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, 1998

                                      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, FLOOR 21 WEST
           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
     Title of Each Class                                 on Which 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]


<PAGE>

      As of March 23, 1999, 21,400,000 Units of Beneficial Interest were
outstanding. The aggregate market value of Units held by nonaffiliates (based on
the closing price of the Units in New York Stock Exchange composite trading on
March 23, 1999 as reported in The Wall Street Journal) was approximately
$141,775,000.

      Documents Incorporated by Reference:  None

<PAGE>


                              TABLE OF CONTENTS

PART I                                                                 1
   ITEM 1.  BUSINESS                                                   1
               Introduction                                            1
               The Trust                                               2
               The Royalty Interest                                    6
               The Units                                              12
               The BP Support Agreement                               14
               The Prudhoe Bay Unit                                   15
               Independent Oil and Gas Consultants' Report            20
               Industry Conditions                                    25
               Certain Tax Considerations                             26
   ITEM 2.  PROPERTIES                                                28
   ITEM 3.  LEGAL PROCEEDINGS                                         28
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS           28

PART II                                                               29
   ITEM 5.  MARKET FOR THE UNITS AND RELATED
               UNIT HOLDER MATTERS                                    29
   ITEM 6.  SELECTED FINANCIAL DATA                                   30
   ITEM 7.  TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS                    30
   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA               34
   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
               ON ACCOUNTING AND FINANCIAL DISCLOSURE                 45

PART III                                                              45
   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT        45
   ITEM 11. EXECUTIVE COMPENSATION                                    45
   ITEM 12. UNIT OWNERSHIP OF CERTAIN BENEFICIAL
               OWNERS AND MANAGEMENT                                  45
   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



                                    - i -

<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 Trustee's corporate
trust offices are located at 101 Barclay Street, New York, New York 10286 and
its telephone number is (212) 815-5092. The Company and Standard Oil are
indirect, wholly owned subsidiaries of British Petroleum Company p.l.c. During
the fourth quarter of 1998, British Petroleum Company p.l.c. merged with Amoco
Corporation to form BP Amoco p.l.c. ("BP"). This transaction should not have a
material effect on the Trust or its operations.

      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 (see "THE
PRUDHOE BAY UNIT" below). 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 Estate"). 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.

                                      -1-

<PAGE>

                                  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 does have the right to establish a cash reserve for the
payment of material liabilities of the Trust which may become due. Such reserve
can only be set up when the Trustee has determined that it is not practical to
pay such liabilities in a subsequent quarter out of funds anticipated to be
available and that, in the absence of such reserve, the Trust Estate is subject
to the risk of loss or diminution in value or the Trustee is subject to the risk
of personal liability for such liabilities. Furthermore, the Trustee shall
receive an unqualified written opinion of counsel to the effect that 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;
unless, the Trustee is unable to obtain such opinion and determines that the
failure to establish such reserve will be materially detrimental to the Unit
Holders considered as a whole or will subject the Trustee to the risk of
personal liability for such liabilities.

      The Trustee has a limited power to borrow on behalf of the Trust on a
secured or unsecured basis. Such borrowing may be effected if at any time the
amount of cash on hand is not sufficient to pay liabilities of the Trust then
due. The Trustee can only borrow from an entity not affiliated with the Trustee.
Certain other conditions must also be satisfied, including, that the Trustee
must determine that it is not practical to pay such liabilities in a subsequent
quarter out of funds anticipated to be available and the Trust Estate is subject
to the risk of loss or diminution in value. The borrowing must be effected
pursuant to terms which (in the opinion of an investment banking firm or
commercial banking firm) are commercially reasonable when compared to other
available alternatives and the Trustee shall receive an unqualified written
opinion of counsel 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; unless, the Trustee is unable to
obtain such opinion and 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 the Trust Estate or
any portion thereof (including the Royalty Interest) and to carve out and convey
production payments. The borrowing itself and the pledges or other encumbrances
to secure borrowings are permitted without a vote of holders of Units. In the
event of such borrowings, no further Trust distributions may be made until the
indebtedness created by such borrowings has been paid in full.

                                      -2-

<PAGE>

      The Trustee may sell Trust properties only as authorized by the
affirmative vote of the holders of Units representing 70 percent of the Units
outstanding, 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 a majority of the holders of
the Units.

      The Trustee may also sell for cash the Trust Estate, or a portion thereof,
if such sale is effected in order to provide for the payment of specific
liabilities of the Trust then due and cash on hand is insufficient and the
Trustee is unable to effect a borrowing by the Trust. The Trustee must also
determine that the failure to pay such liabilities at a later date will be
contrary to the best interest of the holders of Units and that it is not
practicable to submit the sale to a vote of the holders of Units. The sale must
be effected at a price which (in the opinion of an investment banking firm or
commercial banking firm) is at least equal to the fair market value of the
interest sold and is effected pursuant to commercially reasonable terms when
compared to other available alternatives. Again, the Trustee shall receive an
unqualified written 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 cause the income from the Trust to be treated as
unrelated business taxable income for federal income tax purposes; unless, the
Trustee is unable to obtain such opinion and determines that the failure to
effect such sale will be materially detrimental to the Unit Holders considered
as a whole. Finally, the Trustee may sell the Trust Estate upon termination of
the Trust.

      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 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.

                                      -3-

<PAGE>

      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 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.


                                      -4-

<PAGE>

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.

      As discussed above, 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. The Trustee is obligated 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. Borrowings must be repaid in full before any further
distributions are made to holders of Units. As previously described, certain
other necessary conditions must also be satisfied prior to the establishment of
a cash reserve or the Trust's borrowing of funds.

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, commercial 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 

                                      -5-

<PAGE>

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, commercial 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
example, there is no requirement for annual meetings of holders of Units or
annual or other periodic reelection of the Trustee.

      A meeting of the holders of Units may be called at any time to act with
respect to any matter which the holders of Units are authorized to act pursuant
to the Trust Agreement. Any such meeting may be called by the Trustee in its
discretion and will be called (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 holders of Units owning not less than 25
percent of the then outstanding Units or (iii) as may be required by applicable
law or regulations of the New York Stock Exchange. All such meetings are
required to take place in the Borough of Manhattan, The City of New York.


                             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.

                                      -6-

<PAGE>

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 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. See "INDUSTRY
CONDITIONS" below.

                                      -7-

<PAGE>


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, 1998 were: $8.00 during 1994;
$8.25 during 1995; $8.50 during 1996; $8.85 during 1997; and $9.30 during 1998.
Chargeable Costs for the calendar year ending December 31, 1999 and subsequent
years are shown in the following table:


      For the             Chargeable      For the          Chargeable
   Year Ending            Costs Per     Year Ending        Costs Per
   December 31              Barrel      December 31         Barrel
------------------        ---------     -----------        ---------

      1999                   9.80          2010             14.50
      2000                  10.00          2011             16.60
      2001                  10.75          2012             16.70
      2002                  11.25          2013             16.80
      2003                  11.75          2014             16.90
      2004                  12.00          2015             17.00
      2005                  12.25          2016             17.10
      2006                  12.50          2017             17.20
      2007                  12.75          2018             20.00
      2008                  13.00          2019             23.75
      2009                  13.25          2020             26.50

      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.

      (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 

                                      -8-

<PAGE>

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:


                          Additions to Proved Reserves
                          ----------------------------

      Year ended
      December 31                    Annual         Cumulative
      -----------                    ------         ----------
                                          (Million STB)

         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
         1997                         (1.5)           737.7
         1998                         (0.5)           737.2

      The Company anticipates that additional drilling, workovers, facilities
modifications, new recovery projects, and programs for production enhancement
and optimization are expected to mitigate, but not eliminate the recent decline
in gross oil and condensate production capacity. As of December 31, 1998, 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, significant downward revisions of proved reserve
estimates in 1999 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
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 

                                      -9-

<PAGE>

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.


                                      -10-

<PAGE>


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. The Per Barrel Royalty with respect to
each calendar quarter is paid to the Trust on the fifteenth day of the month
following the end of the quarter. See "THE UNITS - Distributions of Income"
below.


                  

           Average                  Cost       Adjusted                   Per
             WTI     Chargeable  Adjustment   Chargeable  Production     Barrel
            Price       Costs      Factor        Costs       Taxes       Royalty
           -------   ----------  ----------   ----------  ----------     -------
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
                                                           
1997:                                                      
1st Qtr     22.86       8.85       1.265        11.19         2.61        9.06
2nd Qtr     19.91       8.85       1.269        11.23         2.16        6.52
3rd Qtr     19.75       8.85       1.274        11.28         2.14        6.34
4th Qtr     19.94       8.85       1.280        11.33         2.16        6.45
                                                           
1998:                                                      
1st Qtr     15.96       9.30       1.280        11.90         1.56        2.49
2nd Qtr     14.58       9.30       1.280        11.90         1.36        1.32
3rd Qtr     14.15       9.30       1.280        11.90         1.29        0.96
4th Qtr     12.80       9.30       1.280        11.90         1.10       (0.19)*
                                                          
* Pursuant to the Conveyance, the payment under the Royalty Interest for any
calendar quarter shall not be less than zero. Accordingly, the Per Barrel
Royalty for the fourth quarter of 1998 is effectively zero.

      The combination of the continuing steep decline in WTI Prices since the
fourth quarter of 1998 and the increase in Chargeable Costs from $9.30 per
barrel in 1998 to $9.80 per barrel in 1999 will have a material adverse effect
on the Per Barrel Royalty payable with respect to the first quarter of 1999 and,
possibly, subsequent quarters. See "INDUSTRY CONDITIONS" below and Item 7.

                                      -11-

<PAGE>

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 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.

      The Trust Agreement provides that the Trustee shall pay the Quarterly
Distribution on the fifth day after the Trustee's receipt of the amount paid by
the Company on the 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).

                                      -12-

<PAGE>

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
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

                                      -13-

<PAGE>

Internal Revenue Code of 1986, the Units subject to the Trustee's right of
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 Ratings Group
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 entity of all or substantially all of the Company's working interest in the
Prudhoe Bay Unit and the assumption by such 

                                      -14-

<PAGE>

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, 1998, approximately 9.7 billion STB of oil and
condensate had been produced from the Field. Field development is well advanced
with approximately $17.5 billion gross capital spent and a total of about 1,885
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 sandstone, conglomerate and shale 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.

                                      -15-

<PAGE>

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, 1998 is summarized in the following table:

                                    Oil Rim        Gas Cap
                                    -------        -------

      BP                             51.22% (a)    13.85%
      Arco                           21.87         42.56
      Exxon                          21.87         42.56
      Mobil/Phillips/Chevron          4.44          1.03
      Others                          0.60          0.00
                                    ------        ------
      Total                         100.00%       100.00%
                                    ======        ======
---------------
      (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.

Historical Production

      Production began on June 19, 1977, with the completion of the Trans Alaska
Pipeline System. The pipeline has a capacity of approximately 1.4 million STB of
oil per day.

      As of December 31, 1998, there were about 825 active producing oil wells,
36 gas reinjection wells, 53 water injection wells and 132 water and miscible
gas injection wells in the Field. In terms of individual well performance, oil
production rates range from 60 to 5,000 STB of oil per day. Currently, the
average well production rate is about 740 STB of oil per day.

                                      -16-

<PAGE>

      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:

                              Oil                        Condensate             
       Year        ------------------------       -------------------------
      Ended        Total            Subject       Total             Subject
   December 31     Field            Leases        Field             Leases
   -----------     -----            -------       -----             -------
                                   (Thousand STB per day)

      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
      1997         512.8             227.4        177.1              21.4
      1998         442.3             196.1        165.2              20.0
              
      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.

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, water
flooding and miscible gas flooding. Separate yet integrated reservoir management
strategies have been developed for the areas affected by each of these recovery
processes.

                                      -17-

<PAGE>


Reserve Estimates

      The Company's net proved remaining reserves of oil and condensate in the
Prudhoe Bay Unit as of December 31, 1998 were estimated to be approximately
1,086.1 million STB, of which approximately 1,075.4 million STB were associated
with the Subject Leases. 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.

      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. Based on the WTI
Price of $12.05 on December 31, 1998, current Production Taxes, and the
Chargeable Costs adjusted as prescribed by the Overriding Royalty Conveyance, as
of December 31, 1998 the Per Barrel Royalty is zero. Therefore, by definition,
there are no net remaining proved reserves attributable to the Trust as of
December 31, 1998. This is a direct result of the prevailing economic conditions
and the prescribed calculation procedures and does not reflect a material change
in the amount of oil or rates of its extraction that are expected to be produced
by the operators of the Prudhoe Bay Unit. Because the Per Barrel Royalty is zero
as of December 31, 1998, under procedures specified in Financial Accounting
Standards Board Statement of Financial Standards No. 69, the estimated Future
Net Revenues and the Present Value of Estimated Future Net Revenues attributable
to the BP Prudhoe Bay Royalty Trust are also $0. 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 forecasting the allocation of reserve
volumes between the Company and the Trust. The Royalty Interest is not a working
interest and the Trust is not entitled to receive any specific volume of
reserves from the Field. Rather, reserve volumes attributable to the Trust at
any given date are estimated by allocating to the Trust its share of estimated
future production from the Field based on WTI Prices and other economic
parameters in effect on the date of the evaluation.

                                      -18-

<PAGE>


      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:

                              Net Proved Reserves     
                              -------------------          WTI Prices
    December 31    Subject Leases (a)    Trust (b)         Per Barrel
    -----------    ------------------    ---------         ----------
                                (Million STB)

      1994              1,395.0             81.0              17.75
      1995              1,371.4             81.0              19.58
      1996              1,247.0            111.1              25.93
      1997              1,154.7             64.8              17.78
      1998              1,075.4              0.0              12.05
                   
-------------
      (a) Includes proved undeveloped reserves of 211.0 million STB at December
31, 1994; 275.2 million STB at December 31, 1995; 223.4 million STB at December
31, 1996; 190.2 million STB at December 31, 1997; and 109.8 million STB at
December 31, 1998.

      (b) Includes proved undeveloped reserves of 0.0 STB at December 31, 1994;
0.8 million STB at December 31, 1995; 9.1 million STB at December 31, 1996; 1.3
million STB at December 31, 1997; and 0.0 STB at December 31, 1998.

      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 6 of the Notes to Financial Statements in Item 8.

      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 progress. These include additional drilling,
water flood expansions and miscible injection continuation/expansion projects.
Other possible investments could include expanded gas cycling, miscible/water
flood 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.

                                      -19-

<PAGE>


                 INDEPENDENT OIL AND GAS CONSULTANTS' REPORT


                    [LETTERHEAD OF MILLER AND LENTS, LTD.]



                                March 15, 1999




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, 1998

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, 1998. 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 15, 1999, addressed to Ms. Marie Trimboli of The Bank of New
York and signed by Mr. V. W. Holt.  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 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 

                                      -20-

<PAGE>

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.  BP Exploration (Alaska) Inc. estimated that, as of December 31,
          1998, 737.2 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.

      5.  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 

                                      -21-

<PAGE>

          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.

      6.  Based on the West Texas Intermediate Price of $12.05 per barrel on
          December 31, 1998, current Production Taxes, and the Chargeable
          Costs adjusted as prescribed by the Overriding Royalty Conveyance,
          as of December 31, 1998 the Per Barrel Royalty is zero.  Therefore
          there are no net remaining Proved Reserves attributable to the BP
          Prudhoe Bay Royalty Trust as of  December 31, 1998.  This is the
          direct result of prevailing economic conditions and the prescribed
          calculational procedures, and does not reflect a material change in
          the amount of oil or rates of its extraction that are expected to
          be produced by the operators of the Prudhoe Bay Unit.

      7.  Because the Per Barrel Royalty is zero as of December 31, 1998, under
          procedures outlined in Financial Accounting Standards Board Statement
          of Financial Accounting Standards No. 69, as of December 31, 1998, the
          estimated Future Net Revenues and the Present Value of Estimated
          Future Net Revenues attributable to the BP Prudhoe Bay Royalty Trust
          are $0.

      8.  Based on the West Texas Intermediate Price of $12.05 per barrel on
          December 31, 1998, current Production Taxes, and the Chargeable
          Costs adjusted as prescribed by the Overriding Royalty Conveyance,
          no additional royalty payments are forecast under the calculational
          procedures prescribed by the Overriding Royalty Conveyance.  Terms
          of the Conveyance allow for continuation of the Trust's existence
          during periods without revenues. BP Exploration (Alaska) Inc.
          expects continued production from the Prudhoe Bay Unit at a
          declining rate through the year 2030.  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.

      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 oil production rate forecast made by BP (Alaska) Inc. for the
Prudhoe Bay Unit 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.

                                      -22-

<PAGE>

      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.

      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.

                                      -23-

<PAGE>


      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.


                               By /s/ William P. Koza         [SEAL]   
                                  -------------------------     
                                  William P. Koza
                                  Vice President

WPK/hsd

                                      -24-

<PAGE>


                             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 and
economic developments in various parts of the world and concerted action by
members of the Organization of Petroleum Exporting Countries ("OPEC") and
non-OPEC oil exporting countries can significantly affect world oil supply and
oil prices.

      Throughout most of 1998 and until early March 1999, world oil prices
continued to be depressed. The decline in world oil prices has been attributed
to an unusually large stockpiling of petroleum and the economic turmoil
affecting a number of Asian countries, both of which sharply reduced demand for
oil. On March 22, 1998, Saudi Arabia, Venezuela and Mexico announced an
agreement among OPEC and some non-OPEC oil exporting countries to reduce world
output by up to 2,000,000 barrels per day. Non-compliance by certain nations to
the accord, however, helped drive oil prices still lower, and the action
ultimately proved ineffective.

      On March 22, 1999, OPEC and certain non-OPEC member nations agreed to
further cut oil production levels. The agreement will increase OPEC's oil cuts
by 1.717 million barrels per day (a 7 percent reduction) on top of the curbs
imposed last year. The new restrictions are scheduled to stay in force for one
year from April 1, 1999. On aggregate, OPEC will have removed more than four
million barrels per day from the world oil market in a year, a 16 percent total
output restriction. Non-OPEC Mexico, Norway and Oman have promised cooperation
with OPEC and will remove a combined 286,000 barrels per day. Russia has also
pledged to lower exports by 100,000 barrels per day during the second quarter of
1999. The agreement is set to reduce OPEC production, excluding sanctions-bound
Iraq, to 22.976 million barrels per day from 24.692 million barrels per day in
July 1998 and 27.289 million barrels per day in March 1998. Since the pact was
first announced in mid-March 1999, oil prices have rebounded from their December
1998 lows.

      If the parties adhere to this agreement, it may result in an sustained
increase in oil prices. However, due to the many political, economic and other
factors influencing oil prices, the duration and magnitude of any recovery in
oil prices is uncertain and there can be no assurance that oil prices in the
near future will recover to, or approach, the price levels that have pertained
during past years.

                                      -25-

<PAGE>

                          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
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.

                                      -26-

<PAGE>

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.

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 

                                      -27-

<PAGE>

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.

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

      None.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS

      None.

                                      -28-


<PAGE>


                                   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 (as reported by Dow Jones Historical Stock
Quote Reporter Service), and the cash distributions paid per Unit, for each
calendar quarter in the two years ended December 31, 1997 and 1998.

                                Distributions

                           High             Low           Per Unit  
                           ----             ---           --------
      1997:                                                
      First Quarter      $18 3/4         $15 1/2           $0.702
      Second Quarter      16 13/16        15                0.551
      Third Quarter       18 3/16         16 1/4            0.399
      Fourth Quarter      18 3/8          15 5/16           0.392
                                                           
      1998:                                                
      First Quarter      $16 7/8         $14 7/16          $0.412
      Second Quarter      14 7/8          10                0.145
      Third Quarter       10 7/8           6 15/16          0.069
      Fourth Quarter       9 1/2           4 5/16           0.055
                                                     
      As of March 15, 1999, 21,400,000 Units were outstanding and were held by
1,184 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. See "INDUSTRY CONDITIONS" in Item 1 and Item 7.

     Due to the continuing decline in WTI Prices, the Trust did not receive a
quarterly distribution during the first quarter of 1999 nor will it receive a
quarterly distribution during the second quarter of 1999. For further
discussion, see "TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Results of Operations" in Item 7.

                                      -29-

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

      The following table presents in summary form selected financial
information regarding the Trust.

<TABLE>
<CAPTION>
                           1998            1997          1996          1995          1994
                           ----            ----          ----          ----          ----
                                     (In thousands, except per Unit amounts)

<S>                    <C>                <C>           <C>           <C>           <C>   
Royalty revenues       $    15,163        44,582        42,263        34,886        32,401
Interest income                 17            21             0             0             0
Trust administration
  expenses                     614           845           750           688           658
                       -----------    ----------    ----------    ----------    ----------
Cash earnings          $    14,566        43,758        41,513        34,198        31,743

Cash distributions     $    14,566        43,758        41,513        34,198        31,743
Cash distributions
  per unit             $     0.681         2.045         1.940         1.598         1.483

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

Cautionary Statement

        The Trustee, its officers or its agents on behalf of the Trustee may,
from time to time, make forward looking statements. To the extent that any
forward looking statements are made, the Trustee is unable to predict future
changes in oil prices, oil production levels, economic activity, legislation and
regulation, and certain changes in expenses of the Trust. In addition, the
Trust's future results of operations and other forward looking statements
contained in this item and elsewhere in this report involve a number of risks
and uncertainties. As a result of variations in such factors, actual results may
differ materially from any forward looking statements. Some of these factors are
described below. The Trustee disclaims any obligation to update forward looking
statements.

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. Generally, 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 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. However,
the Trustee does have a limited power to borrow, establish a cash reserve, or
dispose of all or part of the Trust Estate, under limited circumstances pursuant
to the terms of the Trust Agreement. See the discussion under "THE TRUST" in
Item 1.

                                      -30-

<PAGE>

      The decline in WTI Prices during the fourth quarter of 1998 resulted in
the Trust not receiving a quarterly distribution for such quarter. The Trust
also will not receive a quarterly distribution for the first quarter of 1999.
The Trustee is, therefore, currently considering exercising certain of its
limited powers under the Trust Agreement to obtain liquidity in order to meet
the Trust's accrued and future liabilities and expenses.

      1. Borrowing: The Trustee is considering obtaining a credit facility from
a non-affiliated bank in order to pay Trust expenses. The Trustee estimates that
a two-year, $2,000,000 credit facility would be sufficient to meet the Trust's
current and expected liabilities and expenses. There can be no assurance,
however, that the Trustee will be able to obtain a credit facility for the
Trust. Preliminary discussions with potential lenders have indicated that any
such borrowing would have to be secured by a lien on the Trust Estate and, in
the absence of other funds available to the Trust for debt service, interest
payments on the outstanding indebtedness may have to be guaranteed by a third
party. In the event that a credit facility is established, the Trust Agreement
prohibits Trust distributions to the holders of the Units until the indebtedness
created by such borrowings has been paid in full.

      2. Cash Reserve: Given that the Trust has not received a cash distribution
for the fourth quarter of 1998 and will not receive one for the first quarter of
1999, the Trustee has determined that future political and economic conditions
affecting world oil prices may make it impractical from time to time in the
future to pay liabilities of the Trust out of quarterly royalty distributions.
Accordingly, the Trustee has tentatively determined to establish a cash reserve.
The Trustee anticipates setting aside and adding to such cash reserve, out of
any quarterly distributions received by the Trust, an amount equal to
approximately one year's expected liabilities and expenses of the Trust, which
the Trustee estimates to be approximately $1,000,000. Such amount would be set
aside over the course of at least four quarters, with up to one quarter of such
amount being set aside each quarter, assuming the availability of funds from
quarterly distributions. The Trustee would draw funds from the reserve during
any quarter in which the quarterly distribution received by the Trust did not
exceed the liabilities and expenses of the Trust, and would replenish the
reserve from future quarterly distributions, if any.

      In order either to borrow funds to pay Trust expenses or to establish a
cash reserve, certain conditions imposed by the Trust Agreement must be met. See
"THE TRUST - Duties and Limited Powers of the Trustee" in Item 1. These
conditions include the requirement that the Trustee make certain determinations
with respect to the effect on the Trust Estate of the failure to take such
action, and the receipt by the Trustee of certain opinions of counsel. While the
Trustee anticipates that the requisite conditions imposed by the Trust Agreement
can be satisfied, no assurances can be given that borrowings by the Trust to
meet liabilities and expenses or the establishment of a cash reserve to pay
future expenses will be feasible. It should be noted that the independent
auditors' report on the financial statements of the Trust in Item 8 contains an
explanatory paragraph with respect to the ability of the Trust to continue as a
going concern.

      Amounts set aside for a cash reserve must be invested in U.S. government
or agency securities secured by the full faith and credit of the United States,
or certain repurchase agreements with respect to such U.S.
government or agency securities.

      As previously discussed under CERTAIN TAX CONSIDERATIONS, amounts received
by the Trust as quarterly distributions are income to the holders of the Units,
(as will be any earning on investment of the cash reserve) and must be reported
by the holders of the Units, even if such amounts are used to repay borrowings
or establish a cash reserve and are not received by the holders of the Units.

                                      -31-

<PAGE>

      3. Disposition of Part or All of the Royalty Interest or Other Trust
Interest: The Trustee is currently not considering, and does not expect to
consider in the near future, any plan to dispose of any part or all of the
Royalty Interest or other Trust Interest in order to meet its current and past
liabilities and expenses.

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. For
the statement of cash earnings and distributions, revenues and Trust expenses
are recorded on a cash basis and, as a result, distributions to Unit holders in
the years ended December 31, 1998, 1997 and 1996 are attributable to the
Company's operations during the twelve-month periods ended September 30, 1998,
1997 and 1996, respectively.

      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.

      As a result of the severe decline in the WTI Price during 1998 and the
first quarter of 1999 (see "INDUSTRY CONDITIONS" in Item 1), the royalty
revenues and cash distributions of the Trust declined significantly throughout
1998. The average daily WTI Price decreased below the level necessary for the
Trust to receive a distribution for the fourth quarter of 1998 and the first
quarter of 1999. Accordingly, no distribution will be made to holders of Units
for such quarters. After giving effect to the 1999 increase in Chargeable Costs,
the Trust will not be entitled to a quarterly distribution for any quarter in
which the average daily WTI Price is less than approximately $13.78 (the
"break-even point"). Towards the latter part of March 1999, however, in the days
leading up to the March 22, 1999 meeting among OPEC and certain non-OPEC country
ministers, the WTI Price rose above $15.00. Although industry experts generally
predict that WTI Prices should remain above the levels of the last two quarters,
no such assurance can be given.

      Whether the Trust will be entitled to a quarterly distribution during 1999
will depend on WTI Prices prevailing during the remainder of the year. Even if
the average daily WTI Price each quarter were to remain above the $13.78
break-even point, there may not be distributions to holders of Units. Quarterly
distributions received by the Trust must, under the terms of the Trust
Agreement, first be applied to satisfy the outstanding fees and expenses of the
Trust as of each Quarterly Record Date. Due to the fact that none of the fees
nor expenses of the Trust incurred since September 30, 1998 have been paid, the
Trustee currently estimates that the Trust will pay approximately $750,000 as of
the July 1999 Quarterly Record Date to satisfy such accumulated fees and
expenses, should such amounts be available. As noted above, contributions to a
cash reserve would further reduce distributions to holders of Units.

                                      -32-

<PAGE>


1997 compared to 1996

      Royalty revenues and cash distributions in 1997 increased by approximately
5.5% and 5.4%, respectively, from 1996, principally as a result of high average
WTI Prices in the fourth quarter of 1996 and the first quarter of 1997 (see "THE
ROYALTY INTEREST-Per Barrel Royalty Calculations" in Item 1). Trust
administration expenses increased by 12.7% from 1996 to 1997, reflecting timing
differences in the payment by the Trustee of certain expenses, but, as a
percentage of cash earnings, increased only slightly to 1.9%.

1998 compared to 1997

     Royalty revenues and cash distributions in 1998 decreased by approximately
66.0% and 66.7%, respectively, from 1997, as a result of the progressively
decreasing average WTI Prices throughout 1998 (see "THE ROYALTY INTEREST-Per
Barrel Royalty Calculations" in Item 1). Trust administration expenses decreased
by 27.3% from 1997 to 1998, reflecting changes in the timing of the accounting
of such expenses, but, as a percentage of cash earnings, increased to 4.2% due
to the significantly lower cash earnings for the year. The Royalty Interest for
1998 decreased by approximately 90% from 1997, as a result of an impairment loss
of approximately $174 million, which was calculated as the difference between
the carrying value and the estimated fair value of the Royalty Interest. The
estimated fair value was calculated by projecting future cash flows and
discounting them at a current rate that considered the risk inherent in the cash
flows.

Year 2000 Problem

      The Trustee has established a Year 2000 compliance program consisting of,
among other things, updating major proprietary application systems and
evaluating the Year 2000 compliance efforts of vendors of major vendor-supplied
systems and certain other business partners. The Trustee believes that its Year
2000 compliance program is currently on schedule to meet the needs of its
customers and the compliance deadlines defined by its regulators. As of December
31, 1998, testing and renovation of the proprietary application systems that the
Trustee deems "mission critical" were substantially completed and these systems
are currently being used by the Trustee. In addition, all vendor supplied
software systems that the Trustee deems mission critical have been tested and,
based upon such testing, the Trustee believes that such systems will not be
adversely affected in a material way by the date change to the Year 2000.

      Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of suppliers,
customers and other business partners, the Trustee is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on the Trustee and its ability to perform its obligations under the Trust
Agreement. The Year 2000 compliance program is intended to reduce significantly
the Trustee's level of uncertainty about the Year 2000 problem and, in
particular, the Year 2000 compliance and readiness of the Trustee and its
material business partners. The Trustee believes that, with completion of its
Year 2000-compliance program as scheduled, the possibility of significant
interruption of normal operations should be reduced. However, because of the
unprecedented nature of the Year 2000 problem, there can be no certainty as to
its impact.


                                      -33-

<PAGE>



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
         ABOUT MARKET RISK.

      Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          BP PRUDHOE BAY ROYALTY TRUST
                          INDEX TO FINANCIAL STATEMENTS

                                                                      Page
                                                                      ----

Independent Auditors' Report                                           35

Statements of Assets, Liabilities and Trust Corpus
  As of Dece36er 31, 1998 and 1997                                     36

Statements of Cash Earnings and Distributions for
  the years ended December 31, 1998, 1997 and 1996                     37

Statements of Changes in Trust Corpus for the years
  ended December 31, 1998, 1997 and 1996                               38

Notes to Financial Statements                                          39


                                      -34-
<PAGE>



                          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, 1998 and 1997, 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, 1998.
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, 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, 1998 and 1997, 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, 1998, on the basis of accounting described
in note 2.

     The accompanying financial statements have been prepared assuming that the
Trust will continue as a going concern. As discussed in note 1 to the financial
statements, the Trust did not receive a royalty payment in the first quarter of
1999 and does not expect to receive a royalty payment in the second quarter of
1999 due to the severe decline in world oil prices. As a result, the Trust lacks
the liquidity to pay its accrued and future liabilities and expenses which
raises substantial doubt about the Trust's ability to continue as a going
concern. The Trustee's plans in regard to these matters are also described in
note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


                                                KPMG LLP



New York, New York
March 26, 1999


                                      -35-

<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

               Statements of Assets, Liabilities and Trust Corpus

                           December 31, 1998 and 1997
                        (In thousands, except unit data)



      Assets                                                   1998        1997 
                                                               ----        ---- 

Royalty Interest, net (notes 1, 2 and 3)                      $25,098    243,024
Cash                                                               13          0
                                                              -------    -------

                  Total assets                                $25,111    243,024
                                                              =======    =======

      Liabilities and Trust Corpus

Accrued expenses                                              $   103        195
Trust Corpus (40,000,000 units of beneficial
   interest authorized, 21,400,000 units issued
   and outstanding)                                            25,008    242,829
                                                              -------    -------

                  Total liabilities and Trust Corpus          $25,111    243,024
                                                              =======    =======


See accompanying notes to financial statements.


                                      -36-

<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

                  Statements of Cash Earnings and Distributions

            For the Years Ended December 31, 1998, 1997 and 1996 (In
                          thousands, except unit data)



                                           1998           1997          1996
                                           ----           ----          ----

Royalty revenues                       $    15,163         44,582         42,263

Interest Income                                 17             21              0

Trust administrative expenses                  614            845            750
                                       -----------    -----------    -----------

Cash earnings                          $    14,566         43,758         41,513
                                       ===========    ===========    ===========

Cash distributions                     $    14,566         43,758         41,513
                                       ===========    ===========    ===========

Cash distributions per unit            $     0.681          2.045          1.940
                                       ===========    ===========    ===========

Units outstanding                       21,400,000     21,400,000     21,400,000
                                       ===========    ===========    ===========


See accompanying notes to financial statements.


                                      -37-


<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

                      Statements of Changes in Trust Corpus

              For the Years Ended December 31, 1998, 1997 and 1996
                                 (In thousands)


                                             1998         1997          1996
                                             ----         ----          ----


Trust Corpus at beginning of year         $ 242,829      268,940      304,544
Cash earnings                                14,566       43,758       41,513
Decrease (increase) in accrued expenses          92         (105)          36
Increase in interest income                      13            0            0
Cash distributions                          (14,566)     (43,758)     (41,513)
Amortization of Royalty Interest            (44,408)     (26,006)     (35,640)
Impairment write-down (Note 3)             (173,518)           0            0
                                          ---------    ---------    ---------

Trust Corpus at the end of year           $  25,008      242,829      268,940
                                          =========      =======      =======


See accompanying notes to financial statements.


                                      -38-

<PAGE>


                          BP PRUDHOE BAY ROYALTY TRUST

                          Notes to Financial Statements

                        December 31, 1998, 1997 and 1996

(1)  Formation of the Trust and Organization

        BP Prudhoe Bay Royalty Trust (the "Trust"), a grantor trust, was created
     as a Delaware business trust 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 (The "Trustee") and The
     Bank of New York (Delaware), as co-trustee. Standard Oil and the Company
     are indirect wholly owned subsidiaries of the British Petroleum Company
     p.l.c. ("BP").

        During the fourth quarter of 1998, British Petroleum Company p.l.c.
     merged with Amoco Corporation to form BP Amoco. This transaction should not
     have a material effect on the Trust's operations.

        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 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
     reserves 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 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.

                                      -39-

<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

                    Notes to Financial Statements (Continued)

(1), Continued

     (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).

          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. As a result of the severe drop in world oil prices during
     1998, the quarterly royalty revenues and cash distributions of the Trust
     have been significantly reduced. The royalty revenue for the fourth quarter
     of 1998 that was to be received and recorded in the first quarter of 1999
     was zero. The royalty revenue for the first quarter of 1999 which is to be
     received and recorded in the second quarter of 1999 is also expected to be
     zero. As a result, the Trust lacks the liquidity to pay its accrued and
     future liabilities and expenses which raises substantial doubt about the
     Trust's ability to continue as a going concern. The Trust is considering
     entering into a credit facility with a non-affiliated bank in order to pay
     recurring and non-recurring Trust expenses, but as of the date of this
     report, no such facility has been put in place. The Trust is also
     considering establishing a reserve account sufficient to pay approximately
     one year's current and expected liabilities and expenses of the Trust
     should a distribution be made to the Trust in future quarters. In addition,
     the Trust has written down the carrying value of the Royalty Interest to
     its estimated fair value. See notes 2 and 3 for further discussion.


(2)  Basis of Accounting

        The financial statements of the Trust are prepared on a modified cash
     basis and reflect the Trust's assets, liabilities, Corpus, 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 on an accrual basis.

     (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 65,000,000, 111,000,000 and 80,991,000
         barrels of estimated proved reserves were used to calculate the
         amortization of the Royalty Interest for the years ended December 31,
         1998, 1997 and 1996, respectively). Such amortization is charged
         directly to the Trust Corpus, and does not affect cash earnings. The
         daily rate for amortization per net equivalent barrel of oil was $8.23,
         $4.82 and $6.61 for the years ended December 31, 1998, 1997 and 1996,
         respectively. The Trust evaluates impairment of the Royalty Interest by
         comparing the undiscounted cash flows expected to be realized from the
         Royalty Interest to the carrying value, pursuant to Statement of
         Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the
         Impairment of Long-Lived Assets and for Long-Lived Assets to be
         Disposed Of". If the expected future undiscounted cash flows are less
         than the carrying value, the Trust recognizes an impairment loss for
         the difference between the carrying value and the estimated fair value
         of the Royalty Interest (see note 3).

        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.


                                      -40-

<PAGE>

                          BP PRUDHOE BAY ROYALTY TRUST

                    Notes to Financial Statements (Continued)

(2), Continued

        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.

        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) Royalty Interest

      The Royalty Interest is comprised of the following at December 31, 1998
     and 1997 (in thousands):

                                                  1998        1997
                                                  ----        ----

              Royalty Interest                 $535,000      535,000
              Less:                            (336,384)    (291,976)
              Impairment write                 (173,518)           0
                                               --------     --------

                                               $ 25,098      243,024
                                               ========     ========

      During the fourth quarter of 1998, the Trust determined that the value of
     the Royalty Interest was impaired as a result of the severe drop in world
     oil prices during 1998 and reduced the unamortized recorded value by
     $173,517,532, to its estimated fair value. The estimated fair value was
     calculated by projecting expected future cash flows and discounting them at
     a current rate that considered the risk inherent in the cash flows.

(4)  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.

                                      -41-

<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

                    Notes to Financial Statements (Continued)

(5)   Summary of Quarterly Results (Unaudited)

      A summary of selected quarterly financial information for the years ended
     December 31, 1998 and 1997 is as follows (in thousands, except unit data):
                                        1st        2nd        3rd          4th
                                     Quarter     Quarter     Quarter     Quarter
                                     -------     -------     -------     -------
1998
    Royalty revenues                $  8,773       3,317      1,773       1,300
    Interest income                        5          12       --          --
    Refund of overpayment of expense     142        --         --             3
    Trust administrative expenses       (103)       (234)      (303)       (119)
    Cash earnings                      8,817       3,095      1,470       1,184
    Cash distributions                 8,817       3,095      1,470       1,184
    Cash distributions per unit        0.412       0.145      0.069       0.055

1997
    Royalty revenues                $ 15,138      12,052      8,770       8,622
    Trust administrative expenses       (107)       (257)      (221)       (239)
    Cash earnings                     15,031      11,795      8,549       8,383
    Cash distributions                15,031      11,795      8,549       8,383
    Cash distributions per unit        0.702       0.551      0.399       0.392

(6)  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
     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, 1998 ($12.05 per barrel), December 31, 1997
     ($17.53 per barrel) and December 31, 1996 ($25.93 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.

                                      -42-
<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

                    Notes to Financial Statements (Continued)

(6), Continued

        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 1998, 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, 1998, 1997 and 1996 based on the Company's latest reserve
     estimate at such time, the WTI Prices on December 31, 1998, 1997 and 1996
     and a reduction in Chargeable Costs in years subsequent to 1998, were
     estimated to be 0, 65 and 111 million barrels, respectively (of which 0, 64
     and 102 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, 1998,
     1997 and 1996 the standardized measure of 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 $12.05, $17.53 and $25.93, respectively, were as follows (in
     thousands):


                                   December 31,   December 31,    December 31,
                                       1998          1997             1996
                                     --------      --------         --------
                                                                  
       Future net cash flows         $      0       108,455         779,517
       10% annual discount for                                    
         estimated timing of                                      
         cash flows                         0       (30,649)        (367,217)
                                      -------      --------         --------
                                                                  
       Standardized measure of                                    
         discounted future net                                    
         cash flow relating to                                    
         proved reserves (a)         $      0        77,806           412,300
                                      =======      ========         =========
                                                            
                                      -43-

<PAGE>



                          BP PRUDHOE BAY ROYALTY TRUST

                    Notes to Financial Statements (Continued)

(6), Continued

      (a)The standardized measure of discounted future net cash flow relating to
         proved reserves, estimated without reducing Chargeable Costs in years
         subsequent to 1998, would be $0, $69,220 and $388,249 at December 31,
         1998, 1997 and 1996, respectively. The following are the principal
         sources of the change in the standardized measure of discounted future
         net cash flows (in thousands):

                                                1998        1997        1996 
                                                ----        ----        ----
          Revisions of prior estimates:       
            Reserve volumes                   $116,023      33,018      21,565
            WTI price                         (228,764)   (417,392)    278,082
            Chargeable costs - inflation             5     (13,526)    (18,891)
            Production taxes                    34,319      63,400     (40,513)
            Other                                 (780)     (3,006)     (1,807)
                                              --------    --------     -------
                                               (79,197)   (337,506)    238,436
          Royalty income received (b)           (6,390)    (38,218)    (48,989)
          Accretion of discount                  7,781      41,230      20,259
                                              --------    --------     -------
                                              
          Net (decrease) increase             
            during the year                   $(77,806)   (334,494)    209,706
                                              ========    ========     =======
                                         
     (b) Royalty income received for 1997 and 1996 includes the royalty
         applicable to the period October 1, 1997 through December 31, 1997
         ($8,773) and October 1, 1996 through December 31, 1996 ($15,138), which
         was received by the Trust in January 1998 and 1997, respectively. There
         was no royalty income received for the period October 1, 1998 through
         December 31, 1998 which would normally be received in January 1999.

     The changes in quantities of proved oil and condensate were as follows
     (thousands of barrels):

           Estimated net proved reserves of oil
             and condensate at December 31, 1996                 111,066
           Production                                             (5,395)
           Change caused by prices/costs                         (40,901)
                                                                 -------

           Estimated net proved reserves of oil
             and condensate at December 31, 1997                  64,769
           Production                                             (5,395)
           Change caused by prices/costs                         (59,374)
                                                                 --------

           Estimated net proved reserves of oil
             and condensate at December 31, 1998
                                                                       0
                                                                 =======
           Proved reserves:
              December 31, 1996                                  111,066
                                                                 =======

              December 31, 1997                                   64,769
                                                                 =======

              December 31, 1998                                        0
                                                                 =======

                                      -44
<PAGE>


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

      As of March 24, 1999, there were no persons known to the Trustee to be the
beneficial owners of more than five percent of the Units.

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.

                                      -45-

<PAGE>


                                     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, 1998 and 1997

            Statements of Cash Earnings and Distributions for the years
            ended December 31, 1998, 1997, and 1996

            Statements of Changes in Trust Corpus for the years
            ended December 31, 1998, 1997, and 1996

            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, 1998.

                                      -46-

<PAGE>


                                  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

                                    By:  THE BANK OF NEW YORK, as Trustee


                                    By: /s/ Marie Trimboli        
                                        --------------------------
                                        Marie Trimboli
                                        Assistant Treasurer

March 30, 1999

      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.


                                      -47-

<PAGE>


                                INDEX TO EXHIBITS

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.

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.  Filed herewith.

--------------------------------------------
      * Incorporated by reference to the correspondingly numbered exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 (File No. 1-10243).

                                      -48-