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    Unassociated Document

    VIA EDGAR

    November
13, 2009

    Mr. Karl
Hiller

    Branch
Chief

    Securities
and Exchange Commission

    100 F
Street, N.E.

    Washington,
D.C. 20549-3628

              Re:

              Gran Tierra Energy
      Inc.

    Form
10-K for the Fiscal Year Ended December 31, 2008

    Filed
February 27, 2009

    File
No. 001-34018

    Dear Mr.
Hiller:

    On behalf
of Gran Tierra Energy Inc. (“Gran
Tierra” or the “Company”)
we are responding to the comment received from the staff (the “Staff”) of
the Securities and Exchange Commission (the “Commission”)
by letter dated October 22, 2009, with respect to Gran Tierra’s Form 10-K listed
above (the “Comment”).  The
Comment has been replicated in
italics below for the Staff’s convenience.

    Form 10-K for the Fiscal
Year Ended December 31, 2008

    Financial
Statements

    Note 6 – Share Capital, page
98

    1.           We
note your response to prior comment 3 regarding your accounting for the
modification of the terms of the warrants issued in your 2006 offering and
understand that you believe that the contractual value of $8.6 million in
liquidation damages is a more reliable measure of fair value compared to the
fair value of the modification determined by using the Black Scholes. However,
we note that this view is not consistent with your policy of using the Black
Scholes model to reliably measure the fair value of other equity instruments,
such as your stock options and other warrants, nor is it consistent with having
relied upon this model in determining the extent of modifications that would be
made to the warrants; the difficulty rests on the measure of volatility you have
used in the model. Therefore, we are not convinced that the contractual amount
is a more reliable measure of the fair value conveyed as a result of the
modification of the warrants and we would therefore expect that the
determination of this value be performed consistent with paragraph 51 of SFAS
123R. Although we understand that you used the 25% volatility factor in
determining the warrant modifications that would be made to satisfy the $8.6
million in liquidation damages based on your correspondence with certain warrant
holders, this factor is inconsistent with the historical volatility you used to
compute the value of your other share based payments. If you believe some other
measure of volatility would be appropriate in the modification, you will need to
show how your estimate complies with the guidance in paragraphs A31 through A34
of SFAS 123R, and is not inconsistent with the approach taken in determining the
historical volatility utilized in valuing your other share based
payments.

        1

    Gran Tierra’s
Response:

    Background

    Gran
Tierra sold an aggregate of 50,000,000 units of Gran Tierra’s securities at a
price of $1.50 per unit in a private offering for gross proceeds of $75 million,
pursuant to three separate Securities Purchase Agreements, dated June 20, 2006,
and one Securities Purchase Agreement, dated June 30, 2006 (collectively, the
“2006
Offering”).  Each unit comprised one share of Gran Tierra’s
common stock and one warrant to purchase one-half of a share of Gran Tierra’s
common stock at an exercise price of $1.75 for a period of five years, resulting
in the issuance of 50,000,000 shares of Gran Tierra’s common stock and warrants
to purchase 25,000,000 shares of Gran Tierra’s common stock.  In
connection with the issuance of these securities, Gran Tierra entered into four
separate registration rights agreements (the “Registration
Rights Agreements”) with the investors (“2006
Investors”) pursuant to which Gran Tierra agreed to register for resale
the shares (and shares issuable pursuant to the warrants) issued to the
investors in the offering by November 17, 2006 (the “Mandatory
Effective Date”).  The registration statement filed on December
7, 2006, as amended, was declared effective by the Commission on May 14,
2007.

    Terms of the Registrations Rights
Agreements

    The
Registration Rights Agreements provided that Gran Tierra was required to pay
liquidated damages to the 2006 Investors if the resale registration statement
was not declared effective by the Mandatory Effective Date.  The
liquidated damages provisions in the Registration Rights Agreements provided
that the amount of damages would be calculated daily from the Mandatory
Effective Date until the effective date of the registration statement and would
be based on the gross proceeds of $75,000,000.  The rate of liquidated
damages began at 1% per month with the applicable percentage escalating at
various times.  The maximum amount of liquidated damages payable under
the Registration Rights Agreements was 25% of the gross proceeds, or
$18,750,000.  Payment of the liquidated damages to each investor was
either, at the
investor's option, in cash or additional shares of common stock of Gran
Tierra.

    The
Registration Rights Agreements provided that they could be amended or any term
or provision contained therein waived with the written consent of the holders of
a majority of the then outstanding registrable shares (as defined in each of the
Registration Rights Agreements) and Gran Tierra.  The amendment or
waiver would be effective against all signatories of the Registration Rights
Agreements provided that such amendment or waiver was not materially and
disproportionately adverse to any particular 2006 Investor (as compared to all
2006 Investors, under the particular Registration Rights Agreement, as a
group).

        2

    Gran
Tierra’s Decision to Seek an Amendment or Waiver under the Registration Rights
Agreements

    By May
14, 2009, the date the registration statement was declared effective by the
Commission, Gran Tierra had accrued liquidated damages in the amount of $8.6
million in its financial statements, recording such amount as a current
liability for liquidated damages payable and an associated expense in the income
statement.  The liquidated damages obligation became due and payable
under the terms of the Registration Rights Agreement, in cash, on May 19,
2007.

    The Board
of Directors determined that Gran Tierra would not have adequate cash to pay the
$8.6 million liquidated damages obligation and also complete its 2007 capital
expenditure program unless Gran Tierra sold some of the Company’s assets,
borrowed money under its line of credit with Standard Bank or obtained a waiver
under the Registration Rights Agreement from the 2006 Investors.  The
Board authorized management to approach the 2006 Investors to seek either an
amendment of, or waiver under, the Registration Rights Agreements whereby the
2006 Investors would waive their rights to the payment of liquidated
damages.  Management reached out to several hedge funds (the “Representative
Holders”) which funds constituted part of the 2006 Investors to discuss
whether a waiver was a viable option.

    Discussions
with Representative Holders

    For
approximately two weeks, management discussed with the Representative Holders
the terms upon which such Representative Holders believed would be acceptable to
the 2006 Investors to waive the cash payment owed for liquidated damages under
the Registration Rights Agreements.  The discussions centered upon
modifying the terms of the outstanding warrants held by the 2006
Investors.  During the course of the discussions, one of the
Representative Holders (the “Lead
Holder”) required that, for purposes of determining the nature of the
modifications to the warrants, a Black-Scholes warrant pricing model, based on a
25% volatility rate, be used when determining the fair value of the warrants as
proposed to be amended. The Lead Holder held approximately 13% of the units
issued in the 2006 Offering and the Representative Holders held approximately
28% of the units issued in the 2006 Offering.

    Waiver
and Consent Solicitation

    After the
discussions with the Representative Holders, Gran Tierra sought the consents
from the 2006 Investors to:

        3

    1.           Waive
the payment of all liquidated damages, together with any interest and penalties
related thereto, owed by Gran Tierra under Section 2(d) of the Registration
Rights Agreements to the 2006 Investors as a result of its failure to have the
registration statement declared effective by the Commission by November 17,
2006;

    2.           Waive
the breach of Section 2(e) of the Registration Rights Agreements which existed
as a result of the Commission declaring effective on February 14, 2007 another
registration statement previously filed by Gran Tierra for shares of common
stock acquired by certain of Gran Tierra’s shareholders in a previous offering;
and

    3.           Amend
the warrants to reduce the exercise price to $1.05 per share and extend the
expiry date of each warrant for one year from the original expiry
date.

    Results of the Waiver and Consent
Solicitation

    On June
27, 2007, the Company received waivers and consents from the 2006 Investors
holding 64.9% of the then outstanding registrable shares, as defined under the
Registration Rights Agreements.

    Analysis

    Gran
Tierra’s policy is to use the Black Scholes model, with a volatility rate based
on the historical volatility of the Company’s stock, to measure the fair value
of Gran Tierra’s equity instruments, including warrants and options. The policy
is consistent with paragraph 51 of SFAS 123R and complies with the guidance in
paragraphs A31 through A34 of SFAS 123R.  We believe this approach
represents the best method available to Gran Tierra for measuring fair value of
our equity instruments and we will continue to apply it consistently except in
rare circumstances where the Company has a more reliable and contractually based
and clearly evident measure of fair value.

    The
Representative Holders (and ultimately a majority of the then outstanding
registrable shares under the Registration Rights Agreements through the waiver
and consent process) agreed that the fair value of the negotiated modification
of the terms of the warrants was equivalent to the $8.6 million fair value of
the contractual obligation to pay liquidated damages.  The
Representative Holders advised the Company that a 25% volatility rate was more
appropriate than Gran Tierra’s historical volatility when valuing the
modification of the terms of the warrants.

    The fair
value of the modification of the terms of the warrants determined using a Black
Scholes model with a 100% volatility rate (based on Gran Tierra’s historical
volatility) was $4.3 million which would result in recording a gain of $4.3
million on settlement of the $8.6 million liability for liquidated
damages.

        4

    We
believe the $8.6 million fair value of the contractual liability represents the
most reliable measure of the fair value of the modification of the terms of the
warrants. We do not believe it would be appropriate to record a gain on
settlement of the liability as the 2006 Investors and Gran Tierra had agreed
that the fair value of the modification of the terms of the warrants was
equivalent to $8.6 million.

              1.

              FASB
      Technical Bulletin No. 80-1, paragraph
4.

    We believe that the Black Scholes model
is the appropriate model for determination of fair value of the equity
instruments the Company issues except in this rare circumstance where we have a
more reliable and contractually based measure of fair value. The exception to
this rule is the circumstance where there is a more reliable and contractually
based measure of fair value.  We believe this is consistent with FASB
Technical Bulletin No. 80-1, paragraph 4 which provides:

    The
reacquisition price of the extinguished debt is to be determined by the value of
the common or preferred stock issued or the value of the debt – whichever is
more clearly evident.

    Based on the discussions that Gran
Tierra had with the Representative Holders, it was clear that they believed that
they were receiving equivalent fair value of $8.6 million as a result of the
modifications to the warrants and that there was no element of forgiveness of
any part of the accrued liquidated damages owing to the 2006
Investors.  Consequently, we believe that we have a more reliable and
contractually based measure of fair value than a value determined using the
Black Scholes model, and therefore this case is one of the rare circumstances in
which the use of the contractually based measure of fair value is more
appropriate than using the Black Scholes model.

              2.

              SFAS
      123R, paragraph 51; Accounting Principles Board Bulletin 26, “Early
      Extinguishment of Debt” (APB 26) Footnote
1.

    Gran Tierra calculated the fair value
of the modifications to the warrants determined in accordance with the guidance
in paragraph 51 of SFAS 123R, using the Black-Scholes option pricing model with
a volatility rate of 100% (which is similar to the volatility rate Gran Tierra
used for determining the fair value of stock options granted in 2007 and is
based on the historical volatility of Gran Tierra’s stock).  The fair
value calculation using this methodology equaled $4.3 million compared to the
actual fair value of the liability accrued for the liquidated damages of $8.6
million.  We believe the contractually payable liability of $8.6
million is more clearly evident and a more reliable measure of the fair value of
the modifications to the warrants as this amount is contractually supported by
the Registration Rights Agreements.  The Black-Scholes model is an
estimate of fair value based on assumptions, which is the appropriate model to
use if it is the best estimate of fair value; however, we know the fair value of
the liability being settled in this instance.  By analogy, this is
consistent with paragraph 7 of SFAS 123R, which applies to transactions with
non-employees, and provides:

        5

    If
the fair value of goods or services received in a share-based payment
transaction with nonemployees is more reliably measurable than the fair value of
the equity instruments issued, the fair value of the goods or services received
shall be used to measure the transaction. In contrast, if the fair value of the
equity instruments issued in a share-based payment transaction with nonemployees
is more reliably measurable than the fair value of the consideration received,
the transaction shall be measured based on the fair value of the equity
instruments issued. A share-based payment transaction with employees shall be
measured based on the fair value (or in certain situations specified in this
Statement, a calculated value or intrinsic value) of the equity instruments
issued.

    However, we recognize the Staff’s
concern that this measurement approach is inconsistent with the approach we use
to reliably measure the fair value of our other equity instruments, which is in
accordance with SFAS 123R paragraph 51 and the guidance in paragraphs A31
through A34.

    As noted
above, the fair value of the modifications to the warrants determined in
accordance with the basis used to value our other equity instruments was
approximately $4.3 million, which would result in a gain of approximately $4.3
million on settlement of the $8.6 million liability for liquidated
damages.  However, we believe the gain would be recorded in a manner
consistent with our current accounting for this transaction.

    In this
regard, we note that APB 26, Footnote 1 supports accounting for this transaction
as capital in nature.

    If
upon extinguishment of debt, the parties also exchange unstated (or stated)
rights or privileges, the portion of the consideration exchanged allocable to
such unstated (or stated) rights or privileges should be given appropriate
accounting recognition. Moreover, extinguishment transactions between related
ent