Re: In re M/V PACIFIC VIRGO

britt,

thanks your notes below.

re bug issue - noted. just one question; do you think we should notify our
suppliers in view that, if there is a problem as a result of the bugs, we
will have to proceed against them??? they would want to have a rep to view
the testing as well, i would think.

re joint testing - pls copy eric tan on what needs to be done once a decision
is made on where/when the testing will be done.

re freight payment - before offering to just pay the $500,000, do you think
we should propose it be paid to an interest bearing escrow account pending
the results of the joint testing (or whatever other "pending" limitation you
think might help us)??

rgds

From: Britt Davis@ENRON on 09/11/2000 07:26 PST
To: Paul Henking/SIN/ECT@ECT
cc: Alan Aronowitz/HOU/ECT@ECT, Harry M Collins/HOU/ECT@ECT, Michael A
Robison/HOU/ECT@ECT, Richard B Sanders/HOU/ECT@ECT, James P
Studdert/HOU/ECT@ECT
Subject: Re: In re M/V PACIFIC VIRGO

Paul,

Thanks for your e-mail. Parenthetically, I'd be happy to explain how we got
to where we are on our strategy; maybe a telephone call would be best. Let
me know when you are available. I can call you early a.m. or late p.m.

Re the bug issue: we were aware of this, although I am interested to hear
that SGS raised it with you and Eric in mid-October. I have discussed this
in the past with David Best, and spoke with him on the telephone this morning
about what SGS told you. We don't think we should put anyone on notice about
the bug issue unless and until it appears and is confirmed at the joint
testing. Otherwise, we may be raising an inherent vice argument for both
Mitsubishi and our own cargo underwriters. Let me know if you have a
different view (on this or anything else I put in this e-mail).

Re Mitsubishi's response to our settlement demand: David Best has just
spoken with Sian Heard, Mitsubishi's lead London solicitor. It is clear from
her that Mitsubishi will not be settling prior to instituting arbitration.
It is also clear that Mitsubishi will not consider any substantial settlement
without Heard's advice. Best believes that Heard will recommend that the
joint testing take place before giving Mitsubishi an exposure evaluation. In
sum, while our attempt at settlement prior to joint testing was a worthwhile
effort, to avoid the risk and expense of the problematic joint survey, it now
appears to David and me to be at a dead end.

Re the joint testing: Again, David and I believe that the joint testing
should proceed as quickly as it can be arranged. Neither our cargo
underwriters nor Mitsubishi will move off dead center unless we do so. Given
the problems with SGS's lab in Singapore, the "bug" issue that SGS in Subic
Bay has raised (again), and that SGS did the pre-purchase of product for ECT
that proved off-spec, I have asked David to re-visit with Steve Jones, our
chemist, the logistics and cost of having the testing done in the U.K. I
have also asked him to consider whether Heard might be amenable to splitting
the costs of transporting the samples from Singapore to the U.K. I would
like to get ECT's authority quickly to authorize the joint testing to go
forward.

Re the selection of arbitrators: David has discussed three Q.C.s that he and
Neale agreed were appropriate with Hearn. Of those three, Hearn likes
Nicholas Hamblin, who will charge 275 pounds an hour, and $1,750 pounds per
day. She will be conferring with Mitsubishi about using him as the sole
arbitrator. Given that we have initiated a good-faith discussion of the
choice of arbitrators with Mitsubishi, David advises that we do not need to
worry about sending Mitsubishi a letter tomorrow with our choices of
arbitrator on it. We can wait for Hearn to respond, then I will make a
formal request for your authority to agree to one arbitrator who has already
been accepted by Mitsubishi.

Re the without-prejudice settlement of Mitsubishi's freight and demurrage: I
read you loud and clear (and thanks for making clear that the freight claim
is only about $500,000, not $760,000, as I had inadvertantly indicated in my
last e-mail). As I previously mentioned, David and I are on board with this
idea, given the difficult circumstances of this case.

Let me know if I have inadvertantly mischaracterized anything you said.

Britt

Paul Henking@ECT
11/09/2000 02:25 AM

To: Britt Davis/Corp/Enron@ENRON
cc: Alan Aronowitz/HOU/ECT@ECT, Harry M Collins/HOU/ECT@ECT, Michael A
Robison/HOU/ECT@ECT, Richard B Sanders/HOU/ECT@ECT, James P
Studdert/HOU/ECT@ECT
Subject: Re: In re M/V PACIFIC VIRGO

britt,

thanks your reply which is noted. you will notice i have excluded david best
and ngregson (?) preferring to keep my comments in house as privileged info,
unless you feel this msg should be forwarded to them later.

firstly, i am getting nowhere with mitsubishi on the settlement front. i have
gone so far as to mention this morning to mitsuru that if this does goes to
arbitration, and should mitsubishi succeed in their position, this will only
serve to increase our claim by a similar amount since these costs would then
become part of our contamination claim. he seems quite content to let this go
to arbitration. as an example, he was suppose to call me back this afternoon
but did not.

secondly, with regards to your comments, i would just respond/add the
following information:

1. i don't know if i am switching tactics so much as following what should
have been done in the beginning (i.e. submit the claim to our insurance
company and let them proceed against the owners). i honestly feel the
arbitrators will say, "pay the freight (and possibly the demurrage now) and
settle the contamination claim as a separate issue". clearly, the c/p says
that freight is due without deduction once the vessel has completed discharge.

on the issue of the "pre-sale" survey, i have discussed this matter
internally with eric tan. seems our position is that singapore considered the
sample that was drawn as a bad sample as well as we were not sure that the
test methods used conformed with the testing methods required for first gas.
this position is proved by the loading of the pacific virgo when the product
subsequently tested on-spec for first gas. granted, it might still become an
issue but, as you say. it could become an issue in either proceeding.

i am getting a little confused on the matter of the joint testing. verbally i
was advised that enron did not want to have the joint testing - at least not
on a prompt basis. your msg now says that we do want to test the product and
it should be done as soon as possible (as mitsubishi - and your advices that
the underwriters and hear owner's p and i club would want). i assume this
change is the result of the arbitration.

be that as it may, i do have a bit of information that you may, or may not,
be aware of or find relevant. when eric tan and i visited first gas in
mid-oct to meet the personnel at first gas and witness one of the cargoes
being discharged at the plant, we also took the opportunity to meet with sgs
in subic bay to see their facilities and meet their personnel. during the
conversation the subject of the elang cargo came up and the comment from sgs
is that they were fairly certain it was off-spec due to "bugs". this may
sound silly but i have heard of this before and is a problem with petroleum
products.

it seems sgs even went so far as to test the product themselves for these
"bugs" and got a positive result. this test was not requested by enron or
first gas and was done some time later in this process. i understand there
may be some concern on our part over our subsequent sales to third parties if
we knew there were bugs in the product. i would have to say that this was not
known at the time and even today is only conjecture based on sgs' advices
mid-oct (well after these sales). sgs also described "changes" to the product
which would fit with the cargo having bugs (i.e. a strong sulphur smell and
change in colour).

if the testing is now done, i do not know if these bugs will be detected or
not. however, if they are in the ship's samples, they may have changed the
sample sufficiently that even a visual observation may detect the problem.
the next problem becomes proving from where the bugs originated. were they in
the previous cargo tanks that were not cleaned properly? or were they in the
condensate when the cargo was loaded? obviously, testing of the shore sample
prior to loading will determine the answer. if the shore sample is ok, then
they had to come from the ship. if the shore sample also has bugs, then we
should be claiming against our suppliers.

this of course assumes the suggestion put forth by sgs is in fact correct.
just something else to be considered.

2) i am not saying that we pay the full amount immediately but only the
freight portion (about $500,000). we then advise mitsubishi (or their
lawyers) that we will now review the demurrage claim (about $260,000) and
revert by say end nov. the demurrage claim has been sent to our london
office's demurrage department and i have asked them for their comments on the
claim. after all, there may be issues with the ship's pumping performance or
simple laytime errors which may reduce the demurrage claim. they will try to
get me a response before the weekend.

in this manner, we pay part of the money but still have a smaller portion
which we may apply against our claim once the test results are known. i will
leave this to legal as to decide how the approach to mitsubishi or their
lawyers should be made

rgds