As previously disclosed, in November 2019,
Pacific Coast Energy Company LP (“PCEC”), the sponsor of Pacific Coast Oil Trust (the “Trust”), informed
The Bank of New York Mellon Trust Company, N.A., as trustee of the Trust (the “Trustee”), that PCEC, as permitted by
the Conveyance of Net Profits Interests and Overriding Royalty Interest pursuant to which the Trust’s net profits interests
(the “Net Profits Interests”) and 7.5% overriding royalty interest (the “Royalty Interest”, and together
with the Net Profits Interests, the “Conveyed Interests”) in certain oil and gas properties were conveyed to the Trust
(the “Conveyance”), intended to begin deducting its estimated asset retirement obligation (“ARO”) associated
with the West Pico, Orcutt Hill, Orcutt Hill Diatomite, East Coyote and Sawtelle fields, thereby reducing the amounts payable to
the Trust under its Net Profits Interests. ARO is the accounting recognition related to plugging and abandonment obligations that
all oil and gas operators face. PCEC engaged an accounting firm, Moss Adams LLP (“Moss Adams”), acting as third-party
consultants, to assist PCEC in determining its estimated ARO, and on February 27, 2020, PCEC informed the Trustee that based
on the analysis performed by its consultants, PCEC’s estimated ARO, as of December 31, 2019, is approximately $45.7 million.
According to PCEC and its third-party consultants, its estimated ARO, which reflects PCEC’s assessment of current market
conditions as of December 31, 2019 and changes in California law, was determined to be approximately $33.2 million for the
Developed Properties (as defined in the Conveyance) and approximately $12.5 million for the Remaining Properties (as defined in
the Conveyance), or approximately $26.5 million and approximately $3.1 million net to the Trust, respectively, and PCEC has
reflected these amounts beginning with the calculation of the net profits generated during January 2020. The accrual has resulted
in a current cumulative net profits deficit of approximately $28.7 million, which must be recouped from proceeds otherwise payable
to the Trust from the Net Profits Interests. Therefore, until the net profits deficit is eliminated, the only cash proceeds the
Trust receives are pursuant to the Royalty Interest.
As previously disclosed, the Trust engaged
Martindale Consultants, Inc. (“Martindale”), a provider of analysis and compliance review services to the oil
and gas industry, to perform an independent review of the estimated ARO that PCEC provided to the Trustee. Martindale has completed
its review of the estimated ARO and on December 21, 2020 provided its analysis and recommendations to the Trustee. Martindale concluded
that although the Conveyance permits PCEC to accrue future plugging and abandonment costs and to deduct those costs from proceeds
otherwise payable to the Trust, this method of deducting the entire amount beginning in January 2020 does not produce the most
equitable result for the existing Trust unitholders. Martindale’s report also indicated that based on its review of the estimated
ARO calculation, approximately $26.4 million of the total ARO amount relates to estimated costs attributable to plugging and abandonment
of wells in West Pico, which PCEC indicates will be abandoned over the next five years, and approximately $2.3 million relates
to costs attributable to the plugging and abandonment of idle wells that California regulations require PCEC to address over the
next five years, while the remaining ARO amount relates to wells that have remaining lives of greater than five years.
Based on Martindale’s recommendations
provided in its report to the Trust, the Trustee has requested that PCEC promptly make the following adjustments to its calculations
and methods of deducting ARO from the proceeds to which the Trust is otherwise entitled pursuant to its net profits interests:
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Revise the estimated ARO calculation and deduct from the proceeds to which the Trust is entitled pursuant to its Net Profits
Interest only those plugging and abandonment costs that are expected to be incurred over the next five years. These costs would
relate to the abandonment of (A) wells (producing, injection and idle) in the West Pico field and (B) idle wells in the
Orcutt Hill and Orcutt Diatomite fields that must be abandoned in accordance with California’s idle well abandonment program;
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Provide an accounting to the Trustee of the estimated ARO calculation of the plugging and abandonment costs that are expected
to be incurred specifically for these two categories of wells over the next five years;
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With the exception of idle wells addressed in the first bullet above, revise the estimated ARO calculation for the Orcutt Hill
and Orcutt Diatomite fields, which are expected to have remaining useful lives ranging from 17 to 29 years, and schedule the deduction
of those future plugging and abandonment costs to begin after the West Pico and idle wells have been abandoned;
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Place into escrow all amounts that relate to plugging and abandonment costs for the Orcutt Hill and Orcutt Diatomite fields
(excluding the idle wells addressed in the first bullet above), and which are deducted from the proceeds to which the Trust is
entitled pursuant to its Net Profits Interest; and
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Confirm how PCEC plans to avoid duplication of payment or accrual of plugging and abandonment costs for the East Coyote and
Sawtelle fields, which are operated by third parties that typically would account for their own abandonment liabilities.
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If the ARO amount were to be reduced as
provided above, the resulting net profits deficit would still have exceeded the proceeds attributable to the Net Profits Interests
in 2020, and therefore the Trust would have received proceeds only from the Royalty Interest, which were less than $2.0 million
in 2020. If annual cash proceeds to the Trust attributable to the Conveyed Interests are less than $2.0 million in two consecutive
years, the Trust would be required under the terms of its trust agreement to dissolve and commence winding up its business and
operations.
Cautionary Note Regarding Forward Looking Statements
This Current Report on Form 8-K contains
statements that are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. All statements contained in this Current Report on Form 8-K, other than statements of historical facts,
are “forward-looking statements” for purposes of these provisions. These forward-looking statements include the Trust’s
expectations regarding expected proceeds to the Trust during 2021 and the possible dissolution of the Trust following the end of
2021. Statements made in this Current Report on Form 8-K are qualified by the cautionary statements made in this Current Report
on Form 8-K. The Trustee does not intend, and does not assume any obligation, to update any of the statements included in
this Current Report on Form 8-K. An investment in units issued by Pacific Coast Oil Trust is subject to the risks described in
the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018 and all of its other filings with the SEC.