NORTH EUROPEAN OIL ROYALTY TRUST
ESTIMATE OF REMAINING
PROVED PRODUCING RESERVES
IN THE NORTHWEST BASIN OF THE
FEDERAL REPUBLIC OF GERMANY
AS OF OCTOBER 1, 1997
AND
CALCULATION OF
COST DEPLETION PERCENTAGE
FOR 1997 CALENDAR YEAR
RALPH E. DAVIS ASSOCIATES, INC.
HOUSTON, TEXAS DECEMBER, 1997
T A B L E O F C O N T E N T S
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Description of Holdings. . . . . . . . . . . . . . . . . . . . . . . . . . .2
Limitations of Available Data. . . . . . . . . . . . . . . . . . . . . . . .3
Oldenburg Area - Sales and Reserves. . . . . . . . . . . . . . . . . . . . .4
Net Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Calculation of Cost Depletion Percentage . . . . . . . . . . . . . . . . . .6
Certificate of Qualification . . . . . . . . . . . . . . . . . . . . . . . .8
Attachment A . . . . .
Reserve Summary and Five Year
Net Sales History . . . . . . . . . . . . . . . . . . . . . . .9
Attachment B. . . . .
Calculation of
Cost Depletion Percentage. . . . . . . . . . . . . . . . . . . 10
Ralph E. Davis Associates, Inc.
Consultants - Petroleum and Natural Gas
3555 Timmons Lane - Suite 1105
Houston, Texas 77027
(713) 622-8955
December 18, 1997
The Trustees of
North European Oil Royalty Trust
P. O. Box 456
Red Bank, New Jersey 07701
Gentlemen:
In accordance with your request, we have prepared a report of the
estimated remaining proved producing reserves attributable to the overriding
royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT")
in the Northwest German Basin of the Federal Republic of Germany as of October
1, 1997. The proved producing reserves are as of October 1, 1997 and the
reported sales are for the twelve month period ending September 30, 1997. The
use of the period ending September 30, 1997 is consistent with prior years and
allows the timely calculation of the royalty reserves and the cost depletion
percentage for the calendar year.
In addition, based on the information contained in the first portion
of this report, we have performed the calculations necessary to derive the
cost depletion percentage for the 1997 calendar year. As detailed in
Attachment B, the cost depletion percentage for the 1997 calendar year for
Trust unit owners is equal to 9.056 percent of their cost base as of January
1, 1997.
North European Oil Royalty Trust December 18, 1997
Page 2
DESCRIPTION OF HOLDINGS
-----------------------
The Trust holds various overriding royalty rights on sales of gas,
sulfur and oil from certain concessions and leases in the Federal Republic of
Germany. The Oldenburg concession (1,398,000 acres), covering virtually the
entire former State of Oldenburg and located in the State of Lower Saxony, is
the major source of royalty income for the Trust. Although the Trust has
interests in other producing areas, reserves and net sales for these areas are
no longer used in the calculation of annual cost depletion percentage. While
the Trust continues to receive royalty payments from these interests, these
royalties represent less than one (1) percent of the Trust's total royalties
and the expenses involved in the determination of reserve estimates for these
interests are not warranted by the royalties received. The exclusion of these
reserves does not have a material effect on the calculation of the cost
depletion percentage. We will continue to monitor the quarterly statements
and if increases are noted that could materially add reserves to the Trust, we
will resume estimating future reserves.
1. The Oldenburg concession is held by Oldenburgische
Erdol Gesellschaft ("OEG"). Within this concession
Mobil Oil A.G. ("Mobil"), the German subsidiary of Mobil
Corp. and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture
of Exxon Corp. and the Royal Dutch Group, carry out all
exploration, drilling, production and sales activities.
(a) Under one series of rights covering the western part of
the Oldenburg concession (approximately 662,000 acres),
the Trust receives a royalty payment of 4% on gross
receipts from sales by Mobil of natural gas, casinghead
gas, crude oil and condensate. The Trust also receives
from Mobil a 2% royalty payment on gross receipts of
sales of sulfur obtained as a by-product of sour gas
produced from the western part of Oldenburg. The
payment of the sulfur royalty is subject to an
agreement which provides that if Mobil's selling price
is below the escalated base price, payment of royalties
is deferred until such time as the selling price again
exceeds the escalated base price. Throughout fiscal
1997, Mobil's selling price was below the escalated base
price. We will continue to monitor this situation,
but until the point that Mobil's selling price again
exceeds the escalated base price, reserves subject to this
royalty will not be included in overall reserve
calculations.
North European Oil Royalty Trust December 18, 1997
Page 3
(b) Under another series of rights covering the entire
Oldenburg concession and pursuant to an
agreement with OEG (the "OEG Agreement"), the Trust
receives royalties at the rate of 0.6667% on gross
receipts from sales of natural gas, casinghead gas,
crude oil, condensate and sulfur (removed during the
processing of sour gas) less 50% of an escalating cost
base. This cost base is recalculated annually based
on indices reflecting changes in certain prices within
Germany. This system will be revised in 2002 unless the
escalating cost base diverges significantly from the
actual production costs in earlier years, in which case
the computation system will be revised in 1999. In
either case, the revised system will provide that 50% of
field handling, treatment and transport costs, as
reported for state governmental royalty purposes, will
be deducted from gross sales receipts prior to the
royalty calculation.
LIMITATIONS OF AVAILABLE DATA
-----------------------------
The reserves considered in this report are defined as proved
producing reserves. Proved producing reserves are limited to those quantities
which can be expected to be recoverable commercially from known reservoirs at
current prices and costs, under existing regulatory practices and with
existing conventional equipment and operating methods. Proved producing
reserves do not include either proved developed non-producing reserves or any
class of probable reserves.
The reserve estimates were prepared using engineering methods
generally accepted by the petroleum industry. The reliability of any reserve
estimate is a function of the quality of available information and of
engineering interpretation and judgment.
The Trust, as an overriding royalty interest owner, does not receive
proprietary data from the various operators on producing wells. Data (such as
logs, core analysis, reservoir tests, pressure tests, gas analyses, geologic
maps, and individual well production histories, which are used in volumetric
and material balance type reserve estimates) are not available to the Trust.
The Trust receives various monthly and quarterly statements from the
operators that report production, sales and revenue data. Utilizing the same
procedures as in prior years, this information, plus published information
received from W.E.G. (a German organization comparable to the
North European Oil Royalty Trust December 18, 1997
Page 4
American Petroleum Institute or the American Gas Association), has been used
to prepare this annual report. We believe the reserve estimates prepared
using this data represent realistic values. However, due to the limitation of
available data, this estimate of reserves can not have the same degree of
accuracy that an estimate of reserves prepared using all pertinent data would
have. Our experience in the evaluation of reserves using such limited data
compensates somewhat for the limitations of available data.
The data in the reports received by the Trust is in metric tons and cubic
meters. The following Metric to English Unit conversion factors were used:
Oil: 7.23 barrels per metric ton
Gas: 37.25 cubic feet per cubic meter at 14.7 psia
and 60 degrees Fahrenheit
Sulfur: 1.1 short tons per metric ton
OLDENBURG AREA - SALES AND RESERVES
------------------------------------
The Trust's royalty income comes primarily from the Oldenburg area.
Gas production accounts for the majority of the income; however, the high
hydrogen sulfide content of much of the gas produced necessitates its removal
before the gas can be sold. The facilities at the Grossenkneten
desulfurization plant are the primary means by which the hydrogen sulfide is
removed. Following renovations and improvements to the plant in 1994 and
again in 1996, the plant's input capacity has been increased from 600,000 cu.
meters per hour to its present capacity of 750,000 cu. meters per hour. A
second desulfurization plant, NEAG, remains connected by pipeline with the
transportation system of the Oldenburg concession but is not currently being
utilized.
During the 12 months ending September 30, 1997 total sales for the
Oldenburg area were 279,799 barrels of oil and condensate, 190,310 million
cubic feet (MMcf) of non-associated gas, 274 MMcf of associated gas and
785,036 short tons of sulfur. The sales from the western portion of
Oldenburg, where the Trust has a greater interest, were 174,273 barrels of
condensate and oil, 85,466 MMcf of non-associated gas, 130 MMcf of associated
gas and 302,944 short tons of sulfur.
North European Oil Royalty Trust December 18, 1997
Page 5
Estimated gross remaining proved producing reserves attributable to
the total Oldenburg area are 3,390,906 barrels of condensate and oil,
2,251,661 MMcf of non-associated gas, 1,587 MMcf of associated gas and
10,345,883 short tons of sulfur.
NET RESERVES
------------
To present an accurate picture of estimated proved producing
reserves net to the Trust, the gross reserve figures outlined above must be
modified by the impact of the different royalty rates in effect in the
Oldenburg concession. A comparison of the Trust's overriding royalty rates in
both the western and eastern areas of Oldenburg is as follows:
Mobil Oil A. G. West East
--------------- ---------- ----------
Oil & Gas 4% 0%
Sulfur 2%* 0%
BEB
---------------
Oil & Gas 0.6667%** 0.6667%**
Sulfur 0.6667%** 0.6667%**
*Temporarily suspended. (See explanation above.)
**Prior to the calculation of royalties, 50% of an escalating cost base.
The application of these royalty rates to the estimated gross
remaining proved producing reserves attributable to the western and eastern
Oldenburg areas yields the combined estimated proved producing reserves net to
the Trust. The Trust's estimated remaining net proved producing reserves as
of October 1, 1997 and net sales for the twelve month period ending September
30, 1997 are as follows:
North European Oil Royalty Trust December 18, 1997
Page
6
Reserves Sales
-------- -----
Oil, Barrels 90,869 8,618
Associated Gas, MMcf 44 7
Non-Associated Gas, MMcf 44,980 4,479
Sulfur, Short Tons 52,619** 3,993**
(MMcf = million cubic feet @ 14.7 psia and 60 degrees Fahrenheit)
** Note: At current price levels no royalties are being paid under
the Mobil sulfur royalty.
A summary of net proved producing reserves by product and a five
year history of net sales attributable to the royalty interests of the Trust
are presented in Attachment A.
CALCULATION OF COST DEPLETION PERCENTAGE
----------------------------------------
The categories of proved producing reserves considered in the
calculation of the cost depletion percentage are oil, associated gas, and
non-associated gas. Sulphur is a by-product of gas production and is not
considered in the computation of total cost depletion percentage.
For each category of reserves, a product base was established for
the Trust as of January 1, 1976. Through the use of these product bases, we
can account for the relative size of each of these categories of reserves and
the corresponding impact on the calculation the cost depletion percentage.
The product base for each category of proved producing reserves is reduced
annually by an adjustment that is calculated by multiplying the product base
at the beginning of the current year by the depletion factor for that category
of reserves. The depletion factor for each category of reserve is the ratio
of the relevant net sales during the current year to the corresponding
adjusted net proved producing reserves at the beginning of the current year.
Significant items in the cost depletion percentage calculation that
appear on Attachment B as specific item numbers, shown in parentheses, and
their sources are as follows:
The adjusted estimated net proved producing reserves as
of 10/1/96 (3) is obtained by adding the estimated
remaining net proved producing reserves as of 10/1/96 (1)
and the adjustments to reserves during the period (2).
Therefore (3) = (1) + (2).
North European Oil Royalty Trust December 18, 1997
Page 7
The depletion factor (6) for each category of proved
producing reserves is obtained by dividing the relevant net
sales (4) by the corresponding adjusted estimated net proved
producing reserves as of 10/1/96 (3). Therefore (6) =
(4) / (3).
The product base for each category of proved producing
reserves as of 1/1/96 (7) and the adjustment taken during 1996
(8) were obtained from the previous year's report. The
product base as of 1/1/97 (9) forms the initial starting
point for the calculation of the cost depletion
percentage for the 1997 tax year. The product base for
1/1/97 (9) then is (7) - (8).
The adjustment to the product base for each category of
proved producing reserves (10) is used to reduce the product
base as of the beginning of each year. This adjustment is
the product of the depletion factor for each category of
proved producing reserves (6) multiplied by the
corresponding product base as of 1/1/97 (9).
Therefore (10) = (6) x (9).
The cost depletion percentage (11) then is the sum of
the adjustment to the product base of each category of
proved producing reserves [Sum (10)] divided by the sum
of the product base for each category as of 1/1/97
[Sum (9)]. Therefore (11) = [Sum (10)] / [Sum (9)].
The cost depletion percentage represents the total allowable cost
depletion for the current calendar year for the Trust's unit owners, expressed
as a percentage of their cost base at the beginning of the calendar year.
Sincerely yours,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Larry A. Barnett
----------------------------
Larry A. Barnett, P. E.
Senior Vice-President
LAB:sw
North European Oil Royalty Trust December 18, 1997
Page 8
CERTIFICATE OF QUALIFICATION
----------------------------
I, Larry A. Barnett, Registered Professional Engineer, do hereby
certify:
1. That I am senior vice-president of the consulting firm of
Ralph E. Davis Associates, Inc. with offices at 3555
Timmons Lane, Suite 1105, Houston, Texas 77027.
2. That I have prepared a reserve report on the interests of
the North European Oil Royalty Trust in the Northwest Basin
of the Federal Republic of Germany for the twelve month
period ending September 30, 1997.
3. That I have no direct or indirect interest, nor do I expect
to receive any direct or indirect interest, in the properties
or in any securities of the North European Oil Royalty Trust.
4. That I attended The University of Texas and that I
graduated with a Bachelor of Science Degree in Petroleum
Engineering in 1958.
5. That I am a Registered Professional Engineer in the States
of Texas and Louisiana, Registration Numbers 23399 and
9647 respectively, and that I am a member in good
standing of the Society of Petroleum Engineers, the Society
of Petroleum Evaluation Engineers and the Society of
Professional Well Log Analysts.
6. That I have in excess of thirty-eight years experience in
the evaluation of oil and gas properties in the United
States, Canada, Mexico, South America and Germany, and
that I have been practicing as a consultant in petroleum
engineering and geology since 1987.
RALPH E. DAVIS ASSOCIATES, INC.
/S/ Larry A. Barnett
----------------------------
Larry A. Barnett, P. E.
Senior Vice-President
ATTACHMENT A
NORTH EUROPEAN OIL ROYALTY TRUST
RESERVE SUMMARY AND FIVE YEAR NET SALES HISTORY
ESTIMATED NET PROVED PRODUCING RESERVES
- ---------------------------------------
AS OF OCTOBER 1, 1997
- ---------------------
OLDENBURG
- ---------------------------------------------------------------------------
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
--------- ---------- -------------- ----------
90,869 44 44,980 52,619**
**Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
FIVE YEAR NET SALES SUMMARY
- ---------------------------
12 MONTHS ENDING SEPTEMBER 30
- -----------------------------
OLDENBURG
- ---------------------------------------------------------------------------
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
------- ---------- -------------- ----------
1997 8,618 7 4,479 3,993**
1996 9,348 8 3,450 4,268**
1995 9,226 8 4,098 4,081**
1994 8,984 11 3,681 2,391**
1993 10,550 18 4,031 3,790**
**Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
ATTACHMENT B
NORTH EUROPEAN OIL ROYALTY TRUST
CALCULATION OF COST DEPLETION PERCENTAGE
For the Year Ending December 31, 1997
OLDENBURG
Associated Non-Assoc.
Oil Gas Gas
Barrels MMCF MMCF
------- ---------- ----------
NEORT NET RESERVES (Barrels of Oil and Million Cubic Feet of Gas)
- ------------------------------------------------------------------
1. Estimated remaining net proved
producing reserves as of 10-1-96 89,141 62 40,644
2. Adjustments to reserves
during period 10,346 -11 8,815
3. Adjusted estimated net proved
producing reserves
as of 10-1-96 99,487 51 49,459
4. Net sales from 10-1-96
to 9-30-97 8,618 7 4,479
5. Estimated remaining net proved
producing reserves
as of 10-1-97 90,869 44 44,980
RESERVE DEPLETION FACTOR (%)
- -----------------------------
6. Depletion factor 0.08662 0.13725 0.09056
NEORT PRODUCT BASE ALLOCATION (%)
- ----------------------------------
7. Product base as of 1-1-96 0.59640 0.05047 16.94879
8. Less adjustments taken
during 1996 0.05661 0.00577 1.32611
9. Product base as of 1-1-97 0.53979 0.04470 15.62268
10. 1997 adjustments
to product base 0.04676 0.00614 1.41479
11. Cost depletion percentage for 1997 calendar year for Trust unit owners
is equal to 9.056 percent of their 1-1-97 cost base.
Footnotes:
Line (1) from reserves review as of 10-1-96
Line (2) from reserves review as of 10-1-97
Line (3) = Line (1) + Line (2)
Line (4) from OEG and MOBIL statements
Line (5)from reserves review as of 10-1-97
Line (6)= Line (4) / Line (3)
Line (7) from 1996 product base allocation
Line (8) from 1996 product base allocation
Line (9)= Line (7) - Line (8)
Line (10) = Line (6) x Line (9)
Line (11) = [Sum (10)] / [Sum (9)]