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    Unassociated Document

    VIA EDGAR

    January
8, 2010

    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 comments received from the staff (the “Staff”) of
the Securities and Exchange Commission (the “Commission”)
by letter dated December 9, 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
have read your response to prior comment 1 indicating you continue to believe
that the contractual liability for liquidation damages is a more reliable
measure of fair value of the modifications than would result using the Black
Scholes model.

    If
you firmly believe that your negotiations properly considered the fair value of
the modifications and that this fair value was also reflected in the outcome, we
expect that the 25% volatility factor implicit in the terms of your settlement
would need to have been taken into account in estimating the expected volatility
used in your calculations of grant date fair value of stock options issued after
you made the warrant modifications to comply with the guidance in paragraphs 16
and A34 of SFAS 123(R), and SAB Topic 14D.1.

    Please
explain how your computation and use of the 100% volatility factor in these
other measurements after the settlement of the liability for liquidated damages
properly reflects the implicit volatility, if this is your view. Please clarify
the extent to which this measure of volatility reflects meaningful differences
between the option and warrants.

        1

    Gran Tierra’s
Response:

      In order
to clarify our responses to the previous response letters, the implied
volatility discussion was included to convey our thought process in assessing
the appropriate accounting to record the June 2007 warrant modification ( the
“warrant modification”). Ultimately, the Company concluded that the accounting
should be based on the accrued liquidated damages amount and the implied 25%
volatility factor had no effect on the accounting; as such, it should not be
considered prospectively.

    Additionally,
Gran Tierra believes that there are meaningful differences between its options
and warrants which support utilizing a different measure of
volatility.  Gran Tierra relied, and continues to rely, on historical
volatility for determining expected volatility when calculating the fair value
of stock options’ issued after the warrant modification was made. The first
options’ grant after the warrant modification occurred in November 2007. In
determining whether historical volatility versus an implied volatility or
combination of both should be used, the Company considered the following
guidance under SAB Topic 14D.1:

              a)

              Volume
      of Market Activity

    The
Company does not have any traded options or warrants. The Company’s only
transaction for which an implied volatility calculation could be attempted was
the June 2007 warrant modification of the terms of 50 million warrants to
purchase 25 million shares associated with the shares issued through the 2006
Offerings, as described in our letter to the SEC dated November 13, 2009. To
date, the largest single grant of options by the Company was 5.3 million
options.

    We
believe that the volatility implied by the warrant modification without
consideration of other potential stated or unstated rights would not necessarily
represent a marketplace participant’s expectation (as required by footnote 6 to
paragraph 7 of FAS 123(R)) regarding volatility as it was not a transaction in
an active market and was carried out with a non-arms length group of
shareholders. At the time of the warrant modification, the Company believed that
the warrant holders negotiated to receive the equivalent of the $8.6 million of
fair value. However, due to the warrant holders’ significant relationship with
the Company as shareholders, it is difficult to assess all of the factors the
warrant holders may have considered during the negotiations. Please refer to the
relevant discussion below in our response to the second comment.

              b)

              Synchronization
      of the Variables

    As
indicated above, the date of the warrant modification was June 2007 and the
first grant of stock options subsequent to this date was in November
2007.  We recognize that this time period is not significant enough to
preclude consideration of the volatility used for the warrant
modification.  However, the timing differences become more significant
for later grants since the Company continues to grant options to its employees
and directors from time to time.

        2

              c)

              Similarity
      in Exercise Prices

    The
modified exercise price for the warrants was not determined using a fair market
value determination that the Company uses for stock options granted under its
Equity Incentive Plan.  Stock options granted after the warrant
modification are “at-the-money” since the exercise price is determined on the
grant date using the closing price on the stock exchange of the Company’s stock
on that grant date. The warrants were repriced to $1.05 from the original $1.75
exercise price as a result of their modification when the “at-the-money” price
would have been $1.37 on the date of the warrant modification.

              d)

              Similarity
      in Length of Terms

    The
expected life used for determining the fair value of stock options granted after
the warrant modification is three years. The contractual life of the warrants,
as a result of the modification was five years. The Company understands that the
SEC’s staff’s position is that the implied volatility derived from a traded
option with a term of one year or greater would typically not be significantly
different from the implied volatility that would be derived from a traded option
with a significantly longer term.

    After
considering the above guidance to determine whether implied volatility should be
used to estimate expected volatility for other equity instruments issued by Gran
Tierra after the warrant modification, the Company concluded, and continues to
conclude, that the implied volatility data that could be inferred from the
warrant modification is unlikely to reliably reflect the market’s expectation of
future volatility for the Company’s options and therefore should not be included
in the determination of expected volatility when valuing the Company’s stock
options. The Company believes its position is supported mainly by the absence of
active trading in the Company’s options or warrants, limited implied volatility
data, differences in the volumes and exercise prices of the discussed equity
instruments and the non-arms length nature of the investors (“2006 Investors”)
involved in the warrant modification.

    Therefore,
the Company believes that exclusive reliance should be placed on the use of
historical volatility to determine expected volatility for the following
reasons:

          3

              a)

              Gran
      Tierra expected that future volatility over the expected life of the
      options issued subsequent to the warrant modification would be similar to
      that of its historical volatility at that time as the Company had no
      reason to believe that its future volatility over the options’ expected
      life was likely to differ from its past. At the time of the warrants
      modification, we did not identify any significant factors that would cause
      us to believe that future expectations of volatility would be
      significantly different from the
past.

              b)

              The
      computation of historical volatility uses a simple average calculation
      method based on the annualized standard deviation between the prices based
      on the expected life of the option.

              c)

              The
      period of sequential historical data used to value the options granted in
      November 2007 was shorter than the three year expected life of the options
      issued subsequent to the warrant modification as there were only two years
      of data since trading began in November 2005. Discussion of limitations on
      availability of historical data in SAB Topic 14.D indicates that for
      public companies, if the length of time the entity’s shares have been
      publicly traded is shorter than the expected or contractual term of the
      option, the term structure of volatility for the longest period for which
      trading activity is available generally should be used as long as this
      period is not less than two years.

    The
Company has no reason not to believe, as stated in a) above, that the future
volatility over the expected life of the options issued subsequent to the
warrant modification would not be similar to that of its historical volatility
at that time and the period of observations is reasonably long with no better
information on volatility available.

              d)

              The
      Company uses daily price observations over the historical two year period
      (or a longer period as more information becomes available) prior to
      granting options subsequent to the warrant
  modification.

    By
weighting the above factors, the Company believes that exclusive reliance should
be placed on historical volatility data to determine expected volatility for its
stock option grants subsequent to the warrant modification.

        4

    2.           We
understand from your response to prior comment 1 that if you were to calculate
the value of the warrant modifications using the Black Scholes model, you would
record the excess of the liability over this value as capital contribution,
placing reliance on the guidance in footnote 1 of APB 26.

    However,
referring to the investors on page 5 of your response letter, you state “… it
was clear that they believed that they were receiving equivalent fair value of
$8.6 million as a result of the modifications to these warrants.” Please explain
why you do not believe the intent of the investors would preclude the accounting
you suggest. Please also submit a schedule listing the investors, their
respective share holdings, percentage of such shares to total outstanding shares
at the time, the portion of the liability associated with each, and identifying
those who approved the settlement.

    Gran Tierra’s
Response:

    Since the
investors were contractually entitled to receive $8.6 million in liquidated
damages, the Company assumed that the investors believed that they were
receiving equivalent value as a result of the warrant modification or else they
would not have approved the amendment to the Registration Rights
Agreements.  Gran Tierra is unable to assess the intentions of the
2006 Investors surrounding their acceptance of the fair value provided in the
warrant modification and whether they were actually, in their view, receiving or
giving up some other benefit in their capacity as shareholders. If the Company
received consideration in excess of the fair value, based on using the Black
Scholes model with an historical volatility attributed to the warrant
modification, this may indicate the warrant holders may have considered other
factors important to them in their capacity as principal shareholders. As stated
in our letter to the SEC dated November 13, 2009, we believed that the warrant
holders negotiated to receive fair value equivalent to the liquidated damages.
However, the warrant holders may have agreed to a lesser fair value based on
their desire as shareholders to allow the Company to complete its planned
capital expenditure program that would otherwise have been postponed or
cancelled if a cash settlement was made for the liquidated damages rather than
accepting the warrant modification. The Company has considered whether this
excess over the fair value attributed to the warrant modification should be
considered as a reduction to the originally recorded liquidated damages, but
believes that because of the Company’s relationship with this principal
shareholder group as a related party (since the Registration Rights Agreements
provided that decisions would be made by a majority of the then outstanding
registrable shares), the substance of the transaction was the Company received
the excess as a contribution of capital.

        5

    Consistent
with this, the Company believes that because this transaction was carried out
with a related party group, it is not appropriate that a gain be recorded.
Accordingly, the resulting difference between the fair value of the warrant
modification using an expected volatility based on the Company’s historical
volatility and the liability for liquidated damages settled should be recorded
to shareholders’ equity as part of “Warrants”. The accounting for such a capital
contribution would be consistent with the accounting treatment currently adopted
by the Company for this transaction.

    Please
see Exhibit A for the requested information related to the listing of the 2006
Investors, their respective shareholdings, percentage of such shares to total
outstanding shares at the time, the portion of the liability associated with
each, and identifying those who approved the amendment to the Registration
Rights Agreements.

    In
conclusion, Gran Tierra believes that the accounting for the transaction should
remain unchanged, however, upon further reflection our disclosure of the
transaction and the accounting for the transaction should be clarified in future
filings.

    * * *
*

    In
addition, Gran Tierra Energy Inc. acknowledges:

              ·

              Gran
      Tierra is responsible for the adequacy and accuracy of the disclosure in
      the filing;

              ·

              Staff
      comments or changes to disclosure in response to Staff comments do not
      foreclose the Commission from taking any action with respect to the
      filing; and

              ·

              Gran
      Tierra may not assert Staff comments as a defense in any proceeding
      initiated by the Commission or any person under the federal securities
      laws of the United States.

        6

    Please do
not hesitate to call me at (403) 265-3221, ext. 230, if you have any questions
or would like any additional information regarding this matter.

    Sincerely,

    Gran
Tierra Energy Inc.

              By:

              /s/ Martin
      Eden

              Martin
      Eden

              Chief
      Financial Officer

              cc:

              Dana
      Coffield – Chief Executive Officer and
President

              Nancy
      H. Wojtas, Esq.

        7

                  Exhibit
      A

                  Gran
      Tierra Energy Inc.

                  2006
      Offering Participants

                  Name of Investor

                  # of Shares

                  # of Warrants

                  % of Stock Ownership per Reg Rights
      Agreement

                  Consent Received (x)

                  Allocation of Liquidated
      Damages

                  Bristol
      Investment Fund, Ltd.

                  333,333

                  166,667

                  0.35%

                                51,666.77

                  Capital
      Ventures International

                  1,000,000

                  500,