SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended October 31, 1997 or
----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
---------------- ----------------
Commission file number 1-8245
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NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (IRS Employer Identification Number)
Suite 19A, 43 West Front Street, Red Bank, N.J. 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 732-741-4008
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Units of Beneficial Interest New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
- 2 -
As of December 31, 1997, 8,696,430 units of beneficial interest of the
Registrant were outstanding, and the aggregate market value of outstanding
units of beneficial interest of the Registrant, which may be voted, held by
non-affiliates of the Registrant was approximately $136,598,277 on such date.
(The Trustees and the Managing Director are the only persons deemed to be
affiliates of the Registrant.)
Documents Incorporated by Reference
-----------------------------------
Items 10, 11, 12 and 13 of Part III have been partially or wholly omitted from
this report and the information required to be contained therein is
incorporated by reference from the Registrant's definitive proxy statement,
dated January 13, 1998, for the annual meeting to be held on February 11,
1998.
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PART I
Item 1. Business.
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(a) General Development of Business.
--------------------------------
Registrant (the "Trust") is a trust which, on behalf of the owners
of beneficial interest in the Trust (the "unit owners"), holds overriding
royalty rights covering gas and oil production in certain concessions or
leases in the Federal Republic of Germany. The rights are held under
contracts with local German exploration and development subsidiaries of Mobil
Corp., Exxon Corp., and the Royal Dutch Group. Under these contracts, the
Trust receives various percentage royalties on the proceeds of the sales of
certain products from the areas involved. At the present time, royalties are
received for sales of natural gas, casinghead gas, crude oil, distillate and
sulfur. See Item 2 for descriptions of certain of these contracts.
The royalty rights were received by the Trust from North European
Oil Company (the "Company") upon dissolution of the Company in September,
1975. The Company was organized in 1957 as the successor to North European
Oil Corporation (the "Corporation"). The Trust is administered by trustees
(the "Trustees") under an Agreement of Trust dated September 10, 1975, amended
May 13, 1976 and February 10, 1981 and as deemed amended pursuant to the
Delaware Court of Chancery order dated February 26, 1996 (the "Trust
Agreement").
Neither the Trust nor the Trustees on behalf of the Trust conduct
any active business activities or operations. The sole permitted function of
the Trustees is to monitor, verify, collect, hold, invest, and distribute the
royalty payments made to the Trust. Under the Trust Agreement, the Trustees
make quarterly distributions of the net funds received by the Trust on behalf
of the unit owners. Funds temporarily held by the Trust are invested in
interest bearing bank deposits, certificates of deposit, U.S. Treasury Bills
or other government obligations.
There has been no significant change in the principal operation or
purpose of the Trust during the past fiscal year.
(b) Financial Information about Industry Segments.
----------------------------------------------
The Trust conducts no active business operations, and analysis by
industry segments is therefore not applicable to the Trust. To the extent
that royalty income received by the Trust is attributable to sales of
different products, to sales from different geographic areas or to sales by
different operating companies the information is set forth in Item 2 of this
Report and the Exhibit described in that Item 2.
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(c) Narrative Description of Business.
----------------------------------
Under the Trust Agreement, the Trust conducts no active business
operations and is restricted to collection of income from royalty rights and
distribution to unit owners of the net income after payment of administrative
and related expenses.
The overriding royalty rights held by the Trust are derived from
contracts and agreements originally entered into by German subsidiaries of the
predecessor Corporation during the early 1930's. Some of these royalty rights
are based on leases which have passed their original expiration dates.
However, the leases remain in effect as long as there is continued production
or the lessor does not cancel the lease. Individual lessors will normally not
seek termination of the rights originally granted because the leases provide
for royalty payments to the lessors if sales of oil or gas result from
discoveries made on the leased land. Additionally, termination by individual
lessors would result in the escheat of mineral rights to the State. The
remainder of the Trust's royalty rights are based on government granted
concessions which remain in effect as long as there are continued production
activities and/or exploration efforts by the operating companies. It is
generally anticipated that the operating companies will continue production
where it remains economically profitable for them to do so.
Royalties are paid to the Trust on sales from production under these
leases and concessions by the operating companies on a regular monthly or
quarterly basis pursuant to the royalty agreements. These royalties are paid
in Deutsche marks and are converted into U.S. dollars. The Trust has
experienced no difficulties converting marks to dollars, although its
financial results are impacted by varying currency exchange rates.
As the holder of overriding royalty rights, the Trust has no legal
ability, whether by contract or operation of law, to compel production.
Moreover, if an operator should determine to terminate production in any
concession or lease area and to surrender the concession or lease, the royalty
rights for that area would thereby be terminated. Under certain royalty
agreements, the operators are required to advise the Trust of any intention to
surrender lease or concession rights. In recent years, no such notices have
been received and management of the Trust has not been informed of any such
intention. The Trust itself is precluded from undertaking any production
activities and only if it could locate an alternate operator for the same
areas would there be any possibility of continued royalty payments for such an
area following any such termination. The likelihood of locating such an
alternate operator is small because the current operating companies would be
unlikely to surrender their rights for areas where continued economic return
from production is reasonably anticipated.<PAGE>
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The exploration for and the production of gas and oil is a
speculative business. The Trust has no means of insuring continued income
from its royalty rights at either their present levels or otherwise. In
addition, fluctuations in prices and supplies of gas and oil and what effect
these fluctuations might have on royalty income to the Trust and on reserves
net to the Trust cannot be accurately projected. The Trustees have no
information with which to make any projections beyond information on economic
conditions which is generally available to the public and thus are unwilling
to make any such projections.
While Germany has laws relating to environmental protection, the
Trustees have no detailed information concerning the present or possible
effect of such laws on operations in areas where the Trust holds royalty
rights on production and sale of product from those areas.
Seasonal demand factors affect the income from royalty rights
insofar as they relate to energy demands and increases or decreases in prices,
but, in the average they are not material to the regular annual income
received under the royalty rights.
The Trust, either itself or in cooperation with holders of parallel
royalty rights, arranges for periodic audits of the books and records of the
operating companies to verify compliance with the computation provisions of
the applicable agreements. From time to time, these examinations disclose
computational errors or errors from inappropriate application of existing
agreements and appropriate adjustments are requested and made.
(d) Financial Information about Foreign and Domestic Operations and
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Export Sales.
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The Trust does not engage in any active business operations, and its
sources of income are the overriding royalty rights covering gas, sulfur and
oil production in certain areas in Germany and interest on the funds
temporarily invested by the Trustees. In Item 2 there is a schedule (by
product, geographic area and operating company) showing the royalty income
received by the Trust during the fiscal year ended October 31, 1997.
(e) Executive Officers of the Trust.
--------------------------------
The affairs of the Trust are managed by not more than five
individual Trustees who receive compensation determined under the Trust
Agreement. One of the Trustees is designated as Managing Trustee and receives
additional compensation in such capacity. The Managing Trustee, John H. Van
Kirk, is responsible for managerial oversight, while day to day matters are
handled by the Managing Director, John R. Van Kirk. John H. Van Kirk, who is
73 years old, has been Managing Trustee since the Trust's inception in 1975.
John R. Van Kirk, who is 45 years old, has held the position of Managing
Director of the Trust since November 1990. John R. Van Kirk is the son of
John H. Van Kirk, the Managing Trustee.
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The Managing Director provides office space and services at cost to
the Trust. In addition to the Managing Trustee and the Managing Director, the
Trust has one secretarial employee in the United States. It also retains a
part-time consultant in Germany on a fixed yearly basis plus associated
expenses. Employee relations or labor contracts are not directly material to
the business or income of the Trust. The Trustees have no specific
information concerning employee relations of the operating companies.
Item 2. Properties.
-----------
The properties of Trust, which the Trust and Trustees hold pursuant
to the Trust Agreement on behalf of the unit owners, are overriding royalty
rights on sales of gas, sulfur and oil under certain concessions or leases in
the Federal Republic of Germany. The actual leases or concessions are held
either by Mobil Oil A.G. ("Mobil"), the German operating subsidiary of Mobil
Corp., or by Oldenburgische Erdol Gesellschaft ("OEG"). The Oldenburg
concession (1,398,000 acres), covering virtually the entire former State of
Oldenburg, is the major source of royalty income for the Trust. Within this
concession Mobil and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of
Exxon Corp. and the Royal Dutch Group, carry out all exploration, drilling,
production and sales activities.
Under one series of rights covering the western part of the
Oldenburg concession (approximately 662,000 acres), the Trust receives a
royalty payment of 4% on gross receipts from sales by Mobil of natural gas,
casinghead gas, crude oil and condensate. The Trust also is entitled to
receive from Mobil a 2% royalty on gross receipts of sales of sulfur obtained
as a by-product of sour gas produced from the western part of Oldenburg. The
payment of the sulfur royalty is conditioned upon sales by Mobil of sulfur at
a selling price above an agreed upon base price. This base price is adjusted
annually by an inflation index. When the average selling price falls below
the adjusted base price, no royalties are payable. No payments were received
under this sulfur royalty during fiscal 1997.
Under another series of rights covering the entire Oldenburg
concession and pursuant to an agreement with OEG (the "OEG Agreement"), the
Trust receives royalties at the rate of 0.6667% on gross receipts from sales
of natural gas, casinghead gas, crude oil, condensate and sulfur (removed
during the processing of sour gas) less 50% of an escalating cost base. This
cost base is recomputed annually based on indices reflecting changes in
certain prices within Germany. This system will be revised in 2002 unless the
escalating cost base diverges significantly from the actual production costs
in earlier years, in which case the OEG Agreement provides for the computation
system to be revised in 1999. In either case, the revised system will
provide
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that 50% of field handling, treatment and transport costs, as reported for
state governmental royalty purposes, will be deducted from gross sales
receipts prior to the royalty calculation.
The Trust also holds through Mobil a 2% royalty interest in oil and
gas sales from acreage in Bavaria, and a 0.2117% royalty under the net
interest of the Bayerische Mineral Industries A.G. ("BMI"), a subsidiary of
Mobil, in concessions in Bavaria. The net interest of BMI ranges from 16-1/2
to 100% of the sales, depending on geographic region or area. Due to the low
level of royalty income under this agreement, reserves from this area in
Bavaria are not included in reserve calculations for this report year. While
both Mobil and BMI have suspended production in their concessions in Bavaria,
the concessions remain open. They are considering possible wildcat drilling
or other methods to increase production.
In addition to the areas of Oldenburg and Bavaria, the Trust also
holds overriding royalties on 21 leases in other areas of northwest Germany
ranging in size from 185 to 25,000 acres and totaling 73,214 acres. The
rates of overriding royalties vary from 1.83% to 6.75%. At the present time
all but one of these 21 leases are in the non-producing category. Due to the
low level of income and the intermittent gas production from the single
producing lease, reserves from this lease are not included in reserve
calculations for this report year.
The following is a schedule of royalty income for the fiscal year
ended October 31, 1997 by product, geographic area and operating company:
BY PRODUCT:
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Product Royalty Income
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Natural Gas $ 13,405,398
Sulfur $ 137,555
Oil $ 108,725
BY GEOGRAPHIC AREA:
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Area Royalty Income
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Western Oldenburg $ 11,604,347
Eastern Oldenburg $ 1,924,277
Non-Oldenburg Areas $ 123,054
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BY OPERATING COMPANY:
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Company Royalty Income
- ------- --------------
Mobil Oil A.G. $ 10,188,043
OEG $ 3,463,510
Bayerische Mineral Industries A.G. $ 125
Exhibit 99.1 to this Report is a report dated December 18, 1997
which summarizes certain production data and the estimated net proved
producing reserves as of October 1, 1997, based on the limited information
available, for the Oldenburg area in which the Trust now holds overriding
royalty rights. That report, the Estimate of Remaining Proved Producing
Reserves in the Northwest Basin of the Federal Republic of Germany as of
October 1, 1997 and Calculation of Cost Depletion Percentage for the 1997
Calendar Year, (the "Reserve and Depletion Report") was prepared by Ralph E.
Davis Associates, Inc., 3555 Timmons Lane, Suite 1105, Houston, Texas 77027
("Davis Associates"). Davis Associates is an independent petroleum and
natural gas consulting organization specialized in analyzing hydrocarbon
reserves. In order to permit timely filing of this Report and consistent with
the practice of the Trust in prior years, the information has been prepared
for the 12-month period ending September 30, 1997, which is one month prior to
the end of the fiscal year of the Trust.
In connection with the information in the Reserve and Depletion
Report, note should be taken of the limited nature of the information
available to the Trust. Pursuant to the arrangements under which the Trust
holds royalty rights and due to the fact that the Trust is not considered an
operating company within Germany, it has no access to the operating companies'
proprietary information concerning producing field reservoir data. The
Trustees have been advised that publication of such information is not
required under applicable law in Germany and that the royalty rights do not
give rise to the right to require or compel production of such information.
Past efforts to obtain such information voluntarily have not been successful.
The information made available to the Trust by the operating companies does
not include any of the following: reserve estimates, capitalized costs,
production cost estimates, revenue projections, producing field reservoir data
(including pressure data, permeability, porosity and thickness of producing
zone) or other similar information. The limited nature of the information
available to the Trust makes impossible the calculation of the following:
proved undeveloped or probable future net recoverable oil and gas by
appropriate geographic areas, total gross and net productive wells,
availability of oil and gas from the present reserve, contract supply for one
year or acreage concentration.
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The Trust has the authority to audit for certain limited purposes
the operating companies' sales and production from the royalty areas. The
Trust also has access to published materials in Germany from W.E.G. (a German
organization equivalent to the American Petroleum Institute or the American
Gas Association). The use of such statistical information relating to
production and sales necessarily involves extrapolations and projections.
Both Davis Associates and the Trustees believe the use of the material
available is appropriate and suitable for preparation of the estimates
described in the Reserve and Depletion Report. Both the Trustees
and Davis Associates believe this report and these estimates to be reasonable
and appropriate but they would possibly vary from statistical projections
which could be made if reservoir production information (of the kind normally
available to domestic producing companies) were available. However, the
limited information available makes it inappropriate to make projections or
estimates of proved or probable reserves of any category or class other than
the estimated net proved producing reserves described in the Reserve Report.
Attachment A of the Reserve and Depletion Report is comprised of a
schedule of estimated net proved producing reserves of the Trust's royalty
properties, computed as of October 1, 1997 and a five year schedule of gas,
sulfur and oil sales for the 12 months ended September 30, 1997, 1996, 1995,
1994 and 1993 computed from quarterly sales reports of operating companies
received by the Trust during such periods.
Item 3. Legal Proceedings.
------------------
As previously reported, on February 26, 1996 the settlement of
litigation commenced by the Delaware State Escheator relating to claims
concerning unexchanged shares of predecessor corporate entities was approved
by the Delaware Court of Chancery. The first stage of the settlement,
encompassing the issuance of Trust units without the attributable past
dividends and distributions, was completed on April 17, 1996 with the second
and third stages scheduled for late June of the years 2000 and 2005
respectively. For a more complete description of the terms of this settlement
see Note 3 to Financial Statements contained herein or the Current Reports on
Form 8-K filed on November 26, 1986, November 1, 1988, December 11, 1995 and
February 28, 1996 (including Exhibits).
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Inapplicable.
<PAGE>
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PART II
Item 5. Market for the Registrant Trust's Units of Beneficial Interest
--------------------------------------------------------------
and Related Certificate Holder Matters.
---------------------------------------
The Trust's units of beneficial interest ("Units") are traded on the
New York Stock Exchange (the "NYSE") under the symbol NET. In addition,
the Midwest Stock Exchange and the Boston Exchange have granted unlisted
trading privileges in the Trust Units.
Under the Trust Agreement, the Trustees distribute to unit owners,
on a quarterly basis, the net royalty income after deducting expenses and
reserving limited funds for anticipated administrative expenses.
The following table presents the high and low closing prices for the
quarterly periods ended in fiscal 1997 and 1996 as reported by the NYSE as
well as the cash distributions paid to unit owners by quarter for the past two
fiscal years.
FISCAL YEAR 1997
Low High Distributions
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- -------------
January 31, 1997 12.5000 14.2500 .42
April 30, 1997 13.1250 14.3750 .39
July 31, 1997 13.3750 14.7500 .36
October 31, 1997 14.8125 17.5000 .34
FISCAL YEAR 1996
Low High Distributions
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- -------------
January 31, 1996 12.1250 14.3750 .29
April 30, 1996 12.7500 14.3750 .29
July 31, 1996 13.0000 14.1250 .19
October 31, 1996 12.3750 13.7500 .27
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The quarterly distributions to unit owners represent their undivided
interest in royalty payments from sales of gas, sulfur and oil during the
previous quarter. Each unit owner is entitled to recover a portion of his or
her investment in these royalty rights through a cost depletion percentage.
The calculation of this cost depletion percentage is set forth in detail in
Attachment B to the Reserve and Depletion Report attached as Exhibit 99.1.
This report has been prepared by Davis Associates using the limited
information described under Item 2, Properties, to which reference is made.
The Trustees and Davis Associates believe that the calculations and
assumptions used in this report are reasonable under the facts and
circumstances of available information. The cost depletion percentage
recommended by the Trust's independent petroleum and natural gas consultants
for calendar 1997 is 9.056%. Specific details relative to the Trust's income
and expenses and cost depletion percentage as they apply to the calculation of
taxable income for the 1996 calendar year are included on a special removable
page in the 1997 Annual Report under "Note to Unit Owners" and have been sent
in a separate letter to all unit owners registered at any time during 1997 and
who are no longer registered owners as of year end.
The Trust maintains no reserve to cover any payments which might be
required if the holders of shares of stock of the predecessor Corporation or
Company, who have not yet exchanged those shares for Units, should surrender
them for exchange. See Item 7 and Note 3 to the Financial Statements in
Item 8 of this Report.
As of December 31, 1997, there were 1,825 Unit owners of record,
which figure does not include the owners of unexchanged shares of stock in the
Corporation or the Company (a total of 609 record holders). The owners of
shares of stock in the Corporation are entitled under Section 3.10 of the
Trust Agreement to receive Units upon presentation of those shares or other
evidences of ownership thereof. The owners of unexchanged shares of stock in
the Company, for whom a nominee of the Bank of New York acts as agent under a
shareholder agency agreement, are entitled to receive Units upon presentation
of those shares or other evidences of ownership thereof. See Item 3, Legal
Proceedings, and Note 3 to Financial Statements contained herein.<PAGE>
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ITEM 6. Selected Financial Data
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North European Oil Royalty Trust
--------------------------------
Selected Financial Data (Cash Basis)
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For Five Years Ended October 31, 1997
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1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
German gas, oil
and sulfur
royalties
received $13,651,678 $ 9,710,487 $12,477,788 $ 9,476,252 $10,718,289
=========== =========== =========== =========== ===========
Net Income on a
cash basis$13,070,207 $ 9,086,316 $11,941,675 $ 8,777,422 $10,248,982
=========== =========== =========== =========== ===========
Net Income per unit
on a cash
basis (a) $1.50 $1.05 $1.43 $1.06 $1.24
===== ===== ===== ===== =====
Units of beneficial
interest
outstanding at end
of year (a) 8,696,430 8,696,412 8,313,984 8,312,898 8,298,216
Cash distributions
paid or to be
paid:
Dividends and
distributions
per unit paid
to former
unlocated
shareholders $0.00 $0.01 $0.00 $0.05 $0.01
Distributions per
unit paid or to
be paid to
unit owners $1.51 $1.04 $1.43 $1.01 $1.22
----- ----- ----- ----- -----
$1.51 $1.05 $1.43 $1.06 $1.23
===== ===== ===== ===== =====
Total assets at
end of year$ 3,024,318 $ 2,477,516 $ 2,951,228 $ 1,848,274 $ 2,733,049
=========== =========== =========== ========== ===========
(a) Net income per unit on a cash basis was calculated based on the number of
units of beneficial interest outstanding at the end of the year.
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Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
--------------------------
General
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The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. The Trust is not involved in any business or extractive
operations of any kind in the areas over which it holds royalty rights and is
precluded from any such involvement by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The Trust does not conduct any active business operations and has
only limited need of funds for its own administrative services. These funds
are used to pay Trustees' fees (computed under the Trust Agreement and based
upon a percentage of royalties and interest income received), the remuneration
fixed by the Trustees for the Managing Trustee and the Managing Director,
expenses associated with the Trustees' meetings, professional fees paid to
consultants, legal advisors and auditors, transfer agent fees, and secretarial
and other general office expenses.
Another requirement for funds by the Trust relates to the occasional
necessity of making lump sum payments of arrearages of dividends of a
corporate predecessor and distributions previously declared by the Trust.
The payment of such arrearages would require a reduction in the amount of
distributions which otherwise would be made on presently outstanding units.
For further information on this contingent liability and the impact of the
Delaware Court order see Item 3, Legal Proceedings, and Note 3 to Financial
Statements contained herein.
The Trust has no means of assuring continued income from overriding
royalty rights at their present level or otherwise. Economic and political
factors which are not foreseeable may have an impact on Trust income. The
effect of changing economic conditions on the demand for energy throughout the
world and future prices of oil and gas cannot be accurately projected.
The relatively small amounts required for administrative expenses of
the Trust limit the possible effect of inflation on its financial prospects.
Continued price inflation would be reflected in sales prices, which, with
sales volumes, form the basis on which the royalties paid to the Trust are
computed. In addition, fluctuations in the Deutsche mark/dollar exchange rate
have an impact on domestic energy prices within Germany and on the amount of
dollars received upon conversion. The impact of inflation or deflation on
energy prices in Germany is delayed by the use in certain long-term gas sales
contracts of a deferred "trailing average" related to light fuel oil prices.
- 14 -
Fiscal 1997 versus Fiscal 1996
- ------------------------------
For fiscal 1997 the Trust's royalty income of $13,651,678 increased
40.58% from the prior year. A combination of higher gas prices, relatively
uninterrupted gas production permitting increased overall gas sales, and
increased gas sales from the higher royalty area of western Oldenburg resulted
in the higher royalty revenue. This higher level of royalties occurred
despite the 12.24% decline in the average yearly value of the Deutsche mark
from $0.6707 to $0.5886.
The average yearly price for gas under both the higher and lower
royalty agreements increased by 22.09% and 28.34% respectively to 1.7398 and
1.7960 Pfennigs per Kwh. Compared to the prior year's quarterly averages,
higher average gas prices occurred in each of the four quarters. When
converted into more familiar terms using the year's average exchange rate, gas
prices were $2.93 and $2.97 per Mcf under the higher and lower royalty
agreements.
Following the repairs to the gas pipeline and renovations of the
Grossenkneten desulfurization plant in the late summer of 1996, gas production
increased to its full capacity of 750,000 cubic meters per hour. The
resumption of full production allowed the operating companies to sell more
than 191 billion cubic feet (Bcf) of gas from the entire Oldenburg concession,
an increase of 9.07% from the prior year's sales. The expansion of the
desulfurization plant's capacity also permitted an increase in the relative
volumes of gas drawn from the higher royalty area of western Oldenburg. Gas
sales from western Oldenburg increased 35.63% to more than 85 Bcf. In
addition, the percentage of western gas production to overall gas production
increased from 35.9% in 1996 to 44.6% in 1997. Without considering
differences in prices, the impact of the higher royalty rate from western
Oldenburg is shown in the table on page 7 detailing royalty income by
geographic area. Despite accounting for less than 45% of overall gas
production, royalties from the sale of gas from western Oldenburg are more
than six times higher than royalties from eastern Oldenburg.
With Oldenburg gas sales accounting for over 97% of the Trust's 1997
royalties, non-gas or non-Oldenburg royalties have a very minor impact on the
Trust. Royalties from sulfur, reflecting the continued exclusion of Mobil's
2% sulfur royalty obligation, amounted to only $137,555. Royalties from oil
amounted to $108,725 and continued to decline, reflecting the increasingly
uneconomical nature of oil production in Germany and the continuing capping of
these uneconomical oil wells. Non-Oldenburg royalties amounted to only
$123,054.
- 15 -
Trust expenses for fiscal 1997 of $674,131 declined by 3.1% from the
prior year. Slightly higher interest rates along with larger sums available
for investment resulted in a 29% increase in interest income to $92,660.
During fiscal 1997 and 1996 respectively, an additional 18 and 2,148
Trust units were issued and $558 and $64,932 were paid to former unlocated
shareholders of North European Oil Corporation and North European Oil Company
who presented shares for exchange or filed properly documented affidavits of
loss and obtained an unlimited, open penalty indemnity bond. In addition on
April 17, 1996, pursuant to the settlement approved by the order of the
Delaware Court of Chancery, the Trust issued 380,280 units to the Delaware
State Escheator. The increase in the number of issued units resulted in a
4.57% dilution reducing subsequent per unit income by that percentage. Beyond
the dilution from this and future issuances of units, the order will have no
impact on the Trust's financial condition, result of operations or long or
short term liquidity. The termination of liability for payment of arrears of
dividends or distributions after the year 2005 as specified in the order of
the Delaware Court of Chancery is expected to benefit the Trust's financial
condition. See Note 3 to Financial Statements contained herein.
Fiscal 1996 versus Fiscal 1995
- ------------------------------
For fiscal 1996 the Trust's royalty income of $9,710,487 was 22%
lower than the previous year. A combination of production interruptions,
lower sales from the higher royalty area of western Oldenburg, moderately
weaker gas prices and less favorable currency exchange rates contributed to
the decline in royalties. The interruptions in production resulted from two
events: planned improvements to the Grossenkneten desulfurization plant and a
pipeline accident isolating the Visbek and Cappeln gas fields in western
Oldenburg. The plant improvements occurred at two separate times from late
April to early June and during the month of August and increased the plant
capacity to 750,000 cubic meters of gas per hour. During this combined 10
week period, the plant was shut down completely for 2 weeks and partially for
8 weeks. The pipeline accident occurred shortly after the resumption of
production in early June. Production from these fields was totally shut down
for 4 weeks and partially shut down for 2 weeks. The net effect of these
interruptions helped to reduce overall Oldenburg gas sales by only 4.7% to
175.3 billion cubic feet. However, gas sales from western Oldenburg, with an
effective royalty seven times greater than eastern Oldenburg, were reduced by
18.2% to 62.8 billion cubic feet. Gas prices for both eastern and western
Oldenburg declined by 3.9% and 2.5% respectively. From their lowest level
experienced during the second quarter, gas prices have steadily climbed
through the remainder of the year. In addition, the average exchange rate for
eastern and western Oldenburg also declined by 5.3% and 3.3% respectively.
For the year the average value of the Deutsche mark was 67.1 cents down from
last year's average of 69.2 cents.
- 16 -
In prior years, note was made of the steps taken by the operating
companies to maintain current sales levels despite the increasing ratio of
sour gas to sweet gas in the total product mix. These steps included
improvements to the Grossenkneten plant as well as the construction of a
pipeline to the NEAG desulfurization plant to utilize excess capacity at that
plant. With the discovery of additional reserves outside Oldenburg, the
owners of the NEAG desulfurization plant are currently utilizing that plant's
entire capacity for non-Oldenburg gas. Therefore the recent increases to the
capacity at Grossenkneten do not increase the total production capacity but
instead permit that capacity to be maintained at the previous level of 750,000
cu. meters per hour.
Over 95% of the Trust's current year royalties came from Oldenburg
gas sales; royalties from oil sales were $157,000 and from sulfur sales were
$187,000. During fiscal 1996 the Trust did not receive any royalties under
the Mobil 2% sulfur royalty obligation because prices remained below the
threshold level specified in the agreement. Despite reaching over $62 per
metric ton recorded in the third quarter, sulfur prices ended the year below
$40 per metric ton.
Trust expenses of $696,005 increased 10.9% from the prior year
reflecting increased legal expenses in connection with the settlement of the
suit previously commenced by the Delaware State Escheator and with costs
associated with investigations into the status of certain leases in Germany.
Despite higher average interest rates in effect, interest income declined by
6.2% due to the decrease in funds available for investment.
During fiscal 1996 and 1995 respectively, an additional 2,148 and
1,086 Trust units were issued and $64,932 and $31,701 were paid to former
unlocated shareholders of North European Oil Corporation and North European
Oil Company who presented shares for exchange or filed properly documented
affidavits of loss and obtained an unlimited, open penalty indemnity bond. In
addition on April 17, 1996, pursuant to the settlement approved by the order
of the Delaware Court of Chancery, the Trust issued 380,280 units to the
Delaware State Escheator. The increase in the number of issued units resulted
in a 4.57% dilution reducing subsequent per unit income by that percentage.
Beyond the dilution from this and future issuances of units, the order will
have no impact on the Trust's financial condition, result of operations or
long or short term liquidity. The termination of liability for payment of
arrears of dividends or distributions after the year 2005 as specified in the
order of the Delaware Court of Chancery is expected to benefit the Trust's
financial condition. See Note 3 to Financial Statements contained herein.
- 17 -
Item 8. Financial Statements and Supplementary Data
--------------------------------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
------------------------------------------
Page Number
-----------
Report of Independent Public Accountants F-1
Financial Statements:
Statements of Assets, Liabilities and
Trust Corpus as of October 31, 1997 and 1996 F-2
Statements of Income and Expenses on a Cash Basis
for the Years Ended October 31, 1997, 1996 and 1995 F-3
Statements of Undistributed Earnings
for the Years Ended October 31, 1997, 1996 and 1995 F-4
Statements of Changes in Cash and Cash Equivalents
for the Years Ended October 31, 1997, 1996 and 1995 F-5
Notes to Financial Statements F-6 - F-9
Schedules are omitted because they are not applicable or not required or
because the required information is included in the financial statements or
notes thereto.
- 18 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To North European Oil Royalty Trust:
We have audited the accompanying statements of assets, liabilities and trust
corpus of North European Oil Royalty Trust as of October 31, 1997 and 1996 and
the related statements of income and expenses on a cash basis, undistributed
earnings and changes in cash and cash equivalents for each of the three years
in the period ended October 31, 1997. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accounts of the Trust are maintained on the cash basis of accounting under
which income is not recorded until collected instead of when earned, and
expenses are recorded when paid instead of when incurred. Thus, the
accompanying financial statements are not intended to present financial
position and results of operations in conformity with generally accepted
accounting principles which require the use of the accrual basis of
accounting (see Note 1).
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and trust corpus of North
European Oil Royalty Trust as of October 31, 1997 and 1996, and its income and
expenses, undistributed earnings and changes in cash and cash equivalents
for each of the three years in the period ended October 31, 1997, all on the
cash basis of accounting.
As discussed in Note 3, the Trust has a contingent liability relating to
unclaimed units and distributions. No reserves are established or reflected
in the financial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
Roseland, New Jersey
November 1, 1997
F-1
- 19 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 1997 AND 1996
-------------------------
ASSETS 1997 1996
------ ------------ ------------
Current Assets --
Cash and cash equivalents (Note 1) $3,024,317 $2,477,515
Producing gas and oil
royalty rights (Note 1) 1 1
------------ ------------
$3,024,318 $2,477,516
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities --
Cash distributions payable
to unit owners, paid
November 1997 and 1996 $2,956,786 $2,348,031
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 67,531 129,484
------------ ------------
$3,024,318 $2,477,516
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-2
- 20 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
1997 1996 1995
------------ ------------ ------------
German gas, sulfur and
oil royalties
received $13,651,678 $ 9,710,487 $12,477,788
Interest income 92,660 71,834 76,569
Trust expenses ( 674,131) ( 696,005) ( 612,682)
------------ ------------ ------------
Net income on
a cash basis $13,070,207 $ 9,086,316 $11,941,675
============ ============ ============
Net income per unit
on a cash basis $1.50 $1.05 $1.43
======= ======= =======
Cash distributions paid
or to be paid:
Dividends and
distributions per
unit paid or to be
paid to former unlocated
shareholders (Note 3) $0.00 $0.01 $0.00
Distributions per unit
paid or to be paid to
unit owners (Note 4) 1.51 1.04 1.43
------- ------- -------
$1.51 $1.05 $1.43
======= ======= =======
The accompanying notes to financial statements
are an integral part of these statements.
F-3
- 21 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Balance,
beginning of year $ 129,484 $ 41,333 $ 19,435
Net income on
a cash basis 13,070,207 9,086,316 11,941,675
------------ ------------ ------------
13,199,691 9,127,649 11,961,110
------------ ------------ ------------
Less:
Dividends and
distributions paid
to former unlocated
shareholders (Note 3) 558 64,178 30,781
Current year
distributions paid
or to be paid to unit
owners (Note 4) 13,131,602 8,933,987 11,888,996
------------ ------------ ------------
13,132,160 8,998,165 11,919,777
------------ ------------ ------------
Balance, end of year $ 67,531 $ 129,484 $ 41,333
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-4
- 22 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Sources of cash and
cash equivalents:
German gas, sulfur
and oil
royalties received $13,651,678 $ 9,710,487 $12,477,788
Interest income 92,660 71,834 76,569
------------ ------------ ------------
13,744,338 9,782,321 12,554,357
Uses of cash and
cash equivalents:
Payment of Trust
expenses 674,131 696,005 612,682
Distributions and
dividends paid
(Note 3) 12,523,405 9,560,028 10,838,721
------------ ------------ ------------
13,197,536 10,256,033 11,451,403
------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents
during the year 546,802 ( 473,712) 1,102,954
Cash and cash
equivalents,
beginning of year 2,477,515 2,951,227 1,848,273
------------ ------------ ------------
Cash and cash
equivalents,
end of year $ 3,024,317 $ 2,477,515 $ 2,951,227
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-5
- 23 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1997, 1996 AND 1995
-------------------------------
(1) Summary of significant
accounting policies:
----------------------
Basis of accounting -
---------------------
The accounts of North European Oil Royalty Trust (the "Trust")
are maintained on a cash basis of accounting with the exception of
the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The
Trust's distributable income represents royalty income received by
the Trust during the period plus interest income less any expenses
incurred the Trust, all on a cash basis. In the opinion of the
Trustees, the use of the cash basis provides a more meaningful
presentation to unit owners of the results of operations of
the Trust.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were
transferred to the Trust at their net book value by North European
Oil Company (the "Company") (see Note 2). The net book value of the
royalty rights has been reduced to one dollar ($1) in view of the fact
that the remaining net book value of royalty rights is de minimis
relative to annual royalties received and distributed by the Trust and
does not bear any meaningful relationship to the fair value of such
rights or the actual amount of proved producing reserves.
Federal and state income taxes-
-------------------------------
The Trust, as a grantor trust, is exempt from Federal and state
income taxes under a private letter ruling issued by the Internal
Revenue Service.
Cash and cash equivalents-
--------------------------
Included in cash and cash equivalents are amounts deposited in
bank accounts and amounts invested in certificates of deposit and
U. S. Treasury bills with maturities of three months or less.
F-6
- 24 -
Net income per unit on the cash basis-
--------------------------------------
Net income per unit on the cash basis is based upon the number of
units outstanding at the end of the period (see Note 3). As of
October 31, 1997, 1996 and 1995, there were 8,696,430, 8,696,412 and
8,313,984 units of beneficial interest outstanding, respectively.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities of
the Company, including its royalty rights, were transferred to
the Trust.
(3) Contingent liability:
---------------------
The Trust serves as fiduciary for certain unlocated or unknown
shareholders of the Trust's corporate predecessors, North European
Oil Corporation (the "Corporation") and North European Oil
Company. From the liquidation of the Company to October 31, 1996,
721,070 Trust units were issued in exchange for Corporate or Company
shares and dividends of $353,992 and distributions of $4,226,593 were
paid to former unlocated Corporation and Company shareholders. For the
year ended October 31, 1997, 18 units were issued in exchanges and $0 in
dividends and $558 in distributions were paid to former unlocated
Corporation and Company shareholders.
On February 26, 1996 the settlement of litigation between the Trust
and the Delaware State Escheator was approved by the Delaware Court
of Chancery. As of that date, there were a total of 875,748 authorized
but unissued units representing the unexchanged shares of the Trust's
corporate predecessors. Out of this total, 760,560 units were subject
to the settlement. Pursuant to the Court approved settlement, 380,280
units were issued to the Escheator on April 17, 1996. Of the units
remaining to be issued to the Escheator, 50% will be issued to the
Escheator by June 30, 2000 and the balance by June 30, 2005. Under
the terms of the Court approved settlement, any claims by unlocated or
unknown shareholders of the Trust's corporate predecessors for units
subject to the settlement and past dividends and distributions thereon
("subsequent claims") will be paid by the Escheator and the Trust on a
proportionate basis. For the period until June 30, 2000, subsequent
claims will be paid by the Escheator and the Trust on a 50:50 basis.
For the period from July 1, 2000 to June 30, 2005, subsequent claims
will be paid by the Escheator and the Trust on a 75:25 basis. Any
subsequent claims will reduce the number of units to be issued to the
Escheator in 2000 or 2005. Following the final issuance of units to
F-7
- 25 -
the Escheator in 2005, the Trust's contingent liability for past
dividends and distributions attributable to all unexchanged
Corporation and Company shares subject to the settlement will be
completely eliminated. Under the terms of the settlement, the maximum
liability of the Escheator for subsequent claims is limited to
the value of the units received, plus current distributions on
units retained, less the Escheator's share of subsequent claims. As of
the receipt of the November, 1997 distribution, the maximum liability
of the Escheator is $5,727,559.
Under the Trust Agreement as deemed amended by the February 26, 1996
Delaware Court Order, the Trust is not required to make payments of
arrearages of Company dividends or Trust distributions with respect to
units issued or to be issued to the Escheator. As of October 31, 1997,
there remained a total of 494,160 units that could be issued to
unlocated or unknown Corporation and Company shareholders. Of this
total, 380,280 units are subject to the settlement and remain to be
issued to the Escheator. If all shares, represented by the units
already issued as well as the units remaining to be issued, were
presented for exchange, $487,132 in dividends and $27,186,770 in
distributions would be payable. In the opinion of the Trustees,
based in part on the history of exchanges during the last ten fiscal
years, the maximum liability of the Escheator would be adequate to
cover the Escheator's share of any subsequent claims. In any event, the
Trust's contingent liability for all claims for arrearages will be
eliminated in 2005.
F-8
- 26 -
(4) Quarterly results (unaudited):
------------------------------
The table below summarizes the quarterly results and distributions of
the
Trust for the years ended October 31, 1997 and 1996.
Fiscal 1997 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $3,832,201 $3,510,987 $3,170,930 $3,137,560 $13,651,678
Net income on
a cash basis 3,578,007 3,400,600 3,070,926 3,020,674 13,070,207
Net income
per unit on
a cash basis .41 .39 .35 .35 1.50
Current year cash
distributions
paid or
to be paid 3,652,493 3,391,608 3,130,715 2,956,786 13,131,602
Current year cash
distributions
per unit .42 .39 .36 .34 1.51
Fiscal 1996 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $2,688,592 $2,671,845 $1,796,511 $2,553,539 $ 9,710,487
Net income on
a cash basis 2,466,261 2,507,064 1,674,327 2,438,664 9,086,316
Net income
per unit on
a cash basis .30 .29 .19 .28 1.05
Current year cash
distributions
paid or
to be paid 2,411,304 2,522,316 1,652,336 2,348,031 8,933,987
Current year cash
distributions
per unit .29 .29 .19 .27 1.04
F-9
- 27 -
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure.
-------------------------
Inapplicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The identity, business experience, relationships, and other
information about the Trustees as set forth under the caption "Election of
Trustees" in Registrant's definitive Proxy Statement, dated January 13, 1998,
as filed with the Commission, are incorporated herein by reference in
accordance with Instruction G(3) to Form 10-K. See "Executive Officers of the
Trust" under Item 1 for information concerning the executive officers of the
Trust.
Item 11. Executive Compensation.
-----------------------
The information about remuneration of the Trustees and Management as
set forth under the caption "Management Compensation" in Registrant's
definitive Proxy Statement, dated January 13, 1998, as filed with the
Commission, is incorporated herein by reference in accordance with Instruction
G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information about security ownership of certain beneficial
owners and Management as set forth in the introduction to and under the
caption "Election of Trustees" in Registrant's definitive Proxy Statement
dated January 13, 1998, as filed with the Commission, is incorporated herein
by reference in accordance with Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information about certain relationships and related transactions
as set forth under the captions "Election of Trustees" and "Management
Compensation" in Registrant's definitive Proxy Statement, dated January 13,
1998 as filed with the Commission, is incorporated herein by reference in
accordance with Instruction G(3) to Form 10-K.
- 28 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-----------------------------------------------------------------
(a) The following is a list of the documents filed as part of this
report:
1. Financial Statements
Index to Financial Statements and Schedule for the Years
Ended October 31, 1997, 1996 and 1995
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus as
of October 31, 1997 and 1996
Statements of Income and Expenses on a Cash Basis for the
Years Ended October 31, 1997, 1996 and 1995
Statements of Undistributed Earnings for the Years
Ended October 31, 1997, 1996 and 1995
Statements of Changes in Cash and Cash Equivalents for
the Years Ended October 31, 1997, 1996 and 1995
Notes to Financial Statements
2. Exhibits
The Exhibit Index following the signature page lists
all exhibits filed with this report or incorporated
by reference.
(b) No Current Report on Form 8-K was filed during the last quarter
of the period covered by this Report.
- 29 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
Dated: January 13, 1998 By: /s/ John H. Van Kirk
--------------------------
John H. Van Kirk,
Managing Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: January 13, 1998 /s/ John H. Van Kirk
-----------------------------
John H. Van Kirk, Trustee
Dated: January 13, 1998 /s/ Robert P. Adelman
------------------------------
Robert P. Adelman, Trustee
Dated: January 13, 1998 /s/ Robert J. Castle
------------------------------
Robert J. Castle, Trustee
Dated: January 13, 1998 /s/ Samuel M. Eisenstat
-------------------------------
Samuel M Eisenstat, Trustee
Dated: January 13, 1998 /s/ Willard B. Taylor
--------------------------------
Willard B. Taylor, Trustee
- 30 -
Exhibit Index
-------------
Exhibit Page
- ------- ----
(3) Trust Agreement, dated September 10, 1975,
amended May 13, 1976, and February 10, 1981,
(incorporated by reference to Exhibit 4(i) to
Form 10-Q for the quarter ended April 30, 1981
(File No. 0-8378)).
(10.1) Agreement with OEG, dated April 2, 1979,
exhibit to Current Report on Form 8-K,
filed May 11, 1979 (incorporated by
reference as Exhibit 1 to Current Report
on Form 8-K, filed May 11, 1979
(File No. 0-8378)).
(10.2) Agreement with Mobil Oil, A.G. concerning
sulfur royalty payment, dated March 30,
1979, (incorporated by reference to Exhibit 3
to Current Report on Form 8-K, filed
May 11, 1979 (File No. 0-8378)).
(22) There are no parents and no subsidiaries
of the Trust.
(99.1) Estimate of Remaining Proved Producing Reserves 31
in the Northwest Basin of the Federal Republic of
Germany as of October 1, 1997 and Calculation
Of Cost Depletion Percentage for the 1997
Calendar Year prepared by
Ralph E. Davis Associates, Inc.
(99.2) Order Approving Settlement signed by
Vice Chancellor Jack Jacobs of the
Delaware Court of Chancery on
Form 8-K, filed December 11, 1995.
NORTH EUROPEAN OIL ROYALTY TRUST
ESTIMATE OF REMAINING
PROVED PRODUCING RESERVES
IN THE NORTHWEST BASIN OF THE
FEDERAL REPUBLIC OF GERMANY
AS OF OCTOBER 1, 1997
AND
CALCULATION OF
COST DEPLETION PERCENTAGE
FOR 1997 CALENDAR YEAR
RALPH E. DAVIS ASSOCIATES, INC.
HOUSTON, TEXAS DECEMBER, 1997
T A B L E O F C O N T E N T S
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Description of Holdings. . . . . . . . . . . . . . . . . . . . . . . . . . .2
Limitations of Available Data. . . . . . . . . . . . . . . . . . . . . . . .3
Oldenburg Area - Sales and Reserves. . . . . . . . . . . . . . . . . . . . .4
Net Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Calculation of Cost Depletion Percentage . . . . . . . . . . . . . . . . . .6
Certificate of Qualification . . . . . . . . . . . . . . . . . . . . . . . .8
Attachment A . . . . .
Reserve Summary and Five Year
Net Sales History . . . . . . . . . . . . . . . . . . . . . . .9
Attachment B. . . . .
Calculation of
Cost Depletion Percentage. . . . . . . . . . . . . . . . . . . 10
Ralph E. Davis Associates, Inc.
Consultants - Petroleum and Natural Gas
3555 Timmons Lane - Suite 1105
Houston, Texas 77027
(713) 622-8955
December 18, 1997
The Trustees of
North European Oil Royalty Trust
P. O. Box 456
Red Bank, New Jersey 07701
Gentlemen:
In accordance with your request, we have prepared a report of the
estimated remaining proved producing reserves attributable to the overriding
royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT")
in the Northwest German Basin of the Federal Republic of Germany as of October
1, 1997. The proved producing reserves are as of October 1, 1997 and the
reported sales are for the twelve month period ending September 30, 1997. The
use of the period ending September 30, 1997 is consistent with prior years and
allows the timely calculation of the royalty reserves and the cost depletion
percentage for the calendar year.
In addition, based on the information contained in the first portion
of this report, we have performed the calculations necessary to derive the
cost depletion percentage for the 1997 calendar year. As detailed in
Attachment B, the cost depletion percentage for the 1997 calendar year for
Trust unit owners is equal to 9.056 percent of their cost base as of January
1, 1997.
North European Oil Royalty Trust December 18, 1997
Page 2
DESCRIPTION OF HOLDINGS
-----------------------
The Trust holds various overriding royalty rights on sales of gas,
sulfur and oil from certain concessions and leases in the Federal Republic of
Germany. The Oldenburg concession (1,398,000 acres), covering virtually the
entire former State of Oldenburg and located in the State of Lower Saxony, is
the major source of royalty income for the Trust. Although the Trust has
interests in other producing areas, reserves and net sales for these areas are
no longer used in the calculation of annual cost depletion percentage. While
the Trust continues to receive royalty payments from these interests, these
royalties represent less than one (1) percent of the Trust's total royalties
and the expenses involved in the determination of reserve estimates for these
interests are not warranted by the royalties received. The exclusion of these
reserves does not have a material effect on the calculation of the cost
depletion percentage. We will continue to monitor the quarterly statements
and if increases are noted that could materially add reserves to the Trust, we
will resume estimating future reserves.
1. The Oldenburg concession is held by Oldenburgische
Erdol Gesellschaft ("OEG"). Within this concession
Mobil Oil A.G. ("Mobil"), the German subsidiary of Mobil
Corp. and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture
of Exxon Corp. and the Royal Dutch Group, carry out all
exploration, drilling, production and sales activities.
(a) Under one series of rights covering the western part of
the Oldenburg concession (approximately 662,000 acres),
the Trust receives a royalty payment of 4% on gross
receipts from sales by Mobil of natural gas, casinghead
gas, crude oil and condensate. The Trust also receives
from Mobil a 2% royalty payment on gross receipts of
sales of sulfur obtained as a by-product of sour gas
produced from the western part of Oldenburg. The
payment of the sulfur royalty is subject to an
agreement which provides that if Mobil's selling price
is below the escalated base price, payment of royalties
is deferred until such time as the selling price again
exceeds the escalated base price. Throughout fiscal
1997, Mobil's selling price was below the escalated base
price. We will continue to monitor this situation,
but until the point that Mobil's selling price again
exceeds the escalated base price, reserves subject to this
royalty will not be included in overall reserve
calculations.
North European Oil Royalty Trust December 18, 1997
Page 3
(b) Under another series of rights covering the entire
Oldenburg concession and pursuant to an
agreement with OEG (the "OEG Agreement"), the Trust
receives royalties at the rate of 0.6667% on gross
receipts from sales of natural gas, casinghead gas,
crude oil, condensate and sulfur (removed during the
processing of sour gas) less 50% of an escalating cost
base. This cost base is recalculated annually based
on indices reflecting changes in certain prices within
Germany. This system will be revised in 2002 unless the
escalating cost base diverges significantly from the
actual production costs in earlier years, in which case
the computation system will be revised in 1999. In
either case, the revised system will provide that 50% of
field handling, treatment and transport costs, as
reported for state governmental royalty purposes, will
be deducted from gross sales receipts prior to the
royalty calculation.
LIMITATIONS OF AVAILABLE DATA
-----------------------------
The reserves considered in this report are defined as proved
producing reserves. Proved producing reserves are limited to those quantities
which can be expected to be recoverable commercially from known reservoirs at
current prices and costs, under existing regulatory practices and with
existing conventional equipment and operating methods. Proved producing
reserves do not include either proved developed non-producing reserves or any
class of probable reserves.
The reserve estimates were prepared using engineering methods
generally accepted by the petroleum industry. The reliability of any reserve
estimate is a function of the quality of available information and of
engineering interpretation and judgment.
The Trust, as an overriding royalty interest owner, does not receive
proprietary data from the various operators on producing wells. Data (such as
logs, core analysis, reservoir tests, pressure tests, gas analyses, geologic
maps, and individual well production histories, which are used in volumetric
and material balance type reserve estimates) are not available to the Trust.
The Trust receives various monthly and quarterly statements from the
operators that report production, sales and revenue data. Utilizing the same
procedures as in prior years, this information, plus published information
received from W.E.G. (a German organization comparable to the
North European Oil Royalty Trust December 18, 1997
Page 4
American Petroleum Institute or the American Gas Association), has been used
to prepare this annual report. We believe the reserve estimates prepared
using this data represent realistic values. However, due to the limitation of
available data, this estimate of reserves can not have the same degree of
accuracy that an estimate of reserves prepared using all pertinent data would
have. Our experience in the evaluation of reserves using such limited data
compensates somewhat for the limitations of available data.
The data in the reports received by the Trust is in metric tons and cubic
meters. The following Metric to English Unit conversion factors were used:
Oil: 7.23 barrels per metric ton
Gas: 37.25 cubic feet per cubic meter at 14.7 psia
and 60 degrees Fahrenheit
Sulfur: 1.1 short tons per metric ton
OLDENBURG AREA - SALES AND RESERVES
------------------------------------
The Trust's royalty income comes primarily from the Oldenburg area.
Gas production accounts for the majority of the income; however, the high
hydrogen sulfide content of much of the gas produced necessitates its removal
before the gas can be sold. The facilities at the Grossenkneten
desulfurization plant are the primary means by which the hydrogen sulfide is
removed. Following renovations and improvements to the plant in 1994 and
again in 1996, the plant's input capacity has been increased from 600,000 cu.
meters per hour to its present capacity of 750,000 cu. meters per hour. A
second desulfurization plant, NEAG, remains connected by pipeline with the
transportation system of the Oldenburg concession but is not currently being
utilized.
During the 12 months ending September 30, 1997 total sales for the
Oldenburg area were 279,799 barrels of oil and condensate, 190,310 million
cubic feet (MMcf) of non-associated gas, 274 MMcf of associated gas and
785,036 short tons of sulfur. The sales from the western portion of
Oldenburg, where the Trust has a greater interest, were 174,273 barrels of
condensate and oil, 85,466 MMcf of non-associated gas, 130 MMcf of associated
gas and 302,944 short tons of sulfur.
North European Oil Royalty Trust December 18, 1997
Page 5
Estimated gross remaining proved producing reserves attributable to
the total Oldenburg area are 3,390,906 barrels of condensate and oil,
2,251,661 MMcf of non-associated gas, 1,587 MMcf of associated gas and
10,345,883 short tons of sulfur.
NET RESERVES
------------
To present an accurate picture of estimated proved producing
reserves net to the Trust, the gross reserve figures outlined above must be
modified by the impact of the different royalty rates in effect in the
Oldenburg concession. A comparison of the Trust's overriding royalty rates in
both the western and eastern areas of Oldenburg is as follows:
Mobil Oil A. G. West East
--------------- ---------- ----------
Oil & Gas 4% 0%
Sulfur 2%* 0%
BEB
---------------
Oil & Gas 0.6667%** 0.6667%**
Sulfur 0.6667%** 0.6667%**
*Temporarily suspended. (See explanation above.)
**Prior to the calculation of royalties, 50% of an escalating cost base.
The application of these royalty rates to the estimated gross
remaining proved producing reserves attributable to the western and eastern
Oldenburg areas yields the combined estimated proved producing reserves net to
the Trust. The Trust's estimated remaining net proved producing reserves as
of October 1, 1997 and net sales for the twelve month period ending September
30, 1997 are as follows:
North European Oil Royalty Trust December 18, 1997
Page
6
Reserves Sales
-------- -----
Oil, Barrels 90,869 8,618
Associated Gas, MMcf 44 7
Non-Associated Gas, MMcf 44,980 4,479
Sulfur, Short Tons 52,619** 3,993**
(MMcf = million cubic feet @ 14.7 psia and 60 degrees Fahrenheit)
** Note: At current price levels no royalties are being paid under
the Mobil sulfur royalty.
A summary of net proved producing reserves by product and a five
year history of net sales attributable to the royalty interests of the Trust
are presented in Attachment A.
CALCULATION OF COST DEPLETION PERCENTAGE
----------------------------------------
The categories of proved producing reserves considered in the
calculation of the cost depletion percentage are oil, associated gas, and
non-associated gas. Sulphur is a by-product of gas production and is not
considered in the computation of total cost depletion percentage.
For each category of reserves, a product base was established for
the Trust as of January 1, 1976. Through the use of these product bases, we
can account for the relative size of each of these categories of reserves and
the corresponding impact on the calculation the cost depletion percentage.
The product base for each category of proved producing reserves is reduced
annually by an adjustment that is calculated by multiplying the product base
at the beginning of the current year by the depletion factor for that category
of reserves. The depletion factor for each category of reserve is the ratio
of the relevant net sales during the current year to the corresponding
adjusted net proved producing reserves at the beginning of the current year.
Significant items in the cost depletion percentage calculation that
appear on Attachment B as specific item numbers, shown in parentheses, and
their sources are as follows:
The adjusted estimated net proved producing reserves as
of 10/1/96 (3) is obtained by adding the estimated
remaining net proved producing reserves as of 10/1/96 (1)
and the adjustments to reserves during the period (2).
Therefore (3) = (1) + (2).
North European Oil Royalty Trust December 18, 1997
Page 7
The depletion factor (6) for each category of proved
producing reserves is obtained by dividing the relevant net
sales (4) by the corresponding adjusted estimated net proved
producing reserves as of 10/1/96 (3). Therefore (6) =
(4) / (3).
The product base for each category of proved producing
reserves as of 1/1/96 (7) and the adjustment taken during 1996
(8) were obtained from the previous year's report. The
product base as of 1/1/97 (9) forms the initial starting
point for the calculation of the cost depletion
percentage for the 1997 tax year. The product base for
1/1/97 (9) then is (7) - (8).
The adjustment to the product base for each category of
proved producing reserves (10) is used to reduce the product
base as of the beginning of each year. This adjustment is
the product of the depletion factor for each category of
proved producing reserves (6) multiplied by the
corresponding product base as of 1/1/97 (9).
Therefore (10) = (6) x (9).
The cost depletion percentage (11) then is the sum of
the adjustment to the product base of each category of
proved producing reserves [Sum (10)] divided by the sum
of the product base for each category as of 1/1/97
[Sum (9)]. Therefore (11) = [Sum (10)] / [Sum (9)].
The cost depletion percentage represents the total allowable cost
depletion for the current calendar year for the Trust's unit owners, expressed
as a percentage of their cost base at the beginning of the calendar year.
Sincerely yours,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Larry A. Barnett
----------------------------
Larry A. Barnett, P. E.
Senior Vice-President
LAB:sw
North European Oil Royalty Trust December 18, 1997
Page 8
CERTIFICATE OF QUALIFICATION
----------------------------
I, Larry A. Barnett, Registered Professional Engineer, do hereby
certify:
1. That I am senior vice-president of the consulting firm of
Ralph E. Davis Associates, Inc. with offices at 3555
Timmons Lane, Suite 1105, Houston, Texas 77027.
2. That I have prepared a reserve report on the interests of
the North European Oil Royalty Trust in the Northwest Basin
of the Federal Republic of Germany for the twelve month
period ending September 30, 1997.
3. That I have no direct or indirect interest, nor do I expect
to receive any direct or indirect interest, in the properties
or in any securities of the North European Oil Royalty Trust.
4. That I attended The University of Texas and that I
graduated with a Bachelor of Science Degree in Petroleum
Engineering in 1958.
5. That I am a Registered Professional Engineer in the States
of Texas and Louisiana, Registration Numbers 23399 and
9647 respectively, and that I am a member in good
standing of the Society of Petroleum Engineers, the Society
of Petroleum Evaluation Engineers and the Society of
Professional Well Log Analysts.
6. That I have in excess of thirty-eight years experience in
the evaluation of oil and gas properties in the United
States, Canada, Mexico, South America and Germany, and
that I have been practicing as a consultant in petroleum
engineering and geology since 1987.
RALPH E. DAVIS ASSOCIATES, INC.
/S/ Larry A. Barnett
----------------------------
Larry A. Barnett, P. E.
Senior Vice-President
ATTACHMENT A
NORTH EUROPEAN OIL ROYALTY TRUST
RESERVE SUMMARY AND FIVE YEAR NET SALES HISTORY
ESTIMATED NET PROVED PRODUCING RESERVES
- ---------------------------------------
AS OF OCTOBER 1, 1997
- ---------------------
OLDENBURG
- ---------------------------------------------------------------------------
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
--------- ---------- -------------- ----------
90,869 44 44,980 52,619**
**Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
FIVE YEAR NET SALES SUMMARY
- ---------------------------
12 MONTHS ENDING SEPTEMBER 30
- -----------------------------
OLDENBURG
- ---------------------------------------------------------------------------
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
------- ---------- -------------- ----------
1997 8,618 7 4,479 3,993**
1996 9,348 8 3,450 4,268**
1995 9,226 8 4,098 4,081**
1994 8,984 11 3,681 2,391**
1993 10,550 18 4,031 3,790**
**Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
ATTACHMENT B
NORTH EUROPEAN OIL ROYALTY TRUST
CALCULATION OF COST DEPLETION PERCENTAGE
For the Year Ending December 31, 1997
OLDENBURG
Associated Non-Assoc.
Oil Gas Gas
Barrels MMCF MMCF
------- ---------- ----------
NEORT NET RESERVES (Barrels of Oil and Million Cubic Feet of Gas)
- ------------------------------------------------------------------
1. Estimated remaining net proved
producing reserves as of 10-1-96 89,141 62 40,644
2. Adjustments to reserves
during period 10,346 -11 8,815
3. Adjusted estimated net proved
producing reserves
as of 10-1-96 99,487 51 49,459
4. Net sales from 10-1-96
to 9-30-97 8,618 7 4,479
5. Estimated remaining net proved
producing reserves
as of 10-1-97 90,869 44 44,980
RESERVE DEPLETION FACTOR (%)
- -----------------------------
6. Depletion factor 0.08662 0.13725 0.09056
NEORT PRODUCT BASE ALLOCATION (%)
- ----------------------------------
7. Product base as of 1-1-96 0.59640 0.05047 16.94879
8. Less adjustments taken
during 1996 0.05661 0.00577 1.32611
9. Product base as of 1-1-97 0.53979 0.04470 15.62268
10. 1997 adjustments
to product base 0.04676 0.00614 1.41479
11. Cost depletion percentage for 1997 calendar year for Trust unit owners
is equal to 9.056 percent of their 1-1-97 cost base.
Footnotes:
Line (1) from reserves review as of 10-1-96
Line (2) from reserves review as of 10-1-97
Line (3) = Line (1) + Line (2)
Line (4) from OEG and MOBIL statements
Line (5)from reserves review as of 10-1-97
Line (6)= Line (4) / Line (3)
Line (7) from 1996 product base allocation
Line (8) from 1996 product base allocation
Line (9)= Line (7) - Line (8)
Line (10) = Line (6) x Line (9)
Line (11) = [Sum (10)] / [Sum (9)]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statements of Assets, Liabilities and Trust Corpus at October 31, 1997 and the
Statements of Income and Expenses on a Cash Basis for the year ended October 31,
1997 and is qualified in its entirety by reference to such statements and the
accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
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0
0
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