# Report to Unit Owners

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_NRT_2018/NYSE_NRT_2018.mmd` · pages 1-7_

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Report to Unit Owners ..... 1-3
Ten Year History of Net Gas Sales ..... 4
Net Proved Producing Gas Reserves (Est.) ..... 5
and Volume of Net Gas Sales ..... 6
Dollar Royalties Western and Eastern Oldenburg ..... 7
Gross Gas Sale Volumes ..... 7
Description of Trust Assets ..... 8-9
Management's Discussion and Analysis ..... 10-14
Selected Financial Data ..... 15
Comparison of Five Year Returns ..... 16-17
Critical Accounting Policies ..... 18
Report of Independent Registered Public Accounting Firm ..... 19
Financial Statements ..... 20-23
Notes to Financial Statements ..... 24-26
Disclosure Controls and Procedures ..... 27
Internal Control over Financial Reporting ..... 27-28
2018 Tax Letter (Removable) ..... 29-32

## IMPORTANT TAX INFORMATION

For your convenience, the information necessary to prepare your 2018 tax return is included in the removable "2018 Tax Letter" on Pages 29 through 32. Please note that there will be no separate mailing of the tax letter. The 2018 Tax Letter is also available at the Trust's website, www.neort.com.

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## Report to Unit Owners:

## FOURTH QUARTER 2018

Net income for the Trust for the fourth quarter of fiscal 2018 was \(1,324,902, a decrease of 34.11% from net income of \)2,010,828 for the fourth quarter of fiscal 2017. The Trust receives nearly all of its royalties under two royalty agreements. The Mobil Agreement is the 4% royalty rate agreement covering gas sales from the western half of the Oldenburg concession. The OEG Agreement is the 0.6667% royalty rate agreement covering gas sales from the entire Oldenburg concession. Total royalties, including sulfur royalties, under the 2% Mobil Sulfur Agreement for the fourth quarter of fiscal 2018 were reduced by negative adjustments of (\(114,918), as compared to positive adjustments totaling \)46,974 for the fourth quarter of fiscal 2017. Total royalties under the OEG Agreement for the fourth quarter of fiscal 2018 were increased by negative adjustments of (\(88,239), as compared to positive adjustments of \)177,678 for the fourth quarter of fiscal 2017. Net income in the fourth quarter of 2018 was lower than the fourth quarter of 2017 due to the impact of these adjustments as well as lower gas sales and lower average exchange rates. Gas sales were reduced largely due to the lingering production problems at Grossenkneten that were not finally resolved until August 21, 2018. The relevant details for the fourth quarters of fiscal 2018 and 2017 for gas sales under the Mobil and OEG Agreements are shown in the table below.

Quarterly Gas Data Providing Basis for Fiscal Quarter Royalties

<table><tr><td></td><td>3rd Calendar Quarter Ended 9/30/2018</td><td>3rd Calendar Quarter Ended 9/30/2017</td><td>Percentage Change</td></tr><tr><td>Mobil Agreement:</td><td></td><td></td><td></td></tr><tr><td>Gas Sales (Bcf \( ^{1} \) )</td><td>4.495</td><td>5.643</td><td>-20.34%</td></tr><tr><td>Gas Prices \( ^{2} \)  (Ecents/Kwh \( ^{3} \) )</td><td>1.9231</td><td>1.6197</td><td>+18.73%</td></tr><tr><td>Average Exchange Rate \( ^{4} \)</td><td>1.1550</td><td>1.1806</td><td>-2.17%</td></tr><tr><td>Gas Royalties</td><td>1,145,844</td><td>1,228,092</td><td>-6.70%</td></tr><tr><td>OEG Agreement:</td><td></td><td></td><td></td></tr><tr><td>Gas Sales (Bcf)</td><td>14.029</td><td>17.770</td><td>-21.05%</td></tr><tr><td>Gas Prices (Ecents/Kwh)</td><td>1.9612</td><td>1.6517</td><td>+18.74%</td></tr><tr><td>Average Exchange Rate</td><td>1.1540</td><td>1.1788</td><td>-2.10%</td></tr><tr><td>Gas Royalties</td><td>459,542</td><td>500,886</td><td>-8.25%</td></tr></table>

 \( ^{1} \) Billion cubic feet  \( ^{2} \) Gas prices derived from May-July period  \( ^{3} \) Euro cents per Kilowatt hour

 \( ^{4} \) Based on average Euro/dollar exchange rates of cumulative royalty transfers

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# NORTH EUROPEAN OIL ROYALTY TRUST

## FISCAL 2018 REPORT

For fiscal 2018, the Trust's gross royalty income declined 7.26% to \(7,198,534 from \)7,762,225 in fiscal 2017. The decrease in royalty income is the result of a combination of factors including the decline in gas sales and the difference in the amount of adjustments between fiscal 2018 and 2017. As in prior years, the Trust receives information concerning adjustments from the operating companies based on their final calculations of royalties payable during the previous periods as well as other required adjustments. During fiscal 2018, the adjustments based on royalties payable in 2017 increased royalty income by \(189,529. During fiscal 2017, the adjustments based on royalties payable for 2016 increased royalty income by \)411,884. A similar situation but with the opposite impact occurred with respect to royalties paid under the Mobil Sulfur Agreement. In fiscal 2018 and 2017, Mobil sulfur royalties totaled \(72,358 and \)43,932 respectively. Gas sales were significantly impacted by a series of partial and complete shutdowns at the Grossenkneten desulfurization plant that began on March 15, 2018 and were not fully resolved until August 22, 2018. Further details relating to the changes in gas sales, gas prices and average exchange rates for fiscal 2018 and 2017 are presented on pages 15 through 17. The total distribution for fiscal 2018 was $0.70 per unit compared to $0.76 per unit for fiscal 2017.

The Trust's German consultant periodically contacts the representatives of the operating companies to inquire about their planned and proposed drilling and geophysical work and other general matters. The following represents a summary of the most recent information the Trust's German consultant received from representatives of the operating companies' unified exploration and production venture, ExxonMobil Production Deutschland GmbH ("EMPG"). The Trust is not able to confirm the accuracy of any of the information supplied by the operating companies. In addition, the operating companies are not required to take any of the actions outlined and, if they change their plans with respect to any such actions, they are not obligated to inform the Trust.

EMPG resumed drilling in 2018 with the drilling of two sidetracks off the main bore of Goldenstedt Z-25a. The drilling of the initial sidetrack (M1) began in February 2018 and reached a length of 80 meters using the Directional Coiled Tubing ("DCT") drilling method. The DCT drilling method utilizes a smaller drilling rig, drills a smaller diameter bore and must work off an existing main bore. DCT drilling is a faster drilling method, is far less expensive than a traditional rig and is generally available for use on short notice. In March 2018 EMPG used DCT drilling for a second sidetrack (M2) with a length of 528 meters. However, both the first and second sidetracks were unsuccessful.

In an August 6, 2018 press release, EMPG announced the successful drilling of Goldenstedt Z-12a M1. Goldenstedt Z-12a M1, an eastern sour gas well, was drilled in May 2018 and was the first sidetrack off the main bore of Goldenstedt Z-12. The sidetrack extended 400 meters using DCT drilling, found the Zechstein Stassfurt carbonate reservoir in good condition and has begun production.

Brettorf Z-2b M1 was originally scheduled to begin drilling in May 2018. However, with the experience gained using the DCT drilling, this well has been postponed until the first quarter of 2019. Doetlingen Z-3A was originally scheduled to begin drilling in December 2018 but has been postponed until July 2019 and will again use the DCT drilling method.

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# NORTH EUROPEAN OIL ROYALTY TRUST

The scheduled 2018 workover was on a western Zechstein well, Visbek Z-16a. Visbek Z-16a suffered a severe casing collapse six months after it began production and was shut down in October 2013. While originally planned as a work over to repair the casing, EMPG began the drilling of the first horizontal section in October 2018 and the first gas production is expected in the beginning of 2019. Two additional unscheduled workovers were completed in 2018, Goldenstedt Z-10a and Cappeln Z-3a.

Of the two wells previously scheduled for 2019, Ahlhorn Z-3, a sour gas well, has been postponed until the second quarter of 2020. This well will attempt to reactivate the Ahlhorn field which was abandoned in 1997. Hemmelte NW T-1, an exploration well, was planned to develop a new area of the sweet gas Bunter zone in western Oldenburg. This well is no longer on the drilling schedule and no reason for the change was given.

The first well, Jeddeloh Z-1, to be drilled by Vermilion Energy Inc. under its Farm-In Agreement had been scheduled for 2020. Originally this well was not a candidate for fracking because the water that would normally be used in the fracking process would be absorbed by the type of minerals present. This absorption would cause these minerals to expand filling the gaps that the fracking was intended to create. It is now believed that this well will need to be fracked and a foam or gel will need to be used, which makes the fracking more expensive. According to the Trust's German consultant, "This well is postponed until a time in the future when the approval procedure for fracking will have been defined in more detail by the mining authorities."

No firm dates have been announced for any of the wells described above. Information on wells that are not named or are in preliminary planning stages is not divulged by EMPG.

Based on the limited information available, Graves & Co. Consulting LLC, the Trust's petroleum consultant ("Graves & Co."), has prepared and submitted their report on the cost depletion percentage applicable to Trust unit owners for calendar 2018. The 2018 cost depletion percentage of 11.4193% and related tax information is contained in the removable "2018 Tax Letter" on Pages 29 through 32 of this report. The calculation of the cost depletion percentage is based on Graves & Co.'s estimate of remaining net proved producing reserves as of October 1, 2018. (The complete text of the report is available in the Trust's 2018 Report on Form 10-K as exhibit 99.1.) The application of the Trust's two royalty rates to gross remaining proved producing gas reserves or to gross gas sales for both eastern and western Oldenburg yields the net gas reserves or sales attributable to the Trust, as referenced in the charts on pages 4 and 5. The report indicates that net Trust gas reserves decreased 18.79% to 8.069 Bcf from 9.936 Bcf on net sales for 2018 of 1.066 Bcf and a negative reserve adjustment of 0.801 Bcf. As shown in the chart on page 5, the addition of one successful well and completion of two workovers by the operating companies failed to replace current gas sales with additions to proved producing reserves.

Respectfully submitted,

![](images/4_0.jpg)

John R. Van Kirk
Managing Director

December 31, 2018