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UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF LOUISIANA

IN RE: VIRGIN OFFSHORE USA, INC., DEBTOR

CASE NO. 11-13028 CHAPTER 11 CHIEF JUDGE ELIZABETH W. MAGNER

RESPONSE TO CENTURY EXPLORATION NEW ORLEANS, LLCs OBJECTION TO FIRST AMENDED CHAPTER 11 PLAN OF REORGANIZATION DATED MARCH 28, 2013 OF VIRGIN OFFSHORE U.S.A., INC. SUBMITTED BY GERALD H. SCHIFF, CHAPTER 11 TRUSTEE FOR THE ESTATE OF VIRGIN OFFSHORE U.S.A., INC.

NOW INTO COURT, by and through the undersigned counsel, comes Gerald H. Schiff (the Trustee), in his capacity as the Chapter 11 trustee for the bankruptcy estate of Virgin Offshore U.S.A., Inc. (Offshore or Debtor) who submits this Response on behalf of Offshore to Century Exploration New Orleans, LLCs Objection to First Amended Chapter 11 Plan of Reorganization Dated March 28, 2013 of Virgin Offshore U.S.A., Inc. (the Objection)(R. at 428) and accompanying Memorandum in Support (R. at 429) filed by Century Exploration New Orleans, LLC (Century) 1 as follows: I. Background Offshore owns certain undivided Operating Rights interests in Oil and Gas Lease of Submerged Land Under the Outer Continental Shelf Lands Act dated effective November 1,
1

Century is a successor to Century Exploration Company by merger recorded January 27, 2004. Century Exploration New Orleans, LLC was formerly known as Century Exploration New Orleans, Inc..

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1954 covering Ship Shoal Block 150 and designated as OCS- 419, Oil and Gas Lease of Submerged Land Under the Outer Continental Shelf Lands Act dated effective November 1, 1954 covering Ship Shoal Block 154 and designated as OCS- 420, and Oil and Gas Lease of Submerged Land Under the Outer Continental Shelf Lands Act dated effective July 1, 1997 covering Ship Shoal Block 153 and designated as OCS-G 18011, each block located in the Gulf of Mexico (collectively referred to herein as Ship Shoal). Along with Century and Virgin Oil Company, Inc. (Virgin Oil), Offshore is a party to a Joint Development Agreement dated effective December 31, 2003, as amended by the First Amendment To Joint Development Agreement dated effective May 1, 2005; an Offshore Operating Agreement between Offshore, Century and Virgin Oil dated effective December 1, 2003; and a Production Handling Agreement dated effective December 1, 2003 between

Offshore and Century, (collectively, the Ship Shoal JOA). Century is the designated operator under the Ship Shoal JOA and operates two wells currently in production on Ship Shoal. II. The Ship Shoal JOA is Vital to Offshores Viability and Must be Assumed The vast majority of Offshores present operating revenues are generated from the Ship Shoal and Offshores proposed liquidation plan is dependent upon maintaining those revenues. The Ship Shoal JOA is a valuable asset of Offshore and is integral to Offshores continued operation. Pursuant to its First Amended Disclosure Statement in Support of Chapter 11 Plan of
Reorganization Dated March 28, 2013 (the Disclosure Statement)(R. at 401) and First Amended

Chapter 11 Plan of Reorganization Dated March 28, 2013 (the Plan)(R. at 402), Offshore seeks to assume the Ship Shoal JOA. Should the Plan be confirmed, Offshore will assume the Ship Shoal JOA on the Effective Date and cure its pre-petition arrearage under the Ship Shoal JOA (totaling $141,870.06) over a period of seven (7) months thereafter.

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III.

Offshores financial performance supports assumption of the Ship Shoal JOA 11 U.S.C. 365 requires that a debtor provide adequate assurance of its ability to

promptly cure any existing default and its ability to provide future performance under the contract to be assumed. 11 U.S.C. 365. Century correctly points out in the Memorandum in Support that determination of adequate assurance is a factual question involving determination of, among other things, whether the debtors financial data indicated its ability to generate an income stream sufficient to meet its obligations Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985). Yet, Century does not challenge Offshores financial performance in bankruptcy or its projected post-confirmation financial performance. Nor does Century refer to any of its business dealings with the Trustee as a basis for questioning the proposed cure and related obligations. Since his appointment in October 2011, the Trustee has paid a total of $579,486.01 in post-petition JIBs to Century including significant additional expenses associated with a gaslift project for Ship Shoal. As acknowledged by Century, all post-petition JIBs for the Ship Shoal operations are now current. Offshore makes its post-petition JIB payments to Century on a monthly basis within days of its receipt of net production revenue from the Ship Shoal operations. Going forward, the Budget attached as Exhibit F to the Disclosure Statement approved by this Court projects positive cash flow from operations. Based upon these cash flow projections, Offshore has demonstrated the ability to generate an income stream to meet its future obligations. This income stream is unchallenged by Century except that Century believes that the cure payment must be made in full on the Effective Date and that Offshore must provide

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additional adequate assurance of future performance that the cash flow budget reflects is unavailable. a. Offshore will meet its financial and contractual obligations under the Ship Shoal JOA Century argues that the Trustee has failed to provide adequate assurance of future performance of plugging and abandonment activities for the Ship Shoal Operations because funds projected to be segregated for plugging and abandonment activities are not secured for the obligations referenced. From this, it would appear that Century seeks either a guarantee of Offshores future performance or that Offshore segregate funds for future obligations into an account in which Century holds a security interest. However, Offshore need not prove that it will thrive and make a profit or provide an absolute guarantee of performance to meet the adequate assurance requirement of 11 U.S.C. 365(b)(1)(C); instead, it must appear that Offshore will meet its financial and contractual obligations under the Ship Shoal JOA. Accord, In re Patriot Place. Ltd., 486 B.R. 773, 801 (Bankr. W.D. Tex. 2013); In re: M. Fine Lumber Co., Inc., 383 B.R. 565, 573 (Bank. E.D.N.Y. 2008); In re Westview 74th St. Drug Corp., 59 B.R. 747, 755 (Bankr. S.D.N.Y. 1986). Century cannot hold out for concessions from Offshore beyond those required to provide adequate assurance. Richmond Leasing, 762 F.2d at 1311. In that regard, the Court should note that the Ship Shoal JOA does not require Offshore to segregate dedicated funds for plugging and abandonment activities and the absence of such funds does not constitute a breach of the Ship Shoal JOA. Moreover, Century has apparently not imposed this requirement upon Virgin Oil2

On September 27, 2011, Century filed a non-specific objection to confirmation of Virgin Oil Plan. (Bankr. E.D. La. Case No. 09-11899 / R. at 838). Century later withdrew its Objection, claiming to have reached a compromise for the payment of cure amounts and provision of adequate assurance. (Bankr. E.D. La. Case No. 0911899 / R. at 854). To the best of the Trustees knowledge and belief, that compromise did not require Virgin Oil to

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nor has it committed to do so for its own (much larger) share of the plugging and abandonment liability of Ship Shoal. b. Offshores projected set aside for future plugging and abandonment activity is based upon current income stream projections The Objection next argues that the amount of money Offshore proposes to segregate for plugging and abandonment of currently producing wells is inadequate. Pursuant to the Disclosure Statement, Offshore projects total plugging and abandonment costs of $1,620,000 for Ship Shoal.3 (R. at 401 p. 23). This figure is identical to one presented by the Official Committee of Unsecured Creditors and CIT Capital USA, Inc. in Exhibit 5 to the Second Amended Disclosure Statement in Support of the Second Amended Chapter 11 Plan of Reorganization for Virgin Oil which was filed on September 1, 2011 in Virgin Oil bankruptcy. (Bankr. E.D. La. Case No. 09-11899 / R. at 776). Century was a creditor in the Virgin Oil bankruptcy. It had an opportunity to object to the stated estimate of plugging and abandonment costs for Ship Shoal and it did not do so. Meanwhile, Century offers no support for its present assertion of a $2,500,000 plugging and abandonment liability for Ship Shoal.4 As detailed in the Budget, Offshore anticipates using a combination of cash on hand and net revenue from operations to set aside cash equal to $40,000 per month in 2013 and $20,000

establish and/or fund any sort of segregated plugging and abandonment account for Ship Shoal operations upon confirmation and Virgin Oil has not done so.
3

Offshores share of this liability is projected to be approximately $462,000.

In an apparent effort to shore up this lack of support, Century delivered an unannounced letter to the Trustee on Friday afternoon, June 14, 2013, a copy of which is attached hereto as EXHIBIT A, in which it makes an requests the Trustees approval of a $103,038.00 AFE for Offshores portion of the expense to remove Well Guard #22 from Ship Shoal. Like the $2,500,000 plugging and abandonment estimate it provides in the Objection, the AFE provides no detail as to the source of the figures it includes.

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per month in 2014 for plugging and abandonment of producing wells.5 These funds are the only source of income for Offshore to make available for future obligations. This monthly amount is projected to result in a total of $720,000 having been set aside by Offshore for plugging and abandonment by the end of 2014 a figure well in excess of Offshores share6 of plugging and abandonment liability for the Ship Shoal operations. For this reason, the Trustee believes these amounts are adequate and reasonable in the absence of any other specific documentation regarding Ship Shoal P&A amounts. IV. Offshores seven-month cure period for the Century JOA is reasonable and prudent The Objection concludes by claiming that Offshore should not be allowed to assume the Ship Shoal JOA because the Plans contemplated payment of Centurys pre-petition arrearage of $141,870.06 over a seven (7) month period does not promptly cure the pre-petition default. Among other things, 11 U.S.C. 365(b)(1)(A) provides that an executory contract may not be assumed unless the trustee cures or provides adequate assurance that the trustee will promptly cure any default. The definition of prompt cure depends upon the facts and circumstances of each case and there is no clear test or set of factors which can be rigidly applied. In re PRK Enterprises, Inc., 235 B.R. 597, 601 (Bankr. E.D. Tex. 1999); In re Coors of North Mississippi, Inc., 27 B.R. 918 (Bankr. N.D. Miss. 1983) (curing of $110,000-$115,000 default within 3-year period considered prompt in light of prospective longevity of successful business operations). Some courts contrast the cure period against the remaining life of the contract being assumed. PRK, 235 B.R. at 601. While the Trustee is unable to predict the

At present, the funds budgeted to be set aside for plugging and abandonment have not been segregated from Offshores main account but Offshore has both the means and the stated intention to do so upon confirmation of the Plan. It is Offshores further intention to pay the June 14, 2013 AFE from those funds.
6

Calculated to be approximately $462,335 (28.5392% of $1,620,000) for active Ship Shoal production.

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remaining production life for Ship Shoal, discounted reserve figures would appear to indicate that it is in excess of seven years. The Trustee submits that a seven-month cure is reasonable when contrasted against the possible remaining life of Ship Shoal. Moreover, the Trustee notes that Offshore is not seeking to retain profits during the seven-month cure period. Rather, the Budget will require Offshore to supplement its operating profits with draws on its cash reserves during this time in order to make $20,000 monthly cure payments as well as set aside $40,000 monthly for future plugging and abandonment. Offshores desire to make a seven-month cure will allow it to satisfy its obligations to Century under the Ship Shoal JOA prudently and with reasonable promptness.

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WHEREFORE, Offshore prays that Centurys Objection to the Plan be OVERRULED; that the Offshore Plan be CONFIRMED; and for such other and further relief as is found to be just and proper by this Court.

Respectfully submitted, /s/ Gerald H. Schiff CHAPTER 11 TRUSTEE for the BANKRUPTCY ESTATE OF VIRGIN OFFSHORE U.S.A., Inc. AND GORDON, ARATA, MCCOLLAM, DUPLANTIS & EAGAN, LLC By: /s/Louis M. Phillips Louis M. Phillips (La. Bar No. 10505) GORDON, ARATA, MCCOLLAM, DUPLANTIS, & EAGAN, LLC One American Place 301 Main Street, Suite 1600 Baton Rouge, LA 70825 Phone: (225) 381-9643 Facsimile: (225) 336-9763 Email: lphillips@gordonarata.com - AND Patrick Rick M. Shelby (La Bar. No. 31963) James D. Rhorer (La. Bar No. 34052) 201 St. Charles Avenue, 40th Floor New Orleans, LA 70170-4000 Telephone: (504) 582-1111 Email: pshelby@gordonarata.com - AND -

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Armistead M. Long (La. Bar No. 33949) GORDON, ARATA, MCCOLLAM, DUPLANTIS, & EAGAN, LLC 400 East Kaliste Saloom Road, Suite 4200 Lafayette, LA 70508 Phone: (337) 237-0132 Facsimile: (337) 237-3451 Email: along@gordonarata.com Attorneys for Gerald H. Schiff, Chapter 11 Trustee

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CERTIFICATE OF SERVICE I hereby certify that a copy of the above and foregoing has been served upon the following parties by electronic notice via the Courts CM/ECF system on this 17th day of June, 2013: Stewart F. Peck, speck@lawla.com Christopher T. Caplinger, ccaplinger@lawla.com Benjamin W. Kadden, bkadden@lawla.com Joseph P. Briggett, jbriggett@lawla.com H. Kent Aguillard, kaguillard@yhalaw.com Brent B. Barriere, barrier@phelps.com Raymond A. Beyt, rab@beytlaw.com Frederick L. Bunol, fbunol@derbeslaw.com, dharvey@derbeslaw.com Jeffrey Burmaster, jburmaster@kingkrebs.com Jeffery D. Carruth, jcarruth@wkpz.com Leo D. Congeni, leocongeni@bellsouth.net Michael A. Crawford, mike.crawford@taylorporter.com Albert J. Derbes, ajdiv@derbeslaw.com, jbourdeaux@derbeslaw.com Carl Dore, carldore@doremahone.com, lgraham@doremahoney.com Douglas S. Draper, dsd@hellerdraper.com, lcollins@hellerdraper.com Steven G. Durio, durio@dmsfirm.com, bsandoz@dmsfirm.com Stanwood R. Duval, stan@duvallawfirm.com J. David Forsyth, jdf@sessions-law.com Tanya N. Garrison, tgarrison@wkpz.com Robert C. Gravolet, Robert.Gravolet@usdoj.gov, Adaline.L.Patterson@usdoj.gov Thomas G. Gruenert, tgruenert@ggzlawfirm.com kkeeling@ggzlafirm.com George B. Jurgens, gjurgens@kingkrebs.com, gchristian@kingkrebs.com Omer F. Kuebel, nobankecf@lockeliddell.com Mark Mintz, mmintz@joneswalker.com, sliberio@joneswalker.com Patricia Williams Prewitt, pwp@pattiprewittlaw.com Jacque B. Pucheu, jacque@pprlaw.com, jvienne@pprlaw.com Ryan J. Richmond, rrichmond@stewartrobbins.com Kathleen Shahan, Kathie.shahan@usdoj.gov Thomas J. Smith, tsmith@gjtbs.com, crose@gjtbs.com, chickman@gjtbs.com Office of the U.S. Trustee, USTPRegion5.NR.ECF@usdoj.gov Dennis J. Vidrine, dennisv@vidrinelaw.com Arthur A. Vingiello, avingiello@steffeslaw.com David F. Waguespack, Waguespack@carverdarden.com Guy E. Wall, gwall@wallbulling.com, melon@wallbulling.com Kristin S. Wallis, kwallis@csj-law.com, lderry@csj-law.com Timothy A. York, tyork@qsclpc.com

/s/Louis M. Phillips

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