SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-10243
BP PRUDHOE BAY ROYALTY TRUST
(Exact name of registrant as specified in its charter)
DELAWARE 13-6943724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THE BANK OF NEW YORK, TRUSTEE
101 BARCLAY STREET, 21W
NEW YORK, NEW YORK 10286
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 815-5092
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On Which
Title of Each Class Registered
------------------- ------------------------------
UNITS OF BENEFICIAL INTEREST NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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]
As of March 27, 1997, 21,400,000 Units of Beneficial Interest were
outstanding. The aggregate market value of Units (based on the closing price
of the Units in New York Stock Exchange composite trading on March 26, 1997 as
reported in The Wall Street Journal) held by nonaffiliates was approximately
$337,050,000.
Documents Incorporated by Reference: None
<PAGE> i
TABLE OF CONTENTS
PART I 1
ITEM 1. BUSINESS 1
INTRODUCTION 1
THE TRUST 2
Duties and Limited Powers of Trustee 2
Employees 2
Property of the Trust 2
Amendment of the Trust Agreement 3
Resignation or Removal of Trustee 4
Liabilities and Contingent Reserves 4
Termination of the Trust 5
Voting Rights of Holders of Units 5
THE ROYALTY INTEREST 6
Royalty Production 6
Per Barrel Royalty 6
WTI Price 6
Chargeable Costs 7
Cost Adjustment Factor 8
Production Taxes 9
Per Barrel Royalty Calculations 9
Potential Conflicts of Interest 10
THE UNITS 11
Units 11
Distributions of Income 11
Reports to Unit Holders 12
Limited Liability of Unit Holders 13
Possible Divestiture of Units 13
Issuance of Additional Units 14
THE BP SUPPORT AGREEMENT 14
THE PRUDHOE BAY UNIT 15
General 15
Geology 15
Oil Characteristics 16
Prudhoe Bay Unit Operation and Ownership 16
Historical Production 17
Transportation of Prudhoe Bay Oil 17
Reservoir Management 18
Reserve Estimates 18
INDEPENDENT OIL AND GAS CONSULTANTS' REPORT 21
INDUSTRY CONDITIONS 26
CERTAIN TAX CONSIDERATIONS 26
Federal Income Tax 26
Classification of the Trust 26
General Features of Grantor Trust Taxation 26
Taxation of Unit Holders 27
Depletion Deductions 27
Taxation of Foreign Unit Holders 28
Sale of Units 28
Backup Withholding 28
State Income Taxes 29
ITEM 2. PROPERTIES 29
ITEM 3. LEGAL PROCEEDINGS 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS 29
<PAGE> ii
PART II 30
ITEM 5. MARKET FOR THE UNITS AND RELATED UNIT HOLDER MATTERS 30
ITEM 6. SELECTED FINANCIAL DATA 31
ITEM 7. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 44
PART III 44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 44
ITEM 11. EXECUTIVE COMPENSATION 44
ITEM 12. UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45
PART IV 46
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 46
SIGNATURES 47
INDEX TO EXHIBITS 48
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
BP Prudhoe Bay Royalty Trust (the "Trust"), a grantor trust, was created
as a Delaware business trust pursuant to the BP Prudhoe Bay Royalty Trust
Agreement dated February 28, 1989 (the "Trust Agreement") among The Standard
Oil Company ("Standard Oil"), BP Exploration (Alaska) Inc. (the "Company"),
The Bank of New York, as trustee (the "Trustee"), and F. James Hutchinson, co-
trustee (The Bank of New York (Delaware), successor co-trustee). The Company
and Standard Oil are indirect, wholly owned subsidiaries of The British
Petroleum Company p.l.c. ("BP"). The Trustee's corporate trust offices are
located at 101 Barclay Street, New York, New York 10286 and its telephone
number is (212) 815-5092.
Upon creation of the Trust, the Company conveyed to Standard Oil, and
Standard Oil, in turn, conveyed to the Trust an overriding royalty interest
(the "Royalty Interest"), which entitles the Trust to a royalty on 16.4246
percent of the first 90,000 barrels of the average actual daily net production
of oil and condensate per quarter from the working interest of the Company as
of February 28, 1989 in the Prudhoe Bay Unit located on the North Slope in
Alaska. The Royalty Interest is free of any exploration and development
expenditures.
The only assets of the Trust are the Royalty Interest assigned to the
Trust and cash or cash equivalents held by the Trustee from time to time as
reserves or for distribution. The Trust is a passive entity, and the Trustee
has been given only such powers as are necessary for the collection and
distribution of revenues from the Royalty Interest and the payment of Trust
liabilities and expenses. The beneficial interest in the Trust is divided
into equal undivided units (the "Units"). The Units are not an interest in or
an obligation of the Company, Standard Oil or BP. The Delaware Trust Act,
under which the Trust was formed, entitles holders of the Units to the same
limitation of personal liability as stockholders of a Delaware corporation.
The Company shares control of the operation of the Prudhoe Bay Unit with
other working interest owners. The operations of the Company and the other
working interest owners are governed by an agreement dated April 1, 1977 among
the State of Alaska and such working interest owners establishing the Prudhoe
Bay Unit (the "Prudhoe Bay Unit Agreement") and an agreement dated April 1,
1977 among the working interest owners governing Prudhoe Bay Unit operations
(the "Prudhoe Bay Unit Operating Agreement"). The Company has no obligation
to continue production from the Prudhoe Bay Unit or to maintain production at
any level and may interrupt or discontinue production at any time. The
operation of the Prudhoe Bay Unit is subject to normal operating hazards
incident to the production and transportation of oil in Alaska. In the event
of damage to the Prudhoe Bay Unit which is covered by insurance, the Company
has no obligation to use insurance proceeds to repair such damage and may
elect to retain such proceeds and close damaged areas to production.
The Trustee has no responsibility for the operation of the Prudhoe Bay
Unit or authority over the Company, Standard Oil or BP. The information in
this report relating to the Prudhoe Bay Unit, the calculation of the royalty
payments and certain other matters has been furnished to the Trustee by the
Company.
<PAGE> 2
THE TRUST
Duties and Limited Powers of Trustee
The duties of the Trustee are as specified in the Trust Agreement and by
the laws of the State of Delaware. The descriptions of certain provisions of
the Trust Agreement in this section and elsewhere in this report do not
purport to be complete and are qualified by reference to the relevant
provisions of the Trust Agreement, which is filed as an exhibit to this
report.
The basic function of the Trustee is to collect income from the Royalty
Interest, to pay from the Trust's income and assets all expenses, charges and
obligations of the Trust, and to pay available cash to holders of Units. The
Bank of New York (Delaware) has been appointed co-trustee in order to satisfy
certain requirements of the Delaware Trust Act, but The Bank of New York alone
is able to exercise the rights and powers granted to the Trustee in the Trust
Agreement.
The Trust Agreement grants the Trustee only such rights and powers as are
necessary to achieve the purposes of the Trust. The Trust Agreement prohibits
the Trust from engaging in any business, any commercial activity or, with
certain exceptions, investment activity of any kind and from using any portion
of the assets of the Trust to acquire any oil and gas lease, royalty or other
mineral interest. The Trustee may sell Trust properties only as authorized by
a vote of the holders of Units, or when necessary, to provide for the payment
of specific liabilities of the Trust then due (if, among other things, the
Trustee determines that it is not practicable to submit such sale to a vote of
the holders of Units, and it receives an opinion of counsel to the effect that
such sale will not adversely affect the classification of the Trust as a
"grantor trust" for federal income tax purposes), or upon termination of the
Trust. Pledges or other encumbrances to secure borrowings are permitted
without a vote of holders of Units if the Trustee determines such action is
advisable. Any sale of Trust properties must be for cash unless otherwise
authorized by the holders of Units, and the Trustee is obligated to distribute
the available net proceeds of any such sale to the holders of Units after
establishing reserves for liabilities of the Trust.
Except in certain circumstances, the Trustee is entitled to be
indemnified out of the assets of the Trust for any liability, expense, claim,
damage or other loss incurred by it in the performance of its duties unless
such loss results from its negligence, bad faith, or fraud or from its
expenses in carrying out such duties exceeding the compensation and
reimbursement it is entitled to under the Trust Agreement.
Employees
The Trust has no employees. All administrative functions of the Trust
are performed by the Trustee.
Property of the Trust
Except for cash and cash equivalents held by the Trustee from time to
time, the property of the Trust consists exclusively of the Royalty Interest.
The Royalty Interest was conveyed to the Trust pursuant to an Overriding
<PAGE> 3
Royalty Conveyance dated February 27, 1989 between the Company and Standard
Oil and a Trust Conveyance dated February 28, 1989 between Standard Oil and
the Trust. The Overriding Royalty Conveyance and the Trust Conveyance are
referred to collectively herein as the "Conveyance." For a description of the
terms of the Royalty Interest, see "THE ROYALTY INTEREST" below. The
discussion of the terms of the Conveyance herein is qualified in its entirety
by reference to the relevant provisions of the Overriding Royalty Conveyance
and the Trust Conveyance which are filed with the Securities and Exchange
Commission as exhibits to this report.
The interest conveyed to the Trust by the Conveyance is an overriding
royalty interest consisting of the right to receive a Per Barrel Royalty for
each barrel of Royalty Production. The meaning of these terms is more fully
described below under "THE ROYALTY INTEREST." The Trust does not have the
right to take oil and gas in kind.
The Royalty Interest constitutes a non-operational interest in minerals.
The Trust has no right to take over operations or to share in any operating
decision whatsoever with respect to the Company's working interest in the
Prudhoe Bay Unit. The Company is not obligated to continue to operate any
well or maintain in force or attempt to maintain in force any portion of its
working interest in the Prudhoe Bay Unit when, in its reasonable and prudent
business judgment such well or interest ceases to produce or is not capable of
producing oil or gas in paying quantities.
Under the terms of the Prudhoe Bay Unit Operating Agreement, if the
Company fails to pay any costs and expenses chargeable to the Company under
the Prudhoe Bay Unit Operating Agreement and the production of oil and
condensate is insufficient to pay such costs and expenses, the Royalty
Interest is chargeable with a pro rata portion of such costs and expenses and
is subject to the enforcement against it of liens granted to the operators of
the Prudhoe Bay Unit. However, in the Conveyance the Company agreed to pay
timely all costs and expenses chargeable to it and to ensure that no such
costs and expenses will be chargeable against the Royalty Interest. The Trust
is not liable for any expense, claim, damage, loss or liability incurred by
the Company or others attributable to the Company's working interest in the
Prudhoe Bay Unit or to the oil produced from it, and the Company has agreed to
indemnify the Trust and hold it harmless against any such impositions.
The Company has the right to amend or terminate the Prudhoe Bay Unit
Agreement, the Prudhoe Bay Unit Operating Agreement and any leases or
conveyances with respect to its working interest in the exercise of its
reasonable and prudent business judgment without liability to the Trust. The
Company also has the right to sell or assign all or any part of its working
interest in the Prudhoe Bay Unit, so long as the sale or assignment is
expressly made subject to the Royalty Interest and the terms and provisions of
the Conveyance.
Amendment of the Trust Agreement
The Trust Agreement may be amended without a vote of the holders of Units
to cure an ambiguity, to correct or supplement any provision of the Trust
Agreement that may be inconsistent with any other such provision or to make
any other provision with respect to matters arising under the Trust Agreement
that do not adversely affect the holders of Units. The Trust Agreement also
may be amended with the approval of a majority of the outstanding Units at a
meeting of holders of Units. However, no such amendment may alter the
<PAGE> 4
relative rights of Unit holders, unless approved by the affirmative vote of
100 percent of the holders of Units and by the Trustee, or reduce or delay the
distributions to the holders of Units or effect certain other changes unless
approved by the affirmative vote of 80 percent of the holders of Units and by
the Trustee. No amendment will be effective until the Trustee has received a
ruling from the Internal Revenue Service or an opinion of counsel to the
effect that such modification will not adversely affect the classification of
the Trust as a "grantor trust" for federal income tax purposes or cause the
income from the Trust to be treated as unrelated business taxable income for
federal income tax purposes.
Resignation or Removal of Trustee
The Trustee may resign at any time or be removed with or without cause by
the holders of a majority of the outstanding Units. Its successor must be a
corporation organized and doing business under the laws of the United States,
any state thereof or the District of Columbia, authorized under such laws to
exercise trust powers, or a national banking association domiciled in the
United States, in either case having a combined capital, surplus and undivided
profits of at least $50,000,000 and subject to supervision or examination by
federal or state authorities. Unless the Trust already has a trustee that is
a resident of or has a principal office in the State of Delaware, then any
successor trustee will be such a resident or have such a principal office. No
resignation or removal of the Trustee shall become effective until a successor
trustee shall have accepted appointment.
Liabilities and Contingent Reserves
Because of the passive nature of the Trust's assets and the restrictions
on the power of the Trustee to incur obligations, the only liabilities
incurred by the Trust are routine administrative expenses, such as Trustee's
fees, and accounting, legal and other professional fees.
The Trustee may establish a cash reserve for the payment of material
liabilities of the Trust which may become due, if the Trustee has determined
that it is not practical to pay such liabilities out of funds anticipated to
be available for subsequent quarterly distributions and that, in the absence
of such a reserve, the trust estate is subject to the risk of loss or
diminution in value or The Bank of New York is subject to the risk of personal
liability for such liabilities. Except in certain limited circumstances,
before establishing such a reserve the Trustee must have received an opinion
of counsel to the effect that the establishment and maintenance of such
reserve will not adversely affect the classification of the Trust as a
"grantor trust" for federal income tax purposes or cause the income from the
Trust to be treated as unrelated business taxable income for federal income
tax purposes. The Trustee is obligated, subject to certain conditions, to
borrow funds required to pay liabilities of the Trust when due, and to pledge
or otherwise encumber the Trust's assets, if it determines that the cash on
hand is insufficient to pay such liabilities and that it is not practical to
pay such liabilities out of funds anticipated to be available for subsequent
quarterly distributions, provided that, except in certain limited
circumstances, it has received an opinion of counsel to the effect described
above. Borrowings must be repaid in full before any further distributions are
made to holders of Units.
<PAGE> 5
Termination of the Trust
The Trust is irrevocable and the Company has no power to terminate the
Trust. The Trust will terminate: (a) on or prior to December 31, 2010 upon a
vote of holders of not less than 70 percent of the outstanding Units, or (b)
after December 31, 2010 either (i) at such time as the net revenues from the
Royalty Interest for two successive years commencing after 2010 are less than
$1,000,000 per year, unless the net revenues during such period have been
materially and adversely affected by an event constituting force majeure, or
(ii) upon a vote of holders of not less than 60 percent of the outstanding
Units.
Upon termination of the Trust, the Company will have an option to
purchase the Royalty Interest (for cash unless holders representing 70 percent
of the Units outstanding (60 percent if the decision to terminate the Trust is
made after December 31, 2010) authorize the sale for non-cash consideration
and the Trustee has received a ruling from the Internal Revenue Service or an
opinion of counsel to the effect that such non-cash sale will not adversely
affect the classification of the Trust as a "grantor trust" for federal income
tax purposes or cause the income from the Trust to be treated as unrelated
business taxable income for federal income tax purposes) at a price equal to
the greater of (i) the fair market value of the trust estate as set forth in
an opinion of an investment banking firm or other entity qualified to give an
opinion as to the fair market value of the assets of the Trust, or (ii) the
number of outstanding Units multiplied by (a) the closing price of Units on
the day of termination of the Trust on the stock exchange on which the Units
are listed, or (b) if the Units are not listed on any stock exchange but are
traded in the over-the-counter market, the closing bid price on the day of
termination of the Trust as quoted on the NASDAQ National Market System. If
the Units are neither listed nor traded in the over-the-counter market, the
price will be the fair market value of the trust estate as set forth in the
opinion mentioned above.
If the Company does not exercise its option, the Trustee will sell the
Trust properties pursuant to procedures or material terms and conditions
approved by the vote of holders of 70 percent of the outstanding Units (60
percent if the sale is made after December 31, 2010), unless the Trustee
determines that it is not practicable to submit such procedures or terms to a
vote of the holders of Units, and the sale is effected at a price which is at
least equal to the fair market value of the trust estate as set forth in the
opinion mentioned above and pursuant to terms and conditions deemed
commercially reasonable by the investment banking firm or other entity
rendering such opinion.
After satisfying all existing liabilities and establishing adequate
reserves for the payment of contingent liabilities, the Trustee will
distribute all available proceeds to the holders of Units.
In the Trust Agreement, holders of Units have waived the right to seek or
secure any portion or distribution of the Royalty Interest or any other asset
of the Trust or any accounting during the term of the Trust or during any
period of liquidation and winding up.
Voting Rights of Holders of Units
Although holders of Units possess certain voting rights, their voting
rights are not comparable to those of shareholders of a corporation. For
<PAGE> 6
example, there is no requirement for annual meetings of holders of Units or
annual or other periodic reelection of the Trustee.
THE ROYALTY INTEREST
The Royalty Interest is a property right under Alaska law which burdens
production, but there is no other security interest in the reserves or
production revenues to which the Royalty Interest is entitled. The royalty
payable to the Trust under the Royalty Interest for each calendar quarter is
the sum of the product of (i) the Royalty Production and (ii) the Per Barrel
Royalty for each day in the quarter. The payment under the Royalty Interest
for any calendar quarter may not be less than zero nor more than the aggregate
value of the total production of oil and condensate from the Company's working
interest in the Prudhoe Bay Unit for such calendar quarter, net of the State
of Alaska royalty and less the value of any applicable payments made to
affiliates of the Company.
Royalty Production
The "Royalty Production" for each day in a calendar quarter is 16.4246
percent of the first 90,000 barrels of the actual average daily net production
of oil and condensate for such quarter from the Prudhoe Bay (Permo-Triassic)
Reservoir and allocated to the oil and gas leases owned by the Company in the
Prudhoe Bay Unit as of February 28, 1989 or as modified thereafter by any
redetermination provided under the terms of the Prudhoe Bay Unit Operating
Agreement and the Prudhoe Bay Unit Agreement (the "Subject Leases"). The
Royalty Production is based on oil produced from the oil rim and condensate
produced from the gas cap, but not on gas production or natural gas liquids
production. The actual average daily net production of oil and condensate
from the Subject Leases for any calendar quarter is the total production of
oil and condensate for such quarter, net of the State of Alaska royalty,
divided by the number of days in such quarter.
Per Barrel Royalty
The "Per Barrel Royalty" in effect for any day is an amount equal to the
WTI Price for such day less the sum of (i) the product of the Chargeable Costs
multiplied by the Cost Adjustment Factor and (ii) Production Taxes.
WTI Price
The "WTI Price" for any trading day means (i) the latest price (expressed
in dollars per barrel) for West Texas intermediate crude oil of standard
quality having a specific gravity of 40 degrees API for delivery at Cushing,
Oklahoma ("West Texas Crude"), quoted for such trading day by the Dow Jones
International Petroleum Report (which is published in The Wall Street Journal)
or if the Dow Jones International Petroleum Report does not publish such
quotes, then such price as quoted by Reuters, or if Reuters does not publish
such quotes, then such price as quoted in Platt's Oilgram Price Report, or
(ii) if for any reason such publications do not publish the price of West
Texas Crude, then the WTI Price will mean, until the price quotations
described in (i) are again available, the simple average of the daily mean
prices (expressed in dollars per barrel) quoted for West Texas Crude by one
major oil company, one petroleum broker and one petroleum trading company, in
each case unaffiliated with BP and having substantial U.S. operations. Such
<PAGE> 7
major oil company, petroleum broker and petroleum trading company will be
designated by the Company from time to time. In the event that prices for
West Texas Crude are not quoted so as to permit the calculation of the WTI
Price, "West Texas Crude," for the purposes of calculating the WTI Price will
mean such other light sweet domestic crude oil of standard quality as is
designated by the Company and approved by the Trustee in the exercise of its
reasonable judgment, with appropriate allowance for transportation costs to
the Gulf Coast (or other appropriate location) to equilibrate such price to
the WTI Price. The WTI Price for any day which is not a trading day is the
WTI Price for the next preceding trading day.
Chargeable Costs
The "Chargeable Costs" per barrel of Royalty Production for each calendar
year are fixed amounts specified in the Conveyance and do not necessarily
represent the Company's actual costs of production. Chargeable Costs per
barrel for the five calendar years ended December 31, 1996 were: $6.00 during
1992; $6.75 during 1993; $8.00 during 1994; $8.25 during 1995; and $8.50
during 1996. Chargeable Costs for the calendar year ending December 31, 1997
and subsequent years are shown in the following table:
<TABLE>
<CAPTION>
For the Chargeable For the Chargeable
Year Ending Costs Per Year Ending Costs Per
December 31 Barrel December 31 Barrel
------------ ---------- ------------ ----------
<C> <C> <C> <C>
1997 $ 8.85 2009 $13.25
1998 9.30 2010 14.50
1999 9.80 2011 16.60
2000 10.00 2012 16.70
2001 10.75 2013 16.80
2002 11.25 2014 16.90
2003 11.75 2015 17.00
2004 12.00 2016 17.10
2005 12.25 2017 17.20
2006 12.50 2018 20.00
2007 12.75 2019 23.75
2008 13.00 2020 26.50
</TABLE>
After 2020, Chargeable Costs increase at a uniform rate of $2.75 per
year.
Chargeable Costs may be reduced in future years by up to $1.20 per barrel
in the following circumstances:
(1) Chargeable Costs will be reduced by up to $1.20 per barrel in each
year from 2001 through 2005, inclusive, if, between January 1, 1996 and
December 31, 2000, an additional 200,000,000 stock tank barrels ("STB") of
proved reserves (before taking into account any production therefrom) have not
been added to the proved reserves allocated to the Subject Leases. For the
purpose of this calculation, additions to proved reserves include a credit
equal to the number of STB of proved reserves in excess of 100,000,000 added
to proved reserves after December 31, 1987 and before January 1, 1996.
<PAGE> 8
(2) Chargeable Costs will be reduced by up to $ 1.20 per barrel in 2006
and subsequent years if, between January 1, 2001 and December 31, 2005, either
(a) an additional 400,000,000 STB of proved reserves (before taking into
account any production therefrom) have not been added to proved reserves
allocated to the Subject Leases (including, for the purpose of this
calculation, a credit equal to the number of STB of proved reserves in excess
of 300,000,000 added to the Company's reserves after December 31, 1987 and
before January 1, 2001), or (b) an additional 100,000,000 STB of proved
reserves (before taking into account any production therefrom) have not been
added to the reserves allocated to the Subject Leases, without allowing any
credit for additions prior to January 1, 2001. In general, "proved reserves"
for purposes of this determination consist of the Company's estimate
(determined to be reasonable by independent petroleum engineers) of the
quantities of crude oil and condensate that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years under
existing economic and operating conditions from the Prudhoe Bay (Permo-
Triassic Reservoir) in the Prudhoe Bay Unit. See "THE PRUDHOE BAY UNIT -
Reserve Estimates" below.
As of December 31, 1987, the proved reserves of crude oil and condensate
allocated to the Subject Leases were 2,035.6 million STB. Since that date,
the Company has made the additions (and deductions) to its estimates of proved
reserves allocated to the Subject Leases (before taking into account any
production from such additions) as shown in the following table:
<TABLE>
<CAPTION>
Additions to Proved Reserves
Year ended ----------------------------
December 31 Annual Cumulative
----------- ------ ----------
(Million STB)
<C> <C> <C>
1988 42.3 42.3
1989 45.5 87.8
1990 24.0 111.8
1991 115.8 227.6
1992 144.3 371.9
1993 206.2 578.1
1994 89.9 668.0
1995 92.2 760.2
1996 (21.0) 739.2
</TABLE>
The Company anticipates further additions in future years to the proved
reserves allocated to the Subject Leases. As of December 31, 1996, the
cumulative additions to the proved reserves allocated to the Subject Leases
were sufficient to prevent any reduction in Chargeable Costs during the years
2001 through 2005. However, downward revisions of proved reserve estimates in
1997 or subsequent years could result in a reduction of Chargeable Costs being
required as described above in the year 2001 or thereafter.
Cost Adjustment Factor
The "Cost Adjustment Factor" is the ratio of (1) the Consumer Price Index
published for the most recently past February, May, August or November, as the
case may be, to (2) 121.1 (the Consumer Price Index for January 1989), except
<PAGE> 9
that (a) if for any calendar quarter the average WTI Price is $18.00 or less,
then the Cost Adjustment Factor for that quarter will be the Cost Adjustment
Factor for the immediately preceding quarter, and (b) the Cost Adjustment
Factor for any calendar quarter in which the average WTI Price exceeds $18.00,
after a calendar quarter during which the average WTI Price is equal to or
less than $ 18.00, and for each following calendar quarter in which the
average WTI Price is greater than $18.00, will be the product of (x) the Cost
Adjustment Factor for the most recently past calendar quarter in which the
average WTI Price is equal to or less than $18.00 and (y) a fraction, the
numerator of which will be the Consumer Price Index published for the most
recently past February, May, August or November, as the case may be, and the
denominator of which will be the Consumer Price Index published for the most
recently past February, May, August or November during a quarter in which the
average WTI Price is equal to or less than $18.00. The "Consumer Price Index"
is the U.S. Consumer Price Index, all items and all urban consumers, U.S. city
average, 1982-84 equals 100, as first published, without seasonal adjustment,
by the Bureau of Labor Statistics, Department of Labor, without regard to
subsequent revisions or corrections.
Production Taxes
"Production Taxes" are the sum of any severance taxes, excise taxes
(including windfall profit tax, if any), sales taxes, value added taxes or
other similar or direct taxes imposed upon the reserves or production,
delivery or sale of Royalty Production. Such taxes are computed at defined
statutory rates. In the case of taxes based upon wellhead or field value, the
Conveyance provides that the WTI Price less the product of $4.50 and the Cost
Adjustment factor will be deemed to be the wellhead or field value. At the
present time, the Production Taxes payable with respect to the Royalty
Production are the Alaska Oil and Gas Properties Production Tax ("Alaska
Production Tax") and the Alaska Oil and Gas Conservation Tax ("Alaska
Conservation Tax"). For the purposes of the Royalty Interest, the Alaska
Production Tax is computed without regard to the "economic limit factor," if
any, as the greater of the "percentage of value amount" (based on the
statutory rate and the wellhead value as defined above) and the "cents per
barrel amount." As of the date of this report, the statutory rate for the
purpose of calculating the "percentage of value amount" is 15 percent, and the
Alaska Conservation Tax is a tax of $0.004 per barrel of net production. A
surcharge to the Alaska Production Tax increased Production Taxes by $0.05 per
barrel of net production effective July 1, 1989. Due to the spill response
fund reaching $50 million in 1995, $0.02 per barrel of the surcharge has been
indefinitely suspended. In the event the balance of the spill response fund
falls below $50 million, the $0.02 per barrel surcharge will be reinstated
until the fund balance again reaches $50 million. The remaining $0.03 per
barrel surcharge is not affected by the fund's balance and will continue to be
imposed at all times.
Per Barrel Royalty Calculations
The following table shows how the above-described factors interacted
during each of the past five years to produce the Per Barrel Royalty paid for
each of the calendar quarters indicated.
<PAGE> 10
<TABLE>
<CAPTION>
Average Cost Adjusted Per
WTI Chargeable Adjustment Chargeable Production Barrel
Price Costs Factor Costs Taxes Royalty (a)
------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1992:
1st Qtr $18.94 $6.00 1.134 $ 6.80 $2.13 $10.00
2nd Qtr 21.20 6.00 1.143 6.86 2.46 11.88
3rd Qtr 21.67 6.00 1.153 6.92 2.53 12.23
4th Qtr 20.50 6.00 1.162 6.97 2.34 11.18
1993:
1st Qtr 19.85 6.75 1.171 7.90 2.24 9.71
2nd Qtr 19.76 6.75 1.180 7.96 2.22 9.57
3rd Qtr 17.77 6.75 1.180 7.96 1.92 7.88
4th Qtr 16.43 6.75 1.180 7.96 1.72 6.74
1994:
1st Qtr 14.80 8.00 1.180 9.44 1.48 3.88
2nd Qtr 17.79 8.00 1.180 9.44 1.93 6.42
3rd Qtr 18.49 8.00 1.192 9.53 2.02 6.93
4th Qtr 17.67 8.00 1.192 9.53 1.90 6.23
1995:
1st Qtr 18.35 8.25 1.200 9.90 2.00 6.45
2nd Qtr 19.32 8.25 1.212 10.00 2.11 7.21
3rd Qtr 17.87 8.25 1.212 10.00 1.90 5.98
4th Qtr 18.16 8.25 1.217 10.04 1.94 6.18
1996:
1st Qtr 19.74 8.50 1.227 10.43 2.17 7.14
2nd Qtr 21.70 8.50 1.241 10.55 2.45 8.70
3rd Qtr 22.36 8.50 1.247 10.59 2.55 9.22
4th Qtr 24.71 8.50 1.257 10.68 2.89 11.13
<FN>
- ---------------
(a) Per Barrel Royalty figures shown in this column are exact; but
subtracting the figures for Adjusted Chargeable Costs and Production Taxes
from the figures for Average WTI Prices in the columns to the left does not
yield the Per Barrel Royalty shown in all cases due to rounding.
</TABLE>
Potential Conflicts of Interest
The interests of the Company and the Trust with respect to the Prudhoe
Bay Unit could at times be different. In particular, because the Per Barrel
Royalty is based on the WTI Price and Chargeable Costs rather than the
Company's actual price realized and actual costs, the actual per barrel profit
received by the Company on the Royalty Production could differ from the Per
Barrel Royalty to be paid to the Trust. It is possible, for example, that the
relationship between the Company's actual per barrel revenues and costs could
be such that the Company may determine to interrupt or discontinue production
in whole or in part even though a Per Barrel Royalty may otherwise have been
payable to the Trust pursuant to the Royalty Interest. This potential
<PAGE> 11
conflict of interest could affect the royalties paid to Unit holders, although
the Company will be subject to the terms of the Prudhoe Bay Unit Operating
Agreement.
THE UNITS
Units
Each Unit represents an equal undivided share of beneficial interest in
the Trust. The Units do not represent an interest in or an obligation of the
Company, Standard Oil or any of their respective affiliates. Units are
evidenced by transferable certificates issued by the Trustee. Each Unit
entitles its holder to the same rights as the holder of any other Unit. The
Trust has no other authorized or outstanding class of equity securities.
Distributions of Income
The Company makes quarterly payments to the Trust of the amounts due with
respect to the Trust's Royalty Interest on the fifteenth day following the end
of each calendar quarter or, if the fifteenth is not a business day, on the
next succeeding business day (the "Quarterly Record Date"). The Trustee then
distributes an amount equal to the payment received from the Company (plus, if
applicable, any decrease in cash reserves previously established for estimated
liabilities and any other cash received by the Trustee), less the expenses and
payments of liabilities of the Trust (plus, if applicable, any net increase in
cash reserves for estimated liabilities) (the "Quarterly Distribution") to the
persons in whose names the Units were registered at the close of business on
the immediately preceding Quarterly Record Date.
A total of 8,040,000 Units were sold to the public in May 1989. Prior to
the public offering, however, 13,360,000 Units were sold in a private
placement to a number of institutional investors, including a number of
employee benefit plans subject to the requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA"). The Trust Agreement, therefore,
contains a number of provisions intended to accommodate legal restrictions
resulting from the benefit plan status of these initial investors.
The Trust Agreement provides that unless certain conditions have been
satisfied or are applicable to the Trust, pending payment of the Quarterly
Distribution to the Unit holders, the Trustee must hold the money uninvested
in a non-interest bearing account. This requirement generally applies prior
to the date (the "Opinion Date") on which the Company has delivered to the
Trustee both (i) an opinion of nationally recognized ERISA counsel to the
effect that the Units have been registered under the Securities Exchange Act
of 1934, and the Units are both widely-held and freely transferable (within
the meaning of Department of Labor regulations), and (ii) either an individual
prohibited transaction exemption or an advisory opinion issued by the
Department of Labor, or an opinion of nationally recognized ERISA counsel
based on such a prohibited transaction exemption or advisory opinion, to the
Trustee, the Trust or the Company to the effect that after the date upon which
the requirements referred to in the opinion described in clause (i) have been
satisfied, the assets of the Trust shall not constitute plan assets with
respect to any employee benefit plan which became a Unit holder prior to the
date such requirements have been satisfied. To date, the Company has not
delivered the prohibited transaction exemption, advisory opinion or opinion of
<PAGE> 12
ERISA counsel referred to in clause (ii) of the preceding sentence and,
consequently, the Opinion Date has not occurred.
The investment prohibition described in the preceding paragraph does not
apply, however, during an "Insignificant Investor Period," which is defined to
mean any period prior to the Opinion Date during which benefit plan investors
(within the meaning of Department of Labor regulations) do not own a
sufficient number of Units to cause their equity participation in the Trust to
be "significant" (i.e., benefit plan investors hold 25 percent or more of the
value of the Units). The Units, however, are predominantly held by their
owners indirectly in "street name" through brokers and nominees. (Over 96
percent of the Units were held through brokers and nominees at December 31,
1996). The Trustee thus is unable to determine, on the basis of the names of
the Unit holders registered as such on its books, whether or not Unit
ownership by benefit plan investors is "significant" within the contemplation
of the Trust Agreement. As a result of this uncertainty, to date the Trustee
has held moneys received from the Company uninvested pending their
distribution to Unit holders, and The Bank of New York has had the use of
those balances during such periods.
The Trust Agreement provides that, after the Opinion Date, or during an
Insignificant Investor Period prior to the Opinion Date, the Trustee shall
pay the Quarterly Distribution on the fifth day after the Trustee's receipt of
the amount to be paid by the Company on each Quarterly Record Date, and that
collected cash balances being held by the Trustee for distribution shall be
invested in obligations issued or unconditionally guaranteed by the United
States or any agency or instrumentality thereof and secured by the full faith
and credit of the United States ("Government Obligations") or, if Government
Obligations with a maturity date on the date of the distribution to Unit
holders are not available, in repurchase agreements with banks having capital,
surplus and undivided profits of $100,000,000 or more (which may include The
Bank of New York) secured by Government Obligations. If time does not permit
the Trustee to invest collected funds in investments of the type described in
the preceding sentence, the Trustee may invest such funds overnight in a time
deposit with a bank meeting the foregoing requirement (including The Bank of
New York).
As a result of the recent disposition of substantially all of their Units
by several of the original institutional investors in the Trust, each of which
had held in excess of five percent of the outstanding Units, the Trustee has
conducted an examination of its Unit holder records and other available
information and has concluded that, although the matter is not free from
doubt, it is more probable than not that an Insignificant Investor Period
under the Trust Agreement is in effect. The Trustee further has been advised
by its counsel that, under present circumstances, there are likely to be no
adverse consequences to any benefit plan investor, to the Trust, or to the
Trustee if the Trustee were to commence investing collected funds pending
their distribution to Unit holders in investments of the type permitted by the
Trust Agreement. The Trustee therefore intends to commence investing
collected funds as described above.
Reports to Unit Holders
Within 90 days after the end of each calendar year, the Trustee mails to
the holders of record of Units at any time during the calendar year a report
containing information to enable them to make the calculations necessary for
federal and Alaska income tax purposes, including the calculation of any
<PAGE> 13
depletion or other deduction which may be available to them for the calendar
year. In addition, after the end of each calendar year the Trustee mails to
holders of Units an annual report containing audited financial statements of
the Trust, a letter of the independent petroleum engineers engaged by the
Trust setting forth a summary of such firm's determinations regarding the
Company's estimates of proved reserves and other related matters, and certain
other information required by the Trust Agreement.
Following the end of each quarter, the Trustee mails Unit holders a
quarterly report showing the assets and liabilities, receipts and
disbursements and income and expenses of the Trust and the Royalty Production
for such Quarter.
Limited Liability of Unit Holders
The Trust Agreement provides that the holders of Units are, to the full
extent permitted by Delaware law, entitled to the same limitation of personal
liability extended to stockholders of private corporations for profit under
Delaware law.
Possible Divestiture of Units
The Trust Agreement imposes no restrictions on nationality or other
status of the persons eligible to hold Units. However, the Trust Agreement
provides that if at any time the Trust or the Trustee is named a party in any
judicial or administrative proceeding seeking the cancellation or forfeiture
of any property in which the Trust has an interest because of the nationality,
or any other status, of any one or more holders, the following procedures will
be applicable:
(i) The Trustee will give written notice of the existence of such
proceedings to each holder whose nationality or other status is an issue in
the proceeding. The notice will contain a reasonable summary of such
proceeding and will constitute a demand to each such holder that he dispose of
his Units within 30 days to a party not of the nationality or other status at
issue in the proceeding described in the notice.
(ii) If any holder fails to dispose of his Units in accordance with such
notice, the Trustee will redeem, at any time during the 90-day period
following the termination of the 30-day period specified in the notice, any
Unit not so transferred for a cash price per Unit equal to the closing price
of the Units on the stock exchange on which the Units are then listed or, in
the absence of any such listing, the closing bid price on the NASDAQ National
Market System if the Units are so quoted or, if not, the mean between the
closing bid and asked prices for the Units in the over-the-counter market, in
either case as of the last business day prior to the expiration of the 30-day
period stated in the notice. If the Units are neither listed nor traded in
the over-the-counter market, the price will be the fair market value of the
Units as determined by a recognized firm of investment bankers or other
competent advisor or expert.
Units redeemed by the Trustee will be cancelled. The Trustee may, in its
sole discretion, cause the Trust to borrow any amount required to redeem the
Units. If the purchase of Units from an ineligible holder by the Trustee
would result in a non-exempt "prohibited transaction" under ERISA, or under
the Internal Revenue Code of 1986, the Units subject to the Trustee's right of
<PAGE> 14
redemption will be purchased by the Company or a designee thereof, at the
above described purchase price.
Issuance of Additional Units
The Trust Agreement provides that the Company or an affiliate from time
to time may assign to the Trust additional royalty interests meeting certain
conditions, and, upon satisfaction of various other conditions, including
receipt by the Trustee of a ruling from the Internal Revenue Service to the
effect that neither the existence nor the exercise of the right to assign the
additional royalty interest or the power to accept such assignment will
adversely affect the classification of the Trust as a "grantor trust" for
federal income tax purposes, the Trust may issue up to an additional
18,600,000 Units, The Company has not conveyed any additional royalty
interests to the Trust, and the Trust has not issued any additional Units,
since the inception of the Trust.
THE BP SUPPORT AGREEMENT
BP has agreed pursuant to the terms of a Support Agreement, dated
February 28, 1989, among BP, the Company, Standard Oil and the Trust (the
"Support Agreement"), to provide financial support to the Company in meeting
its payment obligations under the Royalty Interest.
Within 30 days of notice to BP, BP will ensure that the Company is in a
position to perform its payment obligations under the Royalty Interest and to
satisfy its payment obligations to the Trust under the Trust Agreement,
including contributing to the Company such funds as are necessary to make such
payments. BP's obligations under the Support Agreement are unconditional and
directly enforceable by Unit holders.
Except as described below, no assignment, sale, transfer, conveyance,
mortgage or pledge or other disposition of the Royalty Interest will relieve
BP of its obligations under the Support Agreement.
Neither BP nor the Company may transfer or assign its rights or
obligations under the Support Agreement without the prior written consent of
the Trust, except that BP can arrange for its obligations under the Support
Agreement to be performed by any affiliate of BP, provided that BP remains
responsible for ensuring that such obligations are performed in a timely
manner.
The Company may sell or transfer all or part of its working interest in
the Prudhoe Bay Unit, although such a transfer will not relieve BP of its
responsibility to ensure that the Company's payment obligations with respect
to the Royalty Interest and under the Trust Agreement and the Conveyance are
performed.
BP will be released from its obligation under the Support Agreement upon
the sale or transfer of all or substantially all of the Company's working
interest in the Prudhoe Bay Unit if the transferee agrees to assume and be
bound by BP's obligation under the Support Agreement in a writing reasonably
satisfactory to the Trustee and if the transferee is an entity having a rating
assigned to outstanding unsecured, unsupported long term debt from Moody's
Investors Service, Inc. of at least A3 or from Standard & Poor's Rating
Services of at least A- or an equivalent rating from at least one nationally-
<PAGE> 15
recognized statistical rating organization (after giving effect to the sale or
transfer to such entity of all or substantially all of the Company's working
interest in the Prudhoe Bay Unit and the assumption by such entity of all of
the Company's obligations under the Conveyance and of all BP's obligations
under the Support Agreement).
THE PRUDHOE BAY UNIT
General
The Prudhoe Bay field (the "Field") is located on the North Slope of
Alaska, 250 miles north of the Arctic Circle and 650 miles north of Anchorage.
The Field extends approximately 12 miles by 27 miles and contains nearly
150,000 productive acres. The Field, which was discovered in 1968 by BP and
others, has been in production since 1977. The Field is the largest producing
oil field in North America. As of December 31, 1996, approximately 9.6
billion STB of oil and condensate had been produced from the Field. Field
development is well advanced with approximately $17 billion gross capital
spent and a total of about 1,700 wells drilled. Other large fields located in
the same area include the Kuparuk, Endicott, and Lisburne fields. Production
from those fields is not included in the Royalty Interest.
Since several oil companies hold acreage within the Field, the Prudhoe
Bay Unit was established to optimize Field development. The Prudhoe Bay Unit
Operating Agreement specifies the allocation of production and costs to
Prudhoe Bay Unit owners. The Company and a subsidiary of the Atlantic
Richfield Company ("Arco") are the two Field operators. Other Field owners
include affiliates of Exxon Corporation ("Exxon"), Mobil Corporation
("Mobil"), Phillips Petroleum Company ("Phillips") and Chevron Corporation
("Chevron").
Geology
The principal hydrocarbon accumulations at Prudhoe Bay are in the Ivishak
sandstone of the Sadlerochit Group at a depth of approximately 8,700 feet
below sea level. The Ivishak is overlain by four minor reservoirs of varying
extent which are designated the Put River, Eileen, Sag River and Shublik
(collectively, "PESS") formations. Underlying the Sadlerochit Group are the
oil-bearing Lisburne and Endicott formations. The net production referred to
herein pertains only to the Ivishak and PESS formations, collectively known as
the Prudhoe Bay (Permo-Triassic) Reservoir, and does not pertain to the
Lisburne and Endicott formations.
The Ivishak sandstone was deposited, commencing some 250 million years
ago, during the Permian and Triassic geologic periods. The sediments in the
Ivishak are composed of sandstones, conglomerate and shales which were
deposited by a massive braided river and delta system that flowed from an
ancient mountain system to the north. Oil was trapped in the Ivishak by a
combination of structural and stratigraphic trapping mechanisms.
Gross reservoir thickness is 550 feet, with a maximum oil column
thickness of 425 feet. The original oil column is bounded on the top by a
gas-oil contact, originally at 8,575 feet below sea level across the main
field, and on the bottom by an oil-water contact at approximately 9,000 feet
below sea level. A layer of heavy oil and tar overlays the oil-water contact
in the main field and has an average thickness of around 40 feet.
<PAGE> 16
Oil Characteristics
The produced oil from the reservoir is a medium grade, low sulfur crude
with an average specific gravity of 27 degrees API. The gas cap composition
is such that, upon surfacing, a liquid hydrocarbon phase, known as condensate,
is formed.
The interests of the Unit holders are based upon oil produced from the
oil rim and condensate produced from the gas cap, but not upon gas production
(which is currently uneconomic) or natural gas liquids production stripped
from gas produced.
Prudhoe Bay Unit Operation and Ownership
Since several companies hold acreage within the Field's limits, a unit
was established to ensure optimum development of the Field. The Prudhoe Bay
Unit, which became effective on April 1, 1977, divided the Field into two
operating areas. The Company is the operator of the Western Operating Area
and Arco Alaska Inc. is the operator of the Eastern Operating Area. Oil and
condensate production comes from both the Western Operating Area and the
Eastern Operating Area.
The Prudhoe Bay Unit Operating Agreement specifies the allocation of
production and costs to the working interest owners. The Prudhoe Bay Unit
Operating Agreement also defines operator responsibilities and voting
requirements and is unusual in its establishment of separate participating
areas for the gas cap and oil rim. Effective December 31, 1995, the Company
acquired the interest of Amerada Hess Corporation of 0.5379191 percent on the
oil rim participating area. Under the terms of the Conveyance, this increase
in the Company's participation is not allocated to the Subject Leases and does
not increase the Trust's Royalty Interest.
The ownership of the Prudhoe Bay Unit by participating area as of
December 31, 1996 is summarized in the following table:
<TABLE>
<CAPTION>
Oil Rim Gas Cap
------- -------
<S> <C> <C> <C>
BP 51.22% (a) 13.84%
Arco 21.87 42.56
Exxon 21.87 42.56
Mobil/Phillips/Chevron 4.44 1.04
Others 0.60 0.00
------- -------
Total 100.00% 100.00%
======= =======
<FN>
- ---------------
(a) The Trust's share of oil production is computed based on BP's
ownership interest of 50.68 percent as of February 28, 1989.
</TABLE>
<PAGE> 17
Historical Production
Production began on June 19, 1977, with the completion of the Trans
Alaska Pipeline System. The pipeline has a capacity of 1.5 million barrels of
oil per day.
As of December 31, 1996, there were about 1,079 producing oil wells, 36
gas reinjection wells, 42 water injection wells and 140 water and miscible gas
injection wells in the Field. In terms of individual well performance, oil
production rates range from 60 to 5,000 barrels of oil per day. Currently,
the average well production rate is about 788 barrels of oil per day.
The Company's share of the hydrocarbon liquids production from the Field
includes oil, condensate and natural gas liquids. Using the production
allocation procedures from the Prudhoe Bay Unit Operating Agreement, the
Field's production and the share of oil and condensate (net of State of Alaska
royalty) allocated to the Subject Leases have been as follow during the
periods indicated:
<TABLE>
<CAPTION>
Oil Condensate
Year -------------------------- -------------------------
Ended Total Subject Total Subject
December 31 Field Leases Field Leases
----------- ----------- ---------- ---------- ----------
(Million STB per day)
<C> <C> <C> <C> <C>
1992 1,050.5 465.9 131.4 15.9
1993 906.8 402.2 150.0 18.2
1994 785.5 348.4 177.5 21.5
1995 659.3 292.4 200.0 24.2
1996 583.1 258.6 187.6 22.7
</TABLE>
The Company estimates that production will decline at an average rate of
approximately 10 percent per year for the next three to five years, and that
the rate of decline will decrease to approximately five percent per year by
the year 2030.
Transportation of Prudhoe Bay Oil
Production from the Field is carried to Pump Station 1, which is the
starting point for the Trans Alaska Pipeline System, through two 34-inch
diameter transit lines, one from each half of the Field. At Pump Station 1,
Alyeska Pipeline Service Company, the pipeline operator, meters the oil and
pumps it south to Valdez where it is either loaded onto marine tankers or
stored temporarily. It takes the oil about six days to make the trip in the
48-inch diameter pipeline.
Various protests of the Trans Alaska Pipeline System tariffs have been
filed by, among others, the State of Alaska over a period of several years.
Proceedings to resolve these protests are ongoing in the Federal Energy
Regulatory Commission, the Alaska Public Utilities Commission and a Court of
Appeal.
<PAGE> 18
Reservoir Management
The Prudhoe Bay Field is a complex, combination-drive reservoir, with
widely varying reservoir properties. Reservoir management involves directing
Field activities and projects to maximize the economic value of Field
reserves.
Several different oil recovery mechanisms are currently active in the
Field, including pressure depletion, gravity drainage/gas cap expansion,
waterflooding and miscible gas flooding. Separate yet integrated reservoir
management strategies have been developed for the areas affected by each of
these recovery processes.
Reserve Estimates
The Company's net proved remaining reserves of oil and condensate in the
Prudhoe Bay Unit as of December 31, 1996 were estimated to be approximately
1,247 million barrels. This current estimate of reserves is based upon
various assumptions, including a reasonable estimate of the allocation of
hydrocarbon liquids between oil and condensate pursuant to the procedures of
the Prudhoe Bay Unit Operating Agreement. Estimates of proved reserves are
inherently imprecise and subjective and are revised over time as additional
data becomes available. Such revisions may often be substantial. The
Company anticipates that net production from current proved reserves allocated
to the Subject Leases will exceed 90,000 barrels per day until the year 2009.
The occurrence of major gas sales could accelerate the time at which the
Company's net production would fall below 90,000 barrels per day, due to the
consequent decline in reservoir pressure. The Company also projects continued
economic production thereafter, at a declining rate, until the year 2030;
however, on the basis of the economic conditions and reserve estimates as of
December 31, 1996, the Per Barrel Royalty will be zero after the year 2017.
The Company's reserve estimates and production assumptions and
projections are predicated upon a reasonable estimate of hydrocarbon
allocation between oil and condensate. Oil and condensate are physically
produced in a commingled stream of hydrocarbon liquids. The allocation of
hydrocarbon liquids between the oil and condensate from the Field is a
theoretical calculation performed in accordance with procedures specified in
the Prudhoe Bay Unit Operating Agreement. Due to the differences in
percentages between oil and condensate, the overall share of oil and
condensate production allocated to the Subject Leases will vary over time
according to the proportions of hydrocarbon liquid being allocated as
condensate or as oil under the Prudhoe Bay Unit Operating Agreement allocation
procedures. Under the terms of an Issues Resolution Agreement entered into by
the Prudhoe Bay Unit owners in October 1990, the allocation procedures have
been adjusted to generally allocate condensate in a manner which approximates
the anticipated decline in the production of oil until an agreed original
condensate reserve of 1.175 billion barrels has been allocated to the working
interest owners.
The reserves attributable to the Trust's Royalty Interest constitute only
a part of the overall reserves allocated to the Subject Leases. The Company
has estimated that the net remaining proved reserves attributable to the Trust
as of December 31, 1996 were 111.1 million barrels of oil and condensate, of
which 102.0 million barrels were proved developed reserves and 9.1 million
barrels were proved undeveloped reserves. Using procedures specified in
Financial Accounting Standards Board Statement of Financial Standards No. 69,
<PAGE> 19
the Company calculated that as of December 31, 1996 production of oil and
condensate from the proved reserves allocated to the Trust will result in
estimated future net revenues to the Trust of $780 million, with a present
value of $412 million. The Company's estimates of proved reserves and the
estimated future net revenues from the Prudhoe Bay Unit have been reviewed by
Miller and Lents, Ltd., independent oil and gas consultants, as set forth in
their report following this section.
There is no precise method of allocating estimates of physical quantities
of reserve volumes between the Company and the Trust, since the Royalty
Interest is not a working interest and the Trust does not own and is not
entitled to receive any specific volume of reserves from the Field. Reserve
volumes attributable to the Trust are estimated by allocating to the Trust its
share of estimated future production from the Field, based on WTI Prices.
The following table shows the net remaining proved reserves of oil and
condensate allocated to the Subject Leases, the net proved reserves allocated
to the Trust, and the WTI Prices on the dates indicated:
<TABLE>
<CAPTION>
Net Proved Reserves
------------------------------- WTI Prices
December 31 Subject Leases(a) Trust(b) Per Barrel
- ----------- ----------------- -------- ----------
(Million STB)
<C> <C> <C> <C>
1992 1,387.9 94.3 $19.50
1993 1,439.9 43.2 14.15
1994 1,395.0 81.0 17.75
1995 1,371.4 81.0 19.58
1996 1,247.0 111.1 25.93
<FN>
- ---------------
(a) Includes proved undeveloped reserves of 448.9 million STB at
December 31, 1992; 243.1 million STB at December 31, 1993; 211.0 million STB
at December 31, 1994; 275.2 million STB at December 31, 1995; and 223.4
million STB at December 31, 1996.
(b) Includes proved undeveloped reserves of 14.9 million STB at December
31, 1992; 0 STB at December 31, 1993 and 1994; 0.8 million STB at December 31,
1995; and 9.1 million STB at December 31, 1996.
</TABLE>
The reserve volumes attributable to the Trust are estimated using an
allocation of reserve volumes based on estimated future production and the
current WTI Price, and assume no future movement in the Consumer Price Index
and no future additions by the Company of proved reserves. The estimated
reserve volumes attributable to the Trust will vary if different estimates of
production, prices and other factors are used. Even if expected reservoir
performance does not change, the estimated reserves, economic life, and future
revenues attributable to the Trust may change significantly in the future.
This may result from changes in the WTI Price or from changes in other
prescribed variables utilized in calculations defined by the Overriding
Royalty Conveyance. See Note 5 of the Notes to Financial Statements in
Item 8.
<PAGE> 20
The Company is under no obligation to make investments in development
projects which would add additional non-proved resources to proved reserves
and cannot make such investments without the concurrence of the Prudhoe Bay
Unit working interest owners. However, several such investments which would
augment Prudhoe Bay projects are already in process. These include additional
drilling, waterflood expansions and miscible injection continuation/expansion
projects. Other possible investments could include expanded gas cycling,
miscible/waterflood infill drilling, miscible injection supply increases to
peripheral areas, heavy oil tar recovery and development of the smaller
reservoirs. While there is no assurance that the Prudhoe Bay Unit working
interest owners will make any such investments they do regularly assess the
technical and economic attractiveness of implementing further projects to
increase Prudhoe Bay Unit proved reserves.
In the event of changes in the Company's current assumptions, oil and
condensate recoveries may be reduced from the current estimates, unless
recovery projects other than those included in the current estimates are
implemented.
<PAGE> 21
INDEPENDENT OIL AND GAS CONSULTANTS' REPORT
MILLER AND LENTS, LTD. MARTIN G. MILLER (1948-1980)
OIL AND GAS CONSULTANTS MAX R LENTS
TWENTY-SEVENTH FLOOR KENNETH B. FORD
1100 LOUISIANA P. G . VON TUNGELN
HOUSTON, TEXAS 77002-5216 JAMES C. PEARSON
S. J. STIEBER
TELEPHONE 713 651-9455 T. LESLIE REEVES
TELEFAX 713 654-9914 LARRY M. GRING
JAMES A. COLE
February 14, 1997 K. R. CHEATHAM
J. L. POWELL
WILLIAM P KOZA
CHARLES G. GUFFEY
WILLIAM K. KIBLER
KAREN F. LOVING
CHRISTOPHER A. BUTTA
GREGORY W. ARMES
GARY B. KNAPP
LUCY B. KING
CARL T. DISMUKE
The Bank of New York
Trustee, BP Prudhoe Bay Royalty Trust
101 Barclay Street 21 W
New York, New York 10286
Re: Estimates of Proved Reserves, Future Production Rates,
and Future Net Revenues for the BP Prudhoe Bay Royalty
Trust As of December 31, 1996
Gentlemen:
This letter report is a summary of investigations performed in accordance
with our engagement by you as described in Section 4.8(d) of the Overriding
Royalty Conveyance dated February 27, 1989, between BP Exploration (Alaska)
Inc., and The Standard Oil Company. The investigations included reviews of
the estimates of Proved Reserves and production rate forecasts of oil and
condensate made by BP Exploration (Alaska) Inc. attributable to the BP Prudhoe
Bay Royalty Trust as of December 31, 1996. Additionally, we reviewed
calculations of the resulting Estimated Future Net Revenues and Present Value
of Estimated Future Net Revenues attributable to the BP Prudhoe Bay Royalty
Trust.
The estimates and calculations reviewed are summarized in the report
prepared by BP Exploration (Alaska) Inc. and transmitted with a cover letter
dated February 7, 1997, addressed to Ms. Marie Trimboli of The Bank of New
York and signed by Mr. David K. Woodward. Reviews were also performed by
Miller and Lents, Ltd. during this year or in previous years of (1) the
procedures for estimating and documenting Proved Reserves, (2) the estimates
of in-place reservoir volumes, (3) the estimates of recovery factors and
production profiles for the various areas, pay zones, projects, and recovery
processes that are included in the estimate of Proved Reserves, (4) the
production strategy and procedures for implementing that strategy, (5) the
sufficiency of the data available for making estimates of Proved Reserves and
<PAGE> 22
production profiles, and (6) pertinent provisions of the Prudhoe Bay Unit
Operating Agreement, the Issues Resolution Agreement, the Overriding Royalty
Conveyance, the Trust Conveyance, the BP Prudhoe Bay Royalty Trust Agreement,
and other related documents referenced in the Form F-3 Registration Statement
filed with the Securities and Exchange Commission on August 7, 1989, by BP
Exploration (Alaska) Inc.
Proved Reserves were estimated by BP Exploration (Alaska) Inc. in
accordance with the definitions contained in Securities and Exchange
Commission Regulation S-X, Rule 4-10(a). Estimated Future Net Revenues and
Present Value of Estimated Future Net Revenues are not intended and should not
be interpreted to represent fair market values for the estimated reserves.
The Prudhoe Bay (Permo-Triassic) Reservoir is defined in the Prudhoe Bay
Unit Operating Agreement. The Prudhoe Bay Unit is an oil and gas unit
situated on the North Slope of Alaska. The BP Prudhoe Bay Royalty Trust is
entitled to a royalty payment on 16.4246 percent of the first 90,000 barrels
of the actual average daily net production of oil and condensate for each
calendar quarter from the BP Exploration (Alaska) Inc. working interest as
defined in the Overriding Royalty Conveyance. The payment amount depends upon
the Per Barrel Royalty which in turn depends upon the West Texas Intermediate
Price, the Chargeable Costs, the Cost Adjustment Factor, and Production Taxes,
all of which are defined in the Overriding Royalty Conveyance. "Barrel" as
used herein means Stock Tank Barrel as defined in the Overriding Royalty
Conveyance.
Our reviews do not constitute independent estimates of the reserves and
annual production rate forecasts for the areas, pay zones, projects, and
recovery processes examined. We relied upon the accuracy and completeness of
information provided by BP Exploration (Alaska) Inc. with respect to pertinent
ownership interests and various other historical, accounting, engineering, and
geological data.
As a result of our cumulative reviews, based on the foregoing, we conclude
that:
1. A large body of basic data and detailed analyses are available and
were used in making the estimates. In our judgment, the quantity and
quality of currently available data on reservoir boundaries, original
fluid contacts, and reservoir rock and fluid properties are sufficient
to indicate that any future revisions to the estimates of total
original in-place volumes should be minor. Furthermore, the data and
analyses on recovery factors and future production rates are
sufficient to support the Proved Reserves estimates.
2. The methods and procedures employed to accumulate and evaluate the
necessary information and to estimate, document, and reconcile
reserves, annual production rate forecasts, and future net revenues
are effective and are in accordance with generally accepted geological
and engineering practice in the petroleum industry.
3. Based on our limited independent tests of the computations of
reserves, production flowstreams, and future net revenues, such
computations were performed in accordance with the methods and
procedures described to us.
4. The estimated net remaining Proved Reserves attributable to the BP
Prudhoe Bay Royalty Trust as of December 31, 1996, of 111.1 million
<PAGE> 23
barrels of oil and condensate are, in the aggregate, reasonable. Of
the 111.1 million barrels of total Proved Reserves, 102.0 million
barrels are Proved Developed Reserves, and 9.1 million barrels are
Proved Undeveloped Reserves.
5. Utilizing the specified procedures outlined in Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 69, BP
Exploration (Alaska) Inc. calculated that as of December 31, 1996,
production of the Proved Reserves will result in Estimated Future Net
Revenues of $780 million and Present Value of Estimated Future Net
Revenues of $412 million to the BP Prudhoe Bay Royalty Trust. These
estimates are reasonable.
6. BP Exploration (Alaska) Inc. estimated that, as of December 31, 1996,
739.2 million barrels of Proved Reserves have been added to Current
Reserves. This estimate is reasonable. Current Reserves are defined
in the Overriding Royalty Conveyance as net Proved Reserves of 2,035.6
million barrels as of December 31, 1987. Net additions to Proved
Reserves after December 31, 1987 affect the Chargeable Costs that are
used to calculate the Per Barrel Royalty paid to the BP Prudhoe Bay
Royalty Trust.
7. The BP Exploration (Alaska) Inc. projection that its net production of
oil and condensate from Proved Reserves will continue at an average
rate exceeding 90,000 barrels per day until the year 2009 is
reasonable. As long as the Per Barrel Royalty has a positive value,
average daily production attributable to the BP Prudhoe Bay Royalty
Trust will remain constant until the net production falls below 90,000
barrels per day; thereafter, production attributable to the BP Prudhoe
Bay Royalty Trust will decline with the BP Exploration (Alaska) Inc.
production. However, the Per Barrel Royalty will not have a positive
value if the West Texas Intermediate Price is less than the sum of the
per barrel Chargeable Costs and per barrel Production Taxes,
appropriately adjusted in accordance with the Overriding Royalty
Conveyance. Under such circumstances, average daily production
attributable to the BP Prudhoe Bay Royalty Trust will have no value
and therefore will not contribute to the reserves regardless of BP
Exploration (Alaska) Inc.'s net production level.
8. Based on the West Texas Intermediate Price of $25.93 per barrel on
December 31, 1996, current Production Taxes, and the Chargeable Costs
adjusted as prescribed by the Overriding Royalty Conveyance, the
projection that royalty payments will continue through the year 2017
is reasonable. BP Exploration (Alaska) Inc. expects continued
economic production at a declining rate through the year 2030;
however, for the economic conditions and production forecast as of
December 31, 1996, the Per Barrel Royalty will be zero following the
year 2017. Therefore, no reserves are currently attributed to the BP
Prudhoe Bay Royalty Trust after that date.
9. Even if expected reservoir performance does not change, the estimated
reserves, economic life, and future revenues attributable to the BP
Prudhoe Bay Royalty Trust may change significantly in the future.
This may result from changes in the West Texas Intermediate Price or
from changes in other prescribed variables utilized in calculations
defined by the Overriding Royalty Conveyance.
<PAGE> 24
Estimates of ultimate and remaining reserves and production scheduling
depend upon assumptions regarding expansion or implementation of alternative
projects or development programs and upon strategies for production
optimization. BP Exploration (Alaska) Inc. has continual reservoir
management, surveillance, and planning efforts dedicated to (1) gathering new
information, (2) improving the accuracy of its reserves and production
capacity estimates, (3) recognizing and exploiting new opportunities, (4)
anticipating potential problems and taking corrective actions, and (5)
identifying, selecting, and implementing optimum recovery program and cost
reduction alternatives. Given this significant effort and ever-changing
economic conditions, estimates of reserves and production profiles will change
periodically.
The current estimate of Proved Reserves includes only those projects or
development programs that are deemed reasonably certain to be implemented,
given current economic and regulatory conditions. Future projects,
development programs, or operating strategies different from those assumed in
the current estimates may change future estimates and affect recoveries.
However, because several complementary and alternative projects are being
considered for recovery of the remaining oil in the reservoir, a decision not
to implement a currently planned project may allow scope expansion or
implementation of another project, thereby increasing the overall likelihood
of recovering the reserves.
Future production rates will be controlled by facilities limitations and
upsets, well downtime, and the effectiveness of programs to optimize
production and costs. BP Exploration (Alaska) Inc. currently expects
continued economic production from the reservoir at a declining rate through
the year 2030. Additional drilling, workovers, facilities modifications, new
recovery projects, and programs for production enhancement and optimization
are expected to mitigate but not eliminate the decline in gross oil and
condensate production capacity.
In making its future production rate forecasts, BP Exploration (Alaska)
Inc. provided for normal downtime and planned facilities upsets. Although
allowances for unplanned upsets are also considered in the estimates, the
studies do not provide for any impediments to crude oil production as a
consequence of major disruptions.
Under current economic conditions, gas from the Alaskan North Slope,
except for minor volumes, cannot be marketed commercially. Oil and condensate
recoveries are expected to be greater as a result of continued reinjection of
produced gas than the recoveries would be if major volumes of produced gas
were being sold. No major gas sale is assumed in the current estimates. If
major gas sales are determined to be economically viable in the future, BP
Exploration (Alaska) Inc. estimates that such sales would not actually
commence until eight to ten years after such a determination. In the event
that major gas sales are initiated, ultimate oil and condensate recoveries may
be reduced from the current estimates unless recovery projects other than
those included in the current estimates are implemented.
Large volumes of natural gas liquids are likely to be produced and
marketed in the future whether or not major gas sales become viable. Natural
gas liquids reserves are not included in the estimates cited herein. The BP
Prudhoe Bay Royalty Trust is not entitled to royalty payments from production
or sales of natural gas or natural gas liquids.
<PAGE> 25
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on
accepted standards of professional investigation but are subject to those
generally recognized uncertainties associated with interpretation of
geological, geophysical, and engineering information. Government policies and
market conditions different from those reflected in this study or disruption
of existing transportation routes or facilities may cause the total quantity
of oil or condensate to be recovered, actual production rates, prices
received, or operating and capital costs to vary from those reviewed in this
report.
Miller and Lents, Ltd., is an independent oil and gas consulting firm.
None of the principals of this firm have any direct financial interests in BP
Exploration (Alaska) Inc. or its parent or any related companies or in the BP
Prudhoe Bay Royalty Trust. Our fee is not contingent upon the results of our
work or report, and we have not performed other services for BP Exploration
(Alaska) Inc. or the BP Prudhoe Bay Royalty Trust that would affect our
objectivity.
Very truly yours,
MILLER AND LENTS, LTD.
[STATE OF TEXAS
By /s/ William P. Koza *
---------------------- WILLIAM P. KOZA
William P. Koza 58894
Vice President REGISTERED
WPK/hsd PROFESSIONAL
ENGINEER]
<PAGE> 26
INDUSTRY CONDITIONS
The production of oil and gas in Alaska is affected by many state and
federal regulations with respect to allowable rates of production, marketing,
environmental matters and pricing. Future regulations could change allowable
rates of production or the manner in which oil and gas operations may be
lawfully conducted.
In general, the Company's oil and gas activities are subject to laws and
regulations relating to environmental quality and pollution control. The
Company believes that the equipment and facilities currently being used in its
operations generally comply with the applicable legislation and regulations.
During the past few years, numerous environmental laws and regulations have
taken effect at the federal, state and local levels. Oil and gas operations
are subject to extensive federal and state regulation and to interruption or
termination by governmental authorities due to ecological and other
considerations. Although the existence of legislation and regulation has had
no material adverse effect on the Company's current method of operations,
existing and future legislation and regulations could result in the Company
experiencing delays and uncertainties in commencing projects. The ultimate
impact of such legislation and regulations cannot generally be predicted.
Oil prices are subject to international supply and demand. Political
developments (especially in the Middle East) and the outcome of meetings of
the Organization of Petroleum Exporting Countries can particularly affect
world oil supply and oil prices.
CERTAIN TAX CONSIDERATIONS
The following is a summary of the principal tax consequences to Unit
holders resulting from the ownership and disposition of Units. The laws and
regulations affecting these matters are complex, and are subject to change by
future legislation or regulations or new interpretations by the Internal
Revenue Service, state taxing authorities or the courts. In addition, there
may be differences of opinion as to the applicability or interpretation of
present tax laws and regulations. The Company and the Trust have not requested
any rulings from the Internal Revenue Service with respect to the tax
treatment of the Units, and no assurance can be given that the Internal
Revenue Service would concur with the statements below.
Unit holders are urged to consult their tax advisors regarding the
effects on their specific tax situations of owning and disposing of Units.
Federal Income Tax
Classification of the Trust
The following discussion assumes that the Trust is properly classified as
a grantor trust under current law and is not an association taxable as a
corporation.
General Features of Grantor Trust Taxation
A grantor trust is not subject to tax, and its beneficiaries (the Unit
holders in the case of the Trust) are considered for tax purposes to own the
<PAGE> 27
assets of the trust directly. The Trust pays no federal income tax but files
an information return reporting all items of income or deduction. If a court
were to hold that the Trust is an association taxable as a corporation, the
Trust would incur substantial income tax liabilities in addition to its other
expenses.
Taxation of Unit Holders
In computing his federal income tax liability, each Unit holder is
required to take into account his share of all items of Trust income, gain,
loss, deduction, credit and tax preference, based on the Unit holder s method
of accounting. Consequently, it is possible that in any year a Unit holder s
share of the taxable income of the Trust may exceed the cash actually
distributed to him in that year. For example, if the Trustee should establish
a reserve or borrow money to satisfy debts and liabilities of the Trust income
used to establish the reserve or to repay the loan must be reported by the
Unit holder, even though the income is not distributed to the Unit holder.
The Trust makes quarterly distributions to Unit holders of record on each
Quarterly Record Date. The terms of the Trust Agreement seek to assure to the
extent practicable that income, expenses and deductions attributable to each
distributions are reportable by the Unit holder who receives the distribution.
The Trust allocates income and deductions to Unit holders based on record
ownership at Quarterly Record Dates. It is not known whether the Internal
Revenue Service will accept the allocation based on this method.
Depletion Deductions
The owner of an economic interest in producing oil and gas properties is
entitled to deduct an allowance for the greater of cost depletion or (if
otherwise allowable) percentage depletion on each such property. A Unit
holder's deduction for cost depletion in any year is calculated by multiplying
the holder's adjusted tax basis in his Units (generally his cost less prior
depletion deductions) by Royalty Production during the year and dividing that
product by the sum of Royalty Production during the year and estimated
remaining Royalty Production as of the end of the year. The allowance for
percentage depletion generally does not apply to interests in proven oil and
gas properties that were transferred after December 31, 1974 and prior to
October 12, 1990. The Omnibus Budget Reconciliation Act of 1990 repealed this
rule for transfers occurring on or after October 12, 1990. Unit holders who
acquired their Units on or after that date may be permitted to deduct an
allowance for percentage depletion if such deduction would otherwise exceed
the allowable deduction for cost depletion. In order to take percentage
depletion, a Unit holder must qualify for the independent producer exemption
contained in section 613A(c) of the Internal Revenue Code of 1986. Percentage
depletion is based on the Unit holder s gross income from the Trust rather
than on his adjusted basis in his Units. Any deduction for cost depletion or
percentage depletion allowable to a Unit holder reduces his adjusted basis in
his Units for purposes of computing subsequent depletion or gain or loss on
any subsequent disposition of Units.
Unit holders must maintain records of their adjusted basis in their
Units, make adjustments for depletion deductions to such basis, and use the
adjusted basis for the computation of gain or loss on the disposition of the
Units.
<PAGE> 28
Taxation of Foreign Unit Holders
Generally, a holder of Units who is a nonresident alien individual or
which is a foreign corporation (a Foreign Taxpayer ) is subject to tax of on
the gross income produced by the Royalty Interest at a rate equal to 30
percent (or at a lower treaty rate, if applicable). This tax is withheld by
the Trustee and remitted directly to the United States Treasury. A Foreign
Taxpayer may elect to treat the income from the Royalty Interest as
effectively connected with the conduct of a United States trade or business
under Internal Revenue Code section 871 or section 882, or pursuant to any
similar provisions of applicable treaties. If a Foreign Taxpayer makes this
election, it is entitled to claim all deductions with respect to such income,
but a United States federal income tax return must be filed to claim such
deductions. This election once made is irrevocable unless an applicable
treaty allows the election to be made annually.
Section 897 of the Internal Revenue Code and the Treasury Regulations
thereunder treat the Trust as if it were a United States real property holding
corporation. Foreign holders owning more than five percent of the
outstanding Units are subject to United States federal income tax on the gain
on the disposition of their Units. Foreign Unit holders owning less than five
percent of the outstanding Units are not subject to United States federal
income tax on the gain on the disposition of their Units, unless they have
elected under Internal Revenue Code section 871 or section 872 to treat the
income from the Royalty Interest as effectively connected with the conduct of
a United States trade or business.
If a Foreign person is a corporation which made an election under
Internal Revenue Code section 882(d), the corporation would also be subject to
a 30 percent tax under Internal Revenue Code section 884. This tax is imposed
on U.S. branch profits of a foreign corporation that are not reinvested in the
U.S. trade or business. This tax is in addition to the tax on effectively
connected income. The branch profits tax may be either reduced or eliminated
by treaty.
Sale of Units
Generally, a Unit holder will realize gain or loss on the sale or
exchange of his Units measured by the difference between the amount realized
on the sale or exchange and his adjusted basis for such Units. Gain on the
sale of Units by a holder that is not a dealer with respect to such Units will
generally be treated as capital gain. However, pursuant to Internal Revenue
Code section 1254, certain depletion deductions claimed with respect to the
Units must be recaptured as ordinary income upon sale or disposition of such
interest.
Backup Withholding
A payor must withhold 31 percent of any reportable payment if the payee
fails to furnish his taxpayer identification number ("TIN") to the payor in
the required manner or if the Secretary of the Treasury notifies the payor
that the TIN furnished by the payee is incorrect. Unit holders will avoid
backup withholding by furnishing their correct TINs to the Trustee in the form
required by law.
<PAGE> 29
State Income Taxes
Unit holders may be required to report their share of income from the
Trust to their state of residence or commercial domicile. However, only
corporate Unit holders will need to report their share of income to the State
of Alaska. Alaska does not impose an income tax on individuals or estates and
trusts. All Trust income is Alaska source income to corporate Unit holders and
should be reported accordingly.
ITEM 2. PROPERTIES
Reference is made to Item 1 for the information required by this item.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
Not applicable.
<PAGE> 30
PART II
ITEM 5. MARKET FOR THE UNITS AND RELATED UNIT HOLDER MATTERS
The Units are listed on the New York Stock Exchange (ticker symbol BPT).
The following table shows the high and low sales prices of the Units in New
York Stock Exchange composite transactions, and the cash distributions per
Unit, for each calendar quarter in the two years ended December 31, 1996.
<TABLE>
<CAPTION>
Distributions
High Low Per Unit
------- ------- -------------
<S> <C> <C> <C>
1995:
- -----
First Quarter $18 $15 7/8 $0.389
Second Quarter 19 16 3/8 0.445
Third Quarter 17 1/8 15 5/8 0.375
Fourth Quarter 16 1/4 13 0.386
1996:
- -----
First Quarter 16 1/2 14 3/8 0.439
Second Quarter 17 14 1/4 0.533
Third Quarter 17 3/4 14 7/8 0.582
Fourth Quarter 17 7/8 16 1/4 0.702
</TABLE>
As of March 25, 1997, 21,400,000 Units outstanding and were held by 1,338
holders of record.
Future payments of cash distributions are dependent on such factors as
the prevailing WTI Price, the relationship of the rate of change in the WTI
Price to the rate of change in the Consumer Price Index, the Chargeable Costs,
the rates of Production Taxes prevailing from time to time, and the actual
production from the Prudhoe Bay Unit.
<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The following table presents in summary form selected financial information
regarding the Trust.
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(In thousands, except per Unit amounts)
<S> <C> <C> <C> <C> <C>
Royalty revenues $ 42,263 $ 34,886 $ 32,401 $ 51,727 $ 65,250
Trust administration
expenses 750 688 658 554 413
---------- ---------- ---------- ---------- ----------
Cash earnings $ 41,513 $ 34,198 $ 31,743 $ 51,173 $ 64,837
========== ========== ========== ========== ==========
Cash distributions $ 41,513 $ 34,198 $ 31,743 $ 51,173 $ 64,837
========== ========== ========== ========== ==========
Cash distributions
per unit $ 1.940 $ 1.598 $ 1.483 $ 2.391 $ 3.030
========== ========== ========== ========== ==========
Units outstanding 21,400,000 21,400,000 21,400,000 21,400,000 21,400,000
========== ========== ========== ========== ==========
</TABLE>
ITEM 7. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Trust is a passive entity, and the Trustee's activities are limited
to collecting and distributing the revenues from the Royalty Interest and
paying liabilities and expenses of the Trust. The Trust has no source of
liquidity and no capital resources other than the revenue attributable to the
Royalty Interest that it receives from time to time. See generally the
discussion under "THE ROYALTY INTEREST" in Item 1 for a description of the
calculation of the Per Barrel Royalty, and the discussion under "THE PRUDHOE
BAY UNIT - Reserve Estimates" and "INDEPENDENT OIL AND GAS CONSULTANTS'
REPORT" in Item 1 for information concerning the estimated future net revenues
of the Trust.
Results of Operations
Royalty revenues are generally received on the Quarterly Record Date
(generally the fifteenth day of the month) following the end of the calendar
quarter in which the related Royalty Production occurred. The Trustee, to the
extent possible, pays all expenses of the Trust for each quarter on the
Quarterly Record Date on which the revenues for the quarter are received.
Both revenues and Trust expenses are recorded on a cash basis and, as a
result, distributions to Unit holders in the years ended December 31, 1996,
1995 and 1994 are attributable to the Company's operations during the twelve-
month periods ended September 30, 1996, 1995 and 1994, respectively.
<PAGE> 32
As long as the Company's average daily net production from the Prudhoe
Bay Unit exceeds 90,000 barrels, which the Company currently projects will
continue until the year 2009, the only factors affecting the Trust's revenues
and distributions to Unit holders are changes in WTI Prices, scheduled annual
increases in Chargeable Costs, changes in the Consumer Price Index, changes in
Production Taxes and changes in the expenses of the Trust.
1995 compared to 1994
Both royalty revenues and cash distributions increased by approximately
7.7 percent from 1994 to 1995, reflecting generally higher WTI Prices during
1995 which were not fully offset by relatively modest increases in Adjusted
Chargeable Costs and Production Taxes. See "THE ROYALTY INTEREST - Per Barrel
Royalty Calculations" in Item 1. Although trust administration expenses
increased by approximately 4.6 percent, from $658,000 in 1994 to $688,000 in
1995, they remained constant in relation to royalty revenues, at approximately
2 percent in each of 1994 and 1995.
1996 compared to 1995
Royalty revenues and cash distributions increased by approximately 21.2%
and 21.4%, respectively, from 1995 to 1996, reflecting continued increases in
WTI Prices that outpaced increases in Adjusted Chargeable Costs and Production
Taxes. Trust administration expenses increased by 9.0% from 1995 to 1996, but
fell to 1.8% in relation to royalty revenues in 1996.
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BP PRUDHOE BAY ROYALTY TRUST
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 34
Statement of Assets, Liabilities and Trust Corpus
As of December 31, 1996 and 1995 35
Statements of Cash Earnings and Distributions for
the years ended December 31, 1996, 1995 and 1994 36
Statements of Changes in Trust Corpus for the years
ended December 31, 1996, 1995 and 1994 37
Notes to Financial Statements 38
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Trustee and Holders of Trust Units of
BP Prudhoe Bay Royalty Trust:
We have audited the accompanying statements of assets, liabilities and
Trust Corpus of BP Prudhoe Bay Royalty Trust as of December 31, 1996 and 1995,
and the related statements of cash earnings and distributions and changes in
Trust Corpus for each of the years in the three-year period ended December 31,
1996. These financial statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
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 the Trustee, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 2 to the financial statements, these financial
statements have been prepared on a modified basis of cash receipts and
disbursements, which is a comprehensive basis of accounting other than
generally accepted accounting principles.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the assets, liabilities and Trust Corpus of
BP Prudhoe Bay Royalty Trust as of December 31, 1996 and 1995, and its cash
earnings and distributions and its changes in Trust Corpus for each of the
years in the three-year period ended December 31, 1996, on the basis of
accounting described in note 2.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
<PAGE> 35
<TABLE>
BP PRUDHOE BAY ROYALTY TRUST
Statements of Assets, Liabilities and Trust Corpus
December 31, 1996 and 1995
(In thousands, except unit data)
<CAPTION>
Assets 1996 1995
---- ----
<S> <C> <C>
Royalty Interest (notes 1 and 2) $ 535,000 535,000
Less: accumulated amortization (265,970) (230,330)
--------- ---------
Total assets $ 269,030 304,670
========= =========
Liabilities and Trust Corpus
Accrued expenses $ 90 126
Trust Corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units issued
and outstanding) 268,940 304,544
--------- ---------
Total liabilities and Trust Corpus $ 269,030 304,670
========= =========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 36
<TABLE>
BP PRUDHOE BAY ROYALTY TRUST
Statements of Cash Earnings and Distributions
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands, except unit data)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Royalty revenues $ 42,263 34,886 32,401
Trust administrative expenses 750 688 658
---------- ---------- ----------
Cash earnings $ 41,513 34,198 31,743
========== ========== ==========
Cash distributions $ 41,513 34,198 31,743
========== ========== ==========
Cash distributions per unit $ 1.940 1.598 1.483
========== ========== ==========
Units outstanding 21,400,000 21,400,000 21,400,000
========== ========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 37
<TABLE>
BP PRUDHOE BAY ROYALTY TRUST
Statements of Changes in Trust Corpus
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands)
<CAPTION>
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
Trust Corpus at beginning of year $ 304,544 340,193 407,057
Cash earnings 41,513 34,198 31,743
Decrease (increase) in
accrued Trust expenses 36 (8) (34)
Cash distributions (41,513) (34,198) (31,743)
Amortization of Royalty Interest (35,640) (35,641) (66,830)
---------- -------- --------
Trust Corpus at end of year $ 268,940 304,544 340,193
========== ======== ========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE> 38
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(1) FORMATION OF THE TRUST AND ORGANIZATION
BP Prudhoe Bay Royalty Trust (the "Trust") was formed pursuant to a
Trust Agreement dated February 28, 1989 among The Standard Oil Company
("Standard Oil"), BP Exploration (Alaska) Inc. (the "Company"), The Bank
of New York and a co-trustee (collectively, the "Trustee"). Standard Oil
and the Company are indirect wholly owned subsidiaries of the British
Petroleum Company p.l.c. ("BP").
On February 28, 1989, Standard Oil conveyed an overriding royalty
interest (the "Royalty Interest") to the Trust. The Trust was formed for
the sole purpose of owning and administering the Royalty Interest. The
Royalty Interest represents the right to receive, effective February 28,
1989, a per barrel royalty (the "Per Barrel Royalty") on 16.4246% of the
lesser of (a) the first 90,000 barrels of the average actual daily net
production of oil and condensate per quarter or (b) the average actual
daily net production of oil and condensate per quarter from the Company's
working interest in the Prudhoe Bay Field (the "Field") as of
February 28, 1989, located on the North Slope of Alaska. Trust Unit
holders will remain subject at all times to the risk that production will
be interrupted or discontinued or fall, on average, below 90,000 barrels
per day in any quarter. BP has guaranteed the performance by the Company
of its payment obligations with respect to the Royalty Interest.
The co-trustees of the Trust are The Bank of New York, a New York
corporation authorized to do a banking business, and The Bank of New York
(Delaware), a Delaware banking corporation. The Bank of New York
(Delaware) serves as co-trustee in order to satisfy certain requirements
of the Delaware Trust Act. The Bank of New York alone is able to
exercise the rights and powers granted to the Trustee in the Trust
Agreement.
The Per Barrel Royalty in effect for any day is equal to the price
of West Texas Intermediate crude oil (the "WTI Price") for that day less
scheduled Chargeable Costs (adjusted in certain situations for inflation)
and Production Taxes (based on statutory rates then in existence). For
years subsequent to 2001, Chargeable Costs will be reduced up to a
maximum amount of $1.20 per barrel in each year if additions to the
Field's proved reserved do not meet certain specific levels.
The Trust is passive, with the Trustee having only such powers as
are necessary for the collection and distribution of revenues, the
payment of Trust liabilities and the protection of the Royalty Interest.
The Trustee, subject to certain conditions, is obligated to establish
cash reserves and borrow funds to pay liabilities of the Trust when they
become due. The Trustee may sell Trust properties only (a) as authorized
by a vote of the Trust Unit holders, (b) when necessary to provide for
the payment of specific liabilities of the Trust then due (subject to
certain conditions) or (c) upon termination of the Trust. Each Trust
Unit issued and outstanding represents an equal undivided share of
beneficial interest in the Trust. Royalty payments are received by the
<PAGE> 39
Trust and distributed to Trust Unit holders, net of Trust expenses, in
the month succeeding the end of each calendar quarter. The Trust will
terminate upon the first to occur of the following events:
(a) On or prior to December 31, 2010: upon a vote of Trust Unit holders
of not less than 70% of the outstanding Trust Units.
(b) After December 31, 2010: (i) upon a vote of Trust Unit holders of
not less than 60% of the outstanding Trust Units, or (ii) at such
time the net revenues from the Royalty Interest for two successive
years commencing after 2010 are less than $1,000,000 per year
(unless the net revenues during such period are materially and
adversely affected by certain events).
(2) BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on a modified
cash basis and reflect the Trust's assets, liabilities and Trust Corpus
and the earnings and distributions as follows:
(a) Revenues are recorded when received (generally within 15 days of the
end of the preceding quarter) and distributions to Trust Unit
holders are recorded when paid.
(b) Trust expenses (which include accounting, engineering, legal, and
other professional fees, trustees' fees and out-of-pocket expenses)
are recorded when incurred.
(c) Amortization of the Royalty Interest is calculated based on the
units of production attributable to the Trust over the production of
estimated proved reserves attributable to the Trust at the beginning
of the fiscal year (approximately 80,991,000, 80,991,000 and
43,193,000 barrels of estimated proved reserves were used to
calculate the amortization of the Royalty Interest for the years
ended December 31, 1996, 1995 and 1994, respectively). Such
amortization is charged directly to the Trust Corpus, and does not
affect cash earnings. The rate for amortization per net equivalent
barrel of oil was $6.61, $6.61 and $12.39 for the years ended
December 31, 1996, 1995 and 1994, respectively. The remaining
unamortized balance of the net overriding Royalty Interest at
December 31, 1996 is not necessarily indicative of the fair market
value of the interest held by the Trust.
While these statements differ from financial statements prepared in
accordance with generally accepted accounting principles, the cash basis
of reporting revenues and distributions is considered to be the most
meaningful because quarterly distributions to the Unit holders are based
on net cash receipts.
The conveyance of the Royalty Interest by Standard Oil to the Trust
was accounted for as a purchase transaction. On February 28, 1989,
Standard Oil sold 13,360,000 Trust Units to a group of institutional
investors for $334 million in a private placement. For financial
reporting purposes, the Trust's management valued the remaining Trust
Units owned by Standard Oil (8,040,000 units) at a per unit value
equivalent to the amount paid by the investors in the private placement.
<PAGE> 40
Estimates and assumptions are required to be made regarding assets,
liabilities and changes in Trust Corpus resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these
estimates could cause actual results to differ.
(3) INCOME TAXES
The Trust files its federal tax return as a grantor trust subject to
the provisions of subpart E of Part I of Subchapter J of the Internal
Revenue Code of 1986, as amended, rather than as an association taxable
as a corporation. The Unit holders are treated as the owners of Trust
income and Corpus, and the entire taxable income of the Trust will be
reported by the Unit holders on their respective tax returns.
If the Trust were determined to be an association taxable as a
corporation, it would be treated as an entity taxable as a corporation on
the taxable income from the Royalty Interest, the Trust Unit holders
would be treated as shareholders, and distributions to Trust Unit holders
would not be deductible in computing the Trust's tax liability as an
association.
(4) SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
A summary of selected quarterly financial information for the years
ended December 31, 1996 and 1995 is as follows (in thousands, except unit
data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
Royalty revenues $8,411 9,610 11,701 12,541
Trust administrative expenses 151 213 299 87
------ ------ ------ ------
Cash earnings 8,260 9,397 11,402 12,454
Cash distributions 8,260 9,397 11,402 12,454
Cash distributions per unit 0.386 0.439 0.533 0.582
1995
Royalty revenues $8,478 8,584 9,698 8,126
Trust administrative expenses 141 267 185 95
------ ------ ------ ------
Cash earnings 8,337 8,317 9,513 8,031
Cash distributions 8,337 8,317 9,513 8,031
Cash distributions per unit 0.390 0.389 0.445 0.375
</TABLE>
(5) SUPPLEMENTAL RESERVE INFORMATION AND STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOW RELATING TO PROVED RESERVES (UNAUDITED)
Pursuant to Statement of Financial Accounting Standards No. 69 -
"Disclosures About Oil and Gas Producing Activities" ("FASB 69"), the
Trust is required to include in its financial statements supplementary
information regarding estimates of quantities of proved reserves
<PAGE> 41
attributable to the Trust and future net cash flows.
Estimates of proved reserves are inherently imprecise and subjective
and are revised over time as additional data becomes available. Such
revisions may often be substantial. Information regarding estimates of
proved reserves attributable to the combined interests of the Company and
the Trust were based on Company-prepared reserve estimates. The
Company's reserve estimates are believed to be reasonable and consistent
with presently known physical data concerning the size and character of
the Field.
There is no precise method of allocating estimates of physical
quantities of reserve volumes between the Company and the Trust, since
the Royalty Interest is not a working interest and the Trust does not own
and is not entitled to receive any specific volume of reserves from the
Field. Reserve volumes attributable to the Trust were estimated by
allocating to the Trust its share of estimated future production from the
Field, based on the WTI Price on December 31, 1996 ($25.93 per barrel),
December 31, 1995 ($19.58 per barrel) and December 31, 1994 ($17.75 per
barrel). Because the reserve volumes attributable to the Trust are
estimated using an allocation of reserve volumes based on estimated
future production and on the current WTI Price, a change in the timing of
estimated production or a change in the WTI price will result in a change
in the Trust's estimated reserve volumes. Therefore, the estimated
reserve volumes attributable to the Trust will vary if different
production estimates and prices are used.
In addition to production estimates and prices, reserve volumes
attributable to the Trust are affected by the amount of Chargeable Costs
that will be deducted in determining the Per Barrel Royalty. The Royalty
Interest includes a provision under which, in years subsequent to 2001,
if additions to the Field's proved reserves from January 1, 1988 (after
certain adjustments) do not meet certain specified levels, Chargeable
Costs will be reduced up to a maximum amount of $1.20 per barrel in each
year. Under the provisions of FASB 69, no consideration can be given to
reserves not considered proved at the present time. Accordingly, in
estimating the reserve volumes attributable to the Trust, Chargeable
Costs were reduced by the maximum amount in years subsequent to 1996,
after considering the amount of reserves that have been added to the
Field's proved reserves from January 1, 1988.
Net proved reserves of oil and condensate attributable to the Trust
as of December 31, 1996, 1995 and 1994 based on the Company's latest
reserve estimate at such time, the WTI Prices on December 31, 1996, 1995
and 1994 and a reduction in Chargeable Costs in years subsequent to 1996,
were estimated to be 111, 81 and 81 million barrels, respectively (of
which 102, 80 and 81 million barrels, respectively, are proved
developed).
The standardized measure of discounted future net cash flow relating
to proved reserves disclosure required by FASB 69 assigns monetary
amounts to proved reserves based on current prices. This discounted
future net cash flow should not be construed as the current market value
of the Royalty Interest. A market valuation determination would include,
among other things, anticipated price increases and the value of
additional reserves not considered proved at the present time or reserves
that may be produced after the currently anticipated end of field life.
At December 31, 1996, 1995 and 1994 the standardized measure of
<PAGE> 42
discounted future net cash flow relating to proved reserves attributable
to the Trust (estimated in accordance with the provisions of FASB 69),
based on the WTI Prices on those dates of $25.93, $19.58 and $17.75,
respectively, were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Future net cash flows $ 779,517 331,052 257,080
10% annual discount for
estimated timing of
cash flows (367,217) (128,458) (93,935)
--------- --------- --------
Standardized measure of
discounted future net
cash flow relating to
proved reserves (a) $ 412,300 202,594 163,145
========= ========= ========
<FN>
(a) The standardized measure of discounted future net cash flow relating
to proved reserves, estimated without reducing Chargeable Costs in
years subsequent to 1996, would be $388,249, $202,602 and $154,200
at December 31, 1996, 1995 and 1994, respectively.
</TABLE>
The following are the principal sources of the change in the standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revisions of prior estimates:
Reserve volumes $ 21,565 1,678 28,853
WTI price 278,082 79,833 (115,530)
Chargeable costs - inflation (18,891) (11,791) (3,300)
Production taxes (40,513) (10,279) (17,093)
Other (1,807) (1,504) (827)
-------- -------- ---------
238,436 57,937 123,163
Royalty income received (b) (48,989) (34,803) (31,707)
Accretion of discount 20,259 16,315 6,517
-------- -------- ---------
Net increase during the year $ 209,706 39,449 97,973
======== ======== =========
<PAGE> 43
<FN>
(b) Royalty income received for 1996, 1995 and 1994 includes the royalty
applicable to the period October 1, 1996 through December 31, 1996
($15,138), October 1, 1995 through December 31, 1995 ($8,411) and
October 1, 1994 through December 31, 1994 ($8,478), which was
received by the Trust in January 1997, 1996 and 1995, respectively.
</TABLE>
The changes in quantities of proved oil and condensate were as follows
(thousands of barrels):
<TABLE>
<S> <C>
Estimated net proved reserves of oil
and condensate at December 31, 1994 80,991
Production (5,395)
Change in timing of estimated production 5,395
--------
Estimated net proved reserves of oil
and condensate at December 31, 1995 80,991
Production (5,410)
Change in timing of estimated production 35,485
--------
Estimated net proved reserves of oil
and condensate at December 31, 1996 111,066
========
Proved reserves:
December 31, 1994 80,991
========
December 31, 1995 80,991
========
December 31, 1996 111,066
========
</TABLE>
As of December 31, 1996, the 111.1 million barrels of proved reserves
were comprised of 102.0 million barrels of proved developed reserves and
9.1 million barrels of proved undeveloped reserves.
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Trust has no directors or executive officers. The Trustee has only
such rights and powers as are necessary to achieve the purposes of the Trust.
ITEM 11. EXECUTIVE COMPENSATION
Not applicable.
ITEM 12. UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Unit Ownership of Certain Beneficial Owners.
The following table sets forth information regarding the ownership of
Units by all persons known to the Trustee as of March 26, 1997 to be the
beneficial owners of more than five percent of the Units. Except as noted
below, to the Trustee's knowledge, such owners have sole voting and investment
power for the Units indicated as beneficially owned by them.
<TABLE>
<CAPTION>
Name Amount
And Address And Nature Of Percentage of
Of Beneficial Beneficial Outstanding
Owner Ownership Units
------------- ------------- -------------
<S> <C> <C> <C>
J. Taylor Crandall 1,259,500 (a) 5.9%
Keystone, Inc.
201 Main Street, Suite 3100
Fort Worth, TX 76102
Robert W. Bruce III 1,259,500 (b) 5.9
Robert Bruce Management Co., Inc.
P.O. Box 252
South Salem, NY 10590
Alpine Capital, L.P. 1,189,300 5.6
201 Main Street, Suite 3100
Fort Worth, TX 76102
Algenpar, Inc. 1,189,300 (c) 5.6
201 Main Street, Suite 3100
Fort Worth, TX 76102
<PAGE> 45
<FN>
- ---------------
(a) J. Taylor Crandall has shared voting power and investment power,
solely in his capacity as president and sole stockholder of Algenpar, Inc.,
which is one of two general partners of Alpine Capital, L.P., with respect to
1,189,300 Units, and shared voting power and investment power in his capacity
as a director of The Anne T. and Robert M. Bass Foundation (the "Bass
Foundation") with respect to 70,200 Units beneficially owned by the Bass
Foundation.
(b) Robert W. Bruce III has shared voting power and investment power,
solely in his capacity as one of two general partners of Alpine Capital, L.P.,
with respect to 1,189,300 Units, and shared voting power and investment power
in his capacity as a principal of The Robert Bruce Management Co., Inc., which
has shared investment discretion over 70,200 Units beneficially owned by the
Bass Foundation.
(c) Algenpar, Inc. has shared voting power and investment power with
respect to 1,189,300 Units beneficially owned by Alpine Capital, L.P., solely
in its capacity as one of the general partners thereof.
</TABLE>
Unit Ownership of Management
Neither the Company, Standard Oil, nor BP owns any Units. No Units are
owned by The Bank of New York, as Trustee or in its individual capacity, or by
The Bank of New York (Delaware), as co-trustee or in its individual capacity.
Changes in Control
The Trustee knows of no arrangement, including the pledge of Units, the
operation of which may at a subsequent date result in a change in control of
the Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The following financial statements of the Trust are included in Part II,
Item 8:
Independent Auditors' Report
Statements of Assets, Liabilities and Trust Corpus
as of December 31, 1996 and 1995
Statements of Cash Earnings and Distributions for the years
ended December 31, 1996, 1995, and 1994
Statements of Changes in Trust Corpus for the years
ended December 31, 1996, 1995, and 1994
Notes to Financial Statements
(b) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are
either not applicable, not required or the information is set forth in the
financial statements or notes thereto.
(c) EXHIBITS
4.1 BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 among
The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of
New York, Trustee, and F. James Hutchinson, Co-Trustee.
4.2 Overriding Royalty Conveyance dated February 27, 1989 between BP
Exploration (Alaska) Inc. and The Standard Oil Company.
4.3 Trust Conveyance dated February 28, 1989 between The Standard Oil
Company and BP Prudhoe Bay Royalty Trust.
4.4 Support Agreement dated as of February 28, 1989 among The British
Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The standard
Oil Company and BP Prudhoe Bay Royalty Trust.
27 Financial Data Schedule
(d) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission by the Trust during the quarter ended December 31, 1996.
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BP PRUDHOE BAY ROYALTY TRUST
THE BANK OF NEW YORK, as Trustee
By: /s/ Marie Trimboli
----------------------------
Marie Trimboli
Assistant Treasurer
March 27, 1997
The Registrant is a trust and has no officers, directors, or persons
performing similar functions. No additional signatures are available and none
have been provided.
<PAGE> 48
INDEX TO EXHIBITS
Exhibit Exhibit
No. Description
------- -----------
4.1 BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989
among The Standard Oil Company, BP Exploration (Alaska) Inc., The
Bank of New York, Trustee, and F. James Hutchinson, Co-Trustee.
Filed herewith.
4.2 Overriding Royalty Conveyance dated February 27, 1989 between BP
Exploration (Alaska) Inc. and The Standard Oil Company. Filed
herewith.
4.3 Trust Conveyance dated February 28, 1989 between The Standard Oil
Company and BP Prudhoe Bay Royalty Trust. Filed herewith.
4.4 Support Agreement dated as of February 28, 1989 among The British
Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The
standard Oil Company and BP Prudhoe Bay Royalty Trust. Filed
herewith.
27 Financial Data Schedule. Filed herewith.
EXHIBIT 4.1
BP PRUDHOE BAY ROYALTY TRUST AGREEMENT
THIS ROYALTY TRUST AGREEMENT (the "Agreement"), made and entered
into as of the 28th day of February, 1989, by and among The Standard Oil
Company, an Ohio corporation having its principal office in Cleveland, Ohio
("SOC"), as depositor and trustor, BP Exploration (Alaska) Inc., a Delaware
corporation having its principal office in Anchorage, Alaska (formerly
Standard Alaska Production Company) (the "Company"), The Bank of New York, a
corporation organized under the laws of the State of New York, authorized to
do a banking business and having a principal corporate trust office in New
York, New York, as trustee and F. James Hutchinson, a resident of the State of
Delaware, as co-trustee.
WHEREAS, the Company is engaged in the business of developing and
producing.oil and gas and owns mineral interests in lands that contain proved
reserves and are currently producing oil and gas; and
WHEREAS, the Company has determined to convey to SOC the Initial
Royalty Interest (hereinafter defined) pursuant to an Overriding Royalty
Conveyance (as hereinafter defined); and WHEREAS, SOC has determined to offer
and sell trust units representing undivided beneficial interests in the Trust,
which will own the Initial Royalty Interest; and
WHEREAS, SOC has determined to grant to the Trust the Initial
Royalty Interest pursuant to a Trust Conveyance (as hereinafter defined) in
consideration of the issuance by the Trust of the Trust Units, (as hereinafter
defined); and
WHEREAS, The British Petroleum Company p.l.c. ("BP") has agreed to
support the payment obligations of the Company and SOC as more fully set forth
in the Support Agreement (as hereinafter defined); and
WHEREAS, the Initial Conveyance (as hereinafter defined) is
contemporaneously executed and delivered to the Trust;
NOW, THEREFORE, the Initial Royalty Interest has been granted,
assigned and delivered unto the Trust, receipt of which is hereby acknowledged
and accepted by the Trustee on behalf of the Trust, to have and to hold, in
trust as hereinafter set forth, such property and all other properties, real
or personal (including Additional Royalty Interests), which may hereafter be
received by the Trust pursuant to this Agreement; and the Company, SOC, The
Bank of New York in its capacity as Trustee, and the Co-Trustee (as
hereinafter defined) agree that such properties shall be held, administered,
paid and delivered for the purposes and subject to the terms and conditions
hereinafter provided.
ARTICLE I
Definitions
As used herein, the following terms have the meanings
indicated:
Section 1.01. "Affiliate" of a Person means another Person controlled by,
controlling or under common control with such Person.
Section 1.02. "Additional Conveyance" means collectively any instruments
pursuant to which one or more Additional Royalty Interests are created or
conveyed to the Trust as provided in Section 2.04 hereof.
Section 1.03. "Additional Royalty Interest" means any royalty interest
which is identical in all respects to the Initial Royalty Interest, except for
the identity of the parties (other than the Trust), the effective date and the
percentage set forth in the definition of Royalty Production in the related
Additional Conveyance.
Section 1.04. "Agreement" means this instrument, as originally executed,
or, if amended pursuant to the provisions of Section 10.02 or 10.03 hereof,
as so amended.
Section 1.05. "Beneficial Interest" means the right to share in the
benefits and the obligation to share in the detriments resulting from the
accomplishment of the purposes of the Trust as expressly set out in this
Agreement, and includes without limitation the right to share in distributions
during the term of the Trust, to share in the final distributions from the
Trust and to participate in decisions affecting the Trust only to the extent
expressly provided herein, and, except as limited by the provisions of this
Agreement, to exercise all other rights of a beneficiary of a business trust
created under the Delaware Trust Act.
Section 1.06. "BP" means The British Petroleum Company p.l.c., its
successors and assigns.
Section 1.07. "Business Day" means any day that is not a Saturday,
Sunday, a holiday determined by the New York Stock Exchange as "affecting 'ex'
dates" or any other day on which banking institutions in New York, New York,
or in any other city where the principal corporate trust office of the Trustee
may be located, are closed as authorized or required by law.
Section 1.08. "Certificate" means a certificate issued by the Trust
pursuant to ARTICLE III hereof evidencing the ownership of one or more Units.
Section 1.09. "Code" means the Internal Revenue Code of 1986, as amended,
or any successor statute or statutes.
Section 1.16. "Company" means BP Exploration (Alaska) Inc., a Delaware
corporation and includes successors or assigns of the Company.
Section 1.11. "Conveyance" means collectively the Initial Conveyance and
any Additional Conveyance.
Section 1.12. "Co-Trustee" shall have the meaning ascribed to it in
Section 1.33 hereof.
Section 1.13. "Delaware Trust Act" means 12 Delaware Code Section 3801 et
sec.
Section 1.14. "Distribution Date" means the date of any distribution
pursuant to Section 4.02 hereof.
Section 1.15. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended, or any successor statute or statutes.
Section 1.16. "Initial Conveyance" means collectively the Overriding
Royalty Conveyance and the Trust Conveyance.
Section 1.17. "Initial Royalty Interest" means the royalty interest being
conveyed by the Company to SOC and by SOC to the Trust contemporaneously with
the execution and delivery of this Agreement pursuant to the Initial
Conveyance.
Section 1.18. "Insignificant Investor Period" means each period of time
prior to the Opinion Date during which benefit plan investors (within the
meaning-of Department of Labor regulation section 2510.3-101(f)(2)) do not own
a sufficient number of Units of a "class" to cause their equity participation
in the Trust to be "significant" (within the meaning of Department of Labor
regulation section 2510.3-101(f)(1)).
Section 1.19. "Officer's Certificate" means a certificate duly executed
on behalf of the Company or SOC, as the case may be, signed by any president,
any vice president, any assistant vice president, or any treasurer or
assistant treasurer, or any certificate reasonably believed by the Trustee to
have been so signed.
Section 1.20. "Opinion Date" means the first date upon which all of the
following requirements have been satisfied: (i) the Trust Units have been
registered under section 12(b) or section 12(g) of the Securities Exchange Act
of 1934; (ii) the Trust Units are widely-held (within the meaning of paragraph
(b)(3) of the Regulation); (iii) the Trust Units are freely transferable
(within the meaning of paragraph (b)(4) of the Regulation); (iv) the Company
has delivered to the Trustee an opinion of nationally recognized ERISA counsel
(such counsel to be selected by the Company and approved by the Trustee and
such opinion to be reasonably acceptable to the Trust's counsel) which states,
in effect, that the requirements described in clauses (i), (ii) and (iii)
above have been satisfied; and (v) the Company has delivered to the Trustee
either (a) an opinion of nationally recognized ERISA counsel (such counsel to
be selected by the Company and approved by.the Trustee and such opinion to be
reasonably acceptable to the Trust's counsel) or (b) an individual prohibited
transaction exemption or an advisory opinion issued by the Department of Labor
to the Trustee, the Trust or the Company which opinion, exemption or advisory
opinion states, in effect, that from and after the date upon which the
requirements described in clauses (i), (ii) and (iii) above have been
satisfied, the assets of the Trust shall not constitute plan assets (within
the meaning of the Regulation) with respect to any employee benefit plan (as
such term is defined in section 3(3) of ERISA) which became a Unit Holder
prior to the date such requirements have been satisfied (provided, however,
that if the Company has delivered to the Trustee an opinion of counsel as
described in clause (v)(a) above, such opinion must specifically reference and
be based primarily upon an advisory opinion or other published announcement of
similar authoritative import issued by the Department of Labor which favorably
addresses the same issues which are to be addressed in such opinion and which
is based upon facts similar to those involving the Trust and such employee
benefits plans). The Company shall use its best efforts to obtain promptly,
at its expense, from the Department of Labor the individual prohibited
transaction exemption or advisory opinion referred to in clause (v)(b) above;
provided, however, that if the Company has delivered the opinion of counsel
referred to in clause (v)(a) above, then its obligation to use its best
efforts to obtain such exemption or advisory opinion shall terminate. For
purposes of this Section, the term "Regulation" means Department of Labor
regulation section 2510.3-101.
Section 1.21. "Overriding Royalty Conveyance" means the Overriding
Royalty Conveyance from the Company to SOC, the form which is attached hereto
as part of Exhibit A.
Section 1.22. "Person" means an individual, corporation, partnership,
unincorporated association, trust, estate or other organization.
Section 1.23. "Quarter" means a period of approximately three months
beginning on the day after a Quarterly Record Date and continuing through and
including the next succeeding Quarterly Record Date, which shall be the
Quarterly Record Date for such Quarter; provided, however, that the first
Quarter hereunder shall be a period beginning on the date hereof and
continuing until April 17, 1989.
Pursuant to the Conveyance royalty amounts payable to the Trust are
calculated on a calendar quarter basis, and each royalty payment is required
to be made on the Quarterly Record Date immediately following the close of the
calendar quarter during which the related oil production occurs. Therefore,
pursuant to the Conveyance royalty payments for the four calendar quarters in
each year are due and payable to the Trust on the Quarterly Record Date in
April, July and October of such year and in January of the following year.
The term "Quarter" as used herein refers to a three-month period which ends on
the Quarterly Record Date which occurs approximately one-half month after the
end of the corresponding royalty calculation period.
Section 1.24. "Quarterly Income Amount" for any Quarter means the sum of
(a) the cash received by the Trust during the Quarter that is directly
attributable to the Royalty Interest, any cash available for distribution as a
result of the reduction or elimination during the Quarter of any existing cash
reserve created pursuant to Section 6.07 hereof and (c) any other cash
receipts of the Trust during the Quarter including without limitation any cash
received from interest earned pursuant to Section 6.07 hereof, reduced by the
sum of (i) the liabilities of the Trust paid during the Quarter and (ii) the
amount of any cash used in the Quarter to establish or increase a cash reserve
pursuant to Section 6.07 hereof. If (a) prior to the end of a Quarter the
Trustee makes a determination of the Quarterly Income Amount which it
anticipates will be distributed to Unit Holders of record on the Quarterly
Record Date for such Quarter, based on notice provided to the Trustee by the
Company pursuant to Section 4.8(e) of the Overriding Royalty Conveyance (and
similar provisions of any Additional Conveyance), and (b) the Quarterly Income
Amount is not equal to the amount so determined because the amounts stated in
such notice were not received on or prior to such Quarterly Record Date, the
Trustee shall treat such amounts when received as if they were received on
such Quarterly Record Date.
Notwithstanding anything to the contrary in this Section 1.24, the
Quarterly Income Amount for any Quarter shall not include any amount that
would have been required to be reported to any stock exchange on which the
Units are listed in connection with the establishment of an "ex" date in order
to be distributed to Unit Holders who were such on the Quarterly Record Date
for such Quarter but was not so reported unless the stock exchange agrees to
such amount being a part of that Quarter's Quarterly Income Amount or the
Trustee receives an opinion of counsel stating that neither the Trust, the
Trustee nor The Bank of New York will be adversely affected by such inclusion.
An amount that, pursuant to the preceding sentence, is not included in the
Quarterly Income Amount for that Quarter shall be treated as if received
during the next Quarter. In this connection, the Trustee shall report
quarterly to such stock exchange (so long as reporting is so required by the
stock exchange), at the time required by the stock exchange, the amount that,
pursuant to the first paragraph of this Section 1.24, the Trustee in good
faith reasonably expects to be the Quarterly Income Amount for the Quarter
being reported on.
Section 1.25. "Quarterly Record Date" means the.fifteenth day of each
January, April, July and October; provided, however, that if such day is not a
Business Day then the Quarterly Record Date shall be the next Business Day
after such day and provided further that if the Trustee determines that a
different date is required to comply with applicable law or the rules or
regulations of any stock exchange on which the Units are listed, it means such
different date. The first Quarterly Record Date shall be April 17, 1989.
Section 1.26. "Record Date Unit Holder" means a Person who was a Unit
Holder of record on the Voting Record Date for a meeting of Unit Holders.
Section 1.27. "Royalty Interest" means the Initial Royalty Interest and
any Additional Royalty Interests which may hereafter be granted to the Trust
pursuant to this Agreement, taken together.
Section 1.28. "Royalty Statement" means the statement prepared by the
Company and delivered to the Trust pursuant to Section 4.8(f) of the
Overriding Royalty Conveyance or the comparable provision of any Additional
Conveyance.
Section 1.29. "Support Agreement" means the Support Agreement dated as of
even date herewith by and among BP, the Company, SOC and the Trust.
Section 1.30. "Trust" means the business trust under the Delaware Trust
Act created by and administered under the terms of this Agreement.
Section 1.31. "Trust Conveyance" means the Trust Conveyance from SOC to
the Trust, the form of which is attached hereto as part of Exhibit A.
Section 1.32. "Trust Estate" means all assets, however and whenever
acquired, that may belong to the Trust at any designated time and shall
include both income and principal.
Section 1.33. "Trustee" means collectively (except as otherwise provided
in Section 8.06 hereof) The Bank of New York, a corporation organized under
the laws of the State of New York and authorized to do a banking business and
qualified to exercise trust powers, in its capacity as trustee hereunder, and,
F. James Hutchinson, in his capacity as co-trustee hereunder. The Bank of New
York and F. James Hutchinson shall serve as the initial trustees under this
instrument. The term "Trustee" shall include any ancillary or successor
trustee or co-trustee hereunder, during the period it is so serving in such
capacity. The term "Co-Trustee". means F. James Hutchinson, in his capacity
as co-trustee hereunder, and any successor co-trustee hereunder, during the
period he or it is serving in such capacity. References to The Bank of New
York or to the Trustee, individually, or similar references shall be deemed to
be references to The Bank of New York in its individual capacity and not in
its capacity as Trustee hereunder and shall be deemed to include its
successors or assigns which serve as Trustee in their individual capacities
and not in their capacities as successor Trustees hereunder.
Section 1.34. "Unit" or "Trust Unit" means an undivided fractional
interest in the Beneficial Interest determined as hereinafter provided.
Section 1.35. "Unit Holder" means the owner of one or more Units as shown
by the records of the Trustee pursuant to the provisions of ARTICLE III
hereof.
Section 1.36. "Voting Record Date" means a date selected by the Trustee
as the record date for determining Unit Holders of record entitled to notice
of and to vote at a meeting of Unit Holders, as provided in ARTICLE V hereof.
ARTICLE II
Creation, Name and Purpose of Trust
Section 2.01 - Creation and Name of Trust. The Trust is hereby created
under the Delaware Trust Act as a Delaware business trust for the benefit of
the Unit Holders. The Trust shall be known as the BP Prudhoe Bay Royalty
Trust, and the Trustee may transact all affairs of the Trust in that name.
Pursuant to the Trust Conveyance, SOC has granted, bargained, sold, conveyed,
assigned, set over and delivered the Initial Royalty Interest to the Trust.
The Initial Royalty Interest shall constitute the initial Trust Estate.
Section 2.02 - Purposes. The purposes of the Trust are (a) to convert
the Royalty Interest to cash either (1) by retaining the Royalty Interest and
collecting the proceeds from production in accordance with the terms of the
Conveyance until production has ceased permanently or the Royalty Interest has
otherwise terminated or (2) by selling or otherwise disposing of the Royalty
Interest (within the limits stated herein); and (b) to distribute such cash,
net of amounts for payment of expenses and liabilities of the Trust, to the
Unit Holders as provided herein.
It is the intention and agreement of SOC, the Company and the Trustee to
create a grantor trust for federal income tax purposes of which the Unit
Holders are treated as the owners of trust income and corpus. As set forth
above and amplified herein, the Trust is intended to be a passive entity
limited to the receipt of revenues attributable to the Royalty Interest and
the distribution of such revenues, after payment of or provision for Trust
expenses and liabilities, to the Unit Holders. It is neither the purpose nor
the intention of the parties hereto to create, and nothing in this Agreement
shall be construed as creating, a partnership, joint venture, joint stock
company or similar business association between or among Unit Holders, present
or future, or between or among Unit Holders, or any of them, and the Trustee
or SOC or the Company.
Section 2.03. - Initial Conveyance. SOC, as depositor and trustor, has
delivered, and the Trustee on behalf of the Trust has accepted, executed
copies of the Initial conveyance. Accordingly, the Initial Royalty Interest
described therein constitutes the initial Trust Estate. In consideration of
the grant of the Initial Royalty Interest and the execution and delivery of
the Support Agreement, the Trustee is hereby directed to execute and deliver
on behalf of SOC Certificates representing an aggregate of 21,400,000 Trust
Units in such denominations and-to the Persons identified by SOC in an
Officer's Certificate delivered to the Trustee; provided, however, that the
Trustee shall not be obligated to execute and deliver such Certificates to any
Person unless such Person delivers to the Trustee a written instrument
evidencing the agreement of such Person with respect to matters set forth in
subsections (i) through (iv) of the last paragraph of Section 2.04 hereof.
Section 2.04. - Additional Conveyances. The Company or an Affiliate may
from time to time grant, assign and deliver unto the Trust one or more
Additional Royalty Interests by executing and delivering to the Trust one or
more Additional Conveyances, and, subject to the conditions set forth below,
the Trustee shall accept on behalf of the Trust the assignment of such
Additional Royalty Interests and the delivery of such Additional Conveyances.
The obligation of the Trustee to accept the assignment of any such
Additional Royalty Interest shall be subject to the condition that the
Additional Royalty Interest shall be identical in all respects to the Initial
Royalty Interest except for the effective date of the Additional Conveyance
(which must be on the first day of a calendar quarter and must be the date of
delivery thereof to the Trustee), the percentage set forth in the definition
of Royalty Production in the related Additional Conveyance and the identity of
the parties (other than the Trust) to the Additional Conveyance (provided that
the entity which will make payments to the Trust under any Additional Royalty
Interest must be the same entity which will make payments to the Trust under
the Initial Royalty Interest). Any Additional Conveyance must be identical in
all respects to the Initial Conveyance, except for changes which may be
necessary to ensure that the Additional Royalty Interest conforms to the
conditions set forth herein.
In consideration of the grant of an Additional Royalty Interest, and in
exchange therefor, the Trustee shall issue, upon receipt of an Officer's
Certificate containing the direction of the Company or such Affiliate to issue
to the order of the Company or such Affiliate, a number of whole Units in the
Trust not to exceed a total of 18,600,000 additional Units determined by the
following formula:
Number of Units = A x 21,400,000
---------------
16.4246%
where "A" equals the percentage set forth in the definition of "Royalty
Production" in the related Additional Conveyance. In connection with such
issuance, the recipients of such Units and their transferees shall not be
treated as Unit Holders of record entitled to distributions with respect to
the Quarterly Income Amount for the Quarterly Record Date which occurs during
the month in which such Additional Conveyance is effective and shall not be
entitled to transfer such Units (other than to the Company or one of its
Affiliates) on or prior to such Quarterly Record Date, and the Certificates
therefor shall prominently so state.
The acceptance by the Trustee of any assignment of an Additional Royalty
Interest shall be subject to the condition precedent that the Trustee shall
have received (a) a ruling from the Internal Revenue Service to the effect
that neither the existence nor exercise of the right to assign the Additional
Royalty Interest, the power to accept such assignment or the issuance of
additional Units as herein contemplated will adversely affect the
classification of the Trust as a "grantor trust" for federal income tax
purposes and (b) a ruling from the Internal Revenue Service or an unqualified
written opinion of counsel to the Trust to the effect that such assignment
will not cause (i) the income from the Trust to be treated as unrelated
business taxable income for federal income tax purposes or (ii) the Unit
Holders to recognize income, gain or loss attributable to the Royalty
Interests as a result of such assignment, except to the extent of any gain or
loss attributable to any cash received by the Trust in connection with such
assignment.
In addition, the Trustee shall require that the Company or such Affiliate
making the deposit of the Additional Royalty Interest to the Trust pay the
expenses of such assignment and contribute a cash reserve equal to the value
of the cash reserve, if any, existing on the date such Additional Conveyance
is effective multiplied by a fraction whose numerator is the additional number
of Units to be issued and whose denominator is the sum of (a) the number of
Units outstanding immediately preceding such deposit of the Additional Royalty
Interest and (b) the number of Units then to be issued. The Trustee shall
invest the cash, if any, deposited with respect to such cash reserve as
provided in Section 6.07 hereof in investments maturing on the next succeeding
Quarterly Record Date, and there shall be included in the Quarterly Income
Amount distributed to Unit Holders of record on the Quarterly Record Date
which occurs during the month in which such Additional Conveyance is effective
an amount equal to the sum of (a) the amount so deposited and (b) the interest
earned on such amount from the time it is invested to such Quarterly Record
Date.
Upon acceptance thereof by the Trustee on behalf of the Trust, the
Additional Royalty Interest shall constitute a part of the Trust Estate and,
to the extent permitted by law, shall be treated by the Trustee, together with
the Initial Royalty Interest and all other Additional Royalty Interests
previously assigned to the Trust, as constituting one Royalty Interest held
for the benefit of all Unit Holders.
Notwithstanding any other provision of this Agreement, with respect to
any Additional Royalty Interest to be conveyed to the Trust prior to the date
upon which the requirements of clauses (i), (ii), (iii) and (iv) of Section
1.20 have been satisfied (the "Restriction Date"), the Trustee shall not be
required to accept such Additional Royalty Interest on behalf of the Trust
unless each Person who is to be issued Units in connection with such
conveyance delivers to the Trustee a written instrument evidencing the
agreement of such Person:
(i) to furnish to the Trustee, from time to time and within five days
of its receipt of a written request from the Trustee, complete and
correct information in a form and manner reasonably acceptable to
the Trustee as to whether such Person is a benefit plan investor
(within the meaning of Department of Labor regulation section
2510.3-101(f)(2)) and, if such Person is a benefit plan investor,
information as to (a) the identity of the employee benefit plan or
plans established or maintained in connection with, or owning an
interest in, such benefit plan investor if such benefit plan
investor is not a "collective investment fund maintained by a
bank" within the meaning of Department of Labor Prohibited
Transaction Exemption 80-51 (a "Fund") nor an insurance company
pooled separate account within the meaning of Department of Labor
Prohibited Transaction Exemption 78-19 (an "Account"), (b) the
identity of the employee benefit plan or plans owning an interest
in excess of five percent (with all such plans maintained by the
same employer or employee organization treated as a single plan
for purposes of this determination) of all of the assets in such
benefit plan investor if such benefit plan investor is a Fund or
an Account, and (c) the identity of the sponsor of the plan or
plans described in subclauses (a) or (b) above, and (d)
information as to whether any Person designated by the Trustee as
a Person with whom the Trust proposes to engage in a transaction
is a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section
4975(e)(2) of the Code), (collectively referred to as a "party in
interest"), as to such benefit plan investor (including without
limitation, each Plan owning a five percent interest in a Fund or
Account),
(ii) that the Trustee shall be authorized to disclose any information
described in clause (i) above which is provided by such Person to
the Trustee and which may be necessary, in the sole opinion of the
Trustee, in order for the Trustee to perform its duties under this
Agreement,
(iii) to comply in all respects with the recordkeeping and examination
requirements of Section III of (a) Department of Labor Prohibited
Transaction Exemption 80-51 if such Person is a benefit plan
investor which is a Fund, or (b) Department of Labor Prohibited
Transaction Exemption 78-19 if such Person is a benefit plan
investor which is an Account, and
(iv) that such Person will not directly or indirectly transfer any of
the Units.to be issued to such Person prior to the Restriction
Date unless the transferee of such Units delivers to the Trustee a
written instrument evidencing its agreement with respect to the
matters described in clauses (i), (ii) and (iii) above and this
clause (iv) as if such transferee had received a direct issuance
of Units from the Trust in connection with the conveyance of such
Additional Royalty Interest.
Section 2.05. - Certificate of Trust. The Trustee shall cause to be
filed a certificate of trust in the office of the Secretary of State of
Delaware in compliance with Section 3810 of the Delaware Trust Act.
In the event that the Trustee becomes aware that any statement contained
or any matter described in the certificate of trust has changed making the
certificate false in any material respect, the Trustee shall promptly file a
certificate of amendment in the office of the Secretary of State of Delaware
in compliance with Section 3810 of the Delaware Trust Act. Upon the
termination of the Trust pursuant to Section 9.01 of this Agreement, the
Trustee shall file a certificate of cancellation in the office of the
Secretary of State of Delaware in compliance with Section 3810 of the Delaware
Trust Act.
Section 2.06. - Acceptance by Trustee. The Trustee, by joining in the
execution of this Agreement, accepts the Trust herein created and provided for
and accepts all of the rights, powers, privileges, duties and responsibilities
of the Trustee hereunder and agrees to exercise and perform the same in
accordance with the terms and provisions contained herein.
Section 2.07. - Registration of the Units. In connection with the
contemplated registration of the Units under the Securities Act of 1933, as
amended, if required by the Securities and Exchange Commission, the Company,
or its designee, is hereby granted full power and authority to sign on behalf
of the Trust such registration statements and any amendments, including post-
effective amendments and any other related documents relating to the Units as
may be necessary to effect or to continue in effect such registration.
ARTICLE III
Creation of Units and Certificates
Section 3.01 - Creation of Units. The entire Beneficial Interest shall
initially be divided into 21,400,000 Units.
If at any time there is assigned to the Trust an Additional Royalty
Interest pursuant to Section 2.04 hereof, the Beneficial Interest shall
thereafter be considered to be divided into a number of Units equal to the sum
of the number of Units existing prior to such assignment and the number of
Units created upon such assignment pursuant to Section 2.04 hereof, and upon
the acceptance of such assignment, the Trustee shall cause to be issued in
accordance with Section 2.04 hereof new Certificates representing the number
of Units created upon such assignment.
Section 3.02 - Certificates as Evidence of Ownership of Units. The
ownership of the Units shall be evidenced by Certificates in substantially the
form set forth in Exhibit B attached hereto. Except as otherwise provided in
Sections 2.04 and 3.08 hereof and notwithstanding anything else stated herein,
the Trustee may for all purposes set forth in this Agreement, including,
without limitation, the making of distributions and voting, treat the holder
of any Certificate as shown by the records of the Trustee maintained pursuant
to Section 3.06 hereof as the owner of the Units evidenced thereby.
Section 3.03. - Rights of Unit Holders. Except as otherwise specifically
provided herein, the Unit Holders shall own pro rata the Beneficial Interest
and shall be entitled to participate pro rata in the rights and benefits of
Unit Holders under this Agreement. A Unit Holder by assignment or otherwise
shall take and hold the same subject to all the terms and provisions of this
Agreement and the Conveyance, which shall be binding upon and inure to the
benefit of the successors, assigns, legatees, heirs and personal
representatives of the Unit Holder. By an assignment or transfer of one or
more Units, the assignor thereby shall, effective as of the close of business
on the date of transfer and with respect to such assigned or transferred Unit
or Units, part with, except as provided in Sections 3.06 and 4.02 hereof in
the case of a transfer after a Quarterly Record Date and prior to the
corresponding Distribution Date, (a) all of his Beneficial Interest
attributable thereto, (b) all of his rights in, to and under such Unit or
Units and (c) all interests, rights and benefits under this Agreement of a
Unit Holder that are attributable to such Unit or Units as against all other
Unit Holders, the Trust and the Trustee.
Section 3.04. - Character of Rights. The sole interest of each Unit
Holder shall be his pro rata portion of the Beneficial Interest and the
obligations of the Trust expressly created under this Agreement with respect
to the Beneficial Interest. Such interest of a Unit Holder is and shall be
construed for all purposes (except for tax purposes) to be intangible personal
property, and no Unit Holder as such shall have any legal title in or to any
real property interest that is a part of the Trust Estate including, without
limiting the foregoing, the Royalty Interest or any part thereof. No Unit
Holder shall have the right to seek or secure any partition or distribution of
the Royalty Interest or any other asset of the Trust Estate or any accounting
during the term of the Trust or during the period of liquidation and winding
up under Section 9.02 hereof.
Section 3.05. - Form, Execution and Dating of Certificates. The
Certificates may contain such changes of form, but not substance, as the
Trustee, from time to time in its discretion, may deem necessary or desirable.
In addition, the Certificates shall contain such changes (not inconsistent
with the provisions of this Agreement) as from time to time may be required to
comply with any rule or regulation of any stock exchange on which the Units
are listed. Each Certificate shall be dated the date of its issuance. Each
Certificate shall be signed on behalf of the Trust by a duly authorized
signatory of the Trustee (which signature may be a facsimile to the extent
permitted by law or regulations of any stock exchange on which the Units are
listed) and may be sealed with the seal of the Trustee or a facsimile thereof.
Pending the preparation of definitive Certificates, the Trustee shall
execute, and the Transfer Agent and Registrar (as provided in Section 3.06
hereof) shall record, countersign and register, temporary Certificates, as
directed in an Officer's Certificate of SOC. Temporary Certificates may
contain such references to any provisions of this Agreement as may be
appropriate. Every temporary Certificate shall be executed by the Trustee and
recorded, countersigned and registered upon the same conditions and in
substantially the same manner, and with like effect, as the definitive
Certificates.
As promptly as practicable, the Trustee shall execute and furnish
definitive Certificates and thereupon temporary Certificates may be
surrendered in exchange therefor without charge to the Unit Holders at the
principal corporate trust office of The Bank of New York at which Certificates
may be presented for a transfer pursuant to Section 3.06 hereof, and the
Transfer Agent and Registrar shall record, countersign and register in
exchange for such temporary Certificates a like aggregate amount of definitive
Certificates. Until so exchanged, the temporary Certificates shall be
entitled to the same benefits under this Agreement as definitive Certificates.
Section 3.06 - Registration and Transfer of Units. With respect to the
issuance of the initial Certificates representing ownership of the Units
(including Certificates issued pursuant to Section 2.04 hereof) and upon
subsequent transfer of such Certificates in accordance with the provisions of
this Section 3.06, the Trustee shall maintain records that reflect the name
and address of the holder of each Certificate, the number of Units represented
by each Certificate, the date of issuance and/or transfer of each Certificate,
the name of each transferee of a Certificate and any other such information as
the Trustee shall deem necessary or advisable.
Until the Units have been registered under the Securities Act of 1933, as
amended (the "Act"), and qualified under the securities laws of the various
states in which qualification is required, the Units may not be transferred
except pursuant to the provisions of Rule 144 or, if adopted, Rule 144A under
the Act or another exemption from registration under the Act, provided that
prior to any such proposed transfer (other than a transfer to an affiliated
company), the holder of the Trust Units to be transferred shall give written
notice to the Company and the Trustee of such holder's intention to effect
such transfer, which notice shall be accompanied by an unqualified written
opinion of legal counsel, which counsel (who the Company and the Trustee
acknowledge may be counsel in the employ of the transferring Unit Holder) and
opinion (in form, scope and substance) shall be reasonably satisfactory to the
Company and the Trustee, to the effect that the proposed transfer of such
Trust Units may be effected without registration under the Act and applicable
state securities laws. Further, until the requirements of clauses (i), (ii),
(iii) and (iv) of Section 1.20 have been satisfied (and for purposes of this
agreement, such requirements shall be deemed to be satisfied simultaneously
with the delivery of the opinion required by clause (iv) of Section 1.20), the
Units may not be transferred unless the Trustee shall have received a written
instrument from the proposed transferee evidencing its agreement with respect
to the matters described in clauses (i), (ii), (iii) and (iv) of the last
paragraph of Section 2.04 hereof (applied without regard to whether the Units
were originally acquired in connection with an Additional Conveyance or the
Initial Conveyance). Except as set forth in the preceding sentences of this
paragraph and as set forth in Section 2.04 hereof, all Units shall be freely
transferable, but (except as otherwise provided in Section 6.12 hereof) no
transfer of any Unit shall be effective as against the Trustee prior to entry
on the records of the Trustee upon the surrender of the Certificate or
Certificates evidencing ownership of such Unit or Units (or upon compliance
with the provisions of Section 3.07 hereof) and compliance with such
reasonable regulations and requirements, including but not limited to such
instruments of transfer, including signature guarantees of a broker or bank
located, or having a correspondent located, within New York City, as the
Trustee may prescribe. Certificates shall be presented for transfer at the
principal corporate trust office of The Bank of New York or at such office or
agency of the Trustee as the Trustee shall maintain (and hereby agrees to
maintain) in the Borough of Manhattan, in the event the Units are listed on
any stock exchange.
The Trustee hereby appoints The Bank of New York as Transfer Agent and
Registrar for the registration of transfer of Units.
The Trustee may in its sole discretion remove The Bank of New York as Transfer
Agent and Registrar and appoint such one or more other Transfer Agents and
Registrars as it deems appropriate.
No service charge will be made by the Trustee to the transferor or
transferee of a Certificate for any transfer of a Unit evidenced by the
transferred Certificate, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in relation to such transfer. Until any such transfer, the Trustee may treat
the holder of any Certificate as shown by its records as the owner of the
Units evidenced thereby and shall not be charged with notice of any claim or
demand respecting such Certificate or the interest represented thereby by any
other party. Any such transfer of a Unit as evidenced by a transfer of a
Certificate shall, as to the Trustee, transfer to the transferee of the
Certificate as of the close of business on the date of transfer all of the
undivided right, title and interest of the transferor in and to the Beneficial
Interest, provided that, as to the Trustee, a transfer of a Certificate after
any Quarterly Record Date shall not transfer to the transferee of such
Certificate the right of the transferor of the Certificate to any sum payable
to the transferor as the holder of record of the Certificate on such Quarterly
Record Date. However, nothing stated herein shall affect the right of the
Trustee to act in accordance with Sections 3.07 and 6.12 hereof.
Notwithstanding the foregoing, in the event that the Trust receives an
amount which will comprise, in whole or in part, a Quarterly Income Amount on
a day other than a Quarterly Record Date, the Trustee may notify Unit Holders
of the fact of such receipt by any means, including a press release, which the
Trustee deems appropriate in the circumstances.
As to matters affecting the title, ownership, warranty or transfer of
Certificates, Article 8 of the Uniform Commercial Code, the Uniform Act for
Simplification of Fiduciary Security Transfers and other statutes and rules
with respect to the transfer of securities, each as adopted and then in force
in the State of Delaware, shall govern and apply. The death of any Unit
Holder shall not entitle such Unit Holder's transferee to an accounting or
valuation for any purpose, but as to the Trustee, the transferee of a deceased
Unit Holder shall succeed to all rights of the deceased Unit Holder under this
Agreement upon proper proof of title satisfactory to the Trustee.
Upon the Trustee's receipt of written notice of the death of a Unit
Holder, the Trustee may refuse to effect the transfer of any Units held by
such deceased Unit Holder until it has received satisfactory evidence of
compliance with all tax, probate and other requirements of applicable law.
Section 3.07 - Mutilated, Destroyed, Lost or Stolen Certificates. In the
event that any Certificate is mutilated, destroyed, lost or stolen, the
Trustee shall, if the conditions in this section are met and the Trustee has
not received notice that such Certificate has been acquired by a bona fide
holder, issue to the holder of such Certificate as shown by the records of the
Trustee a new Certificate in exchange and substitution for the mutilated
Certificate or in lieu of and substitution for the Certificate so destroyed,
lost or stolen. In every case, the applicant for a substituted Certificate
shall furnish to the Trust and the Trustee such security or indemnity as the
Trustee may reasonably require to save the Trust and the Trustee harmless and,
in every case of destruction, loss or theft, the applicant shall also furnish
to the Trustee evidence to the Trustee's reasonable satisfaction of the
destruction, loss or theft of such Certificate. Upon the issuance of any
substituted Certificate, the Trustee may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and any other reasonable expenses incurred in connection
therewith.
Section 3.08 - Protection of Trustee. The Trustee shall be protected in
acting upon any notice, stock power, Royalty Statement, Officer's Certificate,
opinion of counsel, report of certified public accountant, any petroleum
engineer or auditor or other expert, credential, certificate, instrument of
assignment or transfer or other document or instrument reasonably believed by
the Trustee to be genuine and correct and to be signed or sent by the proper
party or parties. The Trustee is specifically authorized to rely upon the
application of Article 8 of the Uniform Commercial Code, the Uniform Act for
Simplification of Fiduciary Security Transfers and other statutes and rules
with respect to the transfer of securities, each as adopted and then in force
in the State of Delaware, as to all matters affecting title, ownership,
warranty or transfer of Certificates and the Units represented thereby,
without any personal liability for such reliance, and the indemnity granted
pursuant to Section 7.02(a) hereof shall specifically extend to any matters
arising as a result thereof.
Section 3.09 - Transfer Agent and Registrar. Any references in this
ARTICLE III to the rights and duties of the Trustee with respect to the
transfer or registration of Certificates shall also be deemed to be references
to the Transfer Agent and Registrar acting hereunder.
Section 3.10 - Limitation of Personal Liability of Unit Holders. Unit
Holders shall, to the full extent permitted by Section 3803 of the Delaware
Trust Act, be entitled to the same limitation of personal liability extended
to stockholders of private corporations for profit under the laws of the State
of Delaware.
ARTICLE IV
Accounting and Distribution
Section 4.01 - Fiscal Year and Accounting Method. Except as otherwise
required pursuant to Section 4.03 hereof, the fiscal year of the Trust shall
be the calendar year. The Trustee shall maintain the books of the Trust on a
cash basis, in accordance with generally accepted accounting practices, except
to the extent that such books must be kept on any other basis pursuant to
applicable law.
Section 4.02 - Distributions. On the fifth day after the Trustee's
receipt in same day finally collected funds of amounts to be received on a
Quarterly Record Date for each Quarter in each year during the term of the
Trust or if such day is not a Business Day on the next succeeding Business
Day, the Trustee shall distribute the Quarterly Income Amount for the Quarter
to which such Quarterly Record Date relates to the Unit Holders of record on
such Quarterly Record Date (except those Unit Holders which, pursuant to
Section 2.04 hereof, are not treated as Unit Holders of record entitled to
distributions with respect to the Quarterly Income Amount for such Quarterly
Record Date) in proportion to the Units owned by each such Unit Holder;
provided that during any period prior to the Opinion Date which is not an
Insignificant Investor Period, the Trustee shall distribute such Quarterly
Income Amount (including amounts referred to in the last sentence of this
Section 4.02) on or as soon as practicable following the Quarterly Record Date
and such amounts shall be held uninvested in a non-interest bearing account.
Payment of each Unit Holder's pro rata portion of the Quarterly Income Amount
shall be made by check or draft mailed to each of the Unit Holders.
Notwithstanding the foregoing, payments of $100,000 or more shall be made to
any Unit Holder who enters into an agreement with the Trustee providing for
such payments by wire transfer in immediately available funds to an account of
such Unit Holder as specified in the agreement. The Trustee shall, upon the
request of any such Unit Holder, enter into such an agreement unless such
agreement adversely affects The Bank of New York's own rights, duties or
immunities under this Agreement or otherwise, in which case the Trustee may,
but shall not be obligated to, enter into such an agreement. Except as
otherwise provided in any such agreement, if, pursuant to the last sentence of
the first paragraph of Section 1.24, the Trustee treats amounts received after
a Quarterly Record Date as if they were received on such Quarterly Record
Date, the distributions of such amounts shall be made on the fifth day after
the date of receipt thereof by the Trust in finally collected same day funds
or if such day is not a Business Day, on the next succeeding Business Day.
Section 4.03 - Income Tax Withholdings and Reporting. For federal and
Alaska state income tax purposes, the Trustee shall effect such withholdings
and file such returns and statements as in its judgment are required to comply
with applicable provisions of the Code and the regulations thereunder and any
Alaska state income tax laws and regulations thereunder.
Section 4.04 - Reports to Unit Holders. As promptly as practicable
following the end of each calendar year of the Trust, but no later than 90
days following the end of each calendar year, the Trustee shall mail to each
Person who was a Unit Holder of record at any time during such calendar year a
report containing sufficient information to enable Unit Holders to make all
calculations necessary for federal and Alaska tax purposes, including the
calculation of any depletion deduction which may be available to them for such
calendar year.
As promptly as practicable following the end of each Quarter during the
term of the Trust, but no later than 60 days following the end of each such
Quarter, the Trustee shall mail to each Person who was a Unit Holder of record
on the Quarterly Record Date immediately preceding the distribution of such
report a report showing in reasonable detail on a cash basis the assets and
liabilities, receipts and disbursements and income and expenses of the Trust
and the Royalty Production (as that term is defined in the overriding Royalty
Conveyance) for such Quarter.
Within 90 days following the end of each calendar year (or at such
earlier time as may be required by any stock exchange on which the Units are
listed), the Trustee shall mail to each Person who was a Unit Holder of record
on the Quarterly Record Date immediately preceding the distribution of such
report an annual report containing (a) financial statements audited by a
nationally recognized firm of independent public accountants retained by the
Trust for such purposes, (b) a certification by such firm stating whether or
not all fees and expenses paid by the Trust to the Trustee from the beginning
of such calendar year through the first Quarterly Record Date in the next
following year were calculated and paid in accordance with this Agreement and
setting forth any exceptions as may be noted by such firm, (c) such
information as the Trustee deems appropriate from a letter of the Independent
Accountants (as such term is defined in the Overriding Royalty Conveyance)
which has been provided to the Trustee stating whether or not, based on
procedures set forth in detail in such letter (i) the Company has complied in
all material respects with the terms and provisions of the Overriding Royalty
Conveyance, Article Three and Article Four, Sections 4.1 to 4.7 inclusive, and
comparable provisions of any Additional Conveyance, and (ii) the amounts
payable to the Trust in respect of the Royalty Interest have been accurately
computed, and setting forth any exceptions to the foregoing matters as may be
noted by such firm (d) a letter of the Independent Petroleum Engineers (as
such term is defined in the Overriding Royalty Conveyance) setting forth a
summary of such firm's determinations regarding the Company's methods,
procedures and estimates referred to in Section 4.8(d) of the Overriding
Royalty Conveyance (and similar provisions of any Additional Conveyance) and
(e) copies of the latest annual report or reports, if any, with respect to the
Units filed with the Securities and Exchange Commission or, if no such report
is filed, a summary of the information furnished to the Trustee pursuant to
Section 4.8(c) of the Overriding Royalty Conveyance (and similar provisions of
any Additional Conveyance). The Trust shall engage annually a nationally
recognized firm of independent public accountants, a firm of Independent
Accountants (which may be the same firm as the nationally recognized firm of
independent public accountants) and a firm of Independent Petroleum Engineers
in order to furnish such services as are required to permit the Trustee to
perform its obligations under this Section 4.04.
The Trustee shall mail to Unit Holders any other reports or statements,
financial or otherwise, required to be provided to Unit Holders by law or
governmental regulation or the requirements of any stock exchange on which the
Units are listed.
Section 4.05 - Information to be Supplied by the Company. The Company
shall provide to the Trustee on a timely basis upon request such information
not known or otherwise available to the Trustee concerning the Royalty
Interest (including information with respect to the properties burdened by the
Royalty Interest) as shall be necessary to permit the Trustee to comply with
respect to the Trust with the reporting obligations of the Trust pursuant to
the Securities Exchange Act of 1934, as amended, the requirements of any stock
exchange on which the Units are listed and this Agreement and for any other
reasonable purpose of the Trust.
The Company hereby agrees to indemnify The Bank of New York, the Trustee
and the Trust, against any loss, liability, damage and expense (including
reasonable attorneys' fees) incurred by The Bank of New York, the Trustee or
the Trust as a result of or arising out of any of the information provided to
the Trustee by the Company pursuant to this Section 4.05 being untimely,
incorrect, misleading or untrue in any material respect.
Section 4.06 - Information to be Provided to the Company. To the extent
the Company is required to file any report with respect to the Trust with any
stock exchange on which the Units are listed or any governmental authority,
the Trustee will provide to the Company on a timely basis upon the Company's
request such information with respect to the Trust and the Trustee that is not
within the knowledge of the Company and that is necessary to the Company's
ability to make such filing or such report. The Company shall be indemnified
by the Trustee (which shall in turn be indemnified to the extent provided
pursuant to Section 7.02(a) hereof) against any loss, liability, damage and
expense (including reasonable attorneys' fees) incurred by the Company as a
result of or arising out of any of the information provided to the Company by
the Trustee pursuant to this Section 4.06 being untimely or incorrect or
untrue in any material respect. Any indemnification by the Trustee of the
Company pursuant to this Section 4.06, except for indemnification which
relates to any such information concerning The Bank of New York, shall be
limited to amounts actually received by the Trustee for such purposes from the
Trust Estate.
ARTICLE V
Meetings of Unit Holders
Section 5.01 - Purpose of Meetings. A meeting of the Unit Holders may be
called at any time and from time to time pursuant to the provisions of this
ARTICLE V to act with respect to any matter regarding which the Unit Holders
are authorized to act by the express terms of this Agreement.
Section-5.02 - Call and Notice of Meetings. Any such meeting of the Unit
Holders may be called by the Trustee in its discretion and will be called by
the Trustee (i) as soon as practicable after receipt of a written request by
the Company or (ii) as soon as practicable after receipt of a written request
that sets forth in reasonable detail the action proposed to be taken at such
meeting and is signed by unit Holders owning not less than 25 percent of the
then outstanding units or (iii) as may be required by applicable law or
regulations of any stock exchange on which the Units are listed. Except as
may be otherwise required by applicable law or by any stock exchange on which
the Units are listed, written notice signed by the Trustee (which signature
may be a facsimile) of every meeting of the Unit Holders setting forth the
time and place of such meeting and in general terms the matters proposed to be
acted upon at such meeting shall be given in person or by mail not more than
60 nor fewer than 10 days before such meeting is to be held to all Unit
Holders of record on a date ("Voting Record Date") selected by the Trustee,
which Voting Record Date shall not be more than 60 days before the date of
such meeting. If such notice is given to any Unit Holder by mail, it shall be
directed to him at his last address as shown by the records of the Trustee and
shall be deemed to have been duly given when so addressed and deposited in the
United States mail, postage prepaid. No matter other than that stated in the
notice shall be acted upon at any meeting. All such meetings shall be held at
such time and place in the Borough of Manhattan, The City of New York, as the
notice of any such meeting may designate.
Section 5.03 - Voting. Only a Person who was a Unit Holder on the Voting
Record Date ("Record Date Unit Holder") shall be entitled to be present,
speak.or vote at any such meeting. A person appointed by an instrument in
writing as a proxy for such Record Date Unit Holder shall be entitled at such
meeting to exercise all rights exercisable by such Record Date Unit Holder as
if such Record Date Unit Holder attended such meeting and exercised such
rights in person. In addition, any representative of the Company and the
Trustee shall be entitled to be present, speak and generally to participate in
any such meeting. All references in this Agreement to Record Date Unit
Holders shall mean either such Record Date Unit Holder or his duly appointed
proxy.
At any such meeting, the presence in person or by proxy of Record Date
Unit Holders holding Certificates representing a majority of the Units
outstanding on the Voting Record Date shall constitute a quorum and, unless
otherwise provided in this Agreement, any matter shall be deemed to have been
approved if it is approved by the Vote of Record Date Unit Holders holding
Certificates representing a majority of the Units represented at the meeting.
Each Record Date Unit Holder shall be entitled to one vote for each Unit
represented by the Certificate or Certificates held by him. The Trustee,
subject to all applicable laws, may solicit from and vote proxies of Unit
Holders entitled to vote at any meeting thereof.
Section 5.04 - Conduct of Meetings. The Trustee may make such reasonable
regulations as it may deem advisable governing the conduct of any such meeting
including, without limitation, provisions governing the appointment of
proxies, the appointment and duties of inspectors of votes, the submission and
examination of proxies, certificates and other evidences of the right to vote,
the preparation and use at the meeting of a list of the Persons entitled to
vote at the meeting and the appointment of a chairman and secretary of the
meeting.
Section 5.05. Voting of Units Held by Company, SOC and Their Respective
Affiliates. SOC and the Company agree that, at any meeting of Unit Holders,
they will vote or cause to be voted any Units held of record or beneficially
by the Company, SOC or any Affiliate of either of them in the same proportion
as the Units voted by other Unit Holders voting at such meeting.
ARTICLE VI
Administration of Trust and Powers of Trustee
Section 6.01 - General Authority. Subject to the limitations set forth
in this Agreement, the Trustee is authorized to and shall take such actions as
in its judgment are necessary, desirable or advisable to achieve the purposes
of the Trust, including the appointment of an ancillary trustee or trustees
under this Agreement, the solicitation and voting of proxies at meetings of
Unit Holders, the taking of appropriate action to enforce the terms of the
Conveyances and the Support Agreement (including the institution of any
actions or proceedings at law or in equity necessary to the foregoing) and the
authority to agree to modifications of the terms of the Conveyances or the
Support Agreement or to settle disputes with respect thereto, so long as (i)
the Trustee shall have received an unqualified written opinion of counsel to
the Trust to the effect that such modification or settlement will not
adversely affect the classification of the Trust as a "grantor trust" for
federal income tax purposes or cause the income from the Trust to be treated
as unrelated business taxable income for federal income tax purposes, and (ii)
such modifications or settlements do not alter the nature of or the amount or
time of receipt of payments under the Royalty Interest. The Trustee shall not
be (i) obligated or permitted to make any investment or operating decision or
otherwise physically inspect the properties burdened by the Royalty Interest
or (ii) obligated to prevent drainage or any other event or state of facts
which damages or diminishes the value of the Royalty Interest. The Trustee is
authorized to execute the Trust Conveyance and the Support Agreement on behalf
of the Trust. The Trustee is authorized to and shall take such actions as in
its judgment are necessary or advisable to give such approvals as may be
appropriate under the Conveyance, and to make such requests as in its judgment
are necessary or advisable under Section 4.8 of the Overriding Royalty
Conveyance or any comparable provision of any Additional Conveyance, in order
to preserve and protect the Trust Estate and to discharge its other duties
hereunder.
The Company and the Trustee are hereby authorized to make and shall be
responsible for all filings on behalf of the Trust with the Securities and
Exchange Commission required by the Exchange Act and with the Securities and
Exchange commission or such other governmental authorities required by
applicable law or regulation with respect to the Units as may be specified
from time to time in an Officer's Certificate delivered to the Trustee. It is
the expectation of the Company that the Units may, in the future, be listed on
the New York Stock Exchange or another stock exchange. In this regard, the
Company will advise the Trustee of any actions that the Trustee should take in
connection with effectuating such listing and, unless the Trustee shall
determine that such actions are not in the best interest of the Trust, the
Trustee shall take such actions. If listing is accomplished, the Trustee will
take all actions necessary to maintain such listing including compliance with
the rules of the stock exchange and the filing of any reports required by the
stock exchange; provided, however, that if at any time the Company shall have
informed the Trustee in writing that, in the opinion of the Company, such
listing is not in the best interest of the Unit Holders or the interests of
the Unit Holders would be better served by listing the Units on another stock
exchange as specified by the Company, then the Trustee shall as soon as
practicable call a meeting of Unit Holders in accordance with the provision of
ARTICLE V hereof and submit to a vote of Unit Holders at such meeting a
proposal to delist the Units, or to delist the Units and list the Units on
another stock exchange as specified by the Company; if such proposal is a
approved at such meeting by the affirmative vote of the Record Date Unit
Holders holding Certificates representing a majority of the Units represented
at such meeting in accordance with ARTICLE V, the Company will seek to
accomplish the delisting, or the delisting and listing on such other stock
exchange, without the involvement of the Trustee, but if the Company
determines that action by the Trustee is necessary, the Company will instruct
the Trustee regarding what actions the Trustee must take in order to
accomplish such delisting, or delisting and listing on such other stock
exchange; in such event the Trustee shall take such action, if any, as shall
be specified by the Company in order to accomplish the delisting of the Units
from their then current stock exchange or such delisting and listing of the
Units on such other stock exchange. The Company agrees to consider, on a
periodic basis, whether or not such listing is in the best interest of the
Unit Holders and whether the interests of the Unit Holders would be better
served by listing the Units on another stock exchange, and the Company agrees
that if it should reach either conclusion it will furnish appropriate notice
in writing to the Trustee.
The Trustee may not dispose of all or any portion of the Royalty Interest
except as provided in Sections 6.O2, 6.06 or 9.02 hereof.
Section 6.02 - Limited Power to Dispose of Royalty Interest and Other
Trust Interests. (a) The Trustee shall not sell or otherwise dispose of all or
any part of the Trust Estate, including all or any part of the Royalty
Interest, or any interest therein, except that
(i) the Trustee shall make cash distributions to Unit Holders and pay
the liabilities of the Trust as provided herein,
(ii) the Trustee shall sell or otherwise dispose of all or a part of
the Royalty Interest or an interest therein if, prior thereto, such sale or
other disposition and all material terms and conditions thereof (including, if
practicable, the record date for determining Unit Holders of record entitled
to receive any cash to be distributed as a result of such sale) are approved
by the affirmative vote of the Record Date Unit Holders holding Certificates
representing 70% of the Units outstanding on the Voting Record Date if such
sale is to be effected on or prior to December 31, 2010, or 60% of the Units
outstanding on the Voting Record Date if such sale is to be effected
thereafter, in each case at a meeting duly called and held in accordance with
the provisions of ARTICLE V hereof (provided that if the terms or conditions
of such sale or other disposition adversely affect The Bank of New York's own
rights, duties or immunities under this Agreement or otherwise, the Trustee
may in its discretion, but shall not be obligated to, effect such sale or
other disposition); provided, however, that if such sale is effected in order
to provide for the payment of specific liabilities of the Trust then due and
involves a part, but not all or substantially all, of the Trust Estate, such
sale shall be approved by the affirmative vote of the Record Date Unit Holders
holding Certificates representing a majority of the Units outstanding on the
Voting Record Date for such meeting,
(iii) the Trustee shall mortgage, pledge, grant security interests in
or otherwise encumber the Trust Estate, or a portion thereof, if required
pursuant to Section 6.06 or 6.12 hereof,
(iv) the Trustee shall dispose of the Trust Estate if required
pursuant to Section 9.02 hereof,
(v) the Trustee shall sell for cash the Trust Estate, or a portion
thereof, if and to the extent that
(1) the Trustee is unable to effect a borrowing by the Trust, as
specified in sections 6.06 or Section 6.12 hereof,
(2) the Trustee determines that it is not practicable to submit such
sale and all material terms and conditions thereof to a vote of the Unit
Holders pursuant to clause (ii) of this paragraph (a) above,
(3) such sale is effected in order to provide for the payment of
specific liabilities of t he Trust then due, and the cash on hand is
insufficient to discharge such liabilities,
(4) the Trustee determines that the failure to pay such liabilities at
such time will be contrary to the best interest of the Unit Holders and that
such sale is necessary to provide for the payment of such liabilities,
(5) the sale is effected at a price which, in the opinion of an
investment banking firm, commercial banking firm or other Person qualified to
render such opinion and selected by the Trustee, is at least equal to the fair
market value of the interest sold, and the sale is effected pursuant to terms
and conditions which, in the opinion of such investment banking firm,
commercial banking firm or other Person, are commercially reasonable when
compared to alternatives available to the Trust, and
(6) the Trustee has received an unqualified written opinion of counsel
to the Trust to the effect that such sale will not adversely affect the
classification of the Trust as a "grantor trust" for federal income tax
purposes or cause the income from the Trust to be treated as unrelated
business taxable income for federal income tax purposes; provided, however,
that if the Trustee is unable to obtain such opinion the Trustee shall
nevertheless effect such sale if the Trustee determines that the failure to
effect such sale will be materially detrimental to the Unit Holders considered
as a whole.
(b) The Trustee shall distribute any cash received as a result of any
such sale pursuant to clause (ii) of paragraph (a) above, subject to the need
to pay any liabilities of the Trust or to establish or increase any cash
reserves pursuant to Section 6.07 hereof, or any cash received as a result of
a sale pursuant to clause (v) of paragraph (a) which is in excess of the
amount needed to discharge liabilities of the Trust then due, to Unit Holders
of record as specified in connection with the Unit Holder vote or, if there is
no Unit Holder vote or no record date for determining Unit Holders of record
entitled to receive any cash to be distributed as a result of such sale is so
specified, to unit Holders as part of the Quarterly Income Amount distributed
with respect to the first Quarterly Record Date following the date of any such
sale (unless such sale occurs on a Quarterly Record Date or within ten days
prior to a Quarterly Record Date in which event the distribution may be on
such Quarterly Record Date unless the Trustee determines that such an
immediate distribution would prevent the Trust from complying with applicable
law or any regulation of any stock exchange on which the Units are listed).
Section 6.03 - No Power to Engage in Business or Make Investments.
Notwithstanding any provision of the Delaware Trust Act, the Trustee shall not
cause the Trust to engage in any business, commercial or investment activity
of any kind whatsoever, except for investment activity permitted in Section
6.07 hereof, and shall not under any circumstances use any portion of the
Trust Estate to acquire any oil and gas lease, royalty or other mineral
interest or, except as permitted in Sections 6.07 and 6.12, acquire any other
asset. The Trustee shall not accept any contribution to the Trust other than
the Initial Royalty Interest, any Additional Royalty Interest and any cash
required to be deposited pursuant to Section 2.04 hereof; provided that
nothing herein shall be construed to prevent the Trust from receiving the
benefits of the Conveyance and the Support Agreement.
Section 6.04 - Payment of Liabilities of Trust. The Trustee is
authorized to and shall first apply all money received by it (other than
amounts contributed under Section 2.04 hereof with respect to any cash
reserve) for the payment of all liabilities of the Trust, including but not
limited to all expenses, taxes and liabilities incurred of all kinds,
compensation to it for its services and reimbursement of its expenses pursuant
to Sections 7.03 and 7.04 hereof and compensation to such parties as may be
consulted pursuant to Section 7.05 hereof.
Section 6.05 - Timing of Trust Income and Expenses. The Trustee will use
reasonable efforts to cause the Unit Holders to recognize income (including
any income from interest earned on investments made in accordance with this
Agreement or from any sale of the Royalty Interest, except as may be specified
in a vote of Unit Holders in the case of a sale pursuant to clause (ii) of
paragraph (a) of Section 6.02 hereof) and expenses on Quarterly Record Dates.
The Trustee will invoice the Trust for services rendered by the Trustee and,
to the extent provided in Section 7.04 hereof, reimbursement of expenses
incurred by the Trustee relating to the Trust only on a Quarterly Record Date
and shall cause the Trust to pay such invoice only on the Quarterly Record
Date on which such invoice is rendered and will use reasonable efforts to
cause all Persons to whom the Trust becomes liable to invoice the Trust for
such liability on a Quarterly Record Date and to cause the Trust to pay such
liability on the Quarterly Record Date on which such liability is invoiced.
In connection with the requirements of any stock exchange on which the Units
are listed, the Trustee will, if required by such stock exchange, use
reasonable efforts to determine the Quarterly Income Amount and report such
amount to such stock exchange at such time as may be required by such stock
exchange; provided that the Trustee shall not be required to calculate any
amounts payable pursuant to the Conveyance. Nothing in this Section 6.05
shall be construed as requiring the Trustee to cause payment to be made for
Trust liabilities on any date other than on such date as in its sole
discretion it shall deem to be in the best interests of the Unit Holders.
Section 6.06 - Limited Power to Borrow. If at any time the amount of
cash on hand (which amount shall not include any amounts which have been
reported to a stock exchange on which the Units are listed or otherwise
publicly announced as the amount which will be paid to Unit Holders with
respect to a Quarterly Record Date and which amounts have not been paid) is
not sufficient to pay liabilities of the Trust then due (including any amount
payable upon redemption of Units pursuant to Section 6.12 hereof), the Trustee
shall borrow from another Person not affiliated with the Trustee, on a secured
or unsecured basis, such amounts as are required after use of any available
Trust funds to pay such liabilities as have become due; provided that the
Trustee shall effect such borrowing only under the following conditions:
(a) the Trustee shall have determined that it is not practical to pay
such liabilities on subsequent Quarterly Record Dates out of funds anticipated
to be available on such dates and that, in the absence of such borrowing, the
Trust Estate is subject to the risk of loss or diminution in value;
(b) the borrowing is effected pursuant to terms and conditions which,
in the opinion of an investment banking firm, commercial banking firm or other
Person qualified to render such opinion and selected by the Trustee, are
commercially reasonable when compared to alternatives available to the Trust,
and
(c) the Trustee shall have received an unqualified written opinion of
counsel to the Trust to the effect that such borrowing will not adversely
affect the classification of the Trust as a "grantor trust" for federal income
tax purposes or cause the income from the Trust to be treated as unrelated
business taxable income for federal income tax purposes; provided, however,
that if the Trustee is unable to obtain such opinion the Trustee shall
nevertheless effect such borrowing if the Trustee determines that the failure
to effect such borrowing will be materially detrimental to the Unit Holders
considered as a whole.
To secure payment of such indebtedness, the Trustee is authorized to
mortgage, pledge, grant security interests in or otherwise encumber (and to
include as a part thereof any and all terms, powers, remedies, covenants and
provisions deemed necessary or advisable in the Trustee's discretion
including, without limitation, the power of sale with or without judicial
proceedings) the Trust Estate, or any portion thereof, including the Royalty
Interest and to carve out and convey production payments. The Trustee is
prohibited from borrowing in its capacity as Trustee or on behalf of the Trust
except as provided in this Section 6.06 and in Section 6.12(d) hereof. In the
event of such borrowings, no further Trust distributions shall be made until
the indebtedness created by such borrowings has been paid in full.
Section 6.07 - Cash Reserves and Cash Held Pending Distribution Date.
The Trustee shall establish a cash reserve for the payment of material
liabilities of the Trust which may become due, but only under the following
conditions: (a) the Trustee shall have determined that it is not practical to
pay such liabilities on subsequent Quarterly Record Dates out of funds
anticipated to be available on such dates and that, in the absence of such
reserve, the Trust Estate is subject to the risk of loss or diminution in
value or The Bank of New York is subject to the risk of personal liability for
such liabilities and (b) the Trustee shall have received an unqualified
written opinion of counsel to the Trust to the effect that the establishment
and maintenance of such reserve will not adversely affect the classification
of the Trust as a "grantor trust" for federal income tax purposes or cause the
income from the Trust to be treated as unrelated business taxable income for
federal income tax purposes; provided however, that if the Trustee is unable
to obtain such opinion the Trustee shall nevertheless establish such reserve
if the Trustee determines that the failure to establish such reserve will be
materially detrimental to the Unit Holders considered as a whole or will
subject The Bank of New York to the risk of personal liability for such
liabilities.
Collected cash balances being held by the Trustee as a reserve for
liabilities shall be invested (i) in obligations issued by (or unconditionally
guaranteed by) the United States or any agency or instrumentality thereof
(provided such obligations are secured by the full faith and credit of the
United States) or (ii) if such obligations maturing as required in the last
sentence of this paragraph are not available, in repurchase agreements (1)
with any bank, having capital, surplus and undivided profits of $100,000,000
or more; (2) which are secured by collateral of the type specified in (i)
above which collateral (a) is in the possession of the Trustee either directly
or through the Federal Reserve book-entry account of the-Trustee individually
or a third party acting solely as agent for the Trustee, (b) is not subject to
any third party claims, (c) has a market value (determined at the execution
date of the relevant repurchase agreement) at least equal to the principal
amount invested in the repurchase agreement; and (3) which have a fixed rate
of return. Any such obligation or repurchase agreement must mature (x) on the
next succeeding Quarterly Record Date or, if the due date of the liability
with respect to which the reserve is established is known, on the due date of
such liability and (y) must be held to maturity unless there is an earlier
default. In the event of a default thereon prior to maturity, the Trustee may
liquidate such investment and reinvest in another obligation of the type and
maturity date specified in this Section 6.07, provided that the rate of return
thereon is not in excess of the rate of return specified in the investment so
liquidated.
Collected cash balances being held by the Trustee for distribution at the
next Distribution Date shall be invested (i) in obligations issued by (or
unconditionally guaranteed by) the United States or any agency or
instrumentality thereof (provided such obligations are secured by the full
faith and credit of the United States) or (ii) if such obligations with a
maturity date on such Distribution Date are not available, in repurchase
agreements as described in the immediately preceding paragraph; provided that
any such obligation or repurchase agreement must mature on such Distribution
Date and must be held to maturity, except as provided in the last sentence of
the previous paragraph.
Except as otherwise provided in Section 4.02 hereof, in the event funds
are received by the Trustee at a time that does not allow it sufficient time
to invest in obligations or repurchase agreements of the type and maturity
specified in this Section 6.07 with interest accruing from the day such funds
are received by the Trustee, the Trustee shall, if practicable, invest such
funds overnight in a time deposit with a bank having capital, surplus and
undivided profits of $100,000,000 or more and shall, on the following day,
reinvest such funds (and any interest earned thereon) in obligations or
repurchase agreements of the type and maturity so specified.
Notwithstanding the foregoing, prior to the Opinion Date and during any
period which is not an Insignificant Investor Period, none of the investments
described in this section shall be purchased from The Bank of New York.
Section 6.08 - Settlement of Claims. The Trustee is authorized to
prosecute and defend, and to settle by arbitration or otherwise, any claim of
or against the Trustee, the Trust or the Trust Estate, to waive or release
rights of any kind and to pay or satisfy any debt, tax or claim upon any
evidence by it deemed sufficient, without the joinder or consent of any Unit
Holder.
Section 6.09 - Income and Principal. The Trustee shall not be required
to keep separate accounts or records for income and principal or maintain any
reserves for depletion of any mineral assets in the Trust Estate. To the
extent that such separate accounts or records are kept, the Trustee may
allocate the receipts, disbursements and reserves of the Trust between income
and principal in the discretion of the Trustee, and the Trustee's discretion
need not accord with the provision of any, requirement of applicable law.
Regardless of any such characterization, however, the Trustee shall not make
any distribution, accumulate any funds or maintain any reserve except as
expressly provided in this Agreement.
Section 6.10 - Effect of Trustee's Power on Trust Property. The powers
granted the Trustee under this Agreement may be exercised upon such terms as
the Trustee deems advisable and may affect Trust properties.
Section 6.11 - No Requirement of Diversification. The Trustee shall be
under no obligation to diversify the Trust's assets or to dispose of any
wasting assets.
Section 6.12 - Divestiture of Units. If at any time the Trust or the
Trustee is made a party in any judicial or administrative proceeding which
seeks the cancellation or forfeiture of any property in which the Trust has an
interest because of the nationality, or any other status, of any one or more
Unit Holders, the following procedures will be applicable:
(a) The Trustee will promptly give written notice ("Notice") of the
existence of such controversy to each Unit Holder ("Ineligible Holder") whose
nationality or other status is an issue in the proceeding and will mail a copy
of such notice to SOC and the Company. The Notice will contain a reasonable
summary of such controversy and will constitute a demand to each Ineligible
Holder that he dispose of his Units to a party that would not be an Ineligible
Holder, within 30 days after the date of the Notice.
(b) If any Ineligible Holder fails to dispose of his Units as required
by the Notice, the Trustee shall have the right to redeem and shall redeem any
such Units at any time during the 90 days after the expiration of the 30-day
period specified in the Notice. The redemption price on a per Unit basis will
be determined as of the last Business Day ("determination day") preceding the
end of the 30-day period specified in the Notice and will equal the following
per Unit amount:
(1) if the Units are then listed on a stock exchange, the price
will equal the closing price of the Units on such stock exchange (or, if
the Units are then listed on more than one stock exchange, on the largest
such stock exchange in terms of the volume of Units traded thereon during
the preceding 12 months, or for the period the Units have been traded on
such stock exchange if less than 12 months) on the determination day if
any units were sold on such stock exchange on such day or, if not, on the
last day preceding the determination day on which any Units were sold on
such stock exchange, or
(2) if the Units are not then listed on any stock exchange but are
traded in the over-the-counter market, the price will equal the closing
bid price on the determination date as quoted on the National Market
System of the National Association of Securities.Dealers Automatic
Quotation System if the Units are so quoted or, if not, the mean between
the closing bid and asked prices for the Units in the over-the-counter
market on the determination day, if quotations for such prices on such
day are available or, if not, on the last day preceding the determination
day for which such quotations are available, or
(3) if the Units are neither listed nor traded in the over-the-
counter market, the price shall equal the price which, in the written
opinion of a recognized firm of investment bankers selected by the
Trustee, is the fair market value of the Units. The Trustee in relying
on the opinion of such investment banking firm, shall have full
authorization and be entitled to the full protection provided by Section
7.05 hereof. If the Trustee cannot obtain an opinion from an investment
banking firm which in the Trustee's sole discretion is competent to
render such opinion, then the Trustee may obtain (and rely on) the
opinion of any other advisor or expert which the Trustee in its sole
discretion believes to have sufficient competence to render such opinion.
Such redemption (or sale) will be accomplished by tender of the above
cash price to the Ineligible Holder at his address as shown on the
records of the Trustee, either in person or by mail as provided in
Section 12.05 hereof, accompanied by notice of cancellation.
Concurrently with such tender the Trustee shall cancel or cause to be
cancelled all Certificates representing Units then owned by such
Ineligible Holder and for which tender has been made. In the event the
tender is refused by the Ineligible Holder or if he cannot be located
after reasonable efforts to do so, the tendered but unclaimed sum shall
be held by the Trustee in a non-interest bearing account, uninvested and
in trust for the benefit of such Ineligible Holder, until proper claim
for same has been made by such holder, but subject to applicable laws
concerning unclaimed property.
(c) During any period prior to the Opinion Date which is not an
Insignificant Investor Period, if the redemption provided in paragraph
(b) of this Section 6.12, if effected by the Trust, would constitute a
non-exempt "prohibited transaction" within the meaning of section 406 of
ERISA or section 4975 of the Code, the Units subject to the Trust's right
of redemption shall be purchased by the Company or by another Person
eligible to purchase such Units and designated by the Company in a
transaction which does not constitute such a non-exempt "prohibited
transaction." Such purchase shall be accomplished by tender of the cash
price referred to in paragraph (b) to the Ineligible Holder at his
address as shown on the records of the Trustee, either in person or by
mail as provided in Section 12.05 hereof, accompanied by notice that the
Units will be transferred to the purchaser. In the event the tender is
refused by the Ineligible Holder or if he cannot be located after
reasonable efforts to do so, the Company shall cause the tendered but
unclaimed sum to be placed in a non-interest bearing account, uninvested
and in trust for the benefit of such Ineligible Holder, until a proper
claim for same has been made by such holder, but subject to applicable
laws concerning unclaimed property. Upon receipt by the Trustee of
notice from the Company or the purchaser that the tender has been refused
or that the Ineligible Holder has not been located after reasonable
efforts to do so and that the tendered but unclaimed sum has been placed
in trust as provided herein, the Trustee shall cause to be transferred to
the purchaser the Units purchased and shall issue to the purchaser
Certificates representing such Units. Such transfer and issuance shall
be effected notwithstanding the fact that the Certificates representing
the Units purchased have not been presented to the Trustee for
cancellation, and from and after the date of such transfer such
Certificates shall only represent the right to receive the funds held in
trust for the benefit of such Ineligible Holder.
(d) The Trustee may cause the Trust to borrow any amount required
to redeem Units in accordance with the procedures described in paragraph
(b) above, or if the Trustee is unable to effect such borrowing the
Trustee may cause the Trust to sell a portion of the Trust Estate for
cash in order to obtain funds to effect such redemption; provided that
the Trustee shall effect such borrowing only upon the terms and
conditions specified in Section 6.06 hereof and shall effect such sale
only under the conditions specified in Section 6.02 hereof.
Section 6.13 - Prohibited Transactions. Notwithstanding any power,
right, duty or obligation of the Trustee under this Agreement, the Trustee
shall not cause or permit the Trust to participate in any transaction which
would constitute a non-exempt "prohibited transaction" within the meaning of
section 406 of ERISA or section 4975 of the Code. During any period prior to
the Opinion Date which is not an Insignificant Investor Period, (a) the
Company shall provide to the Trustee on a timely basis any and all information
reasonably requested by the Trustee concerning the relationship of the Company
and its Affiliates to certain Unit Holders specified by the Trustee and any
information listing parties-in-interest furnished by Unit Holders, (b) the
Trustee shall review all such information provided by the Company as well as
any relevant information the Trustee may receive from a Unit Holder concerning
its status as an ERISA-covered entity and the identification of parties-in-
interest under ERISA with respect to such Unit Holder, and (c) the Trustee
shall make reasonable inquiry of each Person desiring to enter into a
transaction with the Trust as to whether such Person is a party-in-interest
under ERISA with respect to ERISA-covered Unit Holders.
ARTICLE VII
Rights and Liabilities of Trustee
Section 7.01 - General Liability of Trustee. The Trustee is empowered to
act in its discretion and shall not be personally or individually liable for
any act or omission except in the case of negligence, bad faith or fraud. No
action taken or suffered in good faith by the Trustee in reliance upon and in
accordance with the written opinion of any counsel or the written advice of
any other expert shall in any event constitute negligence, bad faith or fraud
within the purview of this Agreement.
The Trustee shall not be answerable for the negligence of any experts,
provided that the Trustee has selected such experts with due care in good
faith.
It is acknowledged that the Trustee has taken the Trust Estate as is and
without examination. The Trustee shall have no responsibility for any
statements made or omitted in any disclosure documents relating to the Units
or the Trust Estate and, except as may be required by law, no duty to verify
the accuracy or completeness of the same.
The Bank of New York and the Trustee will have no duties whatsoever
except such duties as are set forth in this Agreement, and no implied covenant
or obligation shall be read into this Agreement against the Trustee.
Section 7.02 - Indemnification of Trustee.
(a) The Bank of New York and the Trustee (including its agents and
employees) shall be indemnified by, and receive reimbursement from (i)
the Company (1) during any period prior to the Opinion Date which is not
an Insignificant Investor Period, (2) whenever the assets of the Trust
are insufficient or not permitted by applicable law to provide such
indemnity and (3) after the termination of the Trust to the extent that
the Trustee did not have actual knowledge, or should not have reasonably
known, of a potential claim against the Trustee for which a reserve could
have been established and used to satisfy such claim in accordance with
Section 9.03 prior to the final distribution of assets of the Trust upon
its termination or to the extent any such reserve was insufficient and
(ii) the Trust Estate during any other period, against and from any and
all liability, expense, claim, damage or loss (including reasonable legal
fees and expenses) incurred by it, individually or as Trustee, in the
administration of the Trust and the Trust Estate or any part or parts
thereof, or in the doing of any act done or performed or omission
occurring on account of its being Trustee or any consequence thereof,
including without limitation, those resulting from any non-exempt
prohibited transaction or its resignation as Trustee, except (1) such
liability, expense, claim, damage or loss arising from the Trustee's
negligence, bad faith or fraud and (2) any loss resulting from the
Trustee's expenses (direct or indirect) in acting hereunder exceeding the
compensation and reimbursement provided for pursuant to Sections 7.03,
7.04 and 7.05 hereof. From and after the Opinion Date and during any
Insignificant Investor Period, the Trustee shall have a lien upon the
Trust Estate to secure it for such indemnification and reimbursement and
for compensation to be paid to it; provided, however, that any such lien
on the Royalty Interest shall be deemed released upon a sale or other
disposition of the same. Except as provided in Section 3.07 hereof,
neither the Trustee nor any agent or employee of the Trustee shall be
entitled to any reimbursement or indemnification from any Unit Holder for
any liability, expense, claim, damage or loss incurred by the Trustee or
any such agent or employee. Notwithstanding the foregoing, the Trustee
shall not be entitled to indemnity from the Trust Estate with respect to
matters for which it is entitled to indemnity pursuant to paragraph (b)
of this Section 7.02.
(b) The Company will indemnify and hold the Trustee, individually
and as Trustee, and the Trust harmless from and against any losses,
claims, damages or liabilities to which the Trustee, individually or as
Trustee, or the Trust may become subject, under the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
offering circular, private placement memorandum or similar document or
the registration statement or any prospectus relating to the registration
of the Units under the Securities Act of 1933, as amended, or in any
report or other document filed pursuant to the Securities Exchange Act of
1934, as amended, or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Trustee,
individually and as Trustee, or the Trust for any legal or other expenses
reasonably incurred by the Trustee, individually and as Trustee, or the
trust in connection with investigating or defending any such action or
claim; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the registration
statement or any prospectus or such amendment or supplement in reliance
upon and in conformity with information furnished to the Company by the
Trustee, individually or as Trustee. The foregoing indemnity and hold
harmless agreement shall inure to the benefit of all officers, directors
and controlling persons of the Trustee, individually and as Trustee.
(c) All indemnifications of The Bank of New York and the Trustee
by the Company under this Agreement shall survive the termination of the
Trust and the termination of this Agreement. Moreover, any provision in
this Agreement that provides for the indemnification of The Bank of New
York and the Trustee or that limits the liability of The Bank of New York
and the Trustee shall also apply with respect to any Transfer Agent and
Registrar.
Section 7.03 - Compensation. The Trustee shall receive from the Trust
Estate compensation for its services as set forth in Exhibit C attached hereto
and, to the extent provided in Sections 7.04 and 7.05 hereof, reimbursement of
expenses incurred as Trustee of the Trust and as Transfer Agent and Registrar
of the Certificates representing the Units. In the event that any Person
serving as Trustee is not also serving as Transfer Agent and Registrar, the
compensation payable pursuant to Exhibit C shall be allocated among such
Persons as the Trustee shall determine.
Section 7.04 - Other Services and Expenses.- Charges for performing any
services not contemplated or specifically covered in Exhibit C will be charged
to the Trust on the basis of the Trustee's then prevailing rate for such
services; provided, however, that during any period prior to the Opinion Date
which is not an Insignificant Investor Period, any services rendered by the
Trustee in enforcing the terms and conditions of the Conveyance or the Support
Agreement shall not be deemed to be services not contemplated or specifically
covered in Exhibit C; and provided further that services by the Trustee on
behalf of the Trust in connection with the defense of any litigation against
the Trust or the Trustee, in connection with any audit of the books and
records of the Trust by the Internal Revenue Service, in connection with any
investigation by the Securities and Exchange Commission or other governmental
bodies involving the Trust and other matters which increase the obligations of
the Trustee beyond those contemplated by this Agreement and are not the result
of discretionary action on the part of the Trustee shall constitute services
not contemplated or specifically covered in Exhibit C.
The initial organizational costs of the Trust, including the printing of
the initial Certificates, the Trustee's acceptance fee, out of pocket expenses
and the fees of legal counsel of the Trustee, will be paid by the Company.
During any period prior to the opinion Date which is not an Insignificant
Investor Period, the Trustee shall cause the Trust to pay directly out of the
Trust Estate all expenses, taxes and liabilities incurred and relating to the
Trust, including but not limited to fees and expenses incurred for experts
hired pursuant to Section 7.05 hereof; provided, however, that The Bank of New
York may incur, and shall be reimbursed out of the Trust Estate for, the
actual cost to The Bank of New York of all of its out-of-pocket costs and
expenses for printing, microfiche, postage, delivery and pick-up, long
distance telephone, travel and other similar costs and expenses which are
incurred in connection with the performance of its duties as Trustee or
Transfer Agent and Registrar. From and after the Opinion Date and during any
Insignificant Investor Period, The Bank of New York may incur any out-of-
pocket costs and expenses in the discharge of its duties as Trustee or
Transfer Agent and Registrar (or may, but shall not be required to, cause the
Trust to pay any or all of such expenses directly out of the Trust Estate),
including but not limited to fees and expenses incurred for experts hired
pursuant to Section 7.05 hereof; provided, however, that The Bank of New York
shall be reimbursed out of the Trust Estate at actual cost to The Bank of New
York.
Section 7.05 - Reliance on Experts. The Trustee shall consult with
accountants, counsel and petroleum engineers as specifically provided herein
and may otherwise consult with counsel (including its own counsel),
accountants, geologists, engineers and other parties deemed by the Trustee to
be qualified as experts on the matters submitted to them. The Trustee is
authorized to rely on the advice of such experts as provided in Section 7.01
hereof and to make payments of all reasonable fees for services or expenses
thus incurred out of the Trust Estate.
Section 7.06 - No Security Required. No bond or other security shall be
required of the Trustee.
Section 7.07 - Transactions in Multiple Capacities. To the extent
permitted by applicable law and except as otherwise provided herein, the
Trustee shall not be prohibited in any way in exercising its powers or from
dealing with The Bank of New York in any other capacity, fiduciary or
otherwise.
ARTICLE VIII
Office of Trustee
Section 8.01 - Removal of Trustee. The Trustee may be removed as Trustee
hereunder, with or without cause, by the affirmative vote at a meeting duly
called and held in accordance with the provisions of ARTICLE V hereof of
Record Date Unit Holders holding Certificates representing a majority of the
Units represented at the meeting. Subsequent to such vote, any Trustee being
removed shall have only those duties and obligations such Trustee would have
if such Trustee had commenced a resignation as described in Section 8.02
hereof.
Section 8.02 - Resignation of Trustee. (a) Any Trustee may at any time
resign for any reason whatsoever, with or without cause, and without the
necessity of any court proceeding. Any such resignation may be commenced by
giving notice to the Company. Such notice to the Company shall be promptly
confirmed in writing, and shall be followed by the giving of written notice to
each of the Unit Holders at such Unit Holder's last address as shown by the
records of the Trust at the time such notice is given by first-class mail.
Any resigning Trustee shall account to its successor for the administration of
the Trust as may be reasonably required by the successor Trustee. Any and all
successors to any resigning Trustee shall be fully protected in relying upon
such accounting. Any resignation shall be effective upon the appointment of
and acceptance of the appointment by a successor Trustee.
(b) At no time subsequent to any Trustee's commencement of a
resignation (as described above) shall such Trustee have any duties or
obligations with respect to any filings under the Securities Act of 1933, as
amended, or any successor statute or statutes or the rules and regulations
thereunder, and subsequent to the commencement of a resignation, the resigning
Trustee shall have only those other duties and obligations expressly set forth
herein or contemplated hereby.
(c) No Trustee commencing a resignation shall have any liability for
any consequences, expenses, damages, or effects of any kind whatsoever
including, without limitation, any delay in or non-commencement of any SEC
registration, in whole or in part, arising out of or relating to its
commencing a resignation or in invoking its rights and privileges with respect
thereto as set forth above.
Section 8.03 - Appointment of Successor Trustee. If the Trustee has
given notice of its intention to resign, a successor Trustee shall be
appointed by the Company; provided, that if the Trustee has been removed by a
vote of Unit Holders pursuant to Section 8.01 hereof, a successor Trustee may
be appointed by the Unit Holders at such meeting. Notice of the appointment
of a successor Trustee shall be given by the resigning Trustee within ten days
of receipt of notice of such appointment to each Unit Holder as of the date of
the appointment of the successor Trustee at each Unit Holder's last address as
shown by the records of the Trustee.
In the event that a successor Trustee has not been appointed within 60
days after the commencement of a resignation or occurrence of a vacancy, a
successor Trustee may be appointed by any state court of Delaware, upon the
application of any Unit Holder. In the event any such application is filed,
any such court may appoint a temporary successor Trustee at any time after
such application is filed with it which shall, pending the final appointment
of a successor Trustee, have such powers and duties as the court appointing
such temporary successor Trustee shall provide in its order of appointment,
consistent with the provisions of this Agreement. In the event such court
shall deem it necessary, the court may appoint such temporary successor
Trustee or successor Trustee on such terms as to compensation as it shall deem
necessary and reasonable notwithstanding any provision herein to the contrary.
In no event shall any Trustee which has commenced a resignation as described
in preceding Section 8.02 have any duty or obligation to appoint or apply for
the appointment of any successor Trustee or be eligible to be named as a
successor Trustee.
A Trustee appointed under the provisions of this Section 8.03 shall be a
corporation organized and doing business under the laws of the United States,
any state thereof or the District of Columbia authorized under such laws to
exercise trust powers or a national banking association domiciled in the
United States, in either case which has a capital, surplus and undivided
profits (as of the end of its last fiscal year prior to its appointment) of at
least $50,000,000 and subject to supervision or examination by federal or
state authorities. Unless the Trust already has a Trustee that is a resident
of or has a principal office in the State of Delaware, then any Trustee
appointed under this Section 8.03 shall be such a resident or have such a
principal office.
Section 8.04 - Rights of Successor Trustee. Immediately upon the
appointment of any successor Trustee (including a temporary successor
Trustee), all rights, titles, duties, powers and authority of the resigning
Trustee hereunder shall be vested in and undertaken by the successor Trustee
which shall be entitled to receive from the Trustee which it succeeds in
addition to the accounting referred to in Section 8.02 hereof, all of the
Trust Estate held by it hereunder and all records and files in connection
therewith. No successor Trustee shall be obligated to examine or seek
alteration of any accounting of any preceding Trustee, nor shall any successor
Trustee be liable personally for failing to do so or for any act or omission
of any preceding Trustee. The preceding sentence shall not prevent any
successor Trustee or anyone else from taking any action otherwise permissible
in connection with any such accounting.
Section 8.05. - Merger or Consolidation of Trustee. Neither a change of
name of the Trustee, any merger or consolidation of the Trustee with or into
another bank or trust company nor the transfer of its trust operations to a
separate corporation shall affect the Trustee's right, obligation or capacity
to act hereunder. Any such successor shall continue as the Trustee hereunder.
Section 8.06 - Co-Trustee.
(a) The Co-Trustee has been appointed as trustee and joined as a party
hereunder in order to satisfy the requirements of Section 3807 of the Delaware
Trust Act. In the event of the resignation or removal of the Co-Trustee,
there shall be appointed a successor Co-Trustee hereunder who shall meet the
requirements of Section 3807 of the Delaware Trust Act unless at the time of
such resignation or removal at least one other Trustee acting hereunder
satisfies such requirements. Any successor Co-Trustee shall be appointed in
the manner set forth in Section 8.03 hereof.
(b) Notwithstanding any other term or provision hereof to the contrary, The
Bank of New York, in its capacity as Trustee, alone may exercise the rights and
powers granted to the Trustee herein and shall be solely charged with the
performance of the duties herein declared on the part of the Trustee to be had
and exercised or to be performed; provided, however, that if The Bank of New
York, in its capacity as Trustee, deems it necessary or desirable for the
Co-Trustee to act in a particular matter, the Co-Trustee shall have and
exercise the rights and powers granted herein and shall be charged with the
performance of the duties herein declared on the part of the Trustee to be had
and exercised or to be performed, but only in such particular matter, and the
foregoing shall not relieve The Bank of New York, in its capacity as Trustee,
from any liability or obligation of the Trustee to any Unit Holder.
(c) The Bank of New York, in its capacity as Trustee, alone may execute
and deliver, on behalf of the Trust, any writing, document or instrument which
the Trustee is required to execute and deliver, including, without limitation,
the Conveyance, the Certificates and any writing, document or instrument of a
purely ministerial nature.
ARTICLE IX
Term of Trust and Final Distribution
Section 9.01. - Termination. The Trust shall terminate upon the first to
occur of the following events or times:
(a) on or prior to December 31, 2010, a decision to terminate the Trust
by the affirmative vote at a meeting duly called and held in accordance
with the provisions of ARTICLE V hereof of the Record Date Unit Holders
holding Certificates representing 70 percent of the Units outstanding on
the Voting Record Date; or
(b) after December 31, 2010 either
(i) at such time as the sum of the net revenues from the Royalty
Interest for two successive years commencing with any year after 2010 are
less than $1,000,000 per year, unless the net revenues during such period
have been materially and adversely impacted by an event constituting
"Force Majeure" as defined below; or
(ii) a decision to terminate the Trust by the affirmative vote at a
meeting duly called and held in accordance with the provisions of ARTICLE
V hereof of the Record Date Unit Holders holding Certificates
representing 60 percent of the Units outstanding on the Voting Record
Date.
The term "Force Majeure" shall mean, without limitation, the following:
(i) acts of God; strikes, lockouts or other industrial
disturbances; acts of public enemies; orders or restraints of any kind of
the government of the United States or of the State of Alaska or any of
their departments, agencies, political subdivisions or officials, or any
civil or military authority; insurrections; civil disturbances; riots;
epidemics; sabotage; war, whether or not declared; landslides; lightning;
earthquakes; fires; hurricanes; winds; tornados; storms; droughts;
floods; arrests; restraint of government and people; explosions;
breakage, malfunction or accident to facilities, machinery, transmission
pipes or canals; partial or entire failure of utilities; shortages of
labor, materials, supplies or transportation; or
(ii) any other cause, circumstance or event (other than depletion
of the petroleum reservoir in which the Trust has an interest) not
reasonably within the control of the Company.
Section 9.02. - Disposition of Assets Upon Termination. Subject to the
proviso set forth below, upon termination of the Trust, the Trustee shall sell
for cash (unless by the affirmative vote of the Record Date Unit Holders
holding Certificates representing 70 percent of the Units outstanding on the
Voting Record Date if the decision to terminate the Trust was made on or prior
to December 31, 2010, or 60 percent of the Units outstanding on the Voting
Record Date if the decision to terminate the Trust was made thereafter, the
Unit Holders approve the sale for a specified non-cash consideration, in which
event the Trustee may, but shall not be required to, attempt to consummate
such non-cash sale, but only if the Trustee shall have received a ruling from
the Internal Revenue Service or an unqualified written opinion of counsel to
the Trust to the effect that such non-cash sale will not adversely affect the
classification of the Trust as a "grantor trust" for federal income tax
purposes or cause the income from the Trust to be treated as unrelated
business taxable income for federal income tax purposes) in one or more sales
all the assets other than cash then held in the Trust Estate; provided however
that as soon as practical following termination of the Trust the Trustee shall
obtain an opinion of an investment banking firm, commercial banking firm or
other Person qualified to render such opinion and selected by the Trustee as
to the fair market value of the Trust Estate on the day of termination of the
Trust; and provided further, that upon receipt of such opinion the Trustee
shall notify the Company thereof, and the Company shall have the right,
exercisable by notice to the Trustee within thirty days of receipt of such
notice, to purchase the assets of the Trust at a price equal to the greater of
(i) the fair market value of the Trust Estate as set forth in such opinion or
(ii) the number of then outstanding Trust Units times the following per Unit
amount:
(A) if the Units are then listed on a stock exchange, the price will
equal the closing price of the Units on such stock exchange (or, if the Units
are then listed on more than one stock exchange, on the largest such stock
exchange in terms of the volume of Units traded thereon during the preceding
twelve months, or for the period the Units have been traded on such stock
exchange if less than twelve months) on the day of termination of the Trust if
any Units were sold on such stock exchange on such day or, if not, on.the last
day preceding the day of termination of the Trust on which any Units were sold
on such stock exchange, or
(B) if the Units are not then listed on any stock exchange but are
traded in the over-the-counter market, the price will equal the closing bid
price on the day of termination of the Trust as quoted by the National Market
System of the National Association of Securities Dealers Automated Quotation
System if the Units are so quoted or, if not, the mean between the closing bid
and asked prices for the Units in the over-the-counter market on the day of
termination of the Trust, if quotations for such prices on such day are
available or, if not, on the last day preceding the day of termination of the
Trust for which such quotations are available.
If the Units are neither listed nor traded in the over-the-counter market, the
price shall equal the fair market value of the Trust Estate as set forth in
such opinion.
In rendering such opinion, such firm or other Person shall take into
account the cash owned by the Trust, the liabilities of the Trust, the costs
incident to the sale of the Royalty Interest, the other costs of termination
of the Trust and such other factors as such firm or other Person rendering
such opinion shall deem relevant.
In the event that the Company does not exercise its option, the Trustee
shall effect any such sale (a) pursuant to procedures or material terms and
conditions approved by the affirmative vote of the Record Date Unit Holders
holding Certificates representing 70 percent of the Units outstanding on the
Voting Record Date if such sale is effected on or prior to December 31, 2010,
or 60 percent of Units outstanding on the Voting Record Date if such sale is
effected thereafter, in each case at a meeting duly called and held in
accordance with the provisions of ARTICLE V hereof (provided that if the
procedures, terms or conditions of such sale adversely affect The Bank of New
York's own rights, duties or immunities under this Agreement or otherwise, the
Trustee may in its discretion, but shall not be obligated to, effect such sale
pursuant to such procedures or terms or conditions) or (b) without a vote of
the Unit Holders if (i) the Trustee determines that it is not practicable to
submit such procedures or terms and conditions to a vote of the Unit Holders
pursuant to clause (a) above and (ii) such sale is effected at a price which
is at least equal to the fair market value of the Trust Estate as set forth in
such opinion and pursuant to terms and conditions which, in the opinion of
such firm or other Person rendering such opinion on the fair market value of
the Trust Estate are commercially reasonable when compared to alternatives
available to the Trust.
Section 9.03. - Distribution of Assets upon Termination. The Trustee
shall as promptly as practicable send notice by first class mail of the date
(which shall be not more than 10 Business Days after the date such notice is
sent) on which it will distribute the proceeds of any such sale, and on such
date shall distribute such proceeds and any other cash in the Trust Estate in
proportion to the Units owned by each such Unit Holder upon surrender of the
Certificate evidencing such Units, after paying, satisfying and discharging
all of the existing liabilities of the Trust including fees of the Trustee,
or, if necessary, setting up reserves in such amounts as the Trustee in its
discretion deems appropriate to provide for payment of contingent liabilities.
Any such reserve shall be established in accordance with the procedures
specified in Section 6.07 hereof. From and after the date of distribution set
forth in such notice to Unit Holders, any amounts held by the Trustee pending
distribution shall be held uninvested in a non-interest bearing account.
Upon making final distribution to the Unit Holders, the Trustee shall be
under no further liability except as provided in Section 7.01 hereof. For the
purposes of liquidating and winding up the affairs of the Trust at its
termination, the Trustee shall continue to act as Trustee and may exercise
each power until its duties have been fully performed and the Trust Estate has
been finally distributed.
ARTICLE X
Irrevocability and Amendability
Section 10.01 - Irrevocability. This Agreement and Trust are intended to
be and are irrevocable. No Person shall have the right or power to terminate,
revoke, alter, amend or change this Agreement or any provisions hereof except
as expressly provided in ARTICLE IX hereof or in this ARTICLE X.
Section 10.02 - Limited Amendability. Any provision of this Agreement
(other than this Section 10.02) may be amended by the vote at a meeting duly
called and held in accordance with the provisions of ARTICLE V hereof of the
Record Date Unit Holders holding Certificates representing a majority of the
Units outstanding on the Voting Record Date, but no such amendment shall be
effective unless and until consented to in writing by the Trustee (provided,
however, that the Trustee will so consent unless such amendment affects The
Bank of New York's own rights, duties or immunities under this Agreement or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, agree to such amendment), and in no event may an amendment be
made which would:
(a) alter the rights of the Unit Holders as against each other;
(b) reduce or delay the distributions to the Unit Holders provided
for in Sections 2.04, 4.02, 6.02 and 9.02 hereof;
(c) permit the Trustee to distribute the Royalty Interest in kind
either during the continuation of the Trust or during the period of
liquidation and winding up under Section 9.02 hereof;
(d) provide the Trustee with the power to engage in business or
investment activities (this prohibition is not intended to limit the
authority of the Trustee specifically provided in this Agreement);
(e) adversely affect the characterization of the Trust as a
business trust under the Delaware Trust Act or as a grantor trust for
federal income tax purposes or cause the income from the Trust to be
treated as unrelated business taxable income for federal income tax
purposes;
(f) alter the voting requirements set forth in Sections 6.02,
8.01, 9.01 and 10.02 hereof;
(g) alter the number of Units in the Trust; or
(h) alter the nature of or the amount or time of receipt of
payments under the Royalty Interest;
unless such amendment is approved (1) by the vote at a meeting duly called and
held in accordance with the provisions of ARTICLE V hereof of the Record Date
Unit Holders holding Certificates representing at least 80 percent of the
Units outstanding on the Voting Record Date in the case of subsections (b)
through (h) inclusive above and 100 percent of such Units in the case of
subsection (a) above, and (2) by the Trustee (provided, however, that the
Trustee will so consent unless such amendment affects The Bank of New York's
own rights, duties or immunities under this Agreement or otherwise, in which
case the Trustee may in its discretion, but shall not be obligated to, agree
to such amendment).
Any amendment of Sections 4.05 or Section 7.02(b) shall, in addition to
the above requirements, also require the consent of the Company.
Section 10.03 - Corrective Amendments. Notwithstanding Section 10.02
hereof, SOC, the Company and the Trustee (without the consent of the Unit
Holders) may from time to time and at any time enter into an agreement
amending the terms of this Agreement or any other agreement relating to the
establishment or administration of the Trust to cure any ambiguity or to
correct or supplement any provision contained herein or therein which may be
defective or inconsistent with any other provision contained herein or
therein, to make any other provision with respect to matters arising hereunder
or thereunder that do not adversely affect the Unit Holders or which may be
required by law in connection with the registration of the Units for resale.
Section 10.04 - Tax Rulings and Opinions. No amendment to this Agreement
permitted by Sections 10.02 or 10.03 hereof shall be effective until the
Trustee shall have received a ruling from the Internal Revenue Service or an
unqualified written opinion of counsel to the Trust to the effect that such
amendment will not adversely affect the classification of the Trust as a
"grantor trust" for federal income tax purposes or cause the income from the
Trust to be treated as unrelated business taxable income for federal income
tax purposes.
ARTICLE XI
Failure to Pay Amounts Due Trustee
If, for any reason the royalty payable with respect to the Royalty
Interest or any amount payable by the Company hereunder is not paid to the
Trustee as provided in the Conveyance or hereunder, the Trustee shall as soon
as practicable notify BP by facsimile transmission or telex. The Trustee
shall not exercise any remedies it may have against the Company for failure to
pay any amounts unless BP fails to cause to be paid such amounts pursuant to
its obligations under the Support Agreement within 30 days of notice to BP as
set forth in the preceding sentence. Notice to the Company or BP shall be
made to the notice addresses specified in Section 12.06 hereof.
ARTICLE XII
Miscellaneous
Section 12.01 - Inspection of Records. Each Unit Holder and his duly
authorized agents, attorneys and accountants shall have the right upon request
during reasonable business hours at his own cost and expense to examine and
inspect the books and records of the Trustee relating to the Trust, including
lists of Unit Holders, for any proper purpose, except information which the
Conveyance requires the Trustee to keep confidential.
The Trustee, or its authorized representative, shall have the right
during reasonable business hours at the cost and expense of the Trust to
inspect the Company's books and records relating to the properties burdened by
the Royalty Interest and to discuss with representatives of the Company the
affairs, finances and accounts of the Company relating to the properties
burdened by the Royalty Interest.
Section 12.02 - Filing of this Agreement. Except as otherwise required
by law, neither this Agreement nor any executed copy hereof need be filed in
any jurisdiction in which any of the properties comprising the Trust Estate is
located, but the same may be filed for record in any jurisdiction by the
Trustee. In order to avoid the necessity of filing this Agreement for record,
the Trustee agrees that for the purpose of vesting the record title in any
successor Trustee, the retiring Trustee will, upon appointment of any
successor Trustee, execute and deliver to such successor Trustee appropriate
assignments or conveyances.
Section 12.03 - Disability of Unit Holder. Except as otherwise provided
in Section 4.02 hereof, any payment or distribution to a Unit Holder may be
made by check of the Trustee drawn to the order of the Unit Holder, regardless
of whether or not the Unit Holder is a minor or under other legal disability,
without the Trustee having further responsibility with respect to such payment
or distribution. This Section 12.03 shall not be deemed to prevent the
Trustee from making any payment or distribution by any other method that is
appropriate under law.
Section 12.04 - Savings clause. If any provision of this Agreement
should be held illegal or invalid, such invalidity or illegality shall not
affect the remaining provisions of this Agreement, or any other property
interests, and each provision of this Agreement shall exist separately and
independently, and shall be applied to property interests separately and
independently, of every other provision, and this Agreement shall be construed
as if such illegal or invalid provision had never existed.
Section 12.05 - Notices. Any notice or demand which by any provision of
this Agreement is required or permitted to be given or served upon the Trustee
by any Unit Holder may be given or served by being deposited, postage prepaid
and by registered or certified mail, in a post office or letter box addressed
(until another address is designated by notice given by the Trustee to the
Unit Holders and the Company) to the Trustee at 21 West Street, 12th Floor,
New York, NY 10286, Attention: Corporate Trust, Trustee Administration. Any
notice or other communication by the Trustee to any Unit Holders shall be
deemed to have been sufficiently given, for all purposes, when deposited,
postage prepaid, in a post office or letter box addressed to said holder at
his last address as shown by the records of the Trustee.
Section 12.06 - Notice and Reports to the Company, SOC or BP. Whenever
any notice, communication or report is given by the Trustee to Unit Holders
pursuant to the provisions of this Agreement or is otherwise required to be
provided to Unit Holders pursuant to the provisions of this Agreement or is
required to be provided to the Company, SOC or BP, the Trustee shall provide,
by in-hand delivery or by certified or registered mail, such notice,
communication or report to the Company at the following address:
BP Exploration (Alaska) Inc.
c/o BP America Inc.
200 Public Square
Cleveland, OH 44114-2375
Attention: Treasurer
or to SOC at the following address:
The Standard Oil Company
c/o BP America Inc.
200 Public Square
Cleveland, OH 44114-2375
Attn: Treasurer
or to BP at the following address:
The British Petroleum Company p.l.c.
Brittanic House, Moor Lane
London EC24 9BU, England
Attention: Secretary
FAX: 011-44-879-2341
or at such other address as the Company, SOC or BP, as the case may be, may
from time to time advise the Trustee in writing.
Section 12.07 - Governing Law. The Trust hereby created is a Delaware
business trust, and the laws of Delaware shall control with respect to the
construction, administration and validity of the Trust. This Agreement shall
be governed by and construed in accordance with the law of the State of
Delaware without regard to conflicts of law rules.
Section 12.08 - Counterparts. This Agreement may be executed in a number
of counterparts, each of which shall constitute an original, but such
counterparts shall together constitute but one and the same instrument.
Section 12.09 - Headings. The headings of the Sections and Articles of
this Agreement are inserted for convenience only and shall not constitute a
part hereof.
Section 12.10. - Independent conduct. SOC, the Company, The Bank of New
York and the Co-Trustee on behalf of all future Unit Holders hereby reserve
and retain the right to engage in all businesses and activities of any kind
whatsoever (irrespective of whether the same may be in competition with the
Trust), and to acquire and own all assets however acquired and whenever
situated and to receive compensation or profit thereof, for their own
respective accounts and without in any manner being obligated to disclose or
offer such businesses, activities, assets, compensation or profit to each
other or to the Trust.
Section 12.11 - Determination by the Trustee. In the event that the
Trustee is required to take action or permitted not to take action under
Sections 6.02(a)(ii), 9.02(b) and 10.02 (except for any amendment to Sections
7.03, 7.04 or the last sentence of Section 7.05 hereof) which is conditioned
upon a determination by the Trustee that the action to.be taken or omitted
does not or will not adversely affect The Bank of New York's rights, duties or
immunities under this Agreement or otherwise, the Trustee shall not, in making
such determination, take into consideration the loss of Trustee's fees or the
loss of other financial benefits (other than the right to reimbursement of
expenses or indemnities against liabilities) which may result from any
termination of the Trust or other event which would cause The Bank of New York
to cease to serve as Trustee hereunder as a result of such action. The loss
of such fees or such other financial benefits shall not be deemed to
constitute an adverse impact on The Bank of New York's own rights, duties or
immunities under this Agreement or otherwise.
IN WITNESS WHEREOF, SOC has caused this Agreement to be executed by its
duly authorized Chairman and Chief Executive officer and its seal to be
hereunto affixed and attested by its duly authorized Secretary and the Company
has caused this Agreement to be executed by its duly authorized Treasurer and
its seal to by hereunto affixed and attested by its duly authorized Secretary
and the Trustee has caused this Agreement to be executed by its duly
authorized Assistant Vice President and its seal to be hereunto affixed and
attested by its duly authorized Assistant Vice President and the Co-Trustee
has executed this Agreement as of the 28th day of February, 1989.
ATTEST: THE STANDARD OIL COMPANY
/s/ J. M. Casarik By: /s/ James H. Ross
- ---------------------- ----------------------
Secretary
ATTEST: BP EXPLORATION (ALASKA) INC.
/s/ J. M. Casarik By: /s/ E. Whitehead
- ---------------------- ----------------------
Secretary
ATTEST: THE BANK OF NEW YORK, Trustee
/s/ David A. Sampson By: /s/ W. N. Gitlin
- ---------------------- ----------------------
/s/ Eric A. Mazie /s/ F. James Hutchinson
- ---------------------- ----------------------
Witness F. James Hutchinson, Co-Trustee
<PAGE>
STATE OF OHIO )
) SS
COUNTY OF CUYAHOGA )
BEFORE ME, the undersigned authority, a Notary Public in and for
said County and State, on this day personally appeared J. H. Ross, known to me
to be the person and officer whose name is subscribed to the foregoing
instrument and acknowledged before me that the same was the act of The
Standard Oil Company, an Ohio corporation, and that he executed the same as
the act of such corporation for the purposes and consideration therein
expressed and in the capacity therin stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 28th day of
February, 1989.
/s/ JoAnn Motuza
------------------------
Notary Public
My commission expires:
JoANN MOTUZA
Notary Public, State of Ohio
Recorded in Cuyahoga County
My Comm. Expires 9-14-92
<PAGE>
STATE OF OHIO )
) SS
COUNTY OF CUYAHOGA )
BEFORE ME, the undersigned authority, a Notary Public in and for
said County and State, on this day personally appeared
E. Whitehead, known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged before me that the
same was the act of the said BP Exploration (Alaska) Inc., a Delaware
corporation, and that he executed the same as the act of such corporation for
the purposes and consideration therein expressed and in the capacity therein
stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 28th day of
February, 1989.
/s/ JoAnn Motuza
------------------------
Notary Public
My commission expires:
JoANN MOTUZA
Notary Public, State of Ohio
Recorded in Cuyahoga County
My Comm. Expires 9-14-92
<PAGE>
STATE OF NEW YORK )
ss.:
COUNTY OF NEW YORK )
Before me, a notary public in and for said County, personally
appeared Walter N. Gitlin, known to me to be the person who, as Assistant Vice
President of The Bank of New York, the corporation which executed the
foregoing instrument, signed the same, and acknowledged to me that he did so
sign said instrument in the name and upon behalf of said corporation as such
officer and that he executed the same as the act of such corporation for the
purposes and consideration therein expressed and in the capacity therein
stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 23rd day of
February, 1989.
/s/ Virginia Barazotti
-------------------------
Notary Public, in and for
New York
My Commission Expires:
VIRGINIA BARAZOTTI
Notary Public, State of New York
No. 41-4734647
Qualified in Queens County
Certificate filed in New York County
Commission Expires Nov. 30, 1989
<PAGE>
STATE OF DELAWARE ) )SS
COUNTY OF NEW CASTLE)
BEFORE ME, the undersigned authority, a Notary Public in and for
said County and State, on this day personally appeared James Hutchinson, known
to me to be the person whose name is subscribed to the foregoing instrument
and acknowledged before me that he is a resident of the State of Delaware and
that he executed the same as his free and voluntary act for the purposes and
consideration therein expressed and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 17th day February,
1989.
/s/ Lisa M. Harrison
[SEAL] Notary Public
My commission expires:
MY COMMISSION EXPIRES
AUGUST 8, 1990
EXHIBIT 4.2
OVERRIDING ROYALTY CONVEYANCE
Dated February 27, 1989
Between
BP EXPLORATION (ALASKA) INC.
("Grantor")
and
THE STANDARD OIL COMPANY
("Grantee")
RECORD THIS INSTRUMENT IN THE BARROW RECORDING DISTRICT.
BP EXPLORATION (ALASKA) INC. (a) was formerly known as (1) STANDARD ALASKA
PRODUCTION COMPANY, (2) SOHIO ALASKA PETROLEUM COMPANY, (3) SOHIO NATURAL
RESOURCES COMPANY, and (4) SOHIO PETROLEUM COMPANY and (b) is successor-in-
interest by merger to (1) BP ALASKA EXPLORATION INC. and (2) BP OIL
CORPORATION (which was formerly known as BP EXPLORATION U.S.A. INC.); please
index all eight of these names in the Grantor Index. THE STANDARD OIL COMPANY
is known in Alaska as SOCO INC.; please index both of these names in the
Grantee Index.
THE LANDS AFFECTED BY THIS INSTRUMENT ARE DESCRIBED IN EXHIBIT A ATTACHED
HERETO.
ADDRESSES OF THE PARTIES TO THIS INSTRUMENT ARE SET FORTH IN SECTION 10.4 OF
THIS INSTRUMENT.
RETURN THIS INSTRUMENT TO: GUESS & RUDD
510 L Street, Suite 700
Anchorage, Alaska 99501
Attention: Joseph J. Perkins, Jr.
<PAGE>
OVERRIDING ROYALTY CONVEYANCE
THIS INSTRUMENT OF CONVEYANCE, dated the 27th day of February, 1989,
between BP Exploration (Alaska) Inc., a Delaware corporation (Grantor), and
The Standard Oil Company, an Ohio corporation known as SOCO Inc. (Grantee).
WITNESSETH:
WHEREAS, Grantor desires to grant to Grantee an overriding royalty
interest (as hereinafter more fully defined, called the "Royalty Interest")
from and out of the Subject Interests and to transfer and convey the Royalty
Interest unto Grantee as of the Effective Date herein provided, to the end and
effect that the Royalty Interest shall burden and apply to the Subject
Interests as of such Effective Date; and
WHEREAS, Grantee desires to accept such Royalty Interest;
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements herein contained, the parties agree as follows:
ARTICLE ONE
DEFINITIONS AND REFERENCES
Average Per Barrel Royalty for any calendar quarter shall be the average
of the Per Barrel Royalty for each of the days in such calendar quarter and in
the three preceding calendar quarters. With respect to the first three
calendar quarters after the Effective Date, the Average Per Barrel Royalty
shall be calculated for any preceding quarter as if the Royalty interest had
been conveyed to Grantee prior to the beginning of the earliest preceding
calendar quarter necessary to obtain an average of the present calendar
quarter and the three preceding calendar quarters, using Chargeable Costs
equal to $4.50 per Barrel and a Cost Adjustment Factor of 1.0 for calendar
quarters prior to the Effective Date.
Barrel shall mean 42 United States gallons corrected to 60 degrees
Fahrenheit temperature in accordance with ASTM-IP Petroleum Measurements
Tables, American Edition, ASTM Designation D-1250, and with deductions for
full basic sediment and water content as determined by recognized API
standards.
BP shall mean The British Petroleum Company, p.l.c., an English company
whose principal office is at Britannic House, Moor Lane, London EC2Y 9BU
England.
Business Day shall mean any day that is not a Saturday, Sunday, a holiday
determined by the New York Stock Exchange as "affecting 'ex' dates" or any
other day on which banking institutions in New York, New York, or in any other
city where the principal corporate trust office of the Trustee may be located,
are closed as authorized or required by law.
Chargeable Costs shall have the meaning stated in Section 4.4.
Consumer Price Index shall have the meaning stated in Section 4.5.
Conveyance shall mean this overriding royalty conveyance.
Cost Adjustment Factor shall have the meaning stated in Section 4.5.
Current Reserves shall mean the Proved Reserves as of December 31, 1987,
which is 2,035.6 million Stock Tank Barrels.
Effective Date shall mean 12:01 o'clock A.M. Alaska Time Zone on February
28, 1989. The calendar quarter in which the Effective Date occurs shall be
deemed the first calendar quarter.
Equivalent Financial Standing shall mean a Person having a rating
assigned to outstanding unsecured, unsupported long term debt from Moody's
Investors Service of at least A3 or from Standard & Poor's Corporation of at
least A- or an equivalent rating from at least one nationally-recognized
statistical rating agency, after giving effect to the sale or transfer to such
Person of all or substantially all of the Subject Interests and the assumption
by such Person of all of Grantor's obligations under this Conveyance.
Gas Cap Area Participation shall have the meaning stated in the Prudhoe
Bay Unit Operating Agreement.
Gas Cap Participating Area shall have the meaning stated in the Prudhoe
Bay Unit Agreement.
Grantee shall mean The Standard Oil Company, an Ohio corporation, while
it owns all or any part of or Interest in the Royalty Interest and any other
Person or Persons who acquire legal title to all or any part of or interest in
the Royalty Interest. The Standard Oil Company is known in Alaska as SOCO INC.
Grantor shall mean BP Exploration (Alaska) Inc., a Delaware corporation
while it owns all or any part of or interest in the Subject Interests and any
other Person or Persons who acquire all or any part of or interest in the
Subject Interests. BP Exploration (Alaska) Inc. (a) was formerly known as (i)
Standard Alaska Production Company, (ii) Sohio Alaska Petroleum Company, (iii)
Sohio Natural Resources Company and (iv) Sohio Petroleum Company and (b) is
successor-in-interest by merger to (i) BP Alaska Exploration Inc. and (ii) BP
Oil Corporation (which was formerly known as BP Exploration U.S.A. Inc.).
Independent Accountants shall mean such firm of independent certified
public accountants as may be designated by Grantee and approved by Grantor in
the exercise of its reasonable business judgment, except that Grantee may not
designate the firm of independent certified public accountants then utilized
by Grantor.
Independent Petroleum Engineers shall mean Miller and Lents, Ltd. or such
other firm of independent petroleum engineers as may be designated by Grantee
and approved by Grantor in the exercise of its reasonable business judgment.
Interest Rate shall mean a varying rate per annum equal to the interest
rate publicly announced in New York City by The Bank of New York from time to
time as its prime commercial lending rate.
Lands shall mean the lands described in Exhibit A.
Lease shall mean and include an oil and gas lease described in Exhibit A
issued by the State of Alaska and any new oil and gas leases which may be
acquired by or for the benefit of Grantor on any Lands within one year after
the expiration of the applicable oil and gas lease or leases described in
Exhibit A covering such Lands or any subsequent lease covering such Lands and
in each case shall include, but not by way of limitation, the entire leasehold
estate, working interest and operating rights and all and any other interests
of Grantor, together with all rights, privileges and appurtenances related
thereto and all and any extensions or renewals thereof.
Lessor's Royalty shall mean the royalty reserved to the State of Alaska
as lessor pursuant to each Lease.
Lower Lower Net Profits Royalty Interest shall mean that portion of the
Net Profits Royalty Interest conveyed to The Standard Oil Company by that
certain Instrument of Conveyance and Assignment by and between BP Alaska Inc.
and The Standard Oil Company dated June 18, 1987, and subsequently conveyed to
BP Exploration (Alaska) Inc. by that certain Lower Lower NPRI Conveyance
between The Standard Oil Company and BP Exploration (Alaska) Inc. dated
February 27, 1989, and merged into the leasehold estates of BP Exploration
(Alaska) Inc. in the leases described therein.
Minimum Per Barrel Royalty shall be $8.92 per Barrel, as more fully
described in Section 4.7.
Minimum Royalty Period shall mean the period ending September 30, 1991.
Net Profits Royalty Interest shall mean the overriding royalty interest
described in Section 2.1 of that certain instrument titled Conveyances Between
BP Alaska Inc. and BP Oil Corporation, dated August 1, 1969, as amended, which
overriding royalty interest comprises the Upper Net Profits Royalty Interest
owned by BP Alaska Inc. on the Effective Date, the Upper Lower Net Profits
Royalty Interest owned by The Standard Oil Company on the Effective Date, and
the Lower Lower Net Profits Royalty Interest merged into certain leasehold
estates of BP Exploration (Alaska) Inc.
Oil shall mean (i) for so long as the Prudhoe Bay Unit Agreement and the
Prudhoe Bay Unit Operating Agreement are in effect, crude oil and condensate
that are produced from the Prudhoe Bay (Permo-Triassic) Reservoir and saved
and allocated to the Subject Interests as Separator Liquid Production (as
defined in the Prudhoe Bay Unit Operating Agreement) from the Oil Rim
Participating Area and the Gas Cap Participating Area of the Prudhoe Bay Unit
and taken in kind or otherwise disposed of by Grantor in accordance with the
Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement, and
(ii) at all times after the expiration or termination of the Prudhoe Bay Unit
Agreement or the Prudhoe Bay Unit Operating Agreement, crude oil and
condensate that are produced from the Prudhoe Bay (Permo-Triassic) Reservoir
and saved and allocated to or otherwise attributable to the Subject Interests.
All other gaseous and liquid hydrocarbons and other marketable substances
produced in association with such crude oil and condensate that are
recoverable from such formations or from other reservoirs in the Prudhoe Bay
Unit and allocated to or otherwise attributable to the Subject Interests,
including natural gas liquids, shall be excluded.
Oil Rim Area Participation shall have the meaning stated in the Prudhoe
Bay Unit Operating Agreement.
Oil Rim Participating Area shall have the meaning stated in the Prudhoe
Bay Unit Agreement.
Per Barrel Royalty shall have the meaning stated in Section 4.2.
Person shall mean any individual, corporation, partnership, trust, estate
or other entity, organization or association.
Production Taxes shall mean the sum of any severance taxes, excise taxes
(including windfall profit tax), sales taxes, value added taxes or other
similar or direct taxes imposed upon the reserves or production, delivery or
sale of Royalty Production, as specified and calculated in Section 4.6.
Proved Reserves shall mean Grantor's estimate (to the extent that such
estimate has been determined to be reasonable by the Independent Petroleum
Engineers pursuant to Section 4.8 (d), unless Grantee has waived in writing
its right pursuant to Section 4.8 (d) to cause the Independent Petroleum
Engineers to determine whether Grantor's estimate of Proved Reserves is
reasonable) of the quantities of crude oil and condensate that (i) geological
and engineering data demonstrate with reasonable certainty to be recoverable
in future years under existing economic and operating conditions (i.e. prices
and costs as of the date the estimate is made; prices shall include
consideration of changes in existing prices provided only by contractual
arrangements, but not price escalations based on future conditions) from the
Prudhoe Bay (Permo-Triassic) Reservoir in the Prudhoe Bay Unit and (ii) will
be allocated to the Subject Interests as Separator Liquid Production (as
defined in the Prudhoe Bay Unit Operating Agreement) from the Oil Rim
Participating Area and the Gas Cap Participating Area of the Prudhoe Bay Unit
pursuant to the terms and provisions of the Prudhoe Bay Unit Agreement and the
Prudhoe Bay Unit Operating Agreement. In estimating the Proved Reserves,
Grantor will be guided by the following principles:
(i) Reservoirs are considered proved if economic productibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (a) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any, and (b) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following:
(a) oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
(b) crude oil and condensate the recovery of which is subject to
reasonable doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors;
(c) crude oil and condensate that may occur in undrilled
prospects;
(d) crude oil and condensate that may be recovered from oil
shales, coal, gilsonite and other such sources.
Prudent Standard shall have the meaning stated in Section 7.1.
Prudhoe Bay (Permo-Triassic) Reservoir shall have the meaning stated in
the Prudhoe Bay Unit Agreement.
Prudhoe Bay Unit is the oil and gas unit situated on the North Slope of
Alaska in which the Subject Interests have been heretofore unitized for the
production of oil and gas.
Prudhoe Bay Unit Agreement shall mean the agreement dated April 1, 1977,
as amended, among the State of Alaska and the Prudhoe Bay Unit Working
Interest Owners (as defined in said agreement) establishing the Prudhoe Bay
Unit.
Prudhoe Bay Unit Operating Agreement shall mean the agreement dated April
1, 1977, as amended, among the Prudhoe Bay Unit Working Interest Owners (as
defined in said agreement) governing Prudhoe Bay Unit operations.
Quarterly Record Date shall mean the fifteenth day of each January,
April, July and October; provided, however, that if such day is not a Business
Day then the Quarterly Record Date shall be the next Business Day after such
day and provided further that if Grantor is notified by Grantee that it has
determined that a different date is required to comply with applicable law or
the rules and regulations of any stock exchange on which the units of
beneficial interest of the Trust are listed, it means such different date.
The first Quarterly Record Date shall be April 17, 1989.
Redetermination Settlement Agreement shall mean that certain agreement
titled Redetermination Settlement Agreement among ARCO Alaska, Inc., Exxon
Corporation, Sohio Alaska Petroleum Company and BP Alaska Exploration Inc.,
dated June 30, 1982.
Royalty Interest shall mean the overriding royalty interest described in
Section 2.1.
Royalty Production for each day in a calendar quarter shall be 16.4246%
of the lesser of (1) the first 90,000 Barrels of Grantor's actual average
daily production of Oil for such quarter and (2) Grantor's actual average
daily production of Oil for such quarter. Grantor's actual average daily
production of Oil for any calendar quarter shall be the total production of
Oil for such quarter, net of Lessor's Royalty, divided by the number of days
in such quarter.
Royalty Statement means the statement prepared by Grantor for delivery to
Grantee pursuant to Section 4.8(f).
Stock Tank Barrel means a Barrel of stabilized Oil at a temperature of 60
degrees Fahrenheit and pressure of 14.7 psia.
Subject Interests shall mean each kind and character of right, title,
claim or interest owned by Grantor in the Leases insofar as the Leases affect
the Lands, as such Subject Interests are now affected by the Prudhoe Bay Unit
Agreement, the Prudhoe Bay Unit Operating Agreement, the Redetermination
Settlement Agreement and the Net Profits Royalty interest (excluding the Lower
Lower Net Profits Royalty interest), and as such Subject Interests are now or
may later be affected by applicable law, judicial decree, arbitration,
redetermination or actions of governmental agencies having jurisdiction in the
matter.
Trust shall mean the BP Prudhoe Bay Royalty Trust, a business trust under
the Delaware Trust Act administered under the terms of the BP Prudhoe Bay
Royalty Trust Agreement among The Standard Oil Company, BP Exploration
(Alaska) Inc., The Bank of New York, Trustee, and F. James Hutchinson, Co-
Trustee, dated February 28, 1989.
Trustee shall mean, at the time of determination, the Trustee of the
Trust other than the Co-Trustee thereunder or any ancillary trustee.
Upper Lower Net Profits Royalty Interest shall mean that portion of the
Net Profits Royalty Interest conveyed to The Standard Oil Company by that
certain Instrument of Conveyance and Assignment by and between BP Alaska Inc.
and The Standard Oil Company dated June 18, 1987, but not subsequently
conveyed to BP Exploration (Alaska) Inc. by that certain Lower Lower NPRI
Conveyance between The Standard Oil Company and BP Exploration (Alaska) Inc.
dated February 27, 1989.
Upper Net Profits Royalty Interest shall mean that portion of the Net
Profits Royalty Interest not conveyed to The Standard Oil Company by that
certain Instrument of Conveyance and Assignment by and between BP Alaska Inc.
and The Standard Oil Company dated June 18, 1987.
WTI Price shall have the meaning stated in Section 4.3.
All references to Articles, Sections or other subdivisions refer to the
corresponding Articles, Sections and other subdivisions of this Conveyance,
and the words this Conveyance, herein, hereof, hereby, hereunder and words of
similar import refer to this Conveyance as a whole and not to any particular
Article, Section or other subdivision hereof.
ARTICLE TWO
OVERRIDING ROYALTY CONVEYANCE
Section 2.1 Conveyance. Grantor, for and in consideration of the sum of
Ten Dollars ($10.00) and other good and valuable consideration to it paid by
Grantee, the receipt and sufficiency of which are hereby acknowledged, has
bargained, sold, granted, conveyed, transferred, assigned, set over and
delivered, and by these presents does hereby bargain, sell, grant, convey,
transfer, assign, set over and deliver unto Grantee an overriding royalty
interest (the Royalty Interest) consisting of the right to receive a Per
Barrel Royalty for each Barrel of Royalty Production, if, as and when there is
Royalty Production, as more fully provided herein. Grantee shall have no
right to take Oil in kind.
TO HAVE AND TO HOLD the Royalty Interest unto Grantee, its successors and
assigns, for the term set forth in Section 10.2; subject, however, to the
terms and provisions of this Conveyance.
ARTICLE THREE
PAYMENT
Section 3.1 Payment. The aggregate payments from Grantor to Grantee
under the Royalty Interest for any calendar quarter will equal, except for the
first calendar quarter as set forth in Section 4.1, the sum of the product for
each day of such calendar quarter of (1) the Royalty Production and (2) the
Per Barrel Royalty; provided that the total payment under the Royalty Interest
for any calendar quarter (including any quarter during the Minimum Royalty
Period) shall not be (1) less than zero or (2) more than the aggregate value
of the total production of Oil for such calendar quarter, net of Lessor's
Royalty and less the value of any applicable payments made to the owners of
the Net Profits Royalty Interest (excluding the Lower Lower Net Profits
Royalty Interest).
Grantor hereby agrees to pay to Grantee on the Quarterly Record Date
following the end of each calendar quarter all payments that are then due to
Grantee under the Royalty Interest in respect of such calendar quarter
(including, without limitation, all payments, if any, that are due pursuant to
the Minimum Per Barrel Royalty provisions of Section 4.7). Grantor will make
all payments due to Grantee by wire transfer (or such other manner as Grantor
and Grantee may agree) to an account designated by Grantee in finally
collected same day funds.
Section 3.2 Overpayment. If at any time Grantor inadvertently pays
Grantee more than the amount due, Grantee shall not be obligated to return any
such overpayment, but the amount or amounts otherwise payable to Grantee for
any subsequent period or periods shall be reduced by such overpayment, plus an
amount equal to the product of (i) the amount of such overpayment, (ii) the
Interest Rate, and (iii) a fraction, the numerator of which is the number of
days from the date of the overpayment to the date of the payment subject to
reduction as a result of such overpayment, and the denominator of which is 360
days.
Section 3.3 Underpayment. If at any time Grantor inadvertently pays
Grantee less than the amount due, Grantor shall pay to Grantee, in accordance
with the provisions of the next succeeding sentence, the amount of such
underpayment, together with interest thereon in an amount equal to the
product of (i) the amount of such underpayment, (ii) the Interest Rate, and
(iii) a fraction, the numerator of which is the number of days from the date
of the underpayment to the date of the payment subject to increase as a result
of such underpayment, and the denominator of which is 360 days. Grantor will
make all payments due to Grantee pursuant to this Section 3.3 on the Quarterly
Record Date next following the calendar quarter in which the underpayment in
question is discovered by wire transfer (or such other manner as Grantor and
Grantee may agree) to an account designated by Grantee in finally collected
same day funds. Should Grantor knowingly fail to pay to Grantee when due the
entire amount owing pursuant to Section 3.1. Grantor shall pay to Grantee
interest as provided in this Section 3.3 and, in addition to and not in lieu
of such interest, all damages to which Grantee shall be entitled as a result
of such knowing failure to pay.
ARTICLE FOUR
COMPUTATION OF ROYALTY
Section 4.1 Calculation of Royalty Amount. The Royalty Interest entitles
Grantee to receive, for the first calendar quarter ending March 31, 1989, the
sum of the product for each day in such quarter from the Effective Date to the
end of such quarter of, and for each calendar quarter thereafter the sum of
the product for each day in such quarter of, (1) the Royalty Production and
(2) the Per Barrel Royalty, subject to the Minimum Per Barrel Royalty
provisions of Section 4.7; provided, that the payment under the Royalty
Interest for any calendar quarter (including any quarter during the Minimum
Royalty Period) shall not be (1) less than zero or (2) more than the aggregate
value of the total production of Oil for such calendar quarter, net of
Lessor's Royalty and less the value of any applicable payments made to the
owners of the Net Profits Royalty Interest (excluding the Lower Lower Net
Profits Royalty Interest).
Section 4.2 Per Barrel Royalty. The Per Barrel Royalty in effect for any
day shall equal the WTI Price for such day less the sum of (1) the product of
the Chargeable Costs and the Cost Adjustment Factor and (2) Production Taxes.
Section 4.3 WTI Price. WTI Price for any trading day shall mean (1) the
latest price (expressed in dollars per Barrel) for West Texas intermediate
crude oil of standard quality having a specific gravity of 40 degrees API for
delivery at Cushing, Oklahoma (West Texas Crude), quoted for such trading day
by the Dow Jones International Petroleum Report (which is published in The
Wall Street Journal) or if the Dow Jones International Petroleum Report does
not publish such quotes, then such price as quoted by Reuters, or if Reuters
does not publish such quotes, then such price as quoted in Platt's Oilgram
Price Report, or (2) if for any reason such publications do not publish such
price, then the WTI Price will mean, until (1) shall again be applicable, the
simple average of the daily mean prices expressed in dollars per Barrel)
quoted for West Texas Crude by one major oil company, one petroleum broker and
one petroleum trading company, in each case unaffiliated with Grantor. Such
major oil company, petroleum broker and petroleum trading company shall have
substantial United States operations and will be designated by Grantor from
time to time in an officer's certificate delivered to Grantee. In the event
that prices for West Texas Crude shall not be quoted so as to permit the
calculation of WTI Price, West Texas Crude, for the purpose of calculating the
WTI Price first for (1) and then (2) above, shall mean such other light sweet
domestic crude oil of standard quality as shall be designated by Grantor in an
officer's certificate delivered to Grantee and approved by Grantee in the
exercise of its reasonable business judgment with appropriate allowance for
transportation costs to the Gulf Coast (or other appropriate location) to
equilibrate such price to the WTI Price as contemplated hereunder. The WTI
Price for any day which is not a trading day shall be the WTI Price for the
next preceding day which is a trading day.
Section 4.4 Chargeable Costs. The Chargeable Costs per Barrel of Royalty
Production shall be the amount set forth in the following table opposite the
calendar year stated:
<TABLE>
<CAPTION>
For the Chargeable
Year Ending Costs Per
December 31 Barrel
<C> <C>
1989 4.50
1990 4.50
1991 4.50
1992 6.00
1993 6.75
1994 8.00
1995 8.25
1996 8.50
1997 8.85
1998 9.30
1999 9.80
2000 10.00
2001 10.75
2002 11.25
2003 11.75
2004 12.00
2005 12.25
2006 12.50
2007 12.75
2008 13.00
2009 13.25
2010 14.50
2011 16.60
2012 16.70
2013 16.80
2014 16.90
2015 17.00
2016 17.10
2017 17.20
2018 20.00
2019 23.75
2020 26.50
thereafter increasing by
$2.75 each year
</TABLE>
Chargeable Costs shall be subject to a maximum reduction of $1.20 per
year in years subsequent to 1995 in the following circumstances, irrespective
of whether the number of Proved Reserves added during any applicable period is
a positive number, a negative number, or zero:
(a) If, by December 31, 1995, 100,000,000 or more Stock Tank Barrels
(STB) of Proved Reserves have not been added to Current Reserves (before
taking into account any production therefrom) then for each year 1996 through
2000, inclusive, Chargeable Costs as set forth in the table above shall be
reduced, as of January 1 in each such year, by an amount equal to the lesser
of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator of
which shall be the difference between 100,000,000 STB of Proved Reserves and
the actual number of STB of Proved Reserves so added to Current Reserves from
January 1, 1988 through December 31, 1995, and the denominator of which shall
be 100,000,000 STB of Proved Reserves.
(b) If, between January 1, 1996 and December 31, 2000, an additional
200,000,000 STB of Proved Reserves (that is, 200,000,000 STB of Proved
Reserves in addition to the 100,000,000 STB of Proved Reserves that are
referred to in Section 4.4 (a)) have not been added to Current Reserves
(before taking into account any production therefrom) then for each year from
2001 through 2005, inclusive, Chargeable Costs as set forth in the table above
shall be reduced, as of January 1 in each such year, by an amount equal to the
lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator
of which shall be the difference between (1) 200,000,000 STB of Proved
Reserves and (2) the sum of (i) the actual number of STB of Proved Reserves so
added to Current Reserves from January 1, 1996 through December 31, 2000 plus
(ii) the excess, if any, of the number of STB of Proved Reserves so added to
Current Reserves from January 1, 1988 through December 31, 1995 over
100,000,000 STB of Proved Reserves (provided that the sum of (i) and (ii)
shall not exceed 200,000,000 STB of Proved Reserves), and the denominator of
which shall be 200,000,000 STB of Proved Reserves.
(c) The tests set forth in (i) and (ii) below shall be utilized to
calculate the reduction, if any, in Chargeable Costs for the year 2006 and
each year thereafter. If the calculations under both such tests produce a
reduction in Chargeable Costs, the greater of such reductions shall apply. If
the calculation under one of such tests produces a reduction in Chargeable
Costs but the calculation under the other test does not, the calculation that
produces the reduction shall apply. In applying the tests below, it is the
intention of Grantor and Grantee that test (i) allow as a credit toward the
400,000,000 STB of Proved Reserves that must be added to Current Reserves
during the period set forth in such test an amount equal to the excess, if
any, of the number of STB of Proved Reserves added to Current Reserves prior
to December 31, 2000 over 300,000,000 STB of Proved Reserves, while test (ii)
sets a level of only 100,000,000 STB of Proved Reserves that must be added to
Current Reserves during the period set forth in such test, but does not allow
a credit for additions of STB of Proved Reserves accrued prior to December 31,
2000.
(i) If, between January 1, 2001 and December 31, 2005, an additional
400,000,000 STB of Proved Reserves (that is, 400,000,000 STB of Proved
Reserves in addition to the 100,000,000 STB of Proved Reserves that are
referred to in Section 4.4(a) and the 200,000,000 STB of Proved Reserves that
are referred to in Section 4.4(b)) have not been added to Current Reserves
(before taking into account any production therefrom), then for the year 2006
and each year thereafter Chargeable Costs as set forth in the table above
shall be reduced, as of January 1 of each such year, by an amount equal to the
lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator
of which shall be the difference between (1) 400,000,000 STB of Proved
Reserves and (2) the sum of (i) the actual number of STB of Proved Reserves so
added to Current Reserves from January 1, 2001 through December 31, 2010 plus
(ii) the excess, if any, of the number of STB of Proved Reserves so added to
Current Reserves from January 1, 1988 through December 31, 2000 over
300,000,000 STB of Proved Reserves (provided that the sum of (i) and (ii)
shall not exceed 400,000,000 STB of Proved Reserves) and the denominator of
which shall be 400,000,000 STB of Proved Reserves.
(ii) If between January 1, 2001 and December 31, 2005, an additional
100,000,000 STB of Proved Reserves (that is, 100,000,000 STB of Proved
Reserves in addition to any and all STB of Proved Reserves that are added to
Current Reserves prior to January 1, 2001) have not been added to Current
Reserves (before taking into account any production therefrom), then for the
year 2006 and each year thereafter Chargeable Costs as set forth in the table
above shall be reduced, as of January 1 of each such year, by an amount equal
to the lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the
numerator of which shall be the difference between 100,000,000 STB of Proved
Reserves and the number of STB of Proved Reserves added to Current Reserves
from January 1, 2001 through December 31, 2005 and the denominator of which
shall be 100,000,000 STB of Proved Reserves.
Grantor shall report to Grantee the amount of Proved Reserves added in
any year, taking into account the reductions, if any, to Proved Reserves
resulting from modifications of Grantor's estimates which were made of Proved
Reserves for prior years, it being agreed that only the net amount of Proved
Reserves (that is, additions net of reductions resulting from modifications of
previous estimates of Proved Reserves) shall be utilized in determining
whether the requisite number of STB of Proved Reserves have been added
pursuant to the provisions of this Section 4.4.
Section 4.5 Cost Adjustment Factor. The Cost Adjustment Factor shall
mean the ratio of (1) the Consumer Price Index published for the most recently
past February, May, August or November, as the case may be, to (2) the
Consumer Price Index published most recently prior to the Effective Date,
provided, however, that (a) If for any calendar quarter the average WTI Price
was $18.00 or less, then in such event the Cost Adjustment Factor for such
quarter shall be the Cost Adjustment Factor for the immediately preceding
quarter, and (b) the Cost Adjustment Factor for any calendar quarter in which
the average WTI Price exceeds $18.00, after a calendar quarter during which
the average WTI Price is equal to or less than $18.00, and for each following
calendar quarter in which the average WTI Price is greater than $18.00, shall
be the product of (x) the Cost Adjustment Factor for the most recently past
calendar quarter in which the average WTI Price is equal to or less than
$18.00 and (y) a fraction, the numerator of which shall be the Consumer Price
Index published for the most recently past February, May, August or November,
as the case may be, and the denominator of which shall be the Consumer Price
Index published for the most recently past February, May, August or November
during a quarter in which the average WTI Price was equal to or less than
$18.00. The Consumer Price Index shall mean the U.S. Consumer Price Index, all
items and all urban consumers, U.S. city average, 1982-84 equals 100, as first
published, without seasonal adjustment, by the Bureau of Labor Statistics,
Department at Labor, without regard to subsequent revisions or corrections by
such Bureau.
Section 4.6 Production Taxes. Production Taxes in existence on the
Effective Date or subsequently imposed shall be computed at defined statutory
rates. In the case of taxes based upon wellhead or field value, WTI Price
less the product of $4.50 times the Cost Adjustment Factor shall be deemed to
be the wellhead or field value. At the Effective Date the Production Taxes
payable with respect to the Royalty Production are the Alaska Oil and Gas
Properties Production Tax ("Alaska Production Tax") and the Alaska Oil and Gas
Conservation Tax ("Alaska Conservation Tax"). For the purposes of the Royalty
Interest, the Alaska Production Tax shall be computed without regard to the
"economic limit factor" as the greater of the "percentage of value amount"
(based on the statutory rate and the wellhead value as defined above) and the
"cents per barrel amount" as such terms are used with respect to such tax.
Grantor hereby agrees to pay to the appropriate taxing authorities when due
all Production Taxes in respect of the Royalty Interest, except those
Production Taxes which Grantor is contesting in good faith and which Grantor
is not required to then pay by law. As of the Effective Date, the statutory
rate for the purpose of calculating the "percentage of value amount" is 15%
with respect to the Alaska Production Tax and four mills per Barrel of Oil
production wine respect to the Alaska Conservation Tax.
Section 4.7 Minimum Royalty. If, with respect to any calendar quarter
during the Minimum Royalty Period, the Average Per Barrel Royalty is less than
$8.92 per Barrel, Grantor will make an additional payment to Grantee at the
time specified in Section 3.1 equal to the sum of the product for each day of
such calendar quarter of (1) the difference between the Minimum Per Barrel
Royalty and the Average Per Barrel Royalty and (2) the Royalty Production;
provided, that the total payments under the Royalty Interest for any calendar
quarter (including any payments under this Section 4.7) shall not exceed the
aggregate value of the total production of Oil for such calendar quarter, net
of Lessor's Royalty and less the value of any applicable payments made to the
owners of the Net Profits Royalty Interest (excluding the Lower Lower Net
Profits Royalty Interest).
Section 4.8 Information and Reports. Grantor shall:
(a) provide Grantee with such information concerning the Royalty
Interest as Grantee may need and to which Grantor has access to permit Grantee
(i) to comply with any reporting or disclosure obligations of Grantee pursuant
to applicable law and the requirements of any stock exchange in which the
securities of Grantee are listed, (ii) to prepare Alaska, federal and other
income tax returns and (iii) to prepare reports required to be forwarded by
Grantee to its security holders;
(b) provide Grantee and the Independent Accountants (the expenses of
such Independent Accountants to be borne by Grantee) with access, at the
office of Grantor during reasonable business hours, to inspect Grantor's books
and records, which books and records shall be true and correct in all material
respects and sufficient to enable the Independent Accountants to verify the
correctness of the amounts paid and payable to Grantee as the owner of the
Royalty Interest and to discuss with representatives of Grantor the affairs,
finances and accounts of Grantor relating to the Leases and the Subject
Interests; provided that Grantee and the Independent Accountants shall keep
the information therein confidential except for information which Grantee is
required by law to disclose;
(c) furnish to Grantee on or before February 28 of each year a report
containing all information of a nature, of a standard and in a form consistent
with the requirements of the Securities and Exchange Commission respecting the
inclusion of reserve and reserve valuation information in filings under the
Securities Act of 1933 and the Securities Exchange Act of 1934 and with
applicable accounting rules. Such report shall set forth, among other things,
Grantor's estimates of future net cash flows from Proved Reserves attributable
to the Royalty Interest, the discounted present value thereof, the assumptions
utilized in arriving at the estimates contained therein, and the estimate of
the quantities of Proved Reserves (including reductions of Proved Reserves as
a result of modification of Grantor's estimates of Proved Reserves from prior
years) added to Current Reserves during the preceding year. Current Reserves
shall not be reduced by production of Oil since December 31, 1987;
(d) unless such right is waived in writing by Grantee, provide to the
Independent Petroleum Engineers (the expenses of such Independent Petroleum
Engineers to be borne by Grantee) all access and information which the
Independent Petroleum Engineers deem necessary to determine whether the
methods and procedures employed by Grantor to accumulate and evaluate the
necessary information and to estimate and document the Proved Reserves and
annual production rate forecasts and to prepare the report referred to in
Section 4.8 (c) are effective and in accordance with generally accepted
geological and engineering practices in the petroleum industry and whether
Grantor's estimate of the quantities of Proved Reserves set forth in such
report are, in the aggregate, reasonable, and if not, to determine and specify
that portion of Grantor's estimate of Proved Reserves that, in the opinion of
the Independent Petroleum Engineers, is reasonable, it being agreed that in
the event of a material disagreement with respect to the correct quantities of
Proved Reserves, the opinion of the Independent Petroleum Engineers shall
govern for all purposes of this Conveyance; in carrying out their
investigation the Independent Petroleum Engineers may review, among other
things they deem relevant, (i) Grantor's procedures for estimating and
documenting Proved Reserves, (ii) Grantor's estimates of in-place reservoir
volumes, (iii) Grantor's estimates of recovery factors and production profiles
for the various areas, pay zones, projects and recovery processes that are
included in Grantor's estimate of Proved Reserves, (iv) Grantor's production
strategy and procedures for implementing that strategy, (v) the sufficiency of
data available for making estimates of Proved Reserves and production
profiles, and (vi) pertinent provisions of the Prudhoe Bay Unit Agreement and
the Prudhoe Bay Unit Operating Agreement; provided, that, the Independent
Petroleum Engineers shall keep the information so provided confidential except
for information which is required by law to be disclosed;
(e) provide Grantee on a date no later than twelve calendar days prior
to each Quarterly Record Date (unless otherwise agreed by Grantee) information
as to the amount to be paid to Grantee on the next Quarterly Record Date.
(f) provide to Grantee, and to Grantee's designee, a Royalty Statement
within five working days after the end of each calendar quarter which shall
consist of a computation, supported by data required to perform the
computations hereunder, of the amount to be paid to Grantee at the next
Quarterly Record Date;
(g) provide Grantee with such other information as Grantee may
reasonably request from time to time and to which Grantor has access.
All costs and (expenses incurred by Grantor in providing reports and
information under this Conveyance shall be borne by Grantor.
Section 4.9 Indemnification. Grantor hereby agrees to indemnify and save
harmless Grantee from and against any expense (including, without limitation,
the expense of suit and attorneys' fees), claim, damage, loss or liability
incurred by Grantee as a result of or arising out of the information provided
to Grantee by Grantor pursuant to Section 4.8 being untimely provided or
incorrect or untrue or misleading in any material respect.
ARTICLE FIVE
NON-LIABILITY OF GRANTEE
Section 5.1 Non-Expense Bearing Interest; Non-Liability of Grantee;
Indemnification. It is the express intent of Grantor and Grantee that the
Royalty Interest shall constitute (and this Conveyance shall conclusively be
construed for all purposes as creating) a non-expense bearing interest for all
purposes. Grantor and Grantee acknowledge that, pursuant to the terms of the
Prudhoe Bay Unit Operating Agreement, if Grantor fails to pay any costs or
expenses chargeable to Grantor under the Prudhoe Bay Unit Operating Agreement
and the production of Oil is insufficient to pay such costs and expenses, then
the Royalty Interest is chargeable with a pro rate portion of such cost and
expenses and is subject to the enforcement against it of liens granted to the
unit operators of the Prudhoe Bay Unit. However, as more fully set forth in
Section 7.2, Grantor has agreed to pay timely all costs and expenses
chargeable to it pursuant to the Prudhoe Bay Unit Operating Agreement and to
insure that no such costs and expenses will be chargeable against the Royalty
Interest. Grantor and Grantee acknowledge that in no event shall Grantee ever
be liable or responsible in any way for any expense, claim, damage, loss,
obligation or liability incurred by Grantor or Grantee or others attributable
to the Subject Interests or to Oil produced therefrom (including, without
limitation, those incurred in connection with or attributable to the
developing, exploring, drilling, equipping, testing, operating, reworking,
maintaining, plugging or abandoning of any well or the storing, handling,
treating or marketing of the production therefrom), and Grantor hereby agrees
to indemnify and save harmless Grantee from and against any such expense
(including, without limitation, the expense of suit and attorneys' fees),
claim, damage, loss, obligation and liability, irrespective of whether same
arises pursuant to the provisions of the Prudhoe Bay Unit Operating Agreement
or otherwise.
ARTICLE SIX
UNITIZATION
Section 6.1 Prudhoe Bay Unit. The Subject Interests have been heretofore
unitized for the production of oil and gas in the Prudhoe Bay Unit. The
Subject Interests are and shall be subject to the terms and provisions of the
Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement, the
Leases, and any other type of contract, conveyance, or Instrument, recorded or
unrecorded, relating to the Subject Interests or Grantor's interest therein in
effect at the Effective Date.
Section 6.2 Right to Amend. Grantor shall have the right and power to
alter, change, amend or terminate the Prudhoe Bay Unit Agreement, the Prudhoe
Bay Unit Operating Agreement, the Leases, and any other type of contract,
conveyance, or instrument, recorded or unrecorded, as heretofore or hereafter
entered into, as to all or any part of the Subject Interests, upon such terms
and provisions as Grantor shall in its sole discretion determine, but, if
Grantor exercises such right and power in breach of the Prudent Standard, it
will, and hereby agrees to, indemnify and save harmless Grantee from and
against any and all expense (including, without limitation, the expense of
suit and attorneys' fees), claim, damage, loss, obligation and liability
incurred by Grantee as a result of or arising out of Grantor's exercise of the
aforesaid right and power in breach of the Prudent Standard. If and whenever,
through the exercise of such right and power, or pursuant to any law hereafter
enacted or any rule, regulation or order of any governmental body or official
hereafter promulgated, any of the Subject Interests are altered, changed,
amended or terminated in any manner, the Royalty Interest insofar as it
affects such Subject Interests shall also be altered, changed, amended or
terminated, and in any such event such Royalty Interest, insofar as it is
affects such Subject Interests, shall apply to and affect only the Royalty
Production which is allocated to such Subject Interests, but no such
alteration, change, amendment or termination shall affect the definition of
Royalty Production as set forth in Article One or the method of making
payments under the Royalty Interest as set forth in Article Three or the
method of computing the payments under the Royalty Interest as set forth in
Article Four. Grantee hereby agrees that it will never challenge the right
and power of the Grantor to so alter, change, amend or terminate the Prudhoe
Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases and
any other type of contract conveyance or instrument, recorded or unrecorded,
as heretofore or hereafter entered into, as to all or any part of the Subject
Interests, upon such terms and provisions as Grantor shall in its sole
discretion determine, but nothing in this Section 6.2 shall be construed to
release Grantor from its indemnity obligation to Grantee as set forth in the
first sentence of this Section 6.2 and in other provisions of this Conveyance
or to deny Grantee any of the benefits to which it is entitled under this
Conveyance or at law or in equity.
ARTICLE SEVEN
OPERATION OF SUBJECT INTERESTS
Section 7.1 Prudent Operator Standard. Grantor agrees, to the extent it
has the legal right to do so under the Prudhoe Bay Unit Agreement, the Prudhoe
Bay Unit Operating Agreement, the Leases and applicable law affecting or
pertaining to the Subject Interests, that it will conduct and carry on the
development, exploration, production, maintenance and operation of the Subject
Interests with reasonable and prudent business judgment, in accordance with
the provisions of this Article Seven and good oil and gas field practices, as
a reasonable and prudent operator, and without regard to the existence of the
Royalty Interest or any other royalty, overriding royalty, or other interest
created subsequent to the Effective Date (the "Prudent Standard"). However,
nothing contained in this Section 7.1 shall be deemed to prevent or restrict
Grantor from electing not to participate in any operation which is to be
conducted under the terms of either the Prudhoe Bay Unit Agreement or the
Prudhoe Bay Unit Operating Agreement if such election is made by Grantor in
accordance with the Prudent Standard. Grantor shall not be obligated to
continue to produce Oil from the Subject Interests in the Prudhoe Bay Unit or
to maintain such production at any particular level so long as Grantor acts in
accordance with Prudent Standard. Notwithstanding anything elsewhere herein
to the contrary, Grantor shall never be liable to Grantee for the manner in
which Grantor performs its duties hereunder as long as Grantor has acted in
accordance with the Prudent Standard. Grantee shall have no right to operate
or direct operations of the Subject Interests.
Section 7.2 Assurances. (1) Grantor agrees, to the extent it has the
legal right to do so under the terms of the Prudhoe Bay Unit Agreement, the
Prudhoe Bay Unit Operating Agreement, the Leases and applicable law affecting
or pertaining to the Subject Interests, that it will perform all material
obligations to be performed by it (including without limitations making timely
payment of all costs and expenses chargeable to it pursuant to any applicable
agreement to insure that the Royalty Interest is not charged with any portion
of any such costs or expenses and that no lien or security Interest is
enforced against the Royalty Interest by virtue of any matter arising by
through or under Grantor) under all material contracts and agreements
applicable to the Subject Interests and the production and transportation to
market of Oil (including, without limitation, the Prudhoe Bay Unit Agreement
and the Prudhoe Bay Unit Operating Agreement) and will use its best efforts
(by taking such action as is available to it by contract, at law, or in
equity) to enforce the performance under such contracts and agreements of the
other parties thereto.
(ii) The provisions set forth in this Conveyance that require Grantor to
perform certain duties or take certain actions (but subject to the express and
implied limitations in this Conveyance) that can only be performed or taken by
the operator of the Prudhoe Bay Unit, acting under the direction and
supervision of the working interest owners of the Prudhoe Bay Unit, or the
operators of facilities or pipelines separate from the Prudhoe Bay Unit, shall
be construed to require Grantor to use its best efforts (by taking such action
as is available to it by contract (including, without limitation, exercising
its right to vote and to initiate proposals), at law or in equity) to cause
the operator to perform the duty or to take the action in question. Without
limitation of the generality of the foregoing, if the operator elects,
pursuant to the applicable operating agreement, to become a nonconsenting
party with respect to such duty or action, and if Grantor may cause such duty
or action to be performed or taken by becoming a consenting party under the
applicable operating agreement, then Grantor shall so elect to become a
consenting party unless a reasonable and prudent operator, acting in
accordance with good oil and gas field practices and without regard to the
existence of the Royalty Interest or any other royalty, overriding royalty or
other interest created subsequent to the Effective Date, would refuse to
undertake the performance of the duty or the taking of the action in question.
Section 7.3 Abandonment of Properties. Nothing herein contained shall
obligate Grantor to continue to operate any well or maintain in force or
attempt to maintain in force any of the Subject Interests when, in Grantor's
opinion, formed in accordance with the Prudent Standard, such well or Subject
Interest ceases to produce or is not capable of producing oil or gas in paying
quantities. The expiration of a Subject Interest in accordance with the terms
and conditions applicable thereto shall not be considered to be a voluntary
surrender or abandonment thereof.
Section 7.4 Non-Operating Interest In Minerals. It is the express intent
of Grantor and Grantee that the Royalty Interest shall constitute (and this
Conveyance shall conclusively be construed for all purposes as creating) a
non-operating interest in minerals for all purposes. Without limitation of
the generality of the immediately preceding sentence, Grantor and Grantee
acknowledge that Grantee has no right or power to participate in the selection
of a drilling contractor, to propose the drilling of a well, to determine the
timing or sequence of drilling operations, to commence or shut down
production, to take over operations or to share in any operating decision
whatsoever (including, without limitation, the alteration, change, amendment
of termination of the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit
Operating Agreement, the Leases or any other type of contract, conveyance, or
instrument, recorded or unrecorded, as heretofore or hereafter entered into,
as to all or any part of the Subject Interests hereunder). Grantor and
Grantee hereby expressly negate any intent to create (and this Conveyance
shall never be construed as creating) a mining or other partnership or joint
venture.
ARTICLE EIGHT
GOVERNMENT REGULATION
Section 8.1 Government Regulations. All obligations of Grantor hereunder
shall be subject to all applicable laws, regulations and rules of the State of
Alaska and the United States of America and all other governmental agencies or
authorities having jurisdiction in the matter (except those being contested in
good faith). Grantor shall be entitled to use its reasonable discretion in
making filings, for itself and on behalf of Grantee, with any governmental
body, agency, board or commission having jurisdiction, affecting the Subject
Interests or the Royalty Interest, provided that any such filings shall be
limited to notice required in connection with the grant or transfer of the
Royalty Interest.
Section 8.2 Government Approval. This Conveyance shall not be effective
until approved by the Commissioner of the Department of Natural Resources,
State of Alaska, or his designee.
ARTICLE NINE
ASSIGNMENTS
Section 9.1 Assignment by Grantor. Grantor shall have the right to
assign, sell, transfer, convey, mortgage or pledge the Subject Interests, or
any part thereof, provided that same is expressly made subject to the Royalty
Interest and the terms and provisions of this Conveyance and that a certified
copy of the recorded instrument accomplishing same is promptly furnished to
Grantee by Grantor. From and after the effective date of any such assignment,
sale, transfer or Conveyance by Grantor, the grantee thereunder shall succeed
to all the requirements upon and responsibilities of Grantor hereunder as to
the interests so acquired by such grantee, and, from and after said effective
date, Grantor shall be relieved of such requirements and responsibilities,
excepting only for those accrued or due for performance prior to such
effective date and except as otherwise provided in Section 9.2. The kind of
notice provided herein shall be exclusive, and no other kind, whether actual
or constructive, shall be binding on Grantee.
Section 9.2 Effect of Assignment by Grantor. Notwithstanding any
provision of this Conveyance to the contrary, no assignment, sale, transfer,
conveyance, mortgage or pledge of the Subject Interests, or any part thereof,
shall adversely affect any of Grantee's rights hereunder, including, without
limitation, the amount, computation or method of payment of the Royalty
Interest, it being the intent of Grantor and Grantee that for the purpose of
determining the Royalty Interest payable to Grantee no disposition will be
deemed to have been effected during the term of this Conveyance. Should
Grantor dispose of its interest in the Subject Interests as to some of the
Subject Interests, or as to some part thereof, then, effective as of the date
of such disposition, BP Exploration (Alaska) Inc. shall automatically be
designated by all owners of the Subject Interests as their agent, throughout
the term of this Conveyance, (i) to make all designations that Grantor is
entitled to make pursuant to Section 4.3, (ii) to obtain all information and
take such other steps as may be necessary to permit the Independent Petroleum
Engineers and the Independent Accountants and Grantor to perform their
respective obligations and duties under this Conveyance (including, without
limitation, the calculations to be made pursuant to Article Three and Article
Four) and (iii) to make all payments and to deliver and receive all
communications on behalf of Grantor, it being agreed that during such time, if
any, that the Subject Interests are owned by more than one Person, Grantee
shall never be obligated without its consent to receive payments from or to
deliver or receive communications under this Conveyance from or to any Grantor
other than BP Exploration (Alaska) Inc.; provided, however, that BP
Exploration (Alaska) Inc. shall be released from its obligations under this
Conveyance upon the sale or transfer by it of all or substantially all of the
Subject Interests, if the transferee is of Equivalent Financial Standing and
unconditionally agrees to assume and be bound by all of BP Exploration
(Alaska) Inc.'s obligations under this Conveyance in a writing in form and
substance reasonably satisfactory to Grantee.
Section 9.3 Assignment by Grantee. Grantee has the right to assign the
Royalty Interest in whole or in part. No such assignment will affect the
method of computing the Royalty Interest, and if more than one Person becomes
entitled to participate in the Royalty Interest, Grantor may withhold from
such other Person payments to which such Person would otherwise be entitled
hereunder and the furnishing of any data or information which Grantor is
required by the terms hereof to furnish Grantee until Grantor is furnished a
recordable instrument executed by or binding upon all Persons interested in
the Royalty Interest designating one Person who is to receive such payments,
data and information.
Section 9.4 Change In Ownership. No change of ownership or right to
receive payment of the Royalty Interest, or of any part thereof, however
accomplished, shall be binding upon Grantor until notice thereof shall have
been furnished by the Person claiming the benefit thereof, and then only with
respect to payments thereafter made. Notice of sale or assignment shall
consist of a certified copy of the recorded instrument accomplishing the same;
notice of change of ownership or right to receive payment accomplished in any
other manner (for example by reason of incapacity, death or dissolution) shall
consist of certified copies of such documents and complete proceedings as are
legally binding and conclusive of the rights of all parties. Until such
notice shall have been furnished to Grantor as above provided, the payment or
tender of all sums payable on the Royalty Interest may be made in the manner
provided herein precisely as if no such change in interest or ownership or
right to receive payment had occurred. The kind of notice herein provided
shall be exclusive, and no other kind, whether actual or constructive, shall
be binding on Grantor.
Section 9.5 Rights of Mortgagee or Trustee. If Grantee shall at any time
execute a mortgage or deed of trust covering all or part of the Royalty
Interest, subject to the notice provisions of Section 9.4, the mortgagee(s) or
trustee(s) therein named or the holder of any obligation secured thereby
shall be entitled, to the extent such mortgage or deed of trust so provides,
to exercise all the rights, remedies, powers and privileges conferred upon
Grantee by the terms of this Conveyance, but the provisions of this Section
9.5 shall in no way be deemed or construed to impose upon Grantor any
obligation or liability undertaken by Grantee under such mortgage or deed of
trust or under the obligation secured thereby.
ARTICLE TEN
MISCELLANEOUS
Section 10.1 Proportionate Reduction. In the event of failure or
deficiency in title of the State of Alaska to any of the Lands which affects
any of the Subject Interests, or any modification of the Subject Interests as
provided in Article Six, the portion of the Royalty Production from such
affected or modified Subject Interests out of which the Royalty Interest
attributable to such Subject Interests shall be payable shall be reduced in
the same proportion that such Subject Interests are reduced, but such failure
or deficiency in title shall not affect the definition of Royalty Production
as set forth in Article One or the method of paying the Royalty Interest as
set forth in Article Three or the method of computing the payments to be made
under the Royalty Interest as act forth in Article Four.
Section 10.2 Term. Subject to the limitations stated herein, this
Conveyance shall remain in force so long as any of the Subject Interests are
in effect, provided, however, that all warranties and indemnities set forth in
this Conveyance shall survive for the maximum period permitted by law.
Section 10.3 Further Assurances. Should any additional instrument of
assignment or conveyance be required to describe more specifically any
interests subject hereto or to vest in any Person to whom Grantee assigns the
Royalty Interest in whole or in part the benefit of all covenants,
representations, warranties and indemnities made by Grantor to or for the
benefit of Grantee pursuant to this Conveyance, Grantor agrees to execute and
deliver the same. Also, if any other or additional instruments are required
in connection with the transfer of interests in the Leases to comply with
applicable law, regulations, the Prudhoe Bay Unit Agreement, the Prudhoe Bay
Unit Operating Agreement or any other applicable agreements, Grantor will
execute and deliver the same.
Section 10.4 Notices. Any notice, request, demand, report, statement or
other instrument which may be required or permitted to be given to any party
hereto or other Person succeeding to any interest of a party hereto shall be
deemed sufficiently given if in writing and delivered to such party or Person
or to an officer of such party or Person or deposited in the United States
mail in a sealed envelope, first class mail, with postage prepaid, addressed
to such party or Person at its or his address stated in this Conveyance, or at
such other address as the party or Person to be addressed shall have
designated by written notice to each such party or Person. Each party's
proper address shall be deemed to be that set forth herein below until such
party gives to the other party, in the manner above prescribed, notice of a
new address, after which such new address shall be deemed the proper address
until changed in like manner. Notice shall be deemed given when actually
received by the party or Person to which such notice was intended.
Grantor: BP Exploration (Alaska) Inc.
P.O. Box 196612
900 East Benson Boulevard
Anchorage, Alaska 99519-6612
Grantee: The Standard Oil Company
200 Public Square
Cleveland, Ohio 44114-2375
Section 10.5 Covenants and Warranties with Respect to Participating
Interest and Net Profits Royalty Interest. Grantor hereby covenants and
warrants that its Oil Rim Area Participation as of the Effective Date is
50.6848339% and its Gas Cap Area Participation as of the Effective Date is
13.8398950%, that as of the Effective Date its Oil Rim Area Participation and
its Gas Cap Area Participation is subject only to the Net Profits Royalty
Interest (exclusive of the Lower Lower Net Profits Royalty Interest) and that
such interests are subject to change or adjustment only as provided herein or
as may be provided under the terms of the Prudhoe Bay Unit Operating Agreement
and the Prudhoe Bay Unit Agreement, including, without limitation, any
adjustments which might result from the final redetermination of hydrocarbon
pore volume as provided in Article 37 of the Prudhoe Bay Unit Operating
Agreement. Grantor further covenants that if the existence of the Net Profits
Royalty Interest or the making of any payments under the Net Profits Royalty
Interest results in a decrease in any payment to Grantee under the Royalty
Interest, Grantor shall and hereby agrees to pay Grantee, in addition to and
independent of payments required to be made to Grantee under the Royalty
Interest, the amount of any such decrease, together with interest thereon in
an amount equal to the product of (i) the amount of such decrease, (ii) the
Interest Rate, and (iii) a fraction, the numerator of which is the number of
days from the date of such decrease until the date of payment to Grantee of
the amount owing pursuant to this Section 10.5 and the denominator of which is
360 days, together with such other damages (but not including interest) to
which Grantee may be entitled under this Conveyance, or at law or in equity,
it being the express intent of Grantor and Grantee that Grantee is not to be
prejudiced in any way by the existence of or the making of any payments under
the Net Profits Royalty Interest.
Section 10.6 Other Covenants. Grantor hereby covenants and warrants that
it is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware, is qualified to transact business and
is in good standing in the State of Alaska and is qualified with the Alaska
Department of Natural Resources to hold interests in state oil and gas leases;
that it has the legal right and authority to bargain, grant, sell, convey,
transfer, assign, set over and deliver the Royalty Interest to Grantee and
that it has the legal right and authority to execute, deliver and perform this
Conveyance; that the execution, delivery and performance of this Conveyance by
it (i) does not require the consent of any other Person except as set forth in
Section 8.2; (ii) does not require any action by or filing with any
governmental body, agency, or official that has not been accomplished, other
than the filings which are required under the terms of the Leases and the
terms of applicable statutes of the State of Alaska and the administrative
regulations of the Alaska Department of Natural Resources, which filings will
be promptly made upon execution of this Conveyance; and, (iii) will not
violate or conflict with any law, statute, regulation, agreement, judgment,
injunction, order, decree or other instrument to which Grantor is subject or
is party or by which Grantor or the Leases or the Subject Interests are bound
and that this Conveyance is a valid and binding agreement of Grantor,
enforceable against Grantor in accordance with its terms. Grantor hereby
binds itself and its successors and assigns to forever defend the title to the
Royalty Interest unto Grantee and its successors and assigns against every
Person claiming the same or any part thereof by, through or under Grantor, but
not otherwise. This Conveyance is made with full substitution and subrogation
of Grantee in and to all covenants, representations and warranties by others
heretofore given or made in respect of the Leases or the Subject Interests.
Section 10.7 Binding Effect. This Conveyance and all of the rights and
obligations hereunder (including, without limitation, those arising out of the
covenants, representations, warranties and indemnities made by Grantor to or
for benefit of Grantee pursuant to this Conveyance) shall bind and inure to
the benefit of the successors and assigns of Grantor and Grantee.
Section 10.8 Headings for Convenience. The headings used in this
Conveyance are inserted for convenience only and shall be disregarded in
construing this Conveyance.
Section 10.9 Counterparts. This Conveyance may be executed in several
original counterparts. Each such counterpart shall for all purposes be deemed
an original, and all such counterparts shall constitute but one and the same
Conveyance.
Section 10.10 Interest Affecting Real Property. The Royalty Interest
created and transferred by this Conveyance is an interest affecting real
property within the meaning of AS 40.17.110(b)(59). The parties intend that
the covenants contained in this Conveyance run with and burden the Lands and
the Subject Interests to the maximum extent possible under applicable law.
Section 10.11 Waiver; Estoppel. The failure of Grantor or Grantee to
insist upon strict performance of any provision of this Conveyance shall not
constitute a waiver of or estoppel against asserting the right to require such
performance in the future, nor shall a waiver or estoppel in any one instance
constitute a waiver or estoppel with respect to a later breach of a similar
nature or otherwise.
Section 10.12 Right to Information. The Standard Oil Company shall
remain entitled throughout the term of this Conveyance to receive from Grantor
a copy of all information that is furnished to Grantee by Grantor,
irrespective of the assignment by The Standard Oil Company of the Royalty
Interest in whole to any other Person.
Section 10.13 Indemnification. Grantor hereby agrees to indemnify and
save harmless Grantee from and against any expense (including, without
limitation, the expense of suit and attorneys' fees), claim, damage, loss or
liability incurred by Grantee as a result of or arising out of the breach by
Grantor of any of its representations, warranties or covenants set forth in
this Conveyance.
Section 10.14 Independent Payments. All payments to which Grantee is
entitled by reason of the indemnities set forth in this Conveyance by Grantor
to Grantee or by reason of any breach by Grantor of its representations,
warranties or covenants shall be in addition to and independent of all
payments required to be made to Grantee under the Royalty Interest.
Section 10.15 Governing Law. The validity, effect and construction of
this Conveyance shall be governed by the laws of the State of Alaska.
Section 10.16 Amendment. This Conveyance may not be amended, altered or
modified except pursuant to a written Instrument executed by Grantor and
Grantee.
IN WITNESS WHEREOF, the parties hereto have caused this Conveyance to be
duly executed as of the day and year first written.
GRANTOR:
[SEAL]
Attest: BP Exploration (Alaska) Inc.
/s/ John A. Reeder By /s/ G.N. Nelson
- --------------------------- --------------------------
Assistant Secretary G.N. Nelson, President
GRANTEE:
[SEAL]
Attest: The Standard Oil Company
/s/ J.M. Cesarik By /s/ James H. Ross
- --------------------------- --------------------------
ACKNOWLEDGMENT
STATE OF ALASKA )
) ss
THIRD JUDICIAL DISTRICT )
Before me, a notary public, in and for the State of Alaska, personally
appeared G.N. Nelson, known to me to be the person who, as President of BP
Exploration (Alaska) Inc., the corporation which executed the foregoing
instrument, signed the same, and acknowledged to me that he did so sign said
instrument in the name and upon behalf of said corporation as such officer;
that the same is his free act and deed as such officer, and the free and
corporate act and deed of said corporation; that he was duly authorized
thereunto by its board of directors; and that the seal affixed to said
instrument is the corporation seal of said corporation. In testimony whereof,
I have hereunto subscribed my name, and affixed my official seal, at
Anchorage, Alaska, this 20th day of February, 1989.
[SEAL] /s/ Keri L. Hopkins
-------------------------------
Notary Public in and for Alaska
My Commission Expires: 1-14-93
STATE OF OHIO )
) ss
COUNTY OF CUYAHOGA )
Before me, a notary public, in and for said county, personally appeared
James H. Ross and J.M. Cesarik, known to me to be the persons who, as Chairman
and Chief Executive Officer and Corporate Secretary, respectively, of The
Standard Oil Company, the corporation which executed the foregoing instrument,
signed the same, and acknowledged to me that they did so sign said instrument
in the name and upon behalf of said corporation as such officers,
respectively; that the same is their free act and deed as such officers,
respectively, and the free and corporate act and deed of said corporation;
that they were duly authorized thereunto by its board of directors; and that
the seal affixed to said instrument is the corporation seal of said
corporation. In testimony whereof, I have hereunto subscribed my name, and
affixed my official seal, at Cleveland, Ohio this 15th day of February, 1989.
[SEAL] /s/ JoAnn Motuza
---------------------------------
Notary Public in and for Ohio
My Commission Expires:
JoANN MOTUZA
Notary Public, State of Ohio
Recorded in Cuyahoga County
My Comm. Expires 9-14-92
<PAGE>
<TABLE>
EXHIBIT A
OVERRIDING ROYALTY CONVEYANCE
STATE OF ALASKA
<CAPTION>
Grantor's Recorded
PBU Lease Lands Working Book/
Tract Serial No. Description Interest Page*
<C> <C> <C> <C> <C>
16 ADL-25637 Secs. 13,24 50% 42/609
T12N-R10E, UM
47 ADL-28260 Secs. 1,2,11,12 100%** 52/40
T11N-R13E, UM
25 ADL-28277 Secs. 26,35,36 100%** 52/44
T12N-R13E, UM
24 ADL-28278 Secs. 27,28,33,34 100%** 52/50
T12N-R13E, UM
23 ADL-28279 Secs. 29,30,31,32 100%** 52/56
T12N-R13E, UM
44 ADL-28280 Secs. 1,2,11,12 100%** 52/62
T11N-R13E, UM
45 ADL-28281 Secs. 3,4,9,10 100%** 52/68
T11N-R13E, UM
46 ADL-28282 Secs. 5,6,7,8 100%** 52/74
T11N-R13E, UM
57 ADL-28283 Secs. 17,18,19,20 100%** 52/80
T11N-R13E, UM
58 ADL-28284 Secs. 15,16,21,22 100%** 52/86
T11N-R13E, UM
59 ADL-28285 Secs. 13,14,23,24 100%** 52/92
T11N-R13E, UM
76 ADL-28286 Secs. 25,26,35,36 100%** 52/98
T11N-R13E, UM 29/178
77 ADL-28287 Secs. 27,28,33,34 100%** 47/235
T11N-R13E, UM
60 ADL-28305 Secs. 17,18,19,20 100%** 47/223
T11N-R14E, UM
74 ADL-28309 Secs. 27,28,33,34 100%** 42/336
T11N-R14E, UM
75 ADL-28310 Secs. 29,30,31,32 100%** 47/241
T11N-R14E, UM
90 ADL-28311 Secs. 1,2,11,12 100%** 47/229
T10N-R14E, UM
89 ADL-28312 Secs. 3,4,9,10 100%** 52/104
T10N-R14E, UM
101 ADL-28315 Secs. 13,14,23,24 100%** 52/110
T10N-R14E, UM
38 ADL-28320 Secs. 1,2,11,12 100%** 47/199
T11N-R15E, UM
100 ADL-28330 Secs. 17,18,19,20 100%** 52/116
T10N-R15E, UM
99 ADL-28331 Secs. 15,16,21,22 100%** 52/122
T10N-R15E, UM
110 ADL-28333 Secs. 25,26,35,36 100%** 42/341
T10N-R15E, UM
108 ADL-28335 Secs. 29,30,31,32 100%** 52/128
T10N-R15E, UM
66 ADL-28339 Secs. 17,18,19 100%** 47/193
T11N-R16E, UM
69 ADL-28343 Secs. 30,31,32 100%** 42/356
T11N-R16E, UM
111 ADL-28349 Secs. 29,30,31 100%** 42/370
T10N-R16E, UM
31 ADL-34630 Secs. 25,26,35,36 100%** 47/205
T12N-R15E, UM
<FN>
* All book and page references are to the lease records of the Noatak-Kobuk
Recording District, except: (i) Lease ADL 25637 is recorded in the
Miscellaneous Records of the Fairbanks Recording District; and (ii) Lease ADL
28286 is recorded both in the Lease Records of the Noatak-Kobuk Recording
District (Book 52/page 98) and the Lease Records of the Fairbanks Recording
District (Book 29/page 178).
** The interest of BP Exploration (Alaska) Inc. in these leases is subject to
the Net Profits Royalty Interest (excluding the Lower Net Profits Royalty
Interest).
</TABLE>
EXHIBIT 4.3
TRUST CONVEYANCE
Dated February 28, 1989
Between
THE STANDARD OIL COMPANY
("Grantor")
and
BP PRUDHOE BAY ROYALTY TRUST
("Grantee")
RECORD THIS INSTRUMENT IN THE BARROW RECORDING DISTRICT.
THE STANDARD OIL COMPANY is known in Alaska as SOCO INC.; please index both of
these names in the Grantor Index. BP PRUDHOE BAY ROYALTY TRUST should be
indexed in the Grantee Index.
THE LANDS AFFECTED BY THIS INSTRUMENT ARE DESCRIBED IN EXHIBIT A ATTACHED
HERETO.
ADDRESSES OF THE PARTIES TO THIS INSTRUMENT ARE SET FORTH IN SECTION 4.2 OF
THIS INSTRUMENT.
RETURN THIS INSTRUMENT TO: GUESS & RUDD
510 L Street, Suite 700
Anchorage, Alaska 99501
Attn: Joseph J. Perkins, Jr.
<PAGE>
TRUST CONVEYANCE
THIS CONVEYANCE, dated the 28th day of February, 1989, between The
Standard Oil Company, an Ohio corporation known in Alaska as SOCO INC.
(Grantor) and the BP Prudhoe Bay Royalty Trust, a business trust under the
Delaware Trust Act administered under the terms of the BP Prudhoe Bay Royalty
Trust Agreement among The Standard Oil Company, BP Exploration (Alaska) Inc.,
The Bank of New York, Trustee, and F. James Hutchinson, Co-trustee (Grantee).
WITNESSETH:
WHEREAS, Grantor is the owner of a certain Royalty Interest covering
certain lands and leases situated in the Prudhoe Bay area of the State of
Alaska more fully described in Exhibit A to this Conveyance; and
WHEREAS, Grantor desires to transfer and convey the Royalty Interest unto
Grantee as of the Effective Date herein provided; and
WHEREAS, Grantee desires to accept the Royalty Interest as of the
Effective Date herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements herein contained, the parties hereto agree as follows:
SECTION ONE
DEFINITIONS
For the purposes of this Conveyance, the following words, terms and
phrases shall have the following meanings:
Conveyance shall mean this Trust Conveyance.
Effective Date shall mean 12:01 o'clock A.M. Alaska Time Zone on February
28, 1989.
Grantee shall mean the BP Prudhoe Bay Royalty Trust while it owns all or
any part of or interest in the Royalty Interest and any other Person or
Persons who acquire legal title to all or any part of or interest in the
Royalty Interest.
Grantor shall mean The Standard Oil Company, an Ohio corporation known in
Alaska as SOCO Inc.
Leases shall have the meaning stated in the Overriding Royalty
Conveyance.
Overriding Royalty Conveyance Grantee shall have the same meaning as the
definition of "Grantee" set forth in the Overriding Royalty Conveyance.
Overriding Royalty Conveyance Grantor shall have the same meaning as the
definition of "Grantor" set forth in the Overriding Royalty Conveyance.
Overriding Royalty Conveyance shall mean that certain Overriding Royalty
Conveyance dated February 27, 1989, executed and delivered by BP Exploration
(Alaska) Inc., as Grantor, and The Standard Oil Company, as Grantee, covering
certain lands and leases situated in the Prudhoe Bay area of the State of
Alaska more particularly described in Exhibit A to the Overriding Royalty
Conveyance. A copy of the Overriding Royalty Conveyance is attached hereto as
Exhibit B. The Overriding Royalty Conveyance is recorded in Book 54, Pages
469-495, Barrow Recording District.
Person shall mean an individual, corporation, partnership, trust, estate
or other entity, organization or association.
Royalty Interest shall mean the overriding royalty interest conveyed to
Overriding Royalty Conveyance Grantee by the Overriding Royalty Conveyance.
Subject Interests shall have the meaning stated in the Overriding Royalty
Conveyance.
SECTION TWO
CONVEYANCE
Grantor, for and in consideration of the sum of Ten Dollars ($10.00) and
other good and valuable consideration to it paid by Grantee, the receipt and
sufficiency of which are hereby acknowledged, by these presents does hereby
bargain, sell, grant, convey, transfer, assign, set over and deliver unto
Grantee, its successors and assigns the Royalty Interest and all rights and
benefits to which Overriding Royalty Conveyance Grantee is entitled under or
pursuant to the Overriding Royalty Conveyance (including, without limitation,
the rights and benefits arising out of the covenants, representations,
warranties and indemnities made by Overriding Royalty Conveyance Grantor to
or for the benefit of Overriding Royalty Conveyance Grantee pursuant to the
Overriding Royalty Conveyance), to have and to hold forever.
SECTION THREE
COVENANTS AND WARRANTIES
Grantor hereby covenants and warrants that it is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Ohio, is qualified to transact business and is in good standing in the
State of Alaska, and is qualified with the Alaska Department of Natural
Resources to hold interests in state oil and gas leases; that it has the legal
right and authority to bargain, grant, sell, convey, transfer, assign, set
over and deliver the Royalty Interest to Grantee and that it has legal right
and authority to execute, deliver and perform this Conveyance; that the
execution, delivery and performance of this Conveyance by it (i) does not
require the consent of any other Person; (ii) does not require any action by
or filing with any governmental body, agency, or official that has not been
accomplished, other than the filings which may be required under the terms of
the Leases and the terms of the applicable statutes of the State of Alaska and
the administrative regulations of the Alaska Department of Natural Resources,
which filings will be promptly made by Grantor upon the execution of this
Conveyance; and, (iii) will not violate or conflict with any law, statute,
regulation, agreement, judgment, injunction, order, decree or other instrument
to which Grantor is subject or is party or by which Grantor or the Leases or
the Subject Interests are bound; and that this Conveyance is a valid and
binding agreement of Grantor, enforceable against Grantor in accordance with
its terms. Grantor hereby binds itself and its successors and assigns to
forever defend the title to the Royalty Interest unto Grantee and its
successors and assigns against every Person claiming the same or any part
thereof by, through or under Grantor, but not otherwise. This Conveyance is
made with full substitution and subrogation of Grantee in and to all
covenants, representations and warranties by others heretofore given or made
in respect of the Leases or the Subject Interests.
SECTION FOUR
MISCELLANEOUS
Section 4.1 Further Assurances. Should any additional instruments of
assignment or conveyance be required to describe more specifically any
interests subject hereto, or to vest in Grantee the benefit of all covenants,
representations, warranties and indemnities by others heretofore given or made
in respect of the Royalty Interest or the Leases or the Subject Interests
(including, without limitation, those made by Overriding Royalty Conveyance
Grantor to or for the benefit of Overriding Royalty Conveyance Grantee
pursuant to the Overriding Royalty Conveyance), Grantor agrees to execute and
deliver the same. Also, if any other or additional instruments are required
in connection with the transfer of the Royalty Interest to comply with
applicable law or regulations, Grantor will execute and deliver the same.
Section 4.2 Notices. Any notice, request, demand, report, statement or
other instrument which may be required or permitted to be given to any party
hereto or other Person succeeding to any interest of a party hereto shall be
deemed sufficiently given if in writing and delivered to such party or Person
or to an officer of such party or Person or deposited in the United States
mail in a sealed envelope, first class mail, with postage prepaid, addressed
to such party or Person at its or his address stated in this Conveyance, or at
such other address as the party or Person to be addressed shall have
designated by written notice to each other party or Person. Each party's
proper address shall be deemed to be that set forth herein below until such
party gives to the other party, in the manner above prescribed, notice of a
new address, after which such address shall be deemed the proper address until
changed in like manner. Notice shall be deemed given when actually received
by the party or Person to which such notice was intended.
Grantor: The Standard Oil Company
200 Public Square
Cleveland, Ohio 44114-2375
Grantee: BP Prudhoe Bay Royalty Trust,
The Bank of New York, Trustee
21 West Street, 12th Floor
New York, New York 10286
Attention: Corporate Trust Department
Section 4.3 Binding Effect. This Conveyance and all of the rights and
obligations hereunder shall bind and inure to the benefit of the successors
and assigns of Grantor and Grantee.
Section 4.4 Headings for Convenience. The headings used in this
Conveyance are inserted for convenience only and shall be disregarded in
construing this Conveyance.
Section 4.5 Counterparts. This Conveyance may be executed in several
original counterparts. Each such counterpart shall for all purposes be
deemed an original, and all such counterparts shall constitute but one and the
same Conveyance.
Section 4.6 Governing Law. The validity, effect and construction of
this Conveyance shall be governed by the laws of the State of Alaska.
IN WITNESS WHEREOF, the parties hereto have caused this Conveyance to be
duly executed as of the day and year first written.
GRANTOR:
Attest: The Standard Oil Company
/s/ J.M. Cesarik By /s/ J.H. Ross
- ---------------------------- ---------------------
J.M. Cesarik, J.H. Ross, Chairman and
Corporate Secretary Chief Executive Officer
GRANTEE:
Attest: BP PRUDHOE BAY ROYALTY TRUST
/s/ David G. Sampson By /s/ W.N. Gitlin
- ---------------------------- -------------------------
David G. Sampson Walter N. Gitlin
Assistant Vice President Assistant Vice President
The Bank of New York, Trustee
ACKNOWLEDGMENT
STATE OF OHIO )
) ss
COUNTY OF CUYAHOGA )
Before me, a notary public, in and for said county, personally appeared
J.H. Ross and J.M. Cesarik, known to me to be the persons who, as Chairman and
Chief Executive Officer and Corporate Secretary, respectively, of The Standard
Oil Company, the corporation which executed the foregoing instrument, signed
the same, and acknowledged to me that they did so sign said instrument in the
name and upon behalf of said corporation as such officers, respectively; that
the same is their free act and deed as such officers, respectively, and the
free and corporate act and deed of said corporation; that they were duly
authorized thereunto by its board of directors; and that the seal affixed to
said instrument is the corporation seal of said corporation. In testimony
whereof, I have hereunto subscribed my name, and affixed my official seal, at
Cleveland, Ohio, this ___ day of _____________, 1989.
[SEAL] /s/ JoAnn Motuza
-----------------------------
Notary Public in and for Ohio
My Commission Expires:
JoANN MOTUZA
Notary Public, State of Ohio
Recorded in Cuyahoga County
My Comm. Expires 9-14-92
STATE OF NEW YORK )
) ss
COUNTY OF NEW YORK )
Before me, a notary public, in and for said county, personally appeared
Walter N. Gitlin and David C. Sampson, known to me to be the persons who, as
Assistant Vice Presidents of The Bank of New York, the corporation which
executed the foregoing instrument, signed the same, and acknowledged to me
that they did so sign said instrument in the name and upon behalf of said
corporation as such officers; that the same is their free act and deed as such
officers, and the free and corporate act and deed of said corporation; that
they were duly authorized thereunto by its board of directors; and that the
seal affixed to said instrument is the corporation seal of said corporation.
In testimony whereof, I have hereunto subscribed my name, and affixed my
official seal, at New York, New York this 23rd day of February, 1989.
/s/ Virginia Barazotti
---------------------------------
Notary Public in and for New York
My Commission Expires:
VIRGINIA BARAZOTTI
Notary Public, State of New York
No. 42-4734842
Qualified in Queens County
Certificate filed in New York County
Commission Expires Nov. 30, 1989
<PAGE>
<TABLE>
EXHIBIT A
TRUST CONVEYANCE
STATE OF ALASKA
<CAPTION>
ORCG's Recorded
PBU Lease Lands Working Book/
Tract Serial No. Description Interest* Page**
<C> <C> <C> <C> <C>
16 ADL-25637 Secs. 13,24 50% 42/609
T12N-R10E, UM
47 ADL-28260 Secs. 1,2,11,12 100%*** 52/40
T11N-R13E, UM
25 ADL-28277 Secs. 26,35,36 100%*** 52/44
T12N-R13E, UM
24 ADL-28278 Secs. 27,28,33,34 100%*** 52/50
T12N-R13E, UM
23 ADL-28279 Secs. 29,30,31,32 100%*** 52/56
T12N-R13E, UM
44 ADL-28280 Secs. 1,2,11,12 100%*** 52/62
T11N-R13E, UM
45 ADL-28281 Secs. 3,4,9,10 100%*** 52/68
T11N-R13E, UM
46 ADL-28282 Secs. 5,6,7,8 100%*** 52/74
T11N-R13E, UM
57 ADL-28283 Secs. 17,18,19,20 100%*** 52/80
T11N-R13E, UM
58 ADL-28284 Secs. 15,16,21,22 100%*** 52/86
T11N-R13E, UM
59 ADL-28285 Secs. 13,14,23,24 100%*** 52/92
T11N-R13E, UM
76 ADL-28286 Secs. 25,26,35,36 100%*** 52/98
T11N-R13E, UM 29/178
77 ADL-28287 Secs. 27,28,33,34 100%*** 47/235
T11N-R13E, UM
60 ADL-28305 Secs. 17,18,19,20 100%*** 47/223
T11N-R14E, UM
74 ADL-28309 Secs. 27,28,33,34 100%*** 42/336
T11N-R14E, UM
75 ADL-28310 Secs. 29,30,31,32 100%*** 47/241
T11N-R14E, UM
90 ADL-28311 Secs. 1,2,11,12 100%*** 47/229
T10N-R14E, UM
89 ADL-28312 Secs. 3,4,9,10 100%*** 52/104
T10N-R14E, UM
101 ADL-28315 Secs. 13,14,23,24 100%*** 52/110
T10N-R14E, UM
38 ADL-28320 Secs. 1,2,11,12 100%*** 47/199
T11N-R15E, UM
100 ADL-28330 Secs. 17,18,19,20 100%*** 52/116
T10N-R15E, UM
99 ADL-28331 Secs. 15,16,21,22 100%*** 52/122
T10N-R15E, UM
110 ADL-28333 Secs. 25,26,35,36 100%*** 42/341
T10N-R15E, UM
108 ADL-28335 Secs. 29,30,31,32 100%*** 52/128
T10N-R15E, UM
66 ADL-28339 Secs. 17,18,19 100%*** 47/193
T11N-R16E, UM
69 ADL-28343 Secs. 30,31,32 100%*** 42/356
T11N-R16E, UM
111 ADL-28349 Secs. 29,30,31 100%*** 42/370
T10N-R16E, UM
31 ADL-34630 Secs. 25,26,35,36 100%*** 47/205
T12N-R15E, UM
<FN>
* "OCRG" means Overriding Royalty Conveyance Grantor.
** All book and page references are to the lease records of the Noatak-Kobuk
Recording District, except: (i) Lease ADL 25637 is recorded in the
Miscellaneous Records of the Fairbanks Recording District; and (ii) Lease ADL
28286 is recorded both in the Lease Records of the Noatak-Kobuk Recording
District (Book 52/page 98) and the Lease Records of the Fairbanks Recording
District (Book 29/page 178).
*** The interest of BP Exploration (Alaska) Inc. in these leases is subject to
the "Net Profits Royalty Interest" (excluding the "Lower Net Profits Royalty
Interest")(as said terms are defined in the Overriding Royalty Conveyance.
</TABLE>
EXHIBIT 4.4
SUPPORT AGREEMENT
AMONG
THE BRITISH PETROLEUM COMPANY p.l.c.
AND
BP EXPLORATION (ALASKA) INC.
THE STANDARD OIL COMPANY
AND
BP PRUDHOE BAY ROYALTY TRUST
<PAGE>
THIS SUPPORT AGREEMENT made as of February 28, 1989
AMONG THE BRITISH PETROLEUM COMPANY p.l.c. ("BP"), an English company
whose principal office is at Britannic House, Moor Lane, London EC2Y
9BU England,
BP EXPLORATION (ALASKA) INC., a Delaware corporation having its
principal office in Anchorage, Alaska (the "Company"),
THE STANDARD OIL COMPANY, an Ohio corporation having its principal
office in Cleveland Ohio ("SOC"),
AND BP PRUDHOE BAY ROYALTY TRUST, a Delaware business trust (the
"Trust"), having The Bank of New York, a New York corporation,
authorized to do a banking business, as a Trustee (the "Trustee"),
under the BP Prudhoe Bay Royalty Trust Agreement, dated February 28,
1989, by and among SOC, the Company, the Trustee and a co-trustee
(the "Royalty Trust Agreement").
WHEREAS
1. The Company and SOC are indirect, wholly-owned subsidiaries of BP; and
2. SOC shall grant and convey to the Trust the Initial Royalty Interest in
consideration of the issuance by the Trust, at SOC's direction, of Trust
Units representing units of beneficial interest in the Trust; and
3. In order to induce the initial purchasers of Trust Units to purchase such
Trust Units and in order to induce The Bank of New York and F. James
Hutchinson to act as trustees under the Royalty Trust Agreement, BP shall
provide financial support to the Company and SOC in meeting their
respective payment obligations under the Initial Royalty Interest, any
Additional Royalty Interests, the Royalty Trust Agreement and the
Conveyance to the Trust, the Trustee, the Transfer Agent and the
Registrar (in each case as defined in the Royalty Trust Agreement).
4. The Trust, in consideration of the conveyance of the Initial Royalty
Interest to the Trust and the above-mentioned financial support of BP and
SOC, shall issue 21,400,000 Trust Units in connection with the
establishment of the Trust pursuant to the Royalty Trust Agreement and
accept the benefits of the financial support and guarantee which BP has
agreed to make available on the terms hereinafter contained.
NOW THEREFORE IT IS HEREBY AGREED as follows:
1. DEFINITIONS
In this Agreement, unless the context otherwise requires, the following
terms shall have the following meanings:
"Conveyance" means, collectively, the Overriding Royalty Conveyance
dated February 27, 1989 between the Company and SOC conveying the Initial
Royalty Interest to SOC, the Trust Conveyance dated the date hereof
between SOC and the Trust conveying the Initial Royalty Interest to the
Trust and any Additional Conveyance (as defined in the Royalty Trust
Agreement).
"Equivalent Financial Standing" means a Person having a rating
assigned to outstanding unsecured, unsupported long term debt from
Moody's Investors Service of at least A3 or from Standard & Poor's
Corporation of at least A- or an equivalent rating from at least one
nationally-recognized statistical rating organization (after giving
effect to the sale or transfer to such Person of all or substantial all
of the Company's working interest in the PBU a the assumption by such
Person of all of the Company's obligations under the Conveyance and of
all of BP's obligations hereunder).
"PBU" means the Prudhoe Bay Unit, as defined in the Conveyance.
"Person" means any individual, corporation, partnership, trust,
estate or other entity, organization or association.
"Royalty Interests" means the Initial Royalty Interest and any
Additional Royalty Interests (in each case as defined in the Royalty
Trust Agreement) conveyed to the Trust pursuant to the Initial Conveyance
or any Additional Conveyance (in each case as defined in the Royalty
Trust Agreement.)
2. SCOPE OF UNDERTAKING
(a) Subject to the terms hereof BP shall, within 30 days of notice to BP
pursuant to Article XI of the Royalty Trust Agreement, (i) cause the
Company to perform its payment obligations under the Royalty Interests
pursuant to the Conveyance and (ii) cause the Company and SOC to satisfy
their respective payment obligations to the Trustee, Transfer Agent and
Registrar and their respective payment obligation to the Trust under the
Royalty Trust Agreement (including without limitation, the obligation to
make payments as indemnification), including, in each case, without
limitation, contributing to the Company or SOC or causing to be
contributed to the Company or SOC by an affiliate of BP such funds as are
necessary to make such payments. BP's obligations under the foregoing
undertaking are unconditional.
(b) For purposes of BP's obligations under this Support Agreement, no
assignment, sale, transfer, conveyance, mortgage or pledge or other
disposition of the Royalty Interests shall relieve (i) the Company of its
obligations under the Royalty Trust Agreement or the Conveyance, (ii) SOC
of its obligations under the Royalty Trust Agreement or (iii) BP of its
obligations under this Support Agreement.
3. DURATION
This Agreement shall be deemed to have come into full force and effect on
the date first above written and shall continue thereafter until the
earlier of (a) the termination of the Royalty Interests and all
obligations of the Company under the Conveyance and of the Company and
SOC under the Royalty Trust Agreement or (b) all or substantially all of
the Company's working interest in the PBU is sold or transferred to a
transferee of Equivalent Financial Standing in accordance with the
provisions of Section 5(d) hereof.
4. SUPPORT TO BE PROVIDED BY BP
Pursuant to BP's undertaking described in Section 2 hereof BP shall make
available to the Company and SOC, and the Company and SOC shall receive
such financial support as the Company, SOC or the Trustee may from time
to time request from BP in writing.
5. ASSIGNMENT AND DELEGATION
(a) Neither BP nor the Company nor SOC shall transfer or assign its rights or
obligations under this Agreement without the prior written consent of the
Trust.
(b) Notwithstanding (a) above BP shall however be free to arrange for its
obligations hereunder to be performed by any affiliate of BP (with the
exception of the Company) provided that BP shall remain responsible for
ensuring that such obligations are performed in a timely manner.
(c) The Company may sell or transfer all or part of its working interest in
the PBU, although such a transfer will not relieve BP of its
responsibility to ensure that the Company's payment obligations with
respect to the Royalty Interests and under the Royalty Trust Agreement
and the Conveyance are performed.
(d) BP shall be released from its obligation under the Agreement upon the
sale or transfer of all or substantially all of the Company's working
interest in the PBU, if the transferee is of Equivalent Financial
Standing and unconditionally agrees to assume and be bound by BP's
obligation under this Agreement in a writing in form and substance
reasonably satisfactory to the Trustee.
6. ENFORCEABILITY
This Agreement may be enforced by the Trustee, for the benefit of the
Trust, or for its own benefit or for the benefit of the Transfer Agent or
Registrar at any time when the Company or SOC has failed to pay amounts
due the Trust or the Trustee, individually, or as Trustee, or the
Transfer Agent or Registrar, as described in the Royalty Trust Agreement,
or has otherwise failed to perform their respective payment obligations
under and pursuant to the Royalty Interests or the Royalty Trust
Agreement or the Conveyance.
7. NOTICES
Any communications by a party to another shall be sufficiently made if
sent by post (by airmail where airmail is possible), postage paid, or by
telegraph, telex or facsimile to the address hereinafter specified and
shall be deemed to have been made when received.
Unless otherwise specified by not fewer than 15 days' notice in writing
to the party in question, the address to which communications shall be
sent shall be:
BP - THE BRITISH PETROLEUM COMPANY p.l.c.
Britannic House, Moor Lane
London EC2Y 9BU, England
Attention: Secretary
the Company - BP EXPLORATION (ALASKA) INC.
c/o BP AMERICA INC.
200 Public Square
Cleveland, Ohio 44114
Attention: Treasurer
SOC - The Standard Oil Company
c/o BP America Inc.
200 Public Square
Cleveland, Ohio 44114
Attention: Treasurer
the Trustee - The Bank of New York
21 West Street, 12th Floor
New York, New York 10286
Attention: Corporate Trust
Trustee Administration
8. SUBMISSION TO JURISDICTION
BP agrees that any legal suit, action or proceeding arising out of or
based upon this Agreement may be instituted in any state or Federal Court
in the Borough of Manhattan, The City of New York, New York, United
States of America, and waives, to the extent it may effectively do so,
any objection which it may have now or hereafter to the laying of the
venue of any such suit, action or proceeding, and irrevocably submits to
the jurisdiction of any such court in any such suit, action or
proceeding. BP has designated and appointed BP America Inc. (or any
successor corporation) as BP's authorized agent to accept and acknowledge
on its behalf in any such suit, action or proceeding in any such court
and agrees that service of process upon said agent at its office at 667
Madison Avenue, 22nd Floor, New York, New York 10021, attention of the
General Counsel (or at such other address in the Borough of Manhattan,
The City of New York, as BP may designate by written notice to the
Company and the Trustee), and written notice of said service to BP,
mailed or delivered to it at its notice address specified in Section 7
hereof, shall be deemed in every respect effective service of process
upon BP in any such suit, action or proceeding and shall be taken and
held to be valid personal service upon BP, whether or not BP shall then
be doing, or at any time shall have done, business within the State of
New York, and any such service of process shall be of the same force and
validity as if service were made upon BP according to the laws governing
the validity and requirements of such service in such State, and waives
all claim of error by reason of any such service. Said designation and
appointment shall be irrevocable until this Agreement shall have been
satisfied and discharged. BP agrees to take all action as may be
necessary to continue the designation and appointment of BP America Inc.
or any successor corporation in full force and effect so that BP shall at
all times have an agent for service of process for the above purposes in
the Borough of Manhattan, The City of New York, New York, United States
of America.
9. APPLICABLE LAW
The construction, validity and performance of this Agreement shall be
governed by the laws of the State of New York.
IN WITNESS WHEREOF the undersigned authorized officers have executed this
Agreement the day and year first hereinbefore written:
for and on behalf of )
THE BRITISH PETROLEUM ) /s/ D.A.G. Simon
COMPANY p.l.c. )
for and on behalf of ) /s/ G.N. Nelson
BP EXPLORATION (ALASKA) INC. )
for and on behalf of )
THE BP PRUDHOE BAY ROYALTY TRUST ) /s/ W.N. Gitlin
by THE BANK OF NEW YORK, as Trustee)
for and on behalf of ) /s/ [Signature illegible]
THE STANDARD OIL COMPANY )
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements of BP Prudhoe Bay Royalty Trust as of and for the fiscal
year ended December 31, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 535,000
<DEPRECIATION> (265,970)
<TOTAL-ASSETS> 269,030
<CURRENT-LIABILITIES> 90
<BONDS> 0
0
0
<COMMON> 268,940
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 269,030
<SALES> 0
<TOTAL-REVENUES> 42,263
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 41,513
<INCOME-TAX> 0
<INCOME-CONTINUING> 41,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,513
<EPS-PRIMARY> 1.940
<EPS-DILUTED> 1.940
</TABLE>
