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, 1998
AND
CALCULATION OF
COST DEPLETION PERCENTAGE
FOR 1998 CALENDAR YEAR
RALPH E. DAVIS ASSOCIATES, INC.
HOUSTON, TEXAS
DECEMBER, 1998
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, 1998
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, 1998. The proved producing reserves are as of October 1, 1998
and the reported sales are for the twelve month period ending
September 30, 1998. The use of the period ending September 30, 1998 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 1998 calendar year. As detailed
in Attachment B, the cost depletion percentage for the 1998 calendar year for
Trust unit owners is equal to 9.309 percent of their cost base as of
January 1, 1998.
North European Oil Royalty Trust December 18, 1998
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 some of 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 1998, 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, 1998
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
American Petroleum Institute or the American Gas Association), has been used
to prepare this annual report. In addition, the Trust retains a part-time
consultant in Germany who is familiar with the German petroleum industry in
general and the operating companies in particular. His periodic reports
North European Oil Royalty Trust December 18, 1998
Page 4
and communications are considered in the preparation of this report. We
believe the reserve estimates prepared using all the available data represent
realistic values. However, due to the limitation of available data, this
estimate of reserves cannot 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 760,000 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, 1998 total sales for the
Oldenburg area were 272,036 barrels of oil and condensate, 199,154 million
cubic feet (MMcf) of non-associated gas, 231 MMcf of associated gas and
892,457 short tons of sulfur. The sales from the western portion of
Oldenburg, where the Trust has a greater interest, were 167,524 barrels of
condensate and oil, 95,840 MMcf of non-associated gas, 179 MMcf of associated
gas and 363,091 short tons of sulfur.
Estimated gross remaining proved producing reserves attributable to
the total Oldenburg area are 2,923,299 barrels of condensate and oil,
2,380,300 MMcf of non-associated gas, 2,732 MMcf of associated gas and
10,915,562 short tons of sulfur.
North European Oil Royalty Trust December 18, 1998
Page 5
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, 1998 and net sales for the twelve month period ending
September 30, 1998 are as follows:
Reserves Sales
-------- -----
Oil, Barrels 87,851 8,236
Associated Gas, MMcf 66 9
Non-Associated Gas, MMcf 47,999 4,937
Sulfur, Short Tons 53,006*** 4,334***
(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.
North European Oil Royalty Trust December 18, 1998
Page 6
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
10/1/97 (3) is obtained by adding the estimated remaining net
proved producing reserves as of 10/1/97 (1) and the
adjustments to reserves during the period (2).
Therefore (3) = (1) + (2).
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 10/1/97 (3). Therefore (6) = (4) / (3).
The product base for each category of proved producing
reserves as of 1/1/97 (7) and the adjustment taken during 1997
(8) were obtained from the previous year's report. The
product base as of 1/1/98 (9) forms the initial starting point
for the calculation of the cost depletion percentage for the
1998 tax year. The product base for 1/1/98 (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 1/1/98 (9). Therefore (10) = (6) x (9).
North European Oil Royalty Trust December 18, 1998
Page 7
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 1/1/98 [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, 1998
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, 1998.
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 1985.
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, 1998
- ---------------------
OLDENBURG
- ---------------------------------------------------------------------------
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
--------- ---------- -------------- ----------
87,581 66 47,999 53,006***
***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
------- ---------- -------------- ----------
1998 8,236 9 4,937 4,334***
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***
***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, 1998
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 10-1-97 90,869 44 44,980
2. Adjustments to reserves
during period 4,948 31 7,956
3. Adjusted estimated net proved
producing reserves
as of 10-1-97 95,817 75 52,936
4. Net sales from 10-1-97
to 9-30-98 8,236 9 4,937
5. Estimated remaining net proved
producing reserves
as of 10-1-98 87,581 66 47,999
RESERVE DEPLETION FACTOR (%)
- -----------------------------
6. Depletion factor 0.08596 0.12000 0.09326
NEORT PRODUCT BASE ALLOCATION (%)
- ----------------------------------
7. Product base as of 1-1-97 0.53979 0.04470 15.62268
8. Less adjustments taken
during 1997 0.04676 0.00614 1.41479
9. Product base as of 1-1-98 0.49303 0.03856 14.20789
10. 1998 adjustment
to product base 0.04238 0.00463 1.32508
11. Cost depletion percentage for 1998 calendar year for Trust unit owners
is equal to 9.309 percent of their 1-1-98 cost base.
Footnotes:
Line (1) from reserves review as of 10-1-97
Line (2) from reserves review as of 10-1-98
Line (3) = Line (1) + Line (2)
Line (4) from OEG and MOBIL statements
Line (5)from reserves review as of 10-1-98
Line (6)= Line (4) / Line (3)
Line (7) from 1997 Depletion Computations
Line (8) from 1997 Depletion Computations
Line (9)= Line (7) - Line (8)
Line (10) = Line (6) x Line (9)
Line (11) = [Sum (10)] / [Sum (9)]