stable condition. 4 6. Debtors have performed no such environmental assessments or studies with

regard to the affected CIRI lands, nor, apparently, do they intend to do so. Instead, they seek to abandon to CIRI a black box of potentially costly liabilities from decades of oil and gas activities without one shred of evidence regarding how serious they may be or the threat they may pose to public health or safety. Shutting in the gas wells and shutting

3 4

See section G of West Forelands General Agreement. See paragraph 6 of West Foreland Easement.
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down the pipelines are significant projects by any measure. 5 This Court should not permit PEAO and PERL, as operator, to shift their liabilities to others without any evidence of the severity of the problem or costs involved in preventing harm to the public. Objection A. This Court Cannot Permit Abandonment of Any Property Without Determining Whether Conditions Pose an Imminent Threat to Public Health and Safety As Debtors properly point out in their Motion, Midlantic National Bank v.

7.

New Jersey Department of Environmental Protection, 474 U.S. 494 (1986) is the proper starting point for any analysis of property abandonment in a bankruptcy involving environmental contamination (or the potential for such). In that case, the court was faced with the known presence of barrels leaking hazardous waste, all of which had been previously discovered, and investigated, by state environmental agencies. Id. at p. 497. Based upon what was known by the Court at the time the matter was considered, the court disallowed the abandonment, concluding that the property presented a serious threat to the public health. The Courts holding, however, was not limited to the facts of that particular case. Rather, the Court held broadly that [t]he Bankruptcy Court does not have the power to authorize an abandonment without formulating conditions that will adequately protect the publics health and safety. Id. at p. 507 (emphasis added) 6

The U.S. Bureau of Land Management (in its brief filed concurrently herewith) has estimated that plugging and abandoning the two gas wells will cost approximately $4 million. In their hasty attempt to abandon the assets and to foist financial obligation on others, Debtors offer no proof that abandonment of these assets in such condition is safe for the public. 6 Debtors make much of the Courts qualification in Midlantic that its exception to the
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Where, as here, no reliable environmental audit or analysis has ever been done to determine if any risk to the public exists, it seems obvious that one of the conditions to be formulated should be to perform such an analysis in the first instance. See, e.g. In re Oklahoma Refining Co., 63 Bankr. 562, 563, (W.D. OK 1986) (court made abandonment decision after receiving the report of a consulting firm retained by the trustee to prepare an environmental investigation of the site.). 8. In Leavell v. Karnes, 143 Bankr. 212 (S.D. IL. 1990), as in this case, the

court considered the possible abandonment of certain oil-producing properties. The court described a two-step process for resolving the abandonment issue: Thus, in order to comply with the mandate of Midlantic, the bankruptcy court must first determine whether conditions on the property pose an immediate and identifiable threat to the public health or safety. If that question is answered in the affirmative, the bankruptcy court may allow abandonment only after proper steps are taken to adequately protect public health and safety. Id. at p. 218 (emphasis added). 9. In the Debtors Motion, they state that Debtors will coordinateto take

appropriate remedial steps to effectuate a smooth transition. Motion at p.9, 22. However, nothing in the Motion specifies how those steps will be taken, or even what steps are necessary. Debtors statement is hollow rhetoric. The Debtors state that there is no incremental harm or threat to public health and safety associated with abandonment, but provide no evidence, reports or information to support this

abandonment right should not encompass a speculative indeterminate future violation of such laws that may stem from abandonment. Id. at p. 507, n. 9. In reliance on such language, however, Debtors miss the point. In this case, CIRIs concern is not about future violations but rather present violations that have not yet been discovered because no one, particularly PEAO, has shown a light into the black box.
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statement other than the fact that they could not afford it. p.9, 23. Again, hollow rhetoric. The simple fact is that there have been no reliable audits or studies performed, or presented to the court, which would allow PEAO (or Debtors) to assess the first step. Accordingly, as discussed in greater detail below, no decision should be made by the Court on abandonment until such a baseline investigation has been made and produced to this Court and affected parties. 10. Once the initial step of identifying a threat on the property has been completed, the Court must decide whether to permit the abandonment and, if so, under what conditions. For this analysis the Courts have identified five factors which should be considered. They are: (1) the imminence of danger to the public health and safety; (2) the extent of probable harm; (3) the amount and type of hazardous waste; (4) the cost to bring the property into compliance with environmental laws; and (5) the amount and type of funds available for cleanup. Leavell, supra at 218 (citing In re Franklin Signal Corp., 65 Bankr. 268, 272 (D. MN 1986). 11. None of these factors can be assessed based upon the evidence (or lack thereof) contained in Debtors Motion. Debtors generally assert that they will conduct[ ] an investigation of the potential impacts associated with abandonment and the costs necessary to minimize any adverse consequences. Motion at p. 9, 23(a). However, no such investigation has been performed. As Debtors acknowledge, it is only after they conduct this preliminary baseline investigation that this Court can properly consider abandonment. Franklin, Supra. at 272-273 (requiring, at a minimum, investigation and

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notice before abandonment). 7 Until then, the Court will not know the state of the environmental damage on CIRI property, and therefore, cannot rule on the abandonment motion since there is no way to assess the five factors listed above that it must consider. B. 12. Debtor Must Conduct an Investigation to Determine What Environmental Risks Currently Exist The Debtors state that they intend to take (or have already taken) the initial

step of conducting an investigation of the potential impacts associated with abandonment. p. 9, 23(a). They also state that they will have eliminated any threat to the publics welfare by the time of the hearing on the Motion. Motion at p.10, 24. This is impossible to know until the investigation is complete. The Abandoned Assets may be relatively safe, or they could be in violation of numerous state and federal regulations. With 807 acres in the Federal Lease and 17 miles of subsurface oil and gas pipeline at issue, the Debtors have no way of knowing the extent of environmental damage. What is known, at a minimum, is that there are contractual and statutory requirements to plug the gas wells and drain and moth ball the pipelines. 13. A thorough investigation is necessary to provide for the health and safety of the public and to ensure a safe and orderly transition to the applicable lessors or landowners. The Franklin Court observed that this condition does not require a trustee to investigate all property subject to abandonment and that investigation is required where the trustee reasonably believes a violation may exist. In Franklin, however, the court was considering personal property, in the form of barrels easily visible from the surface. Here we are dealing with subsurface oil and gas production and transportation, where problems may only be discovered through affirmative subsurface investigation. Moreover, the Federal Lease involves activity dating back more than five decades, including periods when environmental standards were lax or non-existent. See Oklahoma Refining Co., supra at 563 (environmental investigation was conducted at refinery where in the early years little thought was given to environmental concerns and, of course, there were no laws or regulations aimed at protecting the environment). Accordingly, any reasonable consideration of the condition of these properties should include a proper environmental audit or assessment.
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7

Without a thorough report, it is premature to know whether abandonment can be approved. Debtors Motion contains no supporting evidence, only hollow generalities. As discussed above, Debtors statutory right to abandon property with environmental liabilities is limited by Midlantic to ensure that abandonment will not pose an imminent threat to the publics welfare. While Courts have interpreted Midlantic in numerous ways, from narrow to broad, regardless of the interpretation, the application of Midlantic is simply not possible until the Debtors have provided sufficient information to assess the state of the property proposed to be abandoned and elaborate on the measures they will take to ensure a smooth transition, comply with the environmental laws and contractual terms, and protect the public. 14. Debtors, by their own admission, assert that Oklahoma Refining is particularly instructive. The Court in Oklahoma Refining outlined several specific measures taken by the trustee in that case that provided the predicate for abandonment, including hiring a professional to fully assess the environmental hazard, drilling monitoring wells and removing waste materials from the site. Id. at 563-564. Here, the Debtors have done none of these things. Requesting approval of abandonment without taking equivalent steps is premature, and Debtors statements that there is no harm to the public and no environmental impact of abandoning the assets cannot be substantiated without better information. 15. Allowing a Debtor to proceed with abandonment without any investigation of the environmental condition of the properties to be abandoned undermines the underlying public-protection rationale of Midlantic. Without enforcement of the investigation

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requirement, debtors would be encouraged to turn a blind eye to potential environmental problems and to run to Court as quickly as possible, in the hopes they could get permission to abandon before any problems could be discovered. This approach is fundamentally inconsistent with the principles of Midlantic and should not be permitted in this case. C. Debtors Must Complete the Investigation to Determine the Cost of Compliance with Environmental Laws

16. Debtors assert that all precautionary steps will be complete by the time of the hearing on this Motion. Motion at pp. 9-10, 23-24. However, the precautionary steps cannot be accomplished without meaningful information about the extent of environmental harm and other contractual and statutory duties is obtained. See Franklin, supra at p. 272. This requires completion of the investigation, and Debtors have not done this. This highlights the premature nature of Debtors Motion. There is no way to determine the potential impacts and associated costs of abandonment and future compliance by applicable authorities and lessors without a reliable environmental assessment of the properties involved. D. Debtor Must Provide Information Regarding Funds Currently Set Aside and Available for Cleanup of CIRI Lands

17. Debtors state that the State and the federal government will have access to the Pledged Cash [$8 million] to defray certain of the costs associated with abandonment. Motion at p. 19, 43. This does not address CIRIs interests and the costs that may be incurred by CIRI associated with abandonment. It is not clear that any of the $8 million, or any other funds, will be available to CIRI. Until Debtors provide more specific

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information regarding funds available to CIRI (and other third parties), the need for which will only be known after a detailed investigation, the Court does not have the information necessary to make a decision regarding abandonment. Again, Debtors statements regarding what currently exists to defray costs and harms associated with abandonment only serves to highlight what does not exist sufficient details, data and analysis needed for the Court to make an informed decision. E. If Abandonment is Permitted, Sufficient Estate Funds Should Be Placed Into Escrow for Decommissioning and Remediation

18. Only after the Court has received evidence of the nature and extent of the threat to the publics health and safety, should the Court decide whether the property should be abandoned. Should the Court find that such threat exists from an unremediated site, it should either order such remediation completed with unencumbered estate funds or escrow such funds from the unencumbered assets of the estate as are necessary to remediate the site to appropriate levels. 8 See In Re FCX, Inc., 96 Bankr. 49, 55 (4th Cir. 1988) (abandonment ordered on condition that trustee set aside $250,000 to complete remediation of hazardous waste at former pesticide blending facility). Any

environmental remediation required by such order is entitled to priority treatment as an administrative expense of the estate within the meaning of 11 U.S.C. 507(a)(1). Id. at p.55; See also Leavell, supra at 270.

Unencumbered funds should be available for this purpose pursuant to the Courts order of June 4, 2009, which expressly reserved certain assets for unsecured creditors and gave them a priority over the unsecured deficiency claims of the Prepetition Lenders and DIP Lenders.
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Conclusion 19. Under Midlantic and its progeny, the decision on abandonment must be taken in two steps. The first is to determine whether the properties proposed to be abandoned present an immediate and identifiable threat to the public health or safety, and such determination requires a thorough investigation by a third party expert. Debtors have presented no credible evidence on this question. After considering an appropriate report, and any other relevant evidence (e.g. the views of federal and state regulatory authorities), the Court can determine if there is a serious threat to the public health. If one exists, the Court should either direct a clean-up with unencumbered estate funds or escrow unencumbered funds from the estate for such a clean-up as a condition of abandonment. Such clean-up should be given priority as an administrative expense. 20. Because Debtors have failed to establish a right to abandonment under the Midlantic standards, the Motion should be denied in its entirety.

Dated: July 21, 2009

DORSEY & WHITNEY (DELAWARE) LLP

By: /s/ Robert W. Mallard Eric Lopez Schnabel, Esq. (DE # 3672) Robert W. Mallard, Esq. (DE # 4279) 1105 N. Market Street, Suite 1600 Wilmington, DE 19801 Tel: (302) 425-7171 Fax: (302) 425-7177 Counsel for Cook Inlet Region, Inc.

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ______________________________________ In re: ) Chapter 11 ) PACIFIC ENERGY RESOURCES LTD., et al., ) Case No. 09-10785 (KJC) ) Debtors. ) (Jointly Administered) ) _____________________________________ ) ) CERTIFICATE OF SERVICE I, Robert W. Mallard, Esq., hereby certify that on the 21st of July, 2009, that Cook Inlet Region, Inc.s Objection To Debtors Alternative Motion 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, was served upon the following parties via First Class Mail and electronic mail or hand delivery. Dated: July 21, 2009 DORSEY & WHITNEY (DELAWARE) LLP /s/ Robert W. Mallard Robert W. Mallard (DE Bar No. 4279) 1105 North Market Street (16th Floor) Wilmington, Delaware 19801 Counsel for Cook Inlet Region, Inc.

Service List Pacific Energy Alaska Operating LLC Attn: Gerald A. Tywoniuk, CFO 111 W. Ocean Boulevard, Suite 1240 Long Beach, CA gtywoniuk@pacenergy.com Via E-Mail Zolfo Cooper LLC Attn: Scott W. Winn Mark A. Cervi 1166 Avenue of the Americas 24th Floor New York, NY swinn@zolfocooper.com mcervi@zolfocooper.com Via E-mail Lazard Freres & Co., LLC Attn: Robert L. Lynd 600 Travis, Suite 2300 Houston, TX 77002 robert.lynd@lazard.com Via E-mail Ira D. Kharasch Robert M. Saunders Pachulski Stang Ziehl & Jones LLP 10100 Santa Monica Blvd, 11th Floor Los Angeles, CA 90067-4100 ikharasch@pszjlaw.com rsaunders@pszjlaw.com Via E-mail James E. O'Neill Pachulski Stang Ziehl & Jones LLP 919 N. Market Street 17th Floor Wilmington, DE 19801 Via Hand Delivery Rutan & Tucker, LLP Attn: Gregg Amber Garett Sleichter 611 Anton Blvd., 14th Floor Costa Mesa, CA 92626 gamber@rutan.com gsleichter@rutan.com Via E-mail Schully, Roberts, Slattery & Marino, PLC Attn: Anthony C. Marino 1100 Pydras Street, Suite 1800 New Orleans, LA 70163 amarino@schullyroberts.com Via E-mail Steptoe & Johnson Attn: Fil Agusti 1330 Connecticut Ave., N.W. Washington, DC 20036 fagusti@steptoe.com Via E-mail Bingham McCutchen LLP Attn: Jeffrey S. Sabin 399 Park Avenue New York, NY 10022 jeffrey.sabin@bingham.com Via E-mail Skadden, Arps, Slate, Meagher & Flom LLP Attn: Seth E. Jacobson 333 West Wacker Drive Chicago, IL 60606 seth.jacobson@skadden.com Via E-mail