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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 LOEB & LOEB LLP FOR THE SECOND 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 Loeb & Loeb LLP for the Second Interim Period (the Application). BACKGROUND 1. Loeb & Loeb LLP (Loeb) was retained as special tax counsel to the debtors-in-

possession. In the Application, Loeb seeks approval of fees totaling $24,830.00 and costs totaling $7.20 for its services from June 26, 2009, through August 31, 2009 (the Application Period). 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 December 1, 2009, 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
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Delaware, and the Third Circuit Court of Appeals. We served on Loeb an initial report based on our review, and received a response from Loeb, portions of which response are quoted herein. DISCUSSION 3. In our initial report, we noted that $11,890, or almost half of the fees requested, relate

to Loebs efforts to effect its own retention. All of the related work was performed by partners billing at $575 per hour or higher, while the activity descriptions in some cases reflect activities that might have been competently performed by associates, paralegals, or administrative staff. We asked Loeb to explain why this amount of fees should be considered reasonable. Loeb provided the following response: As to the query in paragraph [3] concerning the fees charged in connection with Loeb's retention, please note that many of the activities were performed by administrative staff and paralegals who did not bill their time to the matter. Loeb believed that assigning an associate to retention matters would not have been cost efficient under the circumstances and, in fact, at the time of his initial involvement with this matter, Mr. Rubinstein was not a partner, although he became a partner by the time he began billing to this matter. Additionally, the time billed to the matters noted in paragraph [3] of the Report overlaps with the time entries noted in paragraph [4] of the Report. Loeb agrees with the Fee Auditor that all of the time entries noted in paragraph [4] are not compensable, and thus Loeb agrees that $3,047.50 of time billed to the retention category should not be paid; Loeb thus withdraws its fee request with respect to such amounts. As to the balance remaining, $8,842.50, Loeb submits that such amount is reasonable. Be that as it may, Loeb is happy to work consensually with the Fee Auditor to the extent it continues to believe that this remaining amount is not reasonable under the circumstances. We appreciate this response. However, in addition to the conflict-checking, we note 2.20 hours and $1,265 ascribed to the drafting of the engagement letter: 7/16/09 VJR 1.8 $287.50 Conferences with L. Jurich regarding engagement and engagement letter (.2). Correspond with G. Rice and M. Ramirez regarding engagement letter and related issues (.3)....

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7/23/09

VJR

1.7

$977.50

Drafting engagement letter. Correspond with accounting regarding disclosures.

Unlike the drafting of a declaration of disinterestedness, for instance, the drafting of an engagement letter is not an activity imposed by the requirements of the bankruptcy code. It is instead an independent business development activity whose costs should be borne by the professional firm. Accordingly, we recommend a reduction of $4,312.50 in fees. 4. 7/20/09 We note several time entries reflecting time billed for conflict-checking: VJR 0.8 $460.00 Conferences with A. Tarr and S. Giordano regarding retention issues and conflict matters; run additional conflict checks. Correspond with L. Jurich regarding same. Analyze conflict search results and coordinate additional searches with Accounting. Conferences with A. Tarr and S. Giordano regarding retention papers. Amend retention papers and forward to Pachulski with cover. Drafting engagement letter. Correspond with accounting regarding disclosures.

7/21/09

VJR

2.8

$1,610.00

7/23/09

VJR

1.7

$977.50

Ordinarily, time spent performing the initial conflict check required as a condition of a firms employment is not compensable. See In re ACT Manufacturing, Inc., 281 B.R. 468, 490

(Bankr.D.Mass. 2002); In re Sterling Chemicals Holdings, Inc., 293 B.R. 701, 704 (Bankr. S.D.Tex. 2003). Such preliminary conflict checks are not professional services performed for the benefit of the estate. Accordingly, we asked Loeb to de-lump these entries to enable us to determine the amount of the appropriate reduction. Loebs response is included in the two paragraphs quoted in paragraph 4 above. Loeb has agreed to a reduction of $3,047.50 relating to these time entries. Because the reduction in this amount has already been made in the preceding paragraph, no further reduction is warranted. 5. In our initial report, we noted several instances of lumping, such as the following:

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6/29/09

AJT

4.4

$3,630

7/20/09

VJR

0.8

$460

7/21/09

VJR

2.8

$1,610

Review spreadsheets re possible transactions, analysis, research re tax issues, telephone conference with client, Kharasch re same Conferences with A. Tarr and S. Giordano regarding retention issues and conflict matters; run additional conflict checks. Correspond with L. Jurich regarding same. Analyze conflict search results and coordinate additional searches with Accounting. Conferences with A. Tarr and S. Giordano regarding retention papers. Amend retention papers and forward to Pachulski with cover.

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 Loeb to advise all timekeepers to comply with these rules in the future. Loeb provided the following response: The two items listed in paragraph 6 for Mr. Rubinstein have been addressed in paragraph 3 above, and Loeb withdraws its request for these time entries. As to the entry for June 29, 2009 in the amount of $3,630, the de-lumped time is as follows: 1.6 - Review spreadsheets provided by client and analysis regarding same. These were spreadsheets provided by Debtors concerning various transactions under consideration at the time. 2.3 - Tax research - This was tax research in connection with the noted spreadsheets concerning the various transactions under consideration. .5 - Telephone conversation with client, Kharasch re same. This was a call concerning the same spreadsheets and the noted research. The above time relates to the same issues that were all addressed on the same day and the time for which was entered contemporaneously.

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All time keepers have been advised to comply with these rules in the future and have been advised of the Report. Loeb assures the Fee Auditor that time will no longer be lumped. We appreciate this response and have no objection to Mr. Tarrs fees. 6. 7/1/08 7/11/09 In our initial report, we noted several inadequately detailed time entries: JT AJT 1.2 0.2 $990 $165 Work on memo, research Emails re structure

We asked Loeb to provide a further description of the indicated activities. We asked Loeb, in doing so, to consider Guideline II.D.5, which provides, Time entries for telephone calls, letters, and other communications should give sufficient detail to identify the parties to and the nature of the communication. Loeb provided the following response: Responding to paragraph 7, Loeb states that the 1.2 hour time entry relates to research and a related memo concerning tax issues implicated by the proposed transaction that was then under consideration by the Debtors. Finally, the last entry for .2 relates to emails between Mr. Tarr and Gerry Tywoniuk at the Debtors concerning the structure of the proposed transaction to enable Mr. Tarr to better advise the Debtors concerning the tax implications of the structure. We appreciate this response and have no objection to these fees. CONCLUSION 7. Thus we recommend approval of fees in the amount of $20,517.50 ($24,830.00 minus

$4,312.50) and expenses in the amount of $7.20 for Loebs services for the Application Period.

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

By: Warren H. Smith Texas State Bar No. 18757050 Mark W. Steirer Texas State Bar No. 19139600 325 N. St. Paul Street, Suite 1250 Republic Center Dallas, Texas 75201 214-698-3868 214-722-0081 (fax) whsmith@whsmithlaw.com FEE AUDITOR

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 2nd day of February 2010.

Warren H. Smith

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SERVICE LIST The Applicant Vadim J. Rubinstein, Esq. Loeb & Loeb LLP 345 Park Avenue New York, NY 10154-1895 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 Corporation 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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