# Report to Unit Owners

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_NRT_2017/NYSE_NRT_2017.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
Selected Financial Data ..... 7
Gross Gas Sale Volumes ..... 8-9
Description of Trust Assets ..... 10-17
Management's Discussion and Analysis ..... 18
Critical Accounting Policies ..... 19
Distributions and Trading ..... 20-21
Comparison of Five Year Returns ..... 22
Dollar Royalties Western and Eastern Oldenburg ..... 23
Report of Independent Registered Public Accounting Firm ..... 23
Financial Statements ..... 24-27
Notes to Financial Statements ..... 28-30
Disclosure Controls and Procedures ..... 31
Internal Control over Financial Reporting ..... 31-32
2017 Tax Letter (Removable) ..... 33-36

## IMPORTANT TAX INFORMATION

For your convenience, the information necessary to prepare your 2017 tax return is included in the removable "2017 Tax Letter" on Pages 33 through 36. Please note that there will be no separate mailing of the tax letter.

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# NORTH EUROPEAN OIL ROYALTY TRUST

## Report to Unit Owners:

## FOURTH QUARTER 2017

Net income for the Trust for the fourth quarter of fiscal 2017 was \(2,010,828, an increase of 86.48% from net income of \)1,078,292 for the fourth quarter of fiscal 2016. The Trust receives nearly all of its royalties under two royalty agreements. The Mobil Agreement, the higher royalty rate agreement, covers gas sales from the western half of the Oldenburg concession. The OEG Agreement, the lower royalty rate agreement, covers gas sales from the entire Oldenburg concession. Total royalties, including sulfur royalties, under the Mobil Agreement for the fourth quarter of fiscal 2017 were increased by positive adjustments of \(46,974, as compared to negative adjustments totaling \)282,080 for the fourth quarter of fiscal 2016. Total royalties under the OEG Agreement for the fourth quarter of fiscal 2017 were increased by a combination of negative and positive adjustments totaling \(177,678, as compared to negative adjustments totaling \)147,857 for the fourth quarter of fiscal 2016. Net income in the fourth quarter of 2017 was higher than the fourth quarter of 2016 due to the impact of these adjustments as well as higher gas prices and higher average exchange rates. The relevant details for the fourth quarters of fiscal 2017 and 2016 for gas sales under the Mobil and OEG Agreements are shown in the table below.

<table><tr><td rowspan="2"></td><td colspan="3">Factors Determining Gas Royalties Payable</td></tr><tr><td>3rd Calendar Quarter Ended 9/30/2017</td><td>3rd Calendar Quarter Ended 9/30/2016</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>5.643</td><td>6.688</td><td>- 15.63%</td></tr><tr><td>Gas Prices \( ^{2} \)  (Ecents/Kwh \( ^{3} \) )</td><td>1.6197</td><td>1.3753</td><td>+17.77%</td></tr><tr><td>Average Exchange Rate \( ^{4} \)</td><td>1.1806</td><td>1.1047</td><td>+ 6.87%</td></tr><tr><td>Gas Royalties</td><td>1,228,092</td><td>1,166,681</td><td>+ 5.26%</td></tr><tr><td>OEG Agreement:</td><td></td><td></td><td></td></tr><tr><td>Gas Sales (Bcf)</td><td>17.770</td><td>18.752</td><td>- 5.24%</td></tr><tr><td>Gas Prices (Ecents/Kwh)</td><td>1.6517</td><td>1.4025</td><td>+17.77%</td></tr><tr><td>Average Exchange Rate</td><td>1.1788</td><td>1.1068</td><td>+ 6.51%</td></tr><tr><td>Gas Royalties</td><td>500,886</td><td>406,887</td><td>+23.10%</td></tr></table>

<table><tr><td>1 Billion cubic feet</td><td>2 Gas prices derived from May-July period</td></tr><tr><td>3 Euro cents per Kilowatt hour</td><td>4 Based on average Euro/dollar exchange rates of cumulative royalty transfers</td></tr></table>

## FISCAL 2017 REPORT

For fiscal 2017, the Trust's gross royalty income increased 11.51% to \(7,762,225 from \)6,960,961 in fiscal 2016 reflecting the moderate strengthening of the world energy markets. The increase in royalty income is primarily the result of positive adjustments in 2017 and negative adjustments in 2016. As in prior years, the Trust receives information concerning adjustments

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from the operating companies based on their final calculations of royalties payable during the previous periods as well as other required adjustments. During fiscal 2017, the adjustments based on royalties payable for 2016 increased royalty income by \(411,884. During fiscal 2016, the combination of positive and negative adjustments, including the year-end adjustments, reduced royalty income by \)381,886. A similar situation occurred with respect to royalties paid under the Mobil Sulfur Agreement. In fiscal 2017, Mobil sulfur royalties totaled \(43,932. In fiscal 2016 however, royalties under the Mobil Sulfur Agreement resulted in a net negative adjustment of \)51,576 due to EMPG's incorrect inclusion in prior years of eastern sulfur sales in the royalty calculation. Further details relating to the changes in gas sales, gas prices and average exchange rates for fiscal 2017 and 2016 are presented on pages 13 through 15.

The increase in the amount of royalty income resulted in the higher distributions. The total distribution for fiscal 2017 was \(0.76 per unit compared to \)0.67 per unit for fiscal 2016.

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 has indicated that it plans to resume drilling in 2018, after having previously suspended all drilling activities for 2015 through 2017 due to the continuing difficulties caused by low energy prices worldwide and the uncertainties posed by ongoing changes in German regulations. If EMPG follows through with the drilling activities contained in its drilling schedule, 2018 will be a busy year including one workover and four horizontal deviations off existing wells. All the 2018 planned wells, Doetlingen Z-3A, as well as the multilateral wells, Brettorf Z-2b, Goldenstedt Z-12a M1, Goldenstedt Z-25a M1, are located in eastern Oldenburg and are intended to further develop the Zechstein zone through infill drilling. Multilateral wells take advantage of a single master well to draw from multiple sidetracks. The primary advantage is the cost saving in using a single borehole for more than one sidetrack. The 2018 workover is being attempted 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. Due to costs it is believed this work-over will be limited to an attempt to repair the original casing. We have no start dates nor estimated completion times for any of these wells or the workover.

The first well listed for 2019 is Hemmelte NW T-1 and is planned to develop a new area of the sweet gas Bunter zone in western Oldenburg. This well was initially planned as a dual purpose well tapping both the Bunter and the deeper Zechstein zones but, due to technical difficulties, was scaled back. An additional well to be sighted near the Hemmelte NW well and intended to access the Zechstein zone at a later date was

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## NORTH EUROPEAN OIL ROYALTY TRUST

initially mentioned but no further information has been forthcoming. The second well listed for 2019, Ahlhorn Z-3, is a sour gas well. The well will attempt to reactivate the Ahlhorn field which had been abandoned in 1997.

The only new well listed for 2020 is Jeddeloh Z-1. Jeddeloh Z-1 is the first well being drilled in the Oldenburg concession with Vermilion as the lead developer. The well is an exploration well tentatively located in the western portion of the area designated as Oldenburg-Land, the southernmost area of the three areas within the concession subject to Vermilion's Farm-In Agreement. Vermilion's well is intended to develop the Rotliegend (Red Sandstone) formation, a previously undeveloped productive zone within the concession. Oldenburg-Land is a relatively undeveloped area of the concession compared to the southern area of Müensterland-Cloppenburg-Vechta where the majority of the wells operated by EMPG are located. Our understanding of the terms of the original Farm-In Agreement would seem to indicate that there will have to be some further negotiations between Vermilion and EMPG to extend the original time frame. The Trust's consultant in Germany will continue to monitor this situation.

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 2017. The 2017 cost depletion percentage of 11.6635% and related tax information is contained in the removable "2017 Tax Letter" on Pages 36 through 39 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, 2017. (The complete text of the report is available in the Trust's 2017 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 5 and 6. The report indicates that net Trust gas reserves decreased 18.65% to 9.936 Bcf from 12.214 Bcf on net sales for 2017 of 1.330 Bcf and a negative reserve adjustment of 0.948 Bcf. As shown in the chart on page 6, the absence of drilling by the operating companies failed to replace current gas sales with additions to proved producing reserves.

Respectfully submitted,

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John R. Van Kirk
Managing Director

December 28, 2017