Case Document 774 Filed in TXSB on 07/31/17 Page 1 of 12

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1 Case Document 774 Filed in TXSB on 07/31/17 Page 1 of 12 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION IN RE: NORTHSHORE OFFSHORE GROUP, LLC DEBTOR CASE NO (CHAPTER 11) FIELDWOOD ENERGY S: (1) SUPPLEMENTAL OBJECTION TO DEBTOR S PROPOSED SALE TO NORTHSTAR OFFSHORE VENTURES LLC; AND 2) OBJECTION TO DEBTOR S NOTICE OF REQUEST FOR AUTHORITY TO ASSUME AND ASSIGN CERTAIN EXECUTORY CONTRACTS AND UNEXPIRED LEASES [Dkt. No. 437, 703, 725, 730 and 750] TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Fieldwood Energy LLC, Fieldwood Energy Offshore LLC and their affiliates ( Fieldwood Energy ), by and through its undersigned counsel, hereby files its Supplemental Objection to the Debtor s Proposed Sale to Northstar Offshore Ventures LLC and its Objection to the Debtor s Notice of Request for Authority to Assume and Assign Certain Executory Contracts and Unexpired Leases and in support thereof, states as follows: PRELIMINARY STATEMENT 1. As explained below, to the extent that the Sale Motion seeks a de facto determination of property rights of third parties that are governed by state law, arose pre-petition and could not otherwise be heard by the Court absent a bankruptcy filing, Fieldwood Energy does not consent to the entry of a final order or judgment. 2. In a flurry of filings less than a week before the proposed August 1, 2017 sale hearing (the Sale Hearing ), the Debtor has retained new counsel, cancelled the auction and decided to move forward on the sale of certain assets to a buyer (Northstar Offshore Ventures Page 1

2 Case Document 774 Filed in TXSB on 07/31/17 Page 2 of 12 LLC, hereinafter NOV ) that is very unlikely to close anytime soon due to the time required to obtain the required governmental approvals (which are a condition to closing) on the time frame that is being required by the Debtor s DIP Lender. Moreover, based on NOV s own declaration in support of the proposed sale, it appears that NOV has no experience in owning offshore properties/assets or operating an offshore business. Both of these concerns, especially when combined, create serious doubt about whether NOV can demonstrate adequate assurance of future performance as is required for this Court to approve the assumption and assignment of certain contracts to NOV. 3. In addition, the Debtor, after repeatedly revising their cure notice to remedy severe deficiencies, on less than four business days notice to counterparties such as Fieldwood Energy, filed a fourth cure notice [Dkt. No. 725] (the Final Cure Notice ) that removed a significant number of contracts that were being proposed to be assumed in prior cure notices and added new contracts that were not listed in any of the three prior notices. Fieldwood Energy has serious concerns of the lack of adequate notice, especially regarding the contracts added at the last minute. 4. Additionally, again on only a few business days notice, the Debtor also filed a notice of revised schedules to the APA [Dkt. No. 732] (the Revised Schedules ) that, inter alia, highlighted numerous material revisions to the assumed contract list 1 as well as materially revised the preferential rights schedule completely reversing the Debtor s prior position 1 Importantly, there appear to be disparities between the Final Cure Notice and the Revised Schedules. For example, as to Fieldwood Energy, the Final Cure Notice removed the operating agreement related to South Marsh Island 41 from the assumed contracts list but this same operating agreement remains in the Revised Schedules. Compare Dkt. No at p 3 of 4 with Dkt. No , p 20 of 98. This raises a huge notice concern, as Fieldwood Energy, even on the eve of the Sale Hearing, has no clue what contracts the Debtor is actually assuming and assigning to NOV. Page 2

3 Case Document 774 Filed in TXSB on 07/31/17 Page 3 of 12 surrounding the Fieldwood Energy Preference Right from an agreed stance to the apparent position that the Fieldwood Energy Preference Right is Not Applicable. See Dkt. No , p 42 of In the wake of this filing frenzy, in addition to failing to provide sufficient notice to counterparties and parties-in-interest to this bankruptcy proceeding, it appears to Fieldwood that there are serious problems with the proposed sale to NOV and Fieldwood objects to the proposed sale, for a number of reasons. BACKGROUND 6. On April 12, 2017, the Debtor filed a motion for an order approving, among other things, the sale of its assets (the Motion to Sell Assets ) [Dkt. No. 437]. 7. On May 7, 2017, the Debtor filed its Notice of (I) Request for Authority to Assume and Assign Certain Executory Contracts and Unexpired Leases, and (II) Proposed Cure Amounts ( Cure Notice ) [Dkt. No. 544]. 8. On June 15, 2017, the Debtor filed its First Supplemental Notice of (I) Request for Authority to Assume and Assign Certain Executory Contracts and Unexpired Leases, and (II) Proposed Cure Amounts ( Supplemental Cure Notice ) [Dkt. No. 591], which amends and supersedes the Cure Notice. See Supplemental Cure Notice at p. 2. The Debtor s Supplemental Cure Notice contained the Debtor s proposed Schedule of Assumed Executory Contracts and Unexpired Leases, along with the Debtor s proposed cure amounts, which included numerous 2 In addition to the foregoing examples of significant changes on a highly shortened timeframe, it also bears noting that the Debtor s witness and exhibit list was not timely filed nor were the exhibits themselves delivered in compliance with the Local Rules of this Court, which clearly required, in the instant situation, that all exhibits for the Sale Hearing be exchanged/provided by noon on July 28, See L.R. No However, the Debtor did not file their witness and exhibit list until almost 5:00 p.m. on July 28, 2017 and did not provide the documents until 10:55 p.m. on July 28, Page 3

4 Case Document 774 Filed in TXSB on 07/31/17 Page 4 of 12 contracts between the Debtor and Fieldwood Energy. 9. On June 29, 2017, Fieldwood Energy filed its objection (the Cure Objection ) to the Supplemental Cure Notice [Dkt. No. 632] because the proposed cure amounts associated with the Debtor s proposed assumption for each/all the Fieldwood Energy contracts was listed as $0.00. See Supplemental Cure Notice. However, these estimates did not account for the significant amounts due and owing to Fieldwood Energy, which includes amounts owed as of the Petition Date as well as additional amounts that have accrued during this bankruptcy case. Indeed, Fieldwood Energy asserted in its Cure Objection that the correct cure amounts owed for each contract totaled $2,210, (as of June 7, 2017). 10. On June 29, 2017, the Debtor filed a Second Supplemental Notice of (I) Request for Authority to Assume and Assign Certain Executory Contracts and Unexpired Leases, and (II) Proposed Cure Amounts ( Second Supplemental Cure Notice ) [Dkt. No. 649], which adds to, but does not amends and supersedes the Cure Notice or the Supplemental Cure Notice. See Second Supplemental Cure Notice at p Because the Second Supplemental Cure Notice appeared to overlap with the Supplemental Cure Notice, in order to fully preserve its rights, Fieldwood Energy filed an objection to assert the same arguments contained in its Cure Objection. See Dkt. No In addition, on July 7, 2017, Fieldwood Energy also filed its Notice of Preferential Rights [Dkt. No. 671] (the Fieldwood Energy Preference Right ) related to the joint operating agreement dated March 13, 1962 and as amended thereafter governing the Ship Shoal 252 property OCS-G 1529, which provides Fieldwood Energy with preferential rights to purchase this asset which the Debtor is proposing to sell as part of the Motion to Sell Assets. On July 10, 2017, Fieldwood Energy subsequently filed a supplement to the first Notice of Preferential Page 4

5 Case Document 774 Filed in TXSB on 07/31/17 Page 5 of 12 Rights [Dkt. No. 676]. 13. On July 23, 2017, the Debtor filed its Notice of Cancellation of Auction [Dkt. No. 703], wherein the Debtor notified parties that it planned to proceed forward with a sale of certain assets to NOV. 14. On July 26, 2017, the Debtor filed its Notice of (I) Request for Authority to Assume and Assign Certain Executory Contracts and Unexpired Leases, and (II) Proposed Cure Amounts [Dkt. No. 725], which purports to amend and supersede the three prior cure notices filed by the Debtor [Dkt. Nos 544, 591 and 649]. 15. On July 27, 2017, the Debtor filed its Notice of Revised Proposed Sale Order (the Revised Sale Order ) [Dkt. No. 730]. 16. On July 28, 2017, the Debtor filed its Notice of Revised Schedules and Exhibits to Asset Purchase Agreement [Dkt. No. 732]. 17. On July 28, 2017, Fieldwood Energy filed its Objection to the Debtor s Proposed Sale to Northstar Offshore Ventures LLC (the Sale Objection ) [Dkt. No. 750]. 18. On July 28, 2107, NOV filed the Declaration of Thomas Clarke in Support of the Proposed Sale [Dkt. No. 755]. OBJECTION 19. Preferential Rights. First and foremost, Fieldwood Energy objects to the Debtor s last minute transformation in position concerning the Fieldwood Energy Preference Right. As noted above, on only a few business days notice, the Debtor filed Revised Schedules that completely reversed the Debtor s position from earlier filed schedules that had agreed that Fieldwood had preference rights to the current position that the Fieldwood Energy Preference Right is Not Applicable, i.e. that Fieldwood Energy has no preference right. As clearly laid out Page 5

6 Case Document 774 Filed in TXSB on 07/31/17 Page 6 of 12 in Article 26.2 of the pertinent joint operating agreement (which the Debtors have listed as Exhibit 49 in its witness & exhibit list for the Sale Hearing [Dkt. No 754]), Fieldwood Energy indisputably has a preferred right to purchase the interest in Shoal 252 that the Debtor is proposing to sell to NOV. In its response, the Debtor has argued that since it proposes a sale of all or substantially all the preference rights do not apply [Dkt No. 765, p. 5]. 20. Notwithstanding the Debtor s apparent last minute change in position regarding the Fieldwood Energy Preference Right, Fieldwood Energy will assert its rights to purchase the Ship Shoal 252 property at the Sale Hearing, citing the clear language contained in the joint operating agreement. The availability of these preference rights are a matter of State law and could not have been brought in Federal Court, absent a bankruptcy filing. Fieldwood Energy does not consent to entry by this Court of an order or judgment with respect to its preferential rights with regard to Shoal 252. Pursuant 28 U.S.C. 1334(c)(2), this Court should either abstain or make a recommendation to the U.S. District Court. 21. Demonstration of Adequate Assurances. Fieldwood Energy also objects to the proposed sale due to the dearth of evidence to support a conclusion that NOV can provide adequate assurance of future performance surrounding the assumed leases, wells, facilities and contracts. Other than indicating that it has $19 million in loan commitments, NOV has not demonstrated that it is financially capable of performing the lease obligations it is assuming, including plugging and abandoning liabilities, which as this Court is well aware from this case and several other bankruptcy cases (Black Elk, Montco and ATP to name a few examples), is a significant issue in the Gulf of Mexico. NOV has not shown that the assets being purchased will provide sufficient operating income above operating costs to meet the assumed obligations and has not indicated any sources of additional funds other than the loan commitment. Page 6

7 Case Document 774 Filed in TXSB on 07/31/17 Page 7 of Based on the evidence presented, NOV is a newly created special purpose entity that is currently not qualified with the Department of Interior to own and operate offshore properties, has never operated offshore oil and gas properties, has not indicated its source for insurance required of the operator under the applicable operating agreements, does not have (i) insurance or other financially security assurances necessary to satisfy Oil Spill Financial Responsibility under the Oil Pollution Act of 1990, as amended, (ii) a Safety Environmental Management System ( SEMS ), (iii) an Oil Spill Response Plan ( OSRP ), (iv) a Pollutant Discharge Elimination System required by the EPA ( NPDES ), and (v) essential contracts and permits in place or that will be assumed for oil spill response. 23. All of the preceding items will take significant time and will not be approved in only a few weeks and any closing of this proposed sale to NOV appear to be in Fieldwood Energy s estimation several months away, if not significantly longer. Unless and until the Debtor and/or NOV can demonstrate to this Court that each of these items has been completed or will be completed very soon, the proposed sale to NOV is completely illusory and is nothing but a pipe/offshore dream. 24. Fieldwood Energy s concern about the lack of adequate assurance of future performance and the uncertainty that this transaction will timely close is further underscored by the fact that NOV s principal owner, Mr. Thomas Clarke, does not appear to have any experience owning offshore assets or conducting offshore operations. Indeed, even a cursory review of the Declaration of Thomas Clarke filed in support of the proposed sale by NOV [Dkt No. 755] (filed on less than two business days notice before the Sale Hearing) reveals that NOV has not sufficiently demonstrated that it has the operational and financial capability to own and operate properties offshore. Indeed, while Mr. Clarke has significant/impressive experience in coal, this Page 7

8 Case Document 774 Filed in TXSB on 07/31/17 Page 8 of 12 experience does not relate to oil and gas operations either onshore or offshore. 25. The assertions in the declarations of Mr. Thomas Clarke [Dkt. No. 755] and Avery C. Alcorn [Dkt. No. 758] do not satisfy the test. Moreover, if all of the key operations people are transferred to NOV, then management is leaving the Debtor without sufficient operating experience. 26. Due to the last minute substantive modifications to prior cure notices, Fieldwood Energy asserts that proper notice has not been provided to counterparties to the assumed contracts, which is especially egregious as to the newly added contracts such as the pipeline contract for the South Pass West Delta Pipeline that was not including on three prior cure notices but was added to the Final Cure Notice, less than five business days before the Sale Hearing. Further exacerbating the lack of notice issue, due to disparities between the Final Cure Notice and the Revised Schedules noted above, Fieldwood Energy is completely unsure which Fieldwood Energy contracts the Debtor is proposing to assume and assign to NOV. Furthermore, based on its experience as an owner and operator in the Gulf of Mexico, Fieldwood Energy has grave concerns that a number of critical contracts that need to be assumed by NOV in order to successfully operate in the Gulf of Mexico have not made it onto the Debtor s list of assumed contracts. While there may be many additional examples, one example that Fieldwood Energy identified relates to West Cameron 269. As set forth in the Final Cure Notice and the Revised Schedules, the Debtor is planning on assuming the offshore operating agreement dated See Dkt. No , p 10 of 98. However, no other contracts are listed for this property even though NOV will need a mechanism to transport the production in order to successfully operate in this location. Thus, assuming the Production Handling Agreement dated by and between Peregrine Oil & gas II, Phoenix Exploration Company, Merit Page 8

9 Case Document 774 Filed in TXSB on 07/31/17 Page 9 of 12 Management Partners, et al is necessary for operations. See Dkt. No , p. 10 of No Assumption of the Obligations under the Argonaut Bond. It appears from the terms of the Asset Purchase Agreement that NOV does not intend to assume the bond obligations (the Bond ) existing between Argonaut Insurance Company ( Argonaut ) and Fieldwood Energy and NOV is not posting replacement financial security as required under the express provisions of such Bond. NOV clearly has some obligations with respect to the Bond due to the fact that it is required to post $3.9 million in additional collateral with NOV s lender to secure the obligations under the Bond. The Bond is Fieldwood Energy s best protection against a potential default by NOV and/or the Debtor for all lease obligations, including the P&A obligations. As is clearly set forth in the agreements, NOV wishes to purchase some of the properties co-owned with Fieldwood but not all. Fieldwood Energy is entitled to clarity on the proposed sale s impact on Argonaut s responsibilities under the Bond as it relates to the properties being sold to NOV. Fieldwood Energy objects to the sale to NOV to the extent it has any negative impact on the protections afforded to Fieldwood Energy under the Argonaut Bonds. 3 The Argonaut Bonds are not property of the estate, and obligations existing between Fieldwood Energy and Argonaut respecting the Bond (or any proceeds or payments flowing from such Bond) are issues that should not, and cannot, be impacted by this sale in a way that would remove protections provided to Fieldwood Energy under the Bond. The terms of the Argonaut Bond provide that [n]o assignment of the leases by the Principal... shall in any degree relieve the Principal and the Surety or any of them of their obligations under this Bond. Moreover, the terms of the Joint Operating Agreement, which was duly recorded in the property records in the Louisiana, require that the Debtor may only sell, transfer or assign its interest to a 3 Indeed, Fieldwood Energy joins in the similar concerns raised by Argonaut that the transactional documents lack clarity regarding the affect, if any, on the Argonaut Bonds. See Dkt. No.744. Page 9

10 Case Document 774 Filed in TXSB on 07/31/17 Page 10 of 12 financially responsible party or parties. See Debtor s Exhibit 49, Article (a). As noted above, determination of the rights of the parties under those agreements are governed by state law, arose pre-petition and could not otherwise be heard by the Court absent the Debtor s bankruptcy filing and Fieldwood Energy does not consent to the entry of a final order or judgment. 28. Fieldwood Energy also objects to the proposed sale to the extent that it purports to negatively impact Fieldwood Energy s recoupment and/or offset rights under its voluminous contracts with the Debtor. Fieldwood Energy reserves all of its rights as a creditor in this bankruptcy case, including but not limited to, any disputed amounts owed between Fieldwood Energy as well as all of its rights with respect to any claim it may assert in this case, including, but not limited to, administrative claims. Simply put, because of the numerous material modifications to this sale process over the past week and the numerous material modifications to the cure notices and material amendments to the asset purchase agreement on less than five business days notice, Fieldwood Energy believes that it is critical that protective language be added to the Revised Sale Order making it clear that the proposed sale does not limit, in any way whatsoever, Fieldwood Energy s rights and defenses related to the issues highlighted above. RESERVATION OF RIGHTS 29. Fieldwood Energy also reserves the right to further amend, modify or supplement this Objection at any time, including at the Sale Hearing. WHEREFORE, Fieldwood Energy respectfully requests that the Court enter an order denying the proposed sale and for such other and further relief as the Court deems just and equitable. Page 10

11 Case Document 774 Filed in TXSB on 07/31/17 Page 11 of 12 DATED: July 29, 2017 Respectfully submitted, GARDERE WYNNE SEWELL LLP By: /s/ John P.Melko John P. Melko Texas Bar No (direct dial) (direct fax) Sean Wilson Texas Bar No (direct dial) (direct fax) 1000 Louisiana, Suite 2000 Houston, Texas and- KILMER CROSBY & WALKER PLLC By: /s/ Brian A. Kilmer Brian A. Kilmer Texas Bar No.: Main St., Suite 1100 Houston, Texas Telephone: Facsimile: COUNSEL FOR FIELDWOOD ENERGY LLC, FIELDWOOD ENERGY OFFSHORE LLC AND THEIR AFFILIATES Page 11

12 Case Document 774 Filed in TXSB on 07/31/17 Page 12 of 12 CERTIFICATE OF SERVICE I do hereby certify that on July 31, 2017 a true and correct copy of the foregoing pleading was served via CM/ECF to all parties authorized to receive electronic notice in these cases. /s/ John P. Melko John P. Melko Page 12