North European Oil Royalty Trust Annual Report 2010

FY2010 Annual Report · North European Oil Royalty Trust

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Annual Report 2010

North
European
Oil
Royalty
Trust

ATTENTION:
PLEASE RETAIN
CRITICAL TAX INFORMATION ENCLOSED

The Annual Meeting of Unit Owners will be held on Tuesday, February 15, 2011,
at 10:30 A.M., in Rooms 3 and 4, Ninth Floor, at the University Club,
1 West 54th Street, New York City (northwest corner of 5th Avenue; entrance on 54th Street).
All unit owners are cordially invited to attend.

If you plan to attend the meeting, please note that The University Club has a dress code.
Gentlemen are required to wear a jacket and ladies are required to wear business attire.
The University Club does not make exceptions.

Table of Contents

Report to Unit Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4
Ten Year History of Net Gas Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Net Proved Producing Gas Reserves (Est .) and
Volume of Net Gas Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Description of Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-9
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . 9-17
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-18
Distributions and Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-19
Comparison of Five Year Returns . . . . . . . . . . . . . . . . . . . . . . . . . 19-20
Report of Independent Registered Public Accounting Firm . . . . . . . . . 21
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-25
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-28
Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . 29-30
2010 Tax Letter (Removable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-32
Dollar Royalties Western and Eastern Oldenburg . . . . . . . . . . . . . . . . 33

IMPORTANT TAX INFORMATION

For your convenience, the information necessary to prepare
your 2010 tax return is included in the removable
“2010 tax letter” on Pages 31 and 32.
Please note that there will be no separate mailing of the tax letter.

NORTH EUROPEAN OIL ROYALTY TRUST

Report to Unit Owners:

FOURTH QUARTER 2010

Net income for the Trust for the fourth quarter of fiscal 2010 was $5,168,831, an increase

of 48.26% from net income of $3,486,314 for the fourth quarter of fiscal 2009. Significantly higher
gas prices offset both lower gas sales and lower average exchange rates under the two royalty
agreements . At least a portion of the decline in gas sales can be accounted for by the 18 day
shutdown of the Grossenkneten desulfurization plant in August . There was no corresponding
shutdown in the fourth quarter of fiscal 2009. The relevant details for the final quarter of fiscal 2010 for
gas sales under the higher royalty rate covering western Oldenburg (the “Mobil Agreement”) and gas
sales under the lower royalty rate agreement covering the entire Oldenburg concession (the “OEG
Agreement”) are shown in the table below .

Fourth Fiscal Qtr.
Ended 10/31/10

Fourth Fiscal Qtr.
Ended 10/31/09

Percentage
Change

Mobil Agreement:

Gas Sales (Bcf1)
Gas Prices (Ecents/Kwh2)
Gas Prices ($/Mcf3)
Average Exchange Rate4

OEG Agreement:

Gas Sales (Bcf)
Gas Prices (Ecents/Kwh)
Gas Prices ($/Mcf)
Average Exchange Rate

8 .599
2 .2021
$ 8.36
$1.3262

23 .094
2 .3395
$ 8.66
$1.3305

11 .938
1 .4274
$ 6.01
$1.4620

30 .805
1 .6487
$ 6.72
$1.4544

- 27 .97%
+ 54 .27%
+ 39 .10%
- 9 .29%

- 25 .03%
+ 41 .90%
+ 28 .87%
- 8 .52%

1Billion cubic feet
2Euro cents per Kilowatt hour

3Dollars per thousand cubic feet
4Based on average exchange rates of royalty transfers

FISCAL 2010 REPORT

For fiscal 2010, the Trust’s gross royalty income decreased 31.61% to $19,645,331 from
$28,724,078 in fiscal 2009. The decrease in royalty income is due to declines in gas prices, gas
sales and average exchange rates. Average gas prices, with the exception of the final quarter,
were lower than the prior year’s. However, from a low point in the fourth quarter of fiscal 2009, gas
prices have increased steadily in a quarter over quarter basis . The total distribution for fiscal 2010
was $2.04 per unit compared to $3.01 per unit for fiscal 2009. As in prior years, the Trust receives
adjustments from the operating companies based on their final calculations of royalties payable
during the previous calendar year. As an adjustment for the prior calendar year, the Trust received
the equivalent of $0.0473 and $0.1090 per unit during fiscal 2010 and 2009, respectively. In addition,
the Trust’s German accountants discovered calculation errors by the operating companies related

NORTH EUROPEAN OIL ROYALTY TRUST

to discrepancies in the determination of average gas prices for the 2005-2006 period . Following the
required recalculation, the Trust received the equivalent of $0.1013 per unit as an adjustment during
fiscal 2009 .

The Trust’s German consultant meets periodically with representatives of the operating

companies to inquire about their planned and proposed drilling and geophysical work and other
general matters . The following is a summary of his account of the operating companies’ responses
to his inquiries. The Trust is not able to confirm the accuracy of any of these responses. 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. The following
four paragraphs represent a summary of the Trust’s German consultant’s conversation with
representatives of EMPG .

Goldenstedt Z-10a, which is the fourth well to explore the “tight” gas Carboniferous zone
in eastern Oldenburg, began production in February 2010 with higher than expected results and
consistent production levels since entering production. Goldenstedt Z-23, which is the fifth well
exploring the Carboniferous zone in eastern Oldenburg, received planned individual hydraulic
fracturing (“frac”) treatments in July 2010 and entered production in the fall of 2010 as a success .
Cappeln Z-3a, which is the sixth well exploring the Carboniferous zone (but in western Oldenburg
not eastern Oldenburg) completed drilling in October 2010 . Individual hydraulic frac treatments will
take place in the near future. In April 2010, Goldenstedt Z-16a became the second well in western
Oldenburg to enter production . This well served to further develop the sour gas Zechstein zone . In
addition, two Zechstein wells, Hengstlage-N Z-8 and Z-5a, were re-drilled following casing collapses
and re-entered production in February and April 2010, respectively.

The operating companies have scheduled six wells for the 2011-2012 period . Two wells

exploring the Carboniferous zone will bring the total Carboniferous wells to eight. Oythe Z-4,
the seventh Carboniferous well, will begin drilling in early 2011. As a result of technological and
geological analysis of the previous Carboniferous well, the operators have concluded that slanted
or even vertically drilled wells will have more successful results in the Carboniferous zone than
horizontally drilled wells. Oythe Z-4 will be followed in 2012 by Goldenstedt Z-24, the eighth
Carboniferous well .

Four additional wells, one in western Oldenburg, will further explore and develop the
Zechstein zone . Goldenstedt Z-21 is scheduled to start drilling in 2011 . This well will be followed in
2012 by Goldenstedt Z-25 and two horizontal deviations from existing wells Quaadmoor Z-4 and
western well Kneheim Z-5 .

We had previously mentioned other wells that were under discussion but with no firm start

dates. These wells have been put off to a possible start time beyond 2012. In this group, there are
two western wells, Hemmelte NW T-1, sweet gas Bunter zone and Visbek Z-16a, Zechstein, as well
as three eastern Zechstein wells, Rechterfeld Z-5, Sagermeer Z-9a and Brinkholz Z-5. All these wells
present various difficulties, and it is by no means certain they will be drilled.

NORTH EUROPEAN OIL ROYALTY TRUST

Based on the limited information available, Ralph E. Davis Associates, Inc., the Trust’s

petroleum consultant (“Davis Associates”), has prepared and submitted their report on the cost
depletion percentage applicable to Trust unit owners for calendar 2010 . The 2010 cost depletion
percentage of 8 .1743% and related tax information is contained in the removable “2010 Tax Letter”
on Pages 31 and 32 of this report . The calculation of the cost depletion percentage is based on
Davis Associates’ estimate of remaining net proved producing reserves as of October 1, 2010. (The
complete text of the report is available in the Trust’s 2010 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 10 .31% to 26 .962 Bcf from 30 .062 Bcf on net sales for 2009 of 2 .423 Bcf and a negative
reserve adjustment of .677 Bcf. As shown in the chart on page 5, the efforts by the operating
companies have not been successful in replacing current gas sales with additions to proved
producing reserves . Both gas sales and gas reserves have continued to decline since 2006 . To what
extent, if any, additional drilling will result in additions to reserves that will compensate for future gas
sales is unknown .

December 30, 2010

Respectfully submitted,

John R. Van Kirk
Managing Director

TEN YEAR HISTORY OF NET GAS SALES

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Reflecting Effective Royalty Rates and
Gas Sales through September

EASTERN OLDENBURG

WESTERN OLDENBURG

T
E
E
F
C
I
B
U
C
N
O

I
L
L
I
B

NET PROVED PRODUCING GAS RESERVES (EST.)
AND VOLUME OF NET GAS SALES

T
E
E
F
C
I
B
U
C
N
O
I
L
L
I
B

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

As of October 1st

NET PROVED PRODUCING RESERVES (EST.)

ANNUAL NET SALES

NORTH EUROPEAN OIL ROYALTY TRUST

North European Oil Royalty Trust
Selected Financial Data (Cash Basis)
For Fiscal Years Ended October 31

2010

2009

2008

2007

2006

German gas, sulfur and oil royalties received

$19,645,331

$28,724,078

$34,645,159

$27,484,254

$31,079,122

Interest Income

Trust Expenses

Net income

7,359

11,471

95,802

207,932

164,021

(932,425)

(1,036,321)

(1,075,823)

(952,517)

(984,199)

$18,720,265

$27,699,228

$33,665,138

$26,739,669

$30,258,944

Net income per unit

$ 2.04

$ 3.01

$ 3.66

$ 2.91

$ 3.29

Dividends and distributions
per unit paid to formerly
unlocated unit owners

Distributions per unit paid
or to be paid to unit owners

$ 0.00

$ 0.02

$ 2.04
$ 2.04

$ 3.01
$ 3.01

$ 3.66
$ 3.66

$ 2.91
$ 2.91

$ 3.28
$ 3.30

Units outstanding end of period

9,190,590

NORTH EUROPEAN OIL ROYALTY TRUST

Description of Trust Assets

The properties of the Trust, which the Trust and Trustees hold pursuant to the Trust Agreement
on behalf of the unit owners, are overriding royalty rights on sales of gas, sulfur and oil under certain
concessions or leases in the Federal Republic of Germany . The actual leases or concessions are
held either by Mobil Erdgas-Erdol GmbH (“Mobil Erdgas”), a German operating subsidiary of Exxon
Mobil, or by Oldenburgische Erdolgesellschaft (“OEG”). As a result of direct and indirect ownership,
Exxon Mobil owns two-thirds of OEG and the Royal Dutch/Shell Group owns one-third of OEG .
The Oldenburg concession (1,398,000 acres), covering virtually the entire former Grand Duchy of
Oldenburg and located in the federal state of Lower Saxony, provides nearly 100% of the royalties
received by the Trust. BEB Erdgas und Erdol GmbH (“BEB”), a joint venture in which Exxon Mobil
and the Royal Dutch/Shell Group each own 50%, administers the concession held by OEG. In 2002,
Mobil Erdgas and BEB formed Exxon Mobil Production Deutschland GmbH (“EMPG”) to carry out
all exploration, drilling and production activities. All sales activities are still handled by either Mobil
Erdgas or BEB .

Under the Mobil Agreement covering the western part of the Oldenburg concession
(approximately 662,000 acres), the Trust receives a royalty payment of 4% on gross receipts from
sales by Mobil Erdgas of gas well gas, oil well gas, crude oil and condensate. Under the Mobil
Agreement there is no deduction of costs prior to the calculation of royalties from gas well gas and
oil well gas, which together account for approximately 99% of all the royalties under said agreement.
Historically, the Trust has received significantly greater royalty payments under the Mobil Agreement
(as compared to the OEG Agreement described below) due to the higher royalty rate specified by
that agreement .

The Trust is also entitled under the Mobil Agreement to receive a 2% royalty on gross receipts
of sales of sulfur obtained as a by-product of sour gas produced from the western part of Oldenburg .
The payment of the sulfur royalty is conditioned upon sales of sulfur by Mobil Erdgas at a selling
price above an agreed upon base price . This base price is adjusted annually by an inflation index .
When the average selling price falls below the indexed base price, no royalties are payable. Up until
the second quarter of fiscal 2008, the Trust had not received any royalties from sulfur sales under
the Mobil Agreement for over 10 years because the selling price was below the indexed base price .
The average selling price for sulfur exceeded the indexed base price, and the Trust received sulfur
royalties under the Mobil Agreement, during the second, third and fourth quarters of fiscal 2008,
the first quarter of fiscal 2009 and the third quarter of fiscal 2010 . Sulfur royalties under the Mobil
Agreement totaled $974,691, $244,874 and $78,870 during fiscal 2008, 2009 and 2010, respectively.

Under the OEG Agreement covering the entire Oldenburg concession and pursuant to the
agreement with OEG, the Trust receives royalties at the rate of 0.6667% on gross receipts from
sales by BEB of gas well gas, oil well gas, crude oil, condensate and sulfur (removed during the
processing of sour gas) less a certain allowed deduction of costs. Under the OEG Agreement, 50%
of the field handling, treatment and transportation costs as reported for state royalty purposes is
deducted from the gross sales receipts prior to the calculation of the royalty to be paid to the Trust .
In 2008, NV Nederlandse Gasunie (the state owned Dutch gas distribution company) completed the
purchase of BEB’s North German gas distribution and transmission network . As part of its normal

NORTH EUROPEAN OIL ROYALTY TRUST

biennial examination of the operating companies, the Trust’s German accountants, on behalf of
the Trust, completed their examination of the royalty payments for 2007-08. While the pipeline sale
occurred in the latter half of 2008, the accountants confirmed that transportation costs continued
in accordance with the authorized indexed flat rate throughout this period and that the method of
royalty calculation has not been affected. The Trust will continue to monitor the situation but, to date,
the Trust has not received any indications that this pipeline sale would affect the method of royalty
calculations .

In addition to the Oldenburg area, the Trust also holds overriding royalties at various rates
on a number of leases of various sizes in other areas of northwest Germany. At the present time,
all but one of these leases are in the non-producing category . Due to the low level of income and
the intermittent gas production from the single producing lease, Grosses Meer, reserves from this
lease are not included in reserve calculations for this report year. In 2008, the German authorities
requested that the operating companies conduct a reservoir analysis of the Grosses Meer leasehold
area to determine whether the royalties were being properly allocated based on the locations of the
gas reserves. Until this analysis was completed and a final accounting could be made, the payment
of royalties to the Trust was suspended . The final accounting of royalties was completed in the third
quarter of 2010 . The period of adjustment covered the years 2005 through 2009 and the first quarter
of calendar 2010. Royalties payable to the Trust for this period totaled $61,548, which the Trust
received in its third fiscal quarter . With a further negative adjustment covering calendar 2009 and low
production during the remainder of the year, royalty income from Grosses Meer for the remainder of
fiscal 2010 was minimal .

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary

The Trust is a passive fixed investment trust which holds overriding royalty rights, receives

income under those rights from certain operating companies, pays its expenses and distributes
the remaining net funds to its unit owners. As mandated by the Trust Agreement, distributions of
income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute
substantially all of the funds on hand after provision is made for Trust expenses then anticipated .

The Trust does not engage in any business or extractive operations of any kind in the areas

over which it holds royalty rights and is precluded from engaging in such activities by the Trust
Agreement. There are no requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty revenues by the Trust .

The properties of the Trust are described above in “Description of Trust Assets .” Of particular
importance with respect to royalty income are the two royalty agreements, the Mobil Agreement and
the OEG Agreement . The Mobil Agreement covers gas sales from the western part of the Oldenburg
concession. Under the Mobil Agreement, the Trust has traditionally received the majority of its royalty
income due to the higher royalty rate of 4% . The OEG Agreement covers gas sales from the entire
Oldenburg concession but the royalty rate of 0 .6667% is significantly lower and gas royalties have
been correspondingly lower .

NORTH EUROPEAN OIL ROYALTY TRUST

The operating companies pay monthly royalties to the Trust based on their sales of natural

gas, sulfur and oil. Of these three products, natural gas provides approximately 97% of the total
royalties . The amount of royalties paid to the Trust is primarily based on four factors: the amount of
gas sold, the price of that gas, the area from which the gas is sold and the exchange rate.

At approximately the 25th of the months of January, April, July and October, the operating
companies calculate the amount of gas sold during the previous calendar quarter and determine
the amount of royalties that were payable to the Trust based on those sales . This amount forms the
basis for royalty payments for the Trust’s upcoming fiscal quarter and for any adjustment for the prior
calendar quarter. For example, on January 25th the operating companies calculate gas sales and
attributable royalties payable for the months of October through December . This amount is divided
into thirds and forms the monthly royalty payments (payable on the 15th of each month) to the Trust
for its fiscal quarter running from February through April. Continuing in this example, at the same
time that the operating companies determine the actual amount of royalties that were payable for
months of October through December, they look at the actual amount of royalties that were paid
to the Trust during that same period and calculate the difference between what was paid and what
was payable . Additional amounts payable by the operating companies would be paid immediately
in January and any overpayment would be deducted from the February payment . The operating
companies continue their calculations through the calendar year. In September of each year, the
operating companies make the final determination of any necessary royalty adjustments for the prior
calendar year .

There are two types of natural gas found within the Oldenburg concession, sweet gas and

sour gas . Sweet gas has little or no contaminants and needs no treatment before it can be sold . In
recent years sweet gas has assumed the role of swing producer . During periods of high demand
the production of sweet gas is increased as necessary . During the summer months sweet gas
production is reduced due to a general decline in demand. On the other hand, sour gas must be
processed at either the Grossenkneten or the Norddeutsche Erdgas-Aufbereitungs GmbH (“NEAG”)
desulfurization plants before it can be sold . The desulfurization process removes hydrogen sulfide
and other contaminants . The hydrogen sulfide in gaseous form is converted to sulfur in a solid form
and sold separately. For efficiency purposes, the desulfurization plants are operated at capacity on
a continual basis . Any excess production from the plants is stored in underground storage for higher
demand periods. As needed, the operators conduct maintenance on the plants, generally during the
summer months when demand is lower .

Under the Mobil and OEG Agreements, the gas is sold to various distributors under long
term contracts which delineate, among other provisions, the timing, manner, volume and price of the
gas sold . The pricing mechanisms contained in these contracts include a delay factor of three to six
months and use the price of light heating oil in Germany as one of the primary pricing components .
Since Germany must import a large percentage of its energy requirements, the U.S. dollar price of
oil on the international market has a significant impact on the price of light heating oil and a delayed
impact on the price of gas . The Trust itself does not have access to the specific sales contracts
under which gas from the Oldenburg concession is sold . Working under a confidentiality agreement
with the operating companies, the Trust’s German accountant reviews these contracts periodically
on behalf of the Trust to verify the correctness of application of the Agreement formulas for the

NORTH EUROPEAN OIL ROYALTY TRUST

computation of royalty payments . The last such completed examination covering the calendar years
2005-2006 resulted in an adjustment payment that is detailed in the first paragraph of the Results:
Fiscal 2009 versus Fiscal 2008, which follows. As part of the resolution of these matters, the Trust
also agreed to some minor administrative changes to the timing of interim royalty payments made
during each quarter and the annual reconciliation computation . None of these changes are expected
to have a material effect on payments made to the Trust . The Trust’s accountants in Germany have
concluded their examination of the operating companies for the 2007-2008 period . The examination
brought to light certain minor accounting discrepancies and, in addition, raised certain legal issues
with respect to the interpretation of the royalty contracts . The Trust and the operating companies
are in discussions in an effort to resolve these legal issues . The Trust does not anticipate that any
resolution achieved with regard to these legal matters will be material .

For unit owners, changes in the dollar value of the Euro have both an immediate and
long-term impact . The immediate impact is from the exchange rate that is applied at the time the
royalties, paid to the Trust in Euros, are converted into U.S. dollars at the time of their transfer from
Germany to the United States. In relation to the dollar, a stronger Euro would yield more dollars
and a weaker Euro would yield less dollars . The long-term impact relates to the mechanism of gas
pricing contained in the gas sales contracts negotiated by the operating companies . These gas
sales contracts often use the price of German light heating oil as one of the primary pricing factors
by which the price of gas is determined. The price of German light heating oil, which is a refined
product, is largely determined by the price of the imported crude oil from which it was refined. Oil
on the international market is priced in dollars. However, when oil is imported into Germany it is
purchased in Euros, and at this point the dollar value of the Euro becomes relevant. A weaker Euro
would buy less oil making that oil and the subsequently refined light heating oil more expensive . A
stronger Euro would buy more oil making that oil and the subsequently refined light heating oil less
expensive . Since changes in the price of German light heating oil are subsequently reflected in the
price of gas through the gas sales contracts, the dollar/Euro relationship can make the prices of gas
higher or lower . The changes in gas prices that result from changes in the prices of German light
heating oil are only reflected after a built-in delay of three to six months as specified in the individual
gas sales contracts .

Seasonal demand factors affect the income from the Trust’s royalty rights insofar as they relate

to energy demands and increases or decreases in prices, but on average they are generally not
material to the annual income received under the Trust’s royalty rights .

The Trust has no means of ensuring continued income from overriding royalty rights at their

present level or otherwise . The Trust’s current consultant in Germany provides general information to
the Trust on the German and European economies and energy markets . This information provides
a context in which to evaluate the actions of the operating companies. In his position as consultant,
he receives reports from the operating companies with respect to current and planned drilling and
exploration efforts. However, the unified exploration and production venture, EMPG, which provides
the reports to the Trust’s consultant, continues to limit the information flow to that which is required
by German law .

NORTH EUROPEAN OIL ROYALTY TRUST

The low level of administrative expenses of the Trust limits the effect of inflation on costs .

Sustained price inflation would be reflected in sales prices, which with sales volumes form the basis
on which the royalties paid to the Trust are computed . The impact of inflation or deflation on energy
prices in Germany is delayed by the use in certain long-term gas sales contracts of a delay factor of
three to six months prior to the application of any changes in light heating oil prices to gas prices .

Results: Fiscal 2010 versus Fiscal 2009

For fiscal 2010, the Trust’s gross royalty income decreased 31.61% to $19,645,331 from
$28,724,078 in fiscal 2009. The decrease in royalty income is due to declines in gas prices, gas
sales and average exchange rates . The decrease in the amount of royalty income resulted in the
lower distributions. The total distribution for fiscal 2010 was $2.04 per unit compared to $3.01 per unit
for fiscal 2009. As in prior years, the Trust receives adjustments from the operating companies based
on their final calculations of royalties payable during the previous calendar year . As an adjustment
for the prior calendar year, the Trust received the equivalent of $0.0473 and $0.1090 per unit
during fiscal 2010 and 2009, respectively. In addition, the Trust’s German accountants discovered
calculation errors by the operating companies related to discrepancies in the determination of
average gas prices for the 2005-2006 period. Following the required recalculation, the Trust received
the equivalent of $0.1013 per unit as an adjustment during fiscal 2009.

Under the Mobil Agreement, gas sales declined 14.19% to 43.561 Billion cubic feet (“Bcf”)

in fiscal 2010 from 50 .766 Bcf in fiscal 2009 . It is possible that worldwide and European economic
factors may have contributed to this decline. However, it is impossible to determine to what extent, if
any, these factors may have impacted gas sales beyond the natural decline in gas production due to
the normal reduction in well pressure experienced over time .

Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet

Fiscal Quarter

2010 Gas Sales

2009 Gas Sales

Percentage Change

First
Second

Third
Fourth

Fiscal Year Total

11 .861
11 .331
11 .770
8 .599

43 .561

13 .699
12 .839

12 .290
11 .938

50 .766

-13 .42%
-11 .75%

- 4 .23%
-27 .97%

-14 .19%

Average prices for gas sold under the Mobil Agreement decreased 18 .07% to 1 .9099
Eurocents per Kilowatt hour (“Ecents/Kwh”) in fiscal 2010 from 2 .3310 Ecents/Kwh in fiscal 2009 .
In comparison to the prior fiscal year, gas prices showed a decline over the prior year in the first
and second quarters of fiscal 2010 as well as in average for the year. However, from a low point
experienced in the fourth quarter of fiscal 2009, gas prices have steadily improved throughout fiscal
2010 on a quarter over quarter basis since that low point .

NORTH EUROPEAN OIL ROYALTY TRUST

Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt hour

Fiscal Quarter

2010 Gas Prices

2009 Gas Prices

Percentage Change

First
Second

Third
Fourth

Fiscal Year Avg .

1 .6491
1 .9035

1 .9666
2 .2021
1 .9099

3 .1861
2 .7105
1 .8579
1 .4274

2 .3310

-48 .24%
-29 .77%

+ 5 .85%
+54 .27%

-18 .07%

Converting gas prices into more familiar terms, using the average exchange rate, yielded a

price of $7.37 per thousand cubic feet (“Mcf”), a 19.37% decrease over fiscal 2009’s average price of
$9.14/Mcf. For fiscal 2010, royalties paid under the Mobil Agreement were transferred at an average
Euro/dollar exchange rate of $1.3421, a decrease of 1.28% from the average Euro/dollar exchange
rate of $1.3595 for fiscal 2009.

Average Euro Exchange Rate under the Mobil Agreement

Fiscal Quarter

First
Second

Third
Fourth

Fiscal Year Avg .

2010 Average
Euro Exchange Rate
1 .4499
1 .3586
1 .2522
1 .3262
1 .3421

2009 Average
Euro Exchange Rate
1 .3388
1 .3151
1 .4061
1 .4620
1 .3595

Percentage Change

+ 8 .30%
+ 3 .31%

-10 .95%
- 9 .29%

- 1 .28%

Excluding the effects of differences in prices and average exchange rates, the combination of

royalty rates on gas sold from western Oldenburg results in an effective royalty rate approximately
seven times higher than the royalty rate on gas sold from eastern Oldenburg . This is of particular
significance to the Trust since gas sold from western Oldenburg provides the bulk of royalties paid
to the Trust. For fiscal 2010, gas sales from western Oldenburg accounted for only 38.24% of all gas
sales. However, western Oldenburg gas royalties provided approximately 82.54% or $15,703,321 out
of a total of $19,023,814 in overall Oldenburg gas royalties.

Under the OEG Agreement, gas sales decreased 11.53% to 113.924 Bcf in fiscal 2010 from
128 .776 Bcf in fiscal 2009 . It is possible that worldwide and European economic factors may have
contributed to this decline. However, as noted above, it is impossible to determine to what extent, if
any, these factors may have impacted gas sales beyond the natural decline in gas production due to
the normal reduction in well pressure experienced over time .

NORTH EUROPEAN OIL ROYALTY TRUST

Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet

Fiscal Quarter

2010 Gas Sales

First
Second

Third
Fourth

Fiscal Year Total

30 .616
30 .083
30 .131
23 .094
113 .924

2009 Gas Sales
34 .350
32 .416
31 .205
30 .805

128 .776

Percentage Change

-10 .87%
- 7 .20%

- 3 .44%
-25 .03%

-11 .53%

Average gas prices for gas sold under the OEG Agreement decreased 20 .44% to 2 .0996

Ecents/Kwh in fiscal 2010 from 2 .6389 Ecents/Kwh in fiscal 2009 . In comparison to the prior fiscal
year, gas prices showed a decline over the prior year in the first through third quarters of fiscal 2010
as well as in the average for the year. However, from a low point experienced in the fourth quarter of
fiscal 2009, gas prices have steadily improved throughout fiscal 2010 on a quarter over quarter basis
since that low point .

Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt hour

Fiscal Quarter

2010 Gas Prices

First
Second

Third
Fourth

Fiscal Year Avg .

1 .9151
2 .0857

2 .1186
2 .3395

2 .0996

2009 Gas Prices
3 .4411
3 .1818

2 .1681
1 .6487
2 .6389

Percentage Change

-44 .35%
-34 .45%

- 2 .28%
+41 .90%

-20 .44%

Converting gas prices into more familiar terms, using the average exchange rate, yielded a

price of $7.88/Mcf, a 21.36% decrease over fiscal 2009’s average price of $10.02/Mcf. For fiscal
2010, royalties paid under the OEG Agreement were transferred at an average Euro/dollar exchange
rate of $1.3479, an increase of 0.26% from the average Euro/dollar exchange rate of $1.3444 for
fiscal 2009 .

Average Euro Exchange Rate under the OEG Agreement

Fiscal Quarter

2010 Average
Euro Exchange Rate

First
Second

Third
Fourth

Fiscal Year Avg .

1 .4405
1 .3403

1 .2596
1 .3305

1 .3479

2009 Average
Euro Exchange Rate
1 .3382
1 .2987
1 .3946
1 .4544
1 .3444

Percentage Change

+ 7 .64%
+ 3 .20%

- 9 .68%
- 8 .52%

+ 0 .26%

NORTH EUROPEAN OIL ROYALTY TRUST

Reflecting both the reduction in funds available for short term investment and the significantly

lower interest rates in effect, interest income for fiscal 2010 decreased to $7,359 from $11,471 for
fiscal 2009. Trust expenses decreased 10.03% to $932,425 in fiscal 2010 from $1,036,321 in fiscal
2009, primarily due to reduced Trustees’ fees as specified according to the provisions of the Trust
Agreement .

Results: Fiscal 2009 versus Fiscal 2008

For fiscal 2009, the Trust’s gross royalty income decreased 17.09% to $28,724,078 from
$34,645,159 in fiscal 2008. The decrease in royalty income is due to declines in both gas prices
and gas sales, which were only partially offset by an increase in the average exchange rates. The
decrease in the amount of royalty income resulted in the lower distributions . The total distribution
for fiscal 2009 was $3.01 per unit compared to $3.66 per unit for fiscal 2008. As in prior years, the
Trust receives adjustments from the operating companies based on their final calculations of royalties
payable during the previous calendar year. As an adjustment for the prior calendar year, the Trust
received the equivalent of $0.1090 and $0.0862 per unit during fiscal 2009 and 2008, respectively. In
addition, the Trust’s German accountants discovered calculation errors by the operating companies
related to discrepancies in the determination of average gas prices for the 2005-2006 period .
Following the required recalculation, the Trust received the equivalent of $0.1013 per unit as an
adjustment during fiscal 2009 .

Under the Mobil Agreement, gas sales decreased 6.19% to 50.766 Bcf in fiscal 2009 from
54 .114 Bcf in fiscal 2008 . The worldwide economic disruption may have contributed to the decline
in gas sales. However, it is impossible to determine to what extent this and other factors may have
impacted gas sales beyond the natural decline in gas production due to the normal reduction in well
pressure experienced over time .

Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet

Fiscal Quarter

First
Second
Third
Fourth

Fiscal Year Total

2009 Gas Sales
13 .699
12 .839
12 .290
11 .938
50 .766

2008 Gas Sales
14 .251
14 .004
12 .314
13 .545
54 .114

Percentage Change

- 3 .87%
- 8 .32%
- 0 .19%
-11 .86%

- 6 .19%

Average gas prices for gas sold under the Mobil Agreement decreased 2 .56% to 2 .3310
Ecents/Kwh in fiscal 2009 from 2 .3922 Ecents/Kwh in fiscal 2008 . For the first half of fiscal 2009 gas
prices increased significantly reflecting the impact of the very high oil prices experienced in the prior
year. The second half of fiscal 2009, however, reflected the impact of the substantial decline in oil
prices following the peak prices experienced in the summer of 2008 .

NORTH EUROPEAN OIL ROYALTY TRUST

Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt hour

Fiscal Quarter

2009 Gas Prices

2008 Gas Prices

Percentage Change

First
Second

Third
Fourth

Fiscal Year Avg .

3 .1861
2 .7105
1 .8579
1 .4274

2 .3310

2 .0876
2 .2876

2 .4704
2 .7510

2 .3922

+52 .62%
+18 .49%

-24 .79%
-48 .11%

- 2 .56%

Converting gas prices into more familiar terms, using the average exchange rate, yielded a

price of $9.14 per Mcf, a 10.74% decrease over fiscal 2008’s average price of $10.24/Mcf. For fiscal
2009, royalties paid under the Mobil Agreement were transferred at an average Euro/dollar exchange
rate of $1.3621, a decrease of 8.48% from the average Euro/dollar exchange rate of $1.4883 for
fiscal 2008 .

Excluding the effects of differences in prices and average exchange rates, the combination of

royalty rates on gas sold from western Oldenburg results in an effective royalty rate approximately
seven times higher than the royalty rate on gas sold from eastern Oldenburg . This is of particular
significance to the Trust since gas sold from western Oldenburg provides the bulk of royalties paid
to the Trust. For fiscal 2009, gas sales from western Oldenburg accounted for only 39.42% of all gas
sales. However, royalties on these gas sales provided approximately 82.52% or $23,048,569 out of a
total of $27,929,320 in Oldenburg royalties attributable to gas.

Under the OEG Agreement, gas sales decreased 2.89% to 128.776 Bcf in fiscal 2009 from

132 .611 Bcf in fiscal 2008 . A combination of reduced demand caused by the economic disruption as
well as the normal production decline may account for the decline in gas sales .

Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet

Fiscal Quarter

First
Second

Third
Fourth

2009 Gas Prices
34 .350
32 .416
31 .205
30 .805

Fiscal Year Total

128 .776

2008 Gas Prices

Percentage Change

34 .716
33 .680

31 .045
33 .170

132 .611

- 1 .05%
- 3 .75%

+ 0 .51%
- 7 .13%

- 2 .89%

Average gas prices for gas sold under the OEG Agreement increased 5 .28% to 2 .6389

Ecents/Kwh in fiscal 2009 from 2 .5066 Ecents/Kwh in fiscal 2008 . The impact of higher gas prices
during the first half of fiscal 2009 more than offset the decline in gas prices during the latter half and
resulted in the higher yearly average .

NORTH EUROPEAN OIL ROYALTY TRUST

Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt hour

Fiscal Quarter

2009 Gas Prices

2008 Gas Prices

Percentage Change

First
Second

Third
Fourth

Fiscal Year Avg .

3 .4411
3 .1818

2 .1681
1 .6487

2 .6389

2 .1921
2 .3809
2 .5699
2 .9060

2 .5066

+56 .98%
+33 .64%

-15 .63%
-43 .27%

+ 5 .28%

Converting gas prices into more familiar terms, using the average exchange rate, yielded a

price of $10.02/Mcf, a 3.56% decrease over fiscal 2008’s average price of $10.39/Mcf. For fiscal
2009, royalties paid under the OEG Agreement were transferred at an average Euro/dollar exchange
rate of $1.3534, a decrease of 8.32% from the average Euro/dollar exchange rate of $1.4762 for
fiscal 2008 .

Reflecting both the reduction in funds available for short term investment and the significantly

lower interest rates in effect, interest income for fiscal 2009 decreased by 88.03% to $11,471 for
fiscal 2009 from $95,802 for fiscal 2008. Trust expenses decreased 3.67% to $1,036,321 in fiscal
2009 from $1,075,823 in fiscal 2008 due to the earlier resolution of various legal matters raised in
the examination of the royalty payments during the 2005-06 calendar years and cost savings realized
through the elimination of the Trust’s quarterly mailings to unit owners .

Critical Accounting Policies

The financial statements, appearing subsequently in this Report, present financial statement

balances and financial results on a modified cash basis of accounting, which is a comprehensive
basis of accounting other than accounting principles generally accepted in the United States (“GAAP
basis”) . Cash basis accounting is an accepted accounting method for royalty trusts such as the Trust .
GAAP basis financial statements disclose income as earned and expenses as incurred, without
regard to receipts or payments . The use of GAAP would require the Trust to accrue for expected
royalty payments . This is exceedingly difficult since the Trust has very limited information on such
payments until they are received and cannot accurately project such amounts . The Trust’s cash
basis financial statements disclose revenue when cash is received and expenses when cash is
paid . The one modification of the cash basis of accounting is that the Trust accrues for distributions
to be paid to unit owners (those distributions approved by the Trustees for the Trust) . The Trust’s
distributable income represents royalty income received by the Trust during the period plus interest
income less any expenses incurred by the Trust, all on a cash basis. In the opinion of the Trustees,
the use of the modified cash basis provides a more meaningful presentation to unit owners of the
results of operations of the Trust and presents to the unit owners a more accurate calculation of
income and expenses for tax reporting purposes .

___________________________________________________________

NORTH EUROPEAN OIL ROYALTY TRUST

This Annual Report contains forward looking statements concerning business, financial
performance and financial condition of the Trust . Many of these statements are based on information
provided to the Trust by the operating companies or by consultants using public information sources .
These statements are subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in any forward looking statements . These include uncertainties
concerning levels of gas production and gas sale prices, general economic conditions and currency
exchange rates, as well as those factors set forth above under Item 1A of the Trust’s Annual Report
on Form 10-K for the fiscal year ended October 31, 2010 (the “Trust’s Form 10-K”). Actual results and
events may vary significantly from those discussed in the forward looking statements .

Distributions and Trading

The Trust’s units of beneficial interest are listed for trading on the New York Stock Exchange

under the symbol NRT. Under the Trust Agreement, the Trustees distribute to unit owners, on a
quarterly basis, the net royalty income after deducting expenses and reserving limited funds for
anticipated administrative expenses. As of November 30, 2010, there were 1,024 unit owners of
record .

The following table presents the high and low closing prices for the quarterly periods ended in

fiscal 2010 and 2009 as reported by the NYSE as well as the cash distributions paid to unit owners
by quarter for the past two fiscal years .

Quarter Ended

Closing Price

Fiscal Year 2010

Low

High

January 31, 2010

April 30, 2010

July 31, 2010

October 31, 2010

$30.45

$28.70

$26.08

$25.49

$33.00

$32.24

$29.97

$28.57

Fiscal Year 2009

Low

High

Quarter Ended

Closing Price

January 31, 2009

April 30, 2009

July 31, 2009

October 31, 2009

$20.00

$21.80

$27.70

$28.27

$33.60

$29.65

$36.70

$35.48

Distribution

per Unit

$0.50

$0.51

$0.47

$0.56

Distribution

per Unit

$1.06

$0.99

$0.58

$0.38

NORTH EUROPEAN OIL ROYALTY TRUST

The quarterly distributions to unit owners represent their undivided interest in royalty

payments from sales of gas, sulfur and oil during the previous quarter. Each unit owner is entitled to
recover a portion of his or her investment in these royalty rights through a cost depletion percentage .
The calculation of this cost depletion percentage is set forth in detail in Attachment B to the Cost
Depletion Report attached as Exhibit 99 .1 to the Trust’s Form 10-K .

The Cost Depletion Report has been prepared by Davis Associates using the limited
information described in Item 2 of the Trust’s Form 10-K to which reference is made . The Trustees
believe that the calculations and assumptions used in the Cost Depletion Report are reasonable
according to the facts and circumstances of available information . The cost depletion percentage
recommended by the Trust’s independent petroleum and natural gas consultants for calendar 2010 is
8 .1743% . Specific details relative to the Trust’s income and expenses and cost depletion percentage
as they apply to the calculation of taxable income for the 2010 calendar year are included on a
special removable page (31-32) in this report under “2010 Tax Letter.” Additionally, the tax reporting
information for 2010 is available on the Trust’s website, www .neort .com, in the section marked Tax
Letters contained within the Tax Information section .

The Trust does not maintain any compensation plans under which units are authorized for
issuance. The Trust did not make any repurchases of Trust units during fiscal 2010, 2009 or 2008
and has never made such repurchases .

Comparison of Five Year Returns

The graph set forth below compares, for the last five years, the cumulative return on Trust
Units, the securities in a peer group index, and the S&P 500 Composite Index. Because no published
peer group index exists and the Trust has been unable to locate any royalty trusts publicly traded in
the U.S. with reserves and sales in Europe, the Trustees have developed a peer group consisting of
the following three domestic oil royalty trusts: Mesa Royalty Trust, Sabine Royalty Trust and San Juan
Basin Royalty Trust (the “Royalty Peer Group”) . The composition of the Royalty Peer Group has been
the same since the Trust’s proxy statement for its 1993 Annual Meeting of Unit Owners .

While these three domestic oil royalty trusts appear to be the most comparable for comparison

purposes, there are a number of differences between North European Oil Royalty and the Royalty
Peer Group. As previously mentioned, the reserves and sales attributed to the royalty trusts
comprising the Royalty Peer Group are located in the United States, while the reserves and sales
attributed to North European Oil Royalty Trust are located in Germany . There are fundamental
differences between the energy markets in the United States and Germany that affect commodity
pricing and as a result severely restrict the usefulness of any comparison of their cumulative returns .

NORTH EUROPEAN OIL ROYALTY TRUST

In determining the cumulative return on investment, it has been assumed that on
October 31, 2005, an equal dollar amount was invested in the Trust Units, in the securities of the
trusts of the Royalty Peer Group, and in the S&P 500 Composite Index. The comparisons assume
in all cases the reinvestment of all dividends or distributions on the respective payment dates . The
cumulative returns shown for the Trust and the Royalty Peer Group do not reflect any differences
between the tax treatment of Trust distributions, due to permitted cost depletion, and dividends on
securities in the S&P 500 Composite Index.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among North European Oil Royalty Trust, the S&P 500 Index
and a Peer Group

$180

$160

$140

$120

$100

$80

$60

$40

$20

10/31/05

10/31/06

10/31/07

10/31/08

10/31/09

10/31/10

North European Oil Royalty Trust

S&P 500

Peer Group

*$100 invested on 10/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending October 31.

NORTH EUROPEAN OIL ROYALTY TRUST

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Trustees and Unit Owners of
North European Oil Royalty Trust

We have audited the accompanying statements of assets, liabilities and trust corpus of North

European Oil Royalty Trust (the “Trust”) as of October 31, 2010 and 2009, and the related statements
of revenue collected and expenses paid, undistributed earnings, and changes in cash and cash
equivalents for each of the years in the three-year period ended October 31, 2010. The Trust’s
management is responsible for these financial statements . Our responsibility is to express an opinion
on these financial statements based on our audits .

We conducted our audits in accordance with the standards of the Public Company

Accounting Oversight Board (United States) . 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 management, 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 1, these financial statements have been prepared on the modified

cash basis of accounting, which is a comprehensive basis of accounting other than U.S. 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 the Trust as of October 31, 2010 and 2009, its
revenue collected and expenses paid, its undistributed earnings, and changes in its cash and cash
equivalents for each of the years in the three-year period ended October 31, 2010, on the basis of
accounting described in Note 1 .

We also have audited, in accordance with the standards of the Public Company Accounting

Oversight Board (United States), the Trust’s internal control over financial reporting as of
October 31, 2010, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
December 29, 2010 expressed an unqualified opinion.

WeiserMazars LLP
New York, NY
December 29, 2010

2
2

NORTH EUROPEAN OIL ROYALTY TRUST

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
OCTOBER 31, 2010 AND 2009

CURRENT ASSETS:

Cash and cash equivalents

Producing gas and oil royalty rights,

net of amortization (Notes 1 and 2)

Total Assets

CURRENT LIABILITIES:

Distributions to be paid to unit owners,
paid November 2010 and 2009

TRUST CORPUS (Notes 1 and 2)
UNDISTRIBUTED EARNINGS

Total Liabilities and Trust Corpus

ASSETS

2010

2009

$ 5,211,965

$ 3,586,197

$ 5,211,966

$ 3,586,198

LIABILITIES AND TRUST CORPUS

2010

2009

$ 5,146,731

$ 3,492,424

65,234

93,773

$ 5,211,966

$ 3,586,198

The accompanying notes are
an integral part of these financial statements .

NORTH EUROPEAN OIL ROYALTY TRUST

STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2010, 2009 AND 2008

GERMAN GAS, SULFUR AND OIL

ROYALTIES RECEIVED

INTEREST INCOME

TRUST EXPENSES

NET INCOME

2010

2009

2008

$ 19,645,331

$ 28,724,078

$ 34,645,159

7,359

11,471

95,802

(932,425)

(1,036,321)

(1,075,823)

$ 18,720,265

$ 27,699,228

$ 33,665,138

NET INCOME PER UNIT

$ 2.04

$ 3.01

$ 3.66

DISTRIBUTIONS PER UNIT PAID OR TO BE PAID
TO UNIT OWNERS

$ 2.04

$ 3.01

$ 3.66

The accompanying notes are
an integral part of these financial statements .

2
3

2
4

NORTH EUROPEAN OIL ROYALTY TRUST

STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2010, 2009 AND 2008

2010

2009

2008

BALANCE, beginning of year

$ 93,773

$ 58,221

$ 30,642

NET INCOME

LESS:

18,720,265

18,814,038

27,699,228

27,757,449

33,665,138

33,695,780

Current year distributions paid

or to be paid to unit owners

18,748,804

27,663,676

33,637,559

BALANCE, end of year

$ 65,234

$ 93,773

$ 58,221

The accompanying notes are
an integral part of these financial statements .

NORTH EUROPEAN OIL ROYALTY TRUST

STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2010, 2009 AND 2008

SOURCES OF CASH AND CASH EQUIVALENTS:

2010

2009

2008

German gas, sulfur and oil

royalties received

Interest income

USES OF CASH AND CASH EQUIVALENTS:

Payment of Trust Expenses

Distributions paid

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS, during the year

CASH AND CASH EQUIVALENTS,

beginning of year

CASH AND CASH EQUIVALENTS,

end of year

$ 19,645,331 $ 28,724,078

$ 34,645,159

7,359

11,471

95,802

19,652,690

28,735,549

34,740,961

932,425

1,036,321

1,075,823

17,094,497

33,637,560

30,053,229

18,026,922

34,673,881

31,129,052

1,625,768

( 5,938,332)

3,611,909

3,586,197

9,524,529

5,912,620

$ 5,211,965

$ 3,586,197

$ 9,524,529

2
5

The accompanying notes are
an integral part of these financial statements .

NORTH EUROPEAN OIL ROYALTY TRUST

NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2010, 2009 AND 2008

(1) Summary of significant accounting policies:

Basis of accounting -

The accompanying financial statements of North European Oil Royalty Trust (the “Trust”) present

financial statement balances and financial results on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than accounting principles generally accepted in the United States
(“GAAP basis”). On a modified cash basis, revenue is earned when cash is received and expenses are
incurred when cash is paid . GAAP basis financial statements disclose revenue as earned and expenses as
incurred, without regard to receipts or payments. The modified cash basis of accounting is utilized to permit
the accrual for distributions to be paid to unit owners (those distributions approved by the Trustees for the
Trust) . The Trust’s distributable income represents royalty income received by the Trust during the period plus
interest income less any expenses incurred by the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the modified cash basis of accounting provides a more meaningful presentation to unit owners of the
results of operations of the Trust .

Producing gas and oil royalty rights -

The rights to certain gas and oil royalties in Germany were transferred to the Trust at their net book

value by North European Oil Company (the “Company”) (see Note 2) . The net book value of the royalty rights
has been reduced to one dollar ($1) in view of the fact that the remaining net book value of royalty rights is
de minimis relative to annual royalties received and distributed by the Trust and does not bear any meaningful
relationship to the fair value of such rights or the actual amount of proved producing reserves .

Federal income taxes -

The Trust, as a grantor trust, is exempt from federal income taxes under a private letter ruling issued

by the Internal Revenue Service .

Cash and cash equivalents -

Included in cash and cash equivalents are amounts deposited in bank accounts and amounts invested

in certificates of deposit and U . S . Treasury bills with original maturities of approximately three months or
less from the date of purchase . The investment options available to the Trust are limited in accordance with
specific provisions of the Trust Agreement. As of October 31, 2010, the uninsured amounts held in the Trust’s
U.S. bank accounts were approximately $4,850,000. In addition, approximately $6,993 was held in the Trust’s
German account at October 31, 2010.

Net income per unit -

Net income per unit is based upon the number of units outstanding at the end of the period . As of

October 31, 2010, 2009 and 2008, there were 9,190,590 units of beneficial interest outstanding.

NORTH EUROPEAN OIL ROYALTY TRUST

New accounting pronouncements –

In May 2009, the FASB issued authoritative guidance relating to subsequent events, which is effective
June 15, 2009. It provides guidance for disclosing events that occur after the balance sheet date, but prior to
the issuance of the financial statements. The Trust adopted this authoritative guidance on July 31, 2009. The
adoption of this authoritative guidance did not have a significant impact on the Trust’s financial position or
operating results other than additional disclosures included in the notes to financial statements . In February
2010, FASB issued an update to this authoritative guidance, which was effective upon the issuance of the
update. The Trust adopted this authoritative guidance on April 30, 2010. The update to the authoritative
guidance relating to subsequent events removes the requirement for issuers to disclose the date through
which subsequent events have been evaluated in both issued and revised financial statements . The adoption
of this update to the authoritative guidance relating to subsequent events did not have a significant impact on
the Trust’s financial position or operating results other than removing the disclosure .

(2) Formation of the Trust:

The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was
liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were transferred
to the Trust. The Trust, on behalf of the owners of beneficial interest in the Trust, holds overriding royalty rights
covering gas and oil production in certain concessions or leases in the Federal Republic of Germany . These
rights are held under contracts with local German exploration and development subsidiaries of Exxon Mobil
Corp. and the Royal Dutch/Shell Group. Under these contracts, the Trust receives various percentage royalties
on the proceeds of the sales of certain products from the areas involved. At the present time, royalties are
received for sales of gas well gas, oil well gas, crude oil, distillate and sulfur.

(3) Related party transactions:

John R. Van Kirk, the Managing Director of the Trust, provides office space and services to the Trust at

cost. For such office space and services, the Trust reimbursed the Managing Director $24,067, $27,470 and
$28,939 in fiscal 2010, 2009 and 2008, respectively.

Lawrence A. Kobrin, a Trustee of the Trust, is a Senior Counsel at Cahill Gordon & Reindel LLP, which

serves as counsel to the Trust. Mr. Kobrin is no longer a partner with Cahill Gordon & Reindel LLP. For legal
services, the Trust paid Cahill Gordon & Reindel LLP $97,677, $94,191 and $122,218 in fiscal 2010, 2009 and
2008, respectively.

As of November 1, 2006, John H. Van Kirk, the former Managing Trustee of the Trust and the father of
John R. Van Kirk, was named to the position of Founding Trustee Emeritus. For his service in such capacity,
he earned $0, $5,000 and $10,000 in fiscal 2010, 2009 and 2008, respectively. John H. Van Kirk, who served
as President of North European Oil Corporation and North European Oil Company from 1954-1975 and as
Managing Trustee of the Trust from 1975-2006, passed away on February 25, 2009.

(4) Employee benefit plan:

The Trust has established a savings incentive match plan for employees (SIMPLE IRA) that is
available to both employees of the Trust, one of whom is the Managing Director. The Trustees authorized the
making of contributions by the Trust to the accounts of employees, on a matching basis, of up to 3% of cash
compensation paid to each such employee for the 2009 and 2010 calendar years .

NORTH EUROPEAN OIL ROYALTY TRUST

(5) Quarterly results (unaudited):

The tables below summarize the quarterly results and distributions of the Trust for

the fiscal years ended October 31, 2010 and 2009:

Fiscal 2010 by Quarter and Year
Fourth

Second

Third

First

Year

Royalties received

$4,894,409

$4,926,049

$4,482,847 $5,342,026

$19,645,331

Net income

$4,616,291

$4,618,701

$4,316,443 $5,168,830

$18,720,265

Net income per unit

$0.50

$0.47

$0.56

$2.04

Distributions paid
or to be paid

Distributions per unit
paid or to be paid
to unit owners

$4,595,295

$4,687,201

$4,319,577 $5,146,731

$18,748,804

$0.50

$0.51

$0.47

$0.56

$2.04

Fiscal 2009 by Quarter and Year
Fourth

Second

Third

First

Year

Royalties received

$10,180,979 $9,424,837 $5,466,337 $3,651,925

$28,724,078

Net income

9,846,469

9,122,900

5,243,544

3,486,314

27,699,228

Net income per unit

$1.07

$0.99

$0.57

$0.38

$3.01

Distributions paid
or to be paid
Distributions per unit
paid or to be paid
to unit owners

$9,742,025

$9,098,684 $5,330,543 $3,492,424

$27,663,676

$1.06

$0.99

$0.58

$0.38

$3.01

NORTH EUROPEAN OIL ROYALTY TRUST

Disclosure Controls and Procedures

The Trust maintains disclosure controls and procedures that are designed to ensure that

information required to be disclosed by the Trust is recorded, processed, summarized, accumulated
and communicated to its management, which consists of the Managing Director, to allow timely
decisions regarding required disclosure, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms . The Managing Director has performed an
evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and
procedures as of October 31, 2010. Based on that evaluation, the Managing Director concluded that
the Trust’s disclosure controls and procedures were effective as of October 31, 2010.

Internal Control over Financial Reporting

Part A. Management’s Report on Internal Control over Financial Reporting

The Trust’s management is responsible for establishing and maintaining adequate internal

control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) for the
Trust. There are inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of internal control may
vary over time . Management has evaluated the Trust’s internal control over financial reporting as of
October 31, 2010. This assessment was based on criteria for effective internal control over financial
reporting described in the standards promulgated by the Public Company Accounting Oversight
Board and in the Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management concluded
that the Trust’s internal control over financial reporting was effective as of October 31, 2010.
Management’s assessment of the effectiveness of our internal control over financial reporting as of
October 31, 2010 has been audited by WeiserMazars LLP, the Trust’s independent auditor, as stated
in their report which follows .

Part B. Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting

The Board of Trustees and
Unit Owners of North European Oil Royalty Trust

We have audited North European Oil Royalty Trust’s (the “Trust”) internal control over
financial reporting as of October 31, 2010, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) . The Trust’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting . Our responsibility is to express an opinion on the Trust’s internal control over
financial reporting based on our audit .

NORTH EUROPEAN OIL ROYALTY TRUST

We conducted our audit in accordance with the standards of the Public Company Accounting

Oversight Board (United States) . Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects . Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk . Our audit also included performing such other
procedures as we considered necessary in the circumstances . We believe that our audit provides a
reasonable basis for our opinion .

A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles .
A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements .

Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate .

In our opinion, the Trust maintained, in all material respects, effective internal control over

financial reporting as of October 31, 2010, based on criteria established in Internal Control—
Integrated Framework issued by the COSO .

We have also audited, in accordance with the standards of the Public Company Accounting

Oversight Board (United States), the statements of assets, liabilities and trust corpus as of
October 31, 2010, and the related statements of revenue collected and expenses paid, undistributed
earnings, and changes in cash and cash equivalents for the year ended October 31, 2010 of the
Trust and our report dated December 29, 2010 expressed an unqualified opinion thereon.

WeiserMazars LLP
New York, NY
December 29, 2010

NORTH EUROPEAN OIL ROYALTY TRUST
P .O . Box 456
Red Bank, New Jersey 07701
(732) 741-4008

IMPORTANT – 2010 TAX LETTER
RETAIN THIS LETTER FOR PREPARATION OF YOUR
2010 INCOME TAX RETURNS
THE TRUST DOES NOT FILE NOR FURNISH TO OWNERS A FORM 1099

To the Present and Former Unit Owners of
North European Oil Royalty Trust:

January 3, 2011

This letter sets forth the information you will require for preparation of your personal income tax

return in connection with ownership of units of beneficial interest in North European Oil Royalty Trust
(the “Trust”) during 2010. For federal income tax reporting purposes, each owner of units in the Trust
is considered to be a grantor or substitute grantor as well as a beneficiary of the Trust. As such, you
are deemed to have received your pro rata share of overriding royalties when paid to the Trust and
are permitted to deduct your share of Trust expenses. Consequently, your net taxable income may not
correspond exactly to the cash distributions received . TRUST DISTRIBUTIONS ARE NOT DIVIDENDS
AND SHOULD NOT BE INCLUDED ON INCOME TAX RETURNS AS DIVIDEND INCOME.

The Internal Revenue Service has ruled that the overriding royalty rights held by the Trust

represent economic interest in oil and gas deposits. Consequently, income realized from such
interests is taxable to each unit owner as ordinary income subject to cost depletion . In the initial
year of ownership the original cost of the units is the basis for computing the cost depletion . In each
subsequent year the basis for computing cost depletion is the adjusted cost basis for their units . This
adjusted cost basis is the original cost less the cumulative amount of depletion previously taken . For
example 100 units purchased at $20 per unit on January 2nd of a given year would have a cost basis
of $2,000. If the cost depletion percentage for that year were 10%, you would show a cost depletion
of $200 on your tax return and your adjusted cost basis for the following year would be $1,800. If
you continued to hold those units through the next year and the cost depletion percentage were the
same, you would show a cost depletion of $180 on your tax return and your adjusted cost basis for the
following year would be $1,620. The preceding example is for illustration purposes only.

Based upon computations of proved producing reserves estimated in accordance with accepted
engineering analytical principles, Ralph E. Davis Associates, Inc. of Houston, Texas has recommended
that the percentage to be applied to the cost basis to determine deductions for the cost depletion for
the year 2010 is 8.1743% . The suggested percentage for cost depletion deduction will be adjusted
annually in accordance with reported production results and revised reserve estimates . Since the
above percentage covers the entire year 2010, if you owned units for only a portion of the year, you are
required to prorate the percentage depletion in the ratio that the cumulative Income per Unit shown on
the following schedule for the period of your ownership bears to the Total Income per Unit for the entire
year .

If you owned units for the period January 1, 2010 through December 31, 2010, you will be
considered to have received and expended, on the cash basis, the respective totals for each unit
shown in the following schedule. On the other hand, if you owned units for only a portion of that period,

NORTH EUROPEAN OIL ROYALTY TRUST

then the schedule shows the amounts of income and deductible expenses reportable by you for each
unit owned for the respective months. For your information, income is received between the 15th and
the end of each month .

Income Per Unit

Expenses Per Unit

January 2010
February
March
April
May
June
July
August
September
October
November
December

TOTAL 2010

$ 0.1978
0 .1628
0 .1625
0 .2107
0 .1612
0 .1121
0 .2145
0 .1777
0 .2088
0 .1947
0 .0638
0 .1546

$ 2.0212

$ 0.0099
0 .0151
0 .0101
0 .0082
0 .0080
0 .0044
0 .0057
0 .0082
0 .0060
0 .0046
0 .0094
0 .0152

$ 0.1048

Income and expenses should be reported on Federal Income Tax Form 1040, Schedule E.

Please note that royalty income is generally considered portfolio income under the passive loss rules
enacted by the Tax Reform Act of 1986. Under Part I, Income or Loss from Rental Real Estate and
Royalties, line 1 enter property description as “oil and gas overriding royalty rights, Germany through
North European Oil Royalty Trust .” Your income and expenses are calculated by multiplying the above
Per Unit figures by the number of units you owned . Your income should be entered on line 4 . Expenses
should be entered on line 18 as “miscellaneous Trust expenses .” Your cost depletion deduction should
be entered on line 20 . This figure is derived by multiplying the total adjusted cost of all your units by
.081743 . Your adjusted cost is your original cost minus depletion deducted in prior years . Your net
reportable income or loss should be entered on lines 22 and 26 in Part I and on line 40 in Part V and is
determined by subtracting the amounts entered on lines 18 and 20 from the amount on line 4 . All of the
above entries should be adjusted for the period of time you owned your units, if you did not own them
throughout 2010 .

The royalty income received by the Trust represents income from Germany . Although there are
no German taxes imposed on this income, this information should be considered if you have available
foreign tax credits from other sources . The Trust will submit this letter and the listing of unit owners
during 2010 to the Internal Revenue Service. This list will contain names, addresses and tax ID or
Social Security Numbers; we suggest that you attach this letter to your tax returns .

Most sincerely yours,

John R . Van Kirk
Managing Director

DOLLAR ROYALTIES

WESTERN AND EASTERN OLDENBURG

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Dollar Royalties by Fiscal Year

EASTERN OLDENBURG

WESTERN OLDENBURG

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North European Oil Royalty Trust P.O. Box 456, Red Bank, NJ 07701

NORTH EUROPEAN OIL ROYALTY TRUST

Counsel

Cahill Gordon & Reindel LLP
80 Pine Street
New York, N.Y. 10005

Auditors

WeiserMazars LLP

135 West 50th Street

New York, N.Y. 10020

Managing Director
John R. Van Kirk

Office of the
Managing Director
Suite 19A
43 West Front Street
Red Bank, N.J. 07701
Tel: (732) 741-4008
Fax: (732) 741-3140
E-Mail: neort@neort.com
Website: www.neort.com

Petroleum and Natural
Gas Consultants
Ralph E. Davis Associates, Inc.
1717 St. James Place
Suite 460
Houston, Texas 77056

Transfer Agent

Registrar and Transfer Co.

Tel:

10 Commerce Drive
Cranford, N.J. 07016
(800) 368-5948
(908) 497-2300

Website: www.rtco.com

Trustees
Robert P. Adelman
Managing Trustee,
Director or Trustee
of various
profit and non-profit
companies

Samuel M. Eisenstat
Audit Comm. Chairman,
Attorney; CEO,
Abjac Energy Corp.;
Director or Trustee
of several Funds
managed by
SunAmerica Asset
Management Corp.

Lawrence A. Kobrin
Clerk to the Trustees,
Senior Counsel,
Cahill Gordon &
Reindel LLP

Willard B. Taylor
Of Counsel, Sullivan and
Cromwell LLP

Rosalie J. Wolf
Managing Partner,
Botanica Capital
Partners LLC

A copy of the Trust’s Form 10-K Annual Report for fiscal 2010 as filed with the Securities and Exchange Commission will
be sent upon written request to John R. Van Kirk, Managing Director, P.O. Box 456, Red Bank, New Jersey 07701. In addition
to the 2010 10-K, other pertinent filings and documents are available at the Trust’s website, www.neort.com