# North European Oil Royalty Trust: Form 10-Q for the period ended Jul 31, 2023

- Company: [North European Oil Royalty Trust](/companies/nrt.md) (CIK 72633)
- Form: 10-Q
- Filed: 2023-08-31
- Accepted by EDGAR: Aug 31, 2023, 09:32 ET
- Period: 2023-07-31
- Accession: 0000072633-23-000011
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/72633/000007263323000011/tenq3q23.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/72633/000007263323000011/

## Management's discussion and analysis

As filed, 21,309 characters.

#### Executive Summary

The Trust is a passive fixed investment trust which holds overriding royalty rights, receives income under those rights from certain operating companies, pays its expenses and distributes the remaining net funds to its unit owners. As mandated by the Trust Agreement, distributions of income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute substantially all of the funds available after provision is made for anticipated Trust expenses.

The Trust does not engage in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from engaging in such activities by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust.

The properties of the Trust, which the Trust and Trustees hold pursuant to the Trust Agreement on behalf of the unit owners, are overriding royalty rights on sales of gas, sulfur and oil under a concession or leases in the Federal Republic of Germany. The actual concession or leases are held either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German operating subsidiary of the ExxonMobil Corporation ("ExxonMobil"), or by Oldenburgische Erdolgesellschaft ("OEG"). The Oldenburg concession is the primary area from which the natural gas, sulfur and oil are extracted and currently provides 100% of all the royalties received by the Trust. The Oldenburg concession, approximately 1,386,000 acres, covers virtually the entire former Grand Duchy of Oldenburg and is located in the German federal state of Lower Saxony. None of the leases are active.

In 2002, Mobil Erdgas and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of ExxonMobil and the Royal Dutch/Shell Group of Companies, formed a company, ExxonMobil Production Deutschland GmbH ("EMPG"), to carry out all exploration, drilling and production activities. All sales activities are still handled by the operating companies, either Mobil Erdgas or BEB.

The operating companies pay monthly royalties to the Trust based on their sales of natural gas, sulfur and oil. Of these three products, natural gas provided approximately 98.75% of the cumulative royalty income received in fiscal 2023. The amount of royalties paid to the Trust is primarily based on four factors: the amount of gas sold, the price of that gas, the area from which the gas is sold, and the exchange rate.

There are two types of natural gas found within the Oldenburg concession, sweet gas and sour gas. Sweet gas has little or no contaminants and needs no treatment before it can be sold. Sour gas, in comparison, must be processed at the Grossenkneten desulfurization plant which commenced operations in 1972. The desulfurization process removes hydrogen sulfide and other contaminants before the clean gas can be sold. The hydrogen sulfide in gaseous form is converted to sulfur in a solid form and sold separately. With full operation of the plant's two remaining parallel processing units ("trains"), raw gas input capacity stood at approximately 400 million cubic feet ("MMcf") per day. As needed, EMPG conducts maintenance on the plant generally during the summer months when demand is lower.

As previously indicated to the Trust's consultant in Germany, EMPG decommissioned one of the remaining two trains. The decommissioning was conducted in during May-July 2023. For a period of twenty-four days beginning on June 25, 2023, there was no through-put at the plant while the shutdown of one train and the refurbishment and maintenance of the remaining train was completed. The cost of this work was approximately 50 million Euros. The plant is subject to an ongoing schedule of inspections, which may result in shutdowns while required repairs are conducted. Full operation of the remaining train is approximately 200 MMcf per day following the shutdown. It is expected that the single train will be sufficient to handle sour gas production through-put from the concession. It is also expected that operating expenses in the future may be reduced by this measure. Since sour gas accounts for 75% of overall gas sales and 98% of western gas sales, any future shutdown of the remaining train could significantly impact royalty income. The Trust has insufficient data to predict whether, when and to what extent any future shutdown may occur.

Under one set 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 Erdgas of gas well gas, oil well gas, crude oil and condensate (the "Mobil Agreement"). Under the Mobil Agreement, there is no deduction of costs prior to the calculation of royalties from gas well gas and oil well gas, which together accounted for approximately 99.51% of the cumulative royalty income received under this agreement in fiscal 2023. Historically, the Trust has received significantly greater royalty payments under the Mobil Agreement, as compared to the OEG Agreement described below, due to the higher royalty rate specified by that agreement.

The Trust is also entitled under the Mobil Sulfur Agreement to receive a 2% royalty on gross receipts of sales of sulfur obtained as a by-product of sour gas produced from the western part of Oldenburg. The payment of the sulfur royalty is conditioned upon sales of sulfur by Mobil Erdgas at a selling price above an agreed upon base price. This base price is adjusted annually by an inflation index. In the first nine months of fiscal 2023, the Trust received $34,586 in sulfur royalties under the Mobil Sulfur Agreement which was received during the third quarter. In the first nine months of fiscal 2022, the Trust received $231,356 in sulfur royalties under the Mobil Sulfur Agreement, including $101,221 in sulfur royalties during the third quarter.

Under another set of rights covering the entire Oldenburg concession and pursuant to the agreement with OEG, the Trust receives royalties at the rate of 0.6667% on gross receipts from sales by BEB of gas well gas, oil well gas, crude oil, condensate and sulfur (removed during the processing of sour gas) less a certain allowed deduction of costs (the "OEG Agreement"). Under the OEG Agreement, 50% of the field handling and treatment costs, as reported for state royalty purposes, are deducted from the gross sales receipts prior to the calculation of the royalty to be paid to the Trust.

In 2016, the Mobil and OEG Agreements were amended, establishing a new base for the determination of gas prices upon which the Trust's royalties are calculated. This change reflects a shift to the prices calculated for the German Border Import gas Price ("GBIP"). The average GBIP used under the Mobil and OEG Royalty Agreements has been and will continue to be increased by 1% and 3%, respectively, for the royalty calculations. This change was intended to reduce the scope and cost of the accounting examination, eliminate ongoing disputes with OEG and Mobil regarding sales to related parties, and reduce prior year adjustments to the normally scheduled year-end reconciliation. The pricing basis has eliminated certain costs (transportation and plant gas storage), that were previously deductible prior to the royalty calculation under the OEG Agreement.

The amended agreements also established a procedure to address the inherent delay in the availability of data regarding gas prices and gas sales. As their first step on or about the 20th of the months of January, April, July and October, the operating companies determine the amount of royalties that were owed to the Trust based on applicable sales during the relevant periods. The relevant period for gas sales volumes is the immediately preceding calendar quarter. The relevant period for average GBIP begins two months earlier. This amount is paid out to the Trust in three monthly installments as royalty payments (payable on or about the 15th of each month) during its next fiscal quarter. At the same time, the operating companies review the actual amount of royalties that were paid to the Trust for the current quarter and calculate the difference between the amounts paid to the Trust and the amounts owed to the Trust. Any underpayments owed by the operating companies are paid immediately and any overpayments would be deducted from the royalty payments during the following fiscal quarter.

In September of the following year, the operating companies make the final determination of total volumes of the prior year's gas sales. This information along with the final average GBIP published in April allow the operating companies to calculate whether there was an underpayment or overpayment of royalties for the prior calendar year. Any underpayment is paid to the Trust immediately and any overpayment is deducted from the next scheduled royalty payments. The Trust's independent accountants based in Germany review the royalty calculations on a biennial basis and will be starting their next examination for fiscal years 2021 and 2022 in November 2023.

For unit owners, changes in the currency exchange rate between the U.S. Dollar and the Euro have an immediate impact. This impact occurs at the time the royalties, which are paid to the Trust in Euros, are converted into U.S. Dollars at the applicable exchange rate and promptly transferred from Germany to the Trust's bank account in the United States. In relation to the U.S. Dollar, a stronger Euro would yield more U.S. Dollars and a weaker Euro would yield fewer U.S. Dollars.

The Trust continues to engage a consultant in Germany who provides general information to the Trust on the German and European economies and energy markets. The consultant receives reports from EMPG with respect to current and planned drilling and exploration efforts. However, EMPG and the operating companies continue to limit the information flow to that which is required by German law, and the Trust is not able to confirm the accuracy of any of the information supplied by EMPG or the operating companies.

The Trust had previously disclosed that to the best of its knowledge the Farm-In Agreement between Vermilion Energy Inc. ("Vermilion") and Mobil Erdgas and BEB had expired due to Vermilion's failure to meet its drilling commitments within the Oldenburg Concession. Due to the efforts of the Trust's consultant in Germany, the Trust was informed by EMPG that Vermilion's drilling obligation in the Oldenburg area has been halted for the time being due to difficulties obtaining the required permits, and that Vermilion may or may not mature other prospects in the central and northern parts of the Oldenburg Concession in the future. In the middle of 2022, Vermilion gave back to EMPG the rights for exploration of the three northern areas of the concession specified in the Farm-In Agreement thus surrendering any exploration and drilling rights within the concession.

#### Results: Third Quarter of Fiscal 2023 Versus Third Quarter of Fiscal 2022

Total royalty income received during the third quarter of fiscal 2023 was derived from sales of gas, sulfur, and oil from the Trust's overriding royalty areas in Germany during the second calendar quarter of 2023. A distribution of 21 cents per unit was paid on August 30, 2023 to owners of record as of August 18, 2023. Comparisons of total royalty income and net income for the third quarter of fiscal 2023 and 2022 are shown below.

|  | 3rd Fiscal Quarter Ended 7/31/2023 | 3rd Fiscal Quarter Ended 7/31/2022 | Percentage Change |
| --- | ---: | ---: | ---: |
| Total Royalty Income | $2,490,778 | $4,442,665 | -43.94% |
| Net Income | $2,290,894 | $4,292,607 | -46.63% |
| Distributions per Unit | $0.21 | $0.46 | -54.35% |

The decrease in total royalty income for the third quarter of fiscal 2023 in comparison to the third quarter of fiscal 2022 resulted primarily from the decrease in gas prices and gas sales. Total royalty income reflects the inclusion of positive and/or negative adjustments that the operators make during the quarter based upon their corrected royalty calculations for the prior periods, as well as the inclusion of Mobil sulfur royalties. In the third quarter of fiscal 2023, total royalty income was affected because there was a negative carry-over from the prior quarter, but total royalty income was increased by Mobil sulfur royalties of $34,586. In the third quarter of fiscal 2022, total royalty income was not affected because there were no prior period adjustments, but total royalty income was increased by Mobil sulfur royalties of $101,221.

The following table is intended to illustrate trends based on actual gas sales in each fiscal quarter. Gas royalties shown in the table below are determined based on the actual physical gas sales that occurred during the second calendar quarter of 2023 and the average German Border Import gas Price for the period of February 2023 through April 2023.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | --- | ---: | ---: | ---: | --- | ---: | ---: | ---: | --- | ---: | ---: | --- |
| **Mobil Agreement** | **2nd Calendar Quarter Ended 6/30/2023** | **2nd Calendar Quarter Ended 6/30/2022** | **Percentage Change** | Gas Sales (Bcf) 1 | 2.957 | 3.665 | -19.32% | Gas Prices2 (Ecents/Kwh)3 | 4.7294 | 6.1535 | -23.14% | Average Exchange Rate4 | 1.1099 | 1.0236 | +8.43% |
| Gas Royalties | $1,773,400 | $2,640,584 | -32.84% | Gas Prices ($/Mcf)5 | $14.99 | $18.01 | -16.77% |  |  |  |  |  |  |  |  |
| **OEG Agreement** |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Sales (Bcf) | 10.503 | 13.341 | -21.27% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Prices (Ecents/Kwh) | 4.8230 | 6.2753 | -23.14% |  |  |  |  |  |  |  |  |  |  |  |  |
| Average Exchange Rate | 1.1170 | 1.0236 | +9.12% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Royalties | $920,889 | $1,469,383 | -37.33% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Prices ($/Mcf) | $15.02 | $17.93 | -16.23% |  |  |  |  |  |  |  |  |  |  |  |  |

### Quarterly Gas Data Providing Basis for Fiscal Quarter Royalties

### Footnotes

1\. Billion cubic feet

2\. Gas prices derived from February-April period

3\. Euro cents per kilowatt hour

4\. Based on average Euro/dollar exchange rates of cumulative royalty transfers

5\. Dollars per thousand cubic feet

Excluding the effects of differences in prices and average exchange rates, the combination of royalty rates on gas sold from western Oldenburg results in an effective royalty rate approximately seven times higher than the royalty rate on gas sold from eastern Oldenburg. This is of particular significance to the Trust since gas sold from western Oldenburg provides the bulk of royalties paid to the Trust. For the calendar quarter ended June 30, 2023, gas sales from western Oldenburg accounted for only 28.15% of all gas sales from the Oldenburg concession. However, royalties on these gas sales provided approximately 78.02%, or $1,860,930 out of $2,385,127, of all royalties attributable to gas.

Trust expenses for the third quarter of fiscal 2023 increased 53.84%, or $81,140, to $231,833 in comparison to $150,693 for the third quarter of fiscal 2022. The increase in expenses reflects higher Trustee fees as specified by the provisions of the Trust Agreement and increased legal fees. The Trust received interest income in the amount of $31,949 and $635 during the third quarters of fiscal 2023 and 2022, respectively, due to higher interest rates and higher net income.

The current Statement of Assets, Liabilities and Trust Corpus of the Trust at July 31, 2023, compared to that at fiscal year-end (October 31, 2022), shows a decrease in assets due to lower royalty receipts during the third quarter of fiscal 2023.

#### Results: First Nine Months of Fiscal 2023 Versus First Nine Months of Fiscal 2022

Total royalty income received during the first nine months of fiscal 2023 was primarily derived from sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the fourth calendar quarter of 2022 and the first and second calendar quarters of 2023. Comparisons of total royalty income and net income for the first nine months of fiscal 2023 and 2022 are shown below.

|  | Nine Months Ended 7/31/2023 | Nine Months Ended 7/31/2022 | Percentage Change |
| --- | ---: | ---: | --- |
| Total Royalty Income | $22,016,679 | $10,762,772 | +104.56% |
| Net Income | $21,331,473 | $10,204,395 | +109.04% |
| Distributions per Unit | $2.26 | $1.09 | +107.34% |

The increase in total royalty income in the first nine months of fiscal 2023 from the first nine months of fiscal 2022 resulted primarily from higher gas prices under both the Mobil and OEG Agreements. Total royalty income also reflects the inclusion of various positive and negative adjustments that the operators made during the nine-month period, including adjustments from prior periods, as well as the inclusion of Mobil sulfur royalties. During the first nine months of both fiscal 2023 and 2022, there were no prior period adjustments. The Trust received separate sulfur royalty payments under the Mobil Agreement of $34,586 and $231,356 during the first nine months of fiscal 2023 and 2022, respectively.

The following table is intended to illustrate trends based on actual gas sales in each of the fiscal nine-month periods shown. Gas royalties for the nine-month periods shown in the table below are determined based on the actual physical gas sales that occurred during the period from October 1st through June 30th and the average German Border Import gas Price for the period of August 1st through April 30th.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | ---: | ---: | --- | --- | ---: | ---: | ---: | --- | ---: | ---: | --- | --- | ---: | ---: | --- |
| **Mobil Agreement** | **Nine Months Ended 6/30/2023** | **Nine Months Ended 6/30/2022** | **Percentage Change** | Gas Sales (Bcf) | 9.927 | 11.375 | -12.73% | Gas Prices(Ecents/Kwh) | 9.5953 | 4.7168 | +103.43% | Average Exchange Rate | 1.0761 | 1.0699 | +0.58% |
| Gas Royalties Payable | $11,712,503 | $6,566,767 | +78.36% | Gas Prices ($/Mcf) | $29.50 | $14.43 | +104.44% |  |  |  |  |  |  |  |  |
| **OEG Agreement** |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Sales (Bcf) | 35.626 | 40.434 | -11.89% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Prices (Ecents/Kwh) | 9.8363 | 4.8508 | +102.78% |  |  |  |  |  |  |  |  |  |  |  |  |
| Average Exchange Rate | 1.0762 | 1.0673 | +0.84% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Royalties Payable | $6,637,725 | $3,506,328 | +89.31% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Prices ($/Mcf) | $29.53 | $14.45 | +104.36% |  |  |  |  |  |  |  |  |  |  |  |  |

### Gas Data Providing Basis for Fiscal Nine-Month Period Royalties

For the nine months ended June 30, 2023, gas sales from western Oldenburg accounted for only 27.86% of all gas sales from the Oldenburg concession. However, royalties on these gas sales provided approximately 73.79%, or $16,042,165 out of $21,741,095, of all royalties attributable to gas sales from the Oldenburg concession.

Trust expenses for the first nine months of fiscal 2023 increased 42.5% or $237,856 to $797,494 in comparison to $559,638 for the prior fiscal year's equivalent period. The increase in expenses reflects higher Trustee fees as specified by the provisions of the Trust Agreement, higher legal fees, and the higher NYSE fee. Trust interest income received during the first nine months of fiscal 2023 increased to $112,289 in comparison to $1,261 received in the first nine months of fiscal 2022 due to higher interest rates and higher net income.

This report on Form 10-Q may contain forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Such statements address future expectations and events or conditions concerning the Trust. Many of these statements are based on information provided to the Trust by the operating companies or by consultants using public information sources. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements. These include: the fact that the assets of the Trust are depleting assets and, if the operators developing the concession do not perform additional development projects, the assets may deplete faster than expected; risks and uncertainties concerning levels of gas production and gas sale prices, general economic conditions, and currency exchange rates; the ability or willingness of the operating companies to perform under their contractual obligations with the Trust; potential disputes with the operating companies and the resolution thereof; and political and economic uncertainty arising from Russia's invasion of Ukraine. Any forward-looking statement speaks only as of the date on which such statement is made, and the Trust does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

## Market risk

As filed, 190 characters.

The Trust is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and is not required to provide the information required under this item.

## Controls and procedures

As filed, 1,373 characters.

The Trust maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Trust is recorded, processed, summarized, accumulated and communicated to its management, which consists of the Managing Director, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

The Managing Director has performed an evaluation of the effectiveness of the design and operation of the Trust's disclosure controls and procedures as of July 31, 2022 based on the criteria for effective internal control over financial reporting described in the standards promulgated by the Public Company Accounting Oversight Board and the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Managing Director concluded that the Trust's disclosure controls and procedures were effective as of July 31, 2023.

There have been no changes in the Trust's internal control over financial reporting identified in connection with the evaluation described above that occurred during the third quarter of fiscal 2023 that have materially affected or are reasonably likely to materially affect the Trust's internal control over financial reporting.

Filed Aug 31, 2023.
Source: SEC EDGAR, the filing index for accession 0000072633-23-000011. Last ingested by Listed: Oct 24, 2026, 14:53 ET. No prices; not investment advice.