Annual Report 2011
North
European
Oil
Royalty
Trust
ATTENTION:
PLEASE RETAIN
CRITICAL TAX INFORMATION ENCLOSED
The Annual Meeting of Unit Owners will be held on Wednesday, February 14, 2012,
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 . . . . . . . . . . . . . . . . . . . . 10-18
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Distributions and Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-21
Comparison of Five Year Returns . . . . . . . . . . . . . . . . . . . . . . . . . 22-23
Report of Independent Registered Public Accounting Firm . . . . . . . . . 24
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-28
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-32
Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . 33-34
2011 Tax Letter (Removable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-36
Dollar Royalties Western and Eastern Oldenburg . . . . . . . . . . . . . . . . 37
IMPORTANT TAX INFORMATION
For your convenience, the information necessary to prepare
your 2011 tax return is included in the removable
“2011 tax letter” on Pages 35 and 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 2011
Net income for the Trust for the fourth quarter of fiscal 2011 was $5,866,147, an increase of
13 .49% from net income of $5,168,831 for the fourth quarter of fiscal 2010 . The increase in income
was the result of higher gas prices, higher gas sales and higher average exchanges rates under both
the higher royalty rate agreement covering western Oldenburg (the “Mobil Agreement”) and the lower
royalty rate agreement covering the entire Oldenburg concession (the “OEG Agreement”) . Since
there was no maintenance conducted at the Grossenkneten desulfurization plant in the fourth quarter
of fiscal 2011, sales were not impacted . This contrasts with the prior year which saw an 18 day
shutdown of the plant for maintenance in the fourth quarter of fiscal 2010 . The relevant details for the
final quarter of fiscal 2011 for gas sales under the Mobil and OEG Agreements are shown in the table
below .
Fourth Fiscal Qtr.
Ended 10/31/11
Fourth Fiscal Qtr.
Ended 10/31/10
Percentage
Change
Mobil Agreement:
Gas Sales (Bcf1)
Gas Prices (Ecents/Kwh2)
Gas Prices ($/Mcf3)
Average Exchange Rate4
OEG Agreement:
Gas Sales (Bcf)
Gas Prices (Ecents/Kwh)
Gas Prices ($/Mcf)
Average Exchange Rate
10 .021
2 .5102
$10 .04
$1 .3938
28 .671
2 .7998
$10 .89
$1 .3929
8 .599
2 .2021
$ 8 .36
$1 .3262
23 .094
2 .3395
$ 8 .66
$1 .3305
+ 16 .54%
+ 13 .99%
+ 20 .10%
+ 5 .10%
+ 24 .15%
+ 19 .68%
+ 25 .75%
+ 4 .69%
1Billion cubic feet
2Euro cents per Kilowatt hour
3Dollars per thousand cubic feet
4Based on average exchange rates of royalty transfers
FISCAL 2011 REPORT
For fiscal 2011, the Trust’s gross royalty income increased 28 .01% to $25,148,523 from
$19,645,331 in fiscal 2010 . The overall increase in royalty income is primarily due to substantial
increase in gas prices . With the exception of a brief decline in the third quarter of fiscal 2011, gas
prices under both royalty agreements have increased each quarter since the first quarter of fiscal
2010 . Average quarterly exchange rates, except for the first quarter of fiscal 2011, were higher than
the prior year and also contributed to the increase in royalty income . Overall gas sales increased
slightly but Western gas sales declined a fraction of a percent . The total distribution for fiscal 2011
2
NORTH EUROPEAN OIL ROYALTY TRUST
was $2 .63 per unit compared to $2 .04 per unit for fiscal 2010 . 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 per unit during fiscal 2010 . The prior year adjustments for fiscal 2011 were
negligible .
Based on facts disclosed as part of the 2007-2008 examination by the Trust’s German
accountants of the royalty payments by the operating companies and on advice from German
counsel, the Trust has joined the complaint filed by a parallel royalty holder against OEG seeking
additional royalties . A further description of this legal proceeding is contained in Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the Notes to Financial
Statements contained in this report .
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 represents a summary of the Trust’s German consultant’s
conversation with representatives of EMPG . 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 .
During 2011, only one well completed drilling . Brettdorf Z-2b is a horizontal
deviation from an existing Zechstein (sour gas) well in eastern Oldenburg . Brettdorf
Z-2b is intended to reopen the Brettdorf field, which has been closed since 2004 .
Drilling was completed on July 30, 2011 and completion of the surface installation
and pipeline connection is scheduled for December 2011 . Goldenstedt Z-21, another
Zechstein well in eastern Oldenburg, is scheduled to begin drilling in December 2011 .
The first portion of the drilling for Visbek Z-8a, a western well, has been completed .
When the specialized drilling unit (coiled tubing) arrives, the reservoir section of the
well will be drilled .
Not including the wells already in progress, an additional six wells are planned
for the 2012-13 period . No drilling start dates have been announced as yet . Oythe
Z-4 was postponed from 2011 but is the seventh well intended to explore the sweet
gas Carboniferous zone in eastern Oldenburg in 2012 . Goldenstedt Z-24 is the eighth
well intended to explore the sweet gas Carboniferous zone in eastern Oldenburg in
2012 . Depending upon the outcome of this well, two further Carboniferous wells,
Goldenstedt Z-26 and Goldenstedt Z-27, may be drilled in the future . Three Zechstein
wells, one in western Oldenburg and two in eastern Oldenburg, are scheduled to begin
drilling in 2012 . The western well, Visbek Z-16a, is a so-called infill well . Infill wells are
drilled within existing fields with the intention of improving the gas recovery factor and
increasing the productive capacity of the field . The eastern wells are Goldenstedt Z-15a
and Goldenstedt Z-25 . Goldenstedt Z-15a is a horizontal deviation off an existing well .
Kneheim Z-5a, a western Zechstein well, is scheduled to start drilling in 2013 .
3
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 2011 . The 2011 cost depletion
percentage of 9 .5073% and related tax information is contained in the removable “2011 Tax Letter”
on pages 35 and 36 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, 2011 . (The
complete text of the report is available in the Trust’s 2011 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 14 .05% to 23 .174 Bcf from 26 .962 Bcf on net sales for 2011 of 2 .454
Bcf and a negative reserve adjustment of 1 .334 Bcf . As shown in the chart on page 6, 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 .
It is possible that the accelerated drilling program for the 2012-2013 period, as described by the
operating company to the Trust’s German consultant, will positively impact future reserves .
December 30, 2011
Respectfully submitted,
John R . Van Kirk
Managing Director
4
TEN YEAR HISTORY OF NET GAS SALES
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Reflecting Effective Royalty Rates and
Gas Sales through September
EASTERN OLDENBURG WESTERN OLDENBURG
6
5
4
3
2
1
0
T
E
E
F
C
I
B
U
C
N
O
I
L
L
I
B
5
6
50
45
40
35
30
25
20
15
10
5
0
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
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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
2011
2010
2009
2008
2007
German gas, sulfur and oil royalties received
$25,148,523
$19,645,331
$28,724,078
$34,645,159
$27,484,254
Interest income
Trust expenses
Net Income
26,233
7,359
11,471
95,802
207,932
(978,849)
(932,425)
(1,036,321)
(1,075,823)
(952,517)
$24,195,907
$18,720,265
$27,699,228
$33,665,138
$26,739,669
Net income per unit
$ 2 .63
$ 2 .04
$ 3 .01
$ 3 .66
$ 2 .91
Distributions per unit paid
or to be paid to unit owners
$ 2 .63
$ 2 .04
$ 3 .01
$ 3 .66
$ 2 .91
Units outstanding end of period
9,190,590
9,190,590
9,190,590
9,190,590
9,190,590
7
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 first quarter of fiscal 2009 and the third quarter of
fiscal 2010 . During fiscal 2011, the Trust received five sulfur royalty payments during the second
and fourth fiscal quarters . These payments represented one payment that should have been made
in fiscal 2010 and four payments attributable to the four quarters of fiscal 2011 . Sulfur royalties
under the Mobil Agreement totaled $613,203, $78,870 and $244,874 during fiscal 2011, 2010 and
2009, respectively .
Under another set of rights covering the entire Oldenburg concession and pursuant to the
agreement with OEG, the Trust receives royalties at the rate of 0 .6667% on gross receipts from
sales by BEB of gas well gas, oil well gas, crude oil, condensate and sulfur (removed during the
processing of sour gas) less a certain allowed deduction of costs (the “OEG Agreement”) . Under the
OEG Agreement, 50% of the field handling, treatment and transportation costs as reported for state
8
NORTH EUROPEAN OIL ROYALTY TRUST
royalty purposes are 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 pipeline
system . As part of its normal 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 has not received
any indications that this pipeline sale would affect the method of royalty calculations .
However, based on advice of its German counsel, and in order to resolve a dispute with
EMPG over the right of the Trust to receive royalties on amounts received by BEB on the sale of
the transmission pipeline system, the Trust, along with the parallel royalty holder with a similar
royalty agreement, asserted a claim for royalties on the amounts received from such sale . Efforts to
resolve the claim were not successful . The parallel royalty holder filed an action in the District Court
of Hannover, Germany, Civil Chamber against OEG, an affiliate of BEB . Subsequently, German
counsel advised the Trustees that on December 31, 2011 the prescription, or statute of limitations,
period for a claim would expire . In face of that pending expiration, and after unsuccessfully seeking
a waiver of the statute of limitations, the Trustees, on December 16, 2011, filed an application to
join as a party plaintiff to the complaint previously filed by the parallel royalty holder . In joining the
existing action, the Trust seeks a royalty on sales proceeds in the amount of Euros 5 .66 million . See
Item 3 of this Report for a description of this legal proceeding .
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 . For fiscal 2011 the Trust received no royalty income from
Grosses Meer .
9
NORTH EUROPEAN OIL ROYALTY TRUST
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 .
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 .
Effective with the Trust’s third quarter of fiscal 2010, a new royalty payment schedule was
fully implemented . 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 the 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 . The Trust’s German accountants review the royalty calculations on a
biennial basis .
10
NORTH EUROPEAN OIL ROYALTY TRUST
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 . Sour gas, in comparison, must
be processed at 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 plant is operated at capacity on a
continual basis . Any excess production from the plant is stored in underground storage for higher
demand periods . As needed, the operators conduct maintenance on the plant, 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 accountants review these contracts
periodically on behalf of the Trust to verify the correctness of application of the Agreement formulas
for the computation of royalty payments . The Trust’s accountants in Germany have concluded their
examination of the operating companies for the 2007-2008 period and have begun their examination
of the operating companies for the 2009-2010 .
With respect to the accountants’ examination of the 2007-2008 period certain minor
accounting discrepancies were brought to light and have been resolved . In addition, certain
legal issues with respect to the interpretation of the royalty contracts were raised . The remaining
unresolved dispute concerns the potential right of the Trust to royalties on amounts received on
the sale of the transmission pipeline system used to distribute gas produced in the royalty area .
Based on advice of its German counsel, and in order to resolve a dispute with EMPG over the
right of the Trust to receive royalties on amounts received by BEB on the sale of the transmission
pipeline system, the Trust, along with the parallel royalty holder with a similar royalty agreement,
asserted a claim for royalties on the amounts received from such sale . Efforts to resolve the claim
were not successful . The parallel royalty holder filed an action in the District Court of Hannover,
Germany, Civil Chamber against OEG, an affiliate of BEB . Subsequently, German counsel advised
the Trustees that on December 31, 2011 the prescription, or statute of limitations, period for a claim
would expire . In face of that pending expiration, and after unsuccessfully seeking a waiver of the
statute of limitations, the Trustees, on December 16, 2011, filed an application to join as a party
plaintiff to the complaint previously filed by the parallel royalty holder . In joining the existing action,
the Trust seeks a royalty on sales proceeds in the amount of Euros 5 .66 million . See Item 3 of this
Report for a description of this legal proceeding .
11
NORTH EUROPEAN OIL ROYALTY TRUST
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 .
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 2011 versus Fiscal 2010
For fiscal 2011, the Trust’s gross royalty income increased 28 .01% to $25,148,523 from
$19,645,331 in fiscal 2010 . The increase in royalty income was primarily the result of increases
in gas prices under both royalty agreements . Increased gas sales under the OEG Agreement and
increases in the average Euro/dollar exchange rates also positively impacted royalty income . A
moderate decline in gas sales under the Mobil Agreement slightly offset these positive factors . The
12
NORTH EUROPEAN OIL ROYALTY TRUST
total distribution for fiscal 2011 was $2 .63 per unit compared to $2 .04 per unit for fiscal 2010 . 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 during fiscal 2010 . The prior year
adjustments for fiscal 2011 were negligible .
Under the Mobil Agreement, gas sales declined 0 .24% to 43 .456 Billion cubic feet (“Bcf”)
in fiscal 2011 from 43 .561 Bcf in fiscal 2010 . The customary six week biennial shutdown of the
Grossenkneten desulfurization plant did not take place during fiscal 2011 but did take place during
fiscal 2010 . As a consequence, the decline in western gas sales during fiscal 2011 would likely have
been larger if the prior year’s gas sales had not been affected by the shutdown .
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet
Fiscal Quarter
2011 Gas Sales
2010 Gas Sales
Percentage Change
First
Second
Third
Fourth
Fiscal Year Total
11 .707
11 .057
10 .671
10 .021
43 .456
11 .861
11 .331
11 .770
8 .599
43 .561
- 1 .30%
- 2 .42%
- 9 .34%
+16 .54%
- 0 .24%
Average prices for gas sold under the Mobil Agreement increased 27 .88% to 2 .4424
Eurocents per Kilowatt hour (“Ecents/Kwh”) in fiscal 2011 from 1 .9099 Ecents/Kwh in fiscal 2010 .
With the exception of a brief decline in the third quarter of fiscal 2011, the price of gas sold under the
Mobil Agreement has increased each quarter since the first quarter of fiscal 2010 .
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt hour
Fiscal Quarter
2011 Gas Prices
2010 Gas Prices
Percentage Change
First
Second
Third
Fourth
Fiscal Year Avg .
2 .3753
2 .5087
2 .3838
2 .5102
2 .4424
1 .6491
1 .9035
1 .9666
2 .2021
1 .9099
+44 .04%
+31 .79%
+21 .21%
+13 .99%
+27 .88%
Converting gas prices into more familiar terms, using the average exchange rate, yielded a
price of $9 .71 per thousand cubic feet (“Mcf”), a 31 .75% increase over fiscal 2010’s average price
of $7 .37/Mcf . For fiscal 2011, total royalties paid under the Mobil Agreement were transferred at an
average Euro/dollar exchange rate of $1 .3872, an increase of 3 .36% from the average Euro/dollar
exchange rate of $1 .3421 for fiscal 2010 .
13
NORTH EUROPEAN OIL ROYALTY TRUST
Average Euro Exchange Rate under the Mobil Agreement
Fiscal Quarter
2011 Average
Euro Exchange Rate
2010 Average
Euro Exchange Rate
Percentage Change
First
Second
Third
Fourth
Fiscal Year Avg .
1 .3431
1 .3962
1 .4091
1 .3938
1 .3872
1 .4499
1 .3586
1 .2522
1 .3262
1 .3421
- 7 .37%
+ 2 .77%
+12 .53%
+ 5 .10%
+ 3 .36%
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 2011, gas sales from western Oldenburg accounted for only 36 .65% of all gas
sales . However, western Oldenburg gas royalties provided approximately 80 .69% or $19,318,494
out of a total of $23,941,457 in overall Oldenburg gas royalties .
Under the OEG Agreement, gas sales increased 4 .08% to 118 .576 Bcf in fiscal 2011 from
113 .924 Bcf in fiscal 2010 . The increase in gas sales was likely the result of ongoing drilling in
eastern Oldenburg and the lack of maintenance at the Grossenkneten desulfurization plant . The
customary six week biennial shutdown of the Grossenkneten desulfurization plant took place during
fiscal 2010 .
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet
Fiscal Quarter
2011 Gas Sales
2010 Gas Sales
Percentage Change
First
Second
Third
Fourth
Fiscal Year Total
30 .213
30 .098
29 .595
28 .671
118 .576
30 .616
30 .083
30 .131
23 .094
113 .924
- 1 .32%
+ 0 .05%
- 1 .78%
+24 .15%
+ 4 .08%
Average gas prices for gas sold under the OEG Agreement increased 25 .67% to 2 .6386
Ecents/Kwh in fiscal 2011 from 2 .0996 Ecents/Kwh in fiscal 2010 . With the exception of a brief
decline in the third quarter of fiscal 2011, the price of gas sold under the OEG Agreement has
increased each quarter since the first quarter of fiscal 2010 .
14
NORTH EUROPEAN OIL ROYALTY TRUST
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt hour
Fiscal Quarter
2011 Gas Prices
2010 Gas Prices
Percentage Change
First
Second
Third
Fourth
Fiscal Year Avg .
2 .5404
2 .6826
2 .5379
2 .7998
2 .6386
1 .9151
2 .0857
2 .1186
2 .3395
2 .0996
+32 .65%
+28 .62%
+19 .79%
+19 .68%
+25 .67%
Converting gas prices into more familiar terms, using the average exchange rate, yielded a
price of $10 .24/Mcf, a 29 .95% increase over fiscal 2010’s average price of $7 .88/Mcf . For fiscal
2011, total royalties paid under the OEG Agreement were transferred at an average Euro/dollar
exchange rate of $1 .3894, an increase of 3 .08% from the average Euro/dollar exchange rate of
$1 .3479 for fiscal 2010 .
Average Euro Exchange Rate under the OEG Agreement
Fiscal Quarter
2011 Average
Euro Exchange Rate
2010 Average
Euro Exchange Rate
Percentage Change
First
Second
Third
Fourth
Fiscal Year Avg .
1 .3436
1 .3989
1 .4148
1 .3929
1 .3894
1 .4405
1 .3403
1 .2596
1 .3305
1 .3479
- 6 .73%
+ 4 .37%
+12 .32%
+ 4 .69%
+ 3 .08%
Reflecting both the increase in funds available for short-term investment and the shift to a
money market account from T-bills and CD’s, interest income for fiscal 2011 increased to $26,233
from $7,359 for fiscal 2010 . Trust expenses increased 4 .98% to $978,849 in fiscal 2011 from
$932,425 in fiscal 2010, primarily due to higher Trustees’ fees, which are determined according to
the provisions of the Trust Agreement .
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 .
15
NORTH EUROPEAN OIL ROYALTY TRUST
Under the Mobil Agreement, gas sales declined 14 .19% to 43 .561 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 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 .
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/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 .
16
NORTH EUROPEAN OIL ROYALTY TRUST
Average Euro Exchange Rate under the Mobil Agreement
Fiscal Quarter
2010 Average
Euro Exchange Rate
2009 Average
Euro Exchange Rate
Percentage Change
First
Second
Third
Fourth
Fiscal Year Avg .
1 .4499
1 .3586
1 .2522
1 .3262
1 .3421
1 .3388
1 .3151
1 .4061
1 .4620
1 .3595
+ 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 .
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet
Fiscal Quarter
2010 Gas Sales
2009 Gas Sales
Percentage Change
First
Second
Third
Fourth
Fiscal Year Total
30 .616
30 .083
30 .131
23 .094
113 .924
34 .350
32 .416
31 .205
30 .805
128 .776
-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 .
17
NORTH EUROPEAN OIL ROYALTY TRUST
Average Gas Prices under the OEG 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 .9151
2 .0857
2 .1186
2 .3395
2 .0996
3 .4411
3 .1818
2 .1681
1 .6487
2 .6389
-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 Mobil Agreement
Fiscal Quarter
2010 Average
Euro Exchange Rate
2009 Average
Euro Exchange Rate
Percentage Change
First
Second
Third
Fourth
Fiscal Year Avg .
1 .4405
1 .3403
1 .2596
1 .3305
1 .3479
1 .3382
1 .2987
1 .3946
1 .4544
1 .3444
+ 7 .64%
+ 3 .20%
- 9 .68%
- 8 .52%
+ 0 .26%
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 .
18
NORTH EUROPEAN OIL ROYALTY TRUST
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 .
___________________________________________________________
This Annual Report contains forward-looking statements intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform Act of 1995 . Such
statements address future expectations and events or conditions concerning the Trust . Many of
these statements are based on information provided to the Trust by the operating companies or by
consultants using public information sources . These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those anticipated in any forward-
looking statements . These include:
•
•
•
•
risks and uncertainties concerning levels of gas production and gas sale prices, general
economic conditions and currency exchange rates;
the ability or willingness of the operating companies to perform under their contractual
obligations with the Trust;
potential disputes with the operating companies and the resolution thereof; and
the risk factors set forth above under Item 1A of the Trust’s Annual Report on Form 10-K
for the fiscal year ended October 31, 2011 (the “Trust’s Form 10-K”) .
All such factors are difficult to predict, contain uncertainties that may materially affect actual
results, and are generally beyond the control of the Trust . New factors emerge from time to time and
it is not possible for the Trust to predict all such factors or to assess the impact of each such factor
on the Trust . Any forward-looking statement speaks only as of the date on which such statement is
made, and the Trust does not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made .
19
NORTH EUROPEAN OIL ROYALTY TRUST
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, 2011, there were 996 unit owners of
record .
The following table presents the high and low closing prices for the quarterly periods ended in
fiscal 2011 and 2010 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
January 31, 2011
April 30, 2011
July 31, 2011
October 31, 2011
Quarter Ended
January 31, 2010
April 30, 2010
July 31, 2010
October 31, 2010
Fiscal Year 2011
Low
High
Closing Price
Closing Price
$28 .35
$29 .46
$30 .49
$29 .35
$31 .00
$31 .76
$34 .15
$34 .00
Fiscal Year 2010
Low
High
Closing Price
Closing Price
$30 .45
$28 .70
$26 .08
$25 .49
$33 .00
$32 .24
$29 .97
$28 .57
Distribution
per Unit
$0 .55
$0 .73
$0 .71
$0 .64
Distribution
per Unit
$0 .50
$0 .51
$0 .47
$0 .56
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 .
20
NORTH EUROPEAN OIL ROYALTY TRUST
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 2011 is
9 .5073% . 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 2011 calendar year are included on a
special removable page (35-36) in this report under “2011 Tax Letter .” Additionally, the tax reporting
information for 2011 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 2011, 2010 and 2009
and has never made such repurchases .
21
NORTH EUROPEAN OIL ROYALTY TRUST
Comparison of Five Year Returns
The graph set forth on the next page 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 .
In determining the cumulative return on investment, it has been assumed that on October 31,
2006, 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 .
22
NORTH EUROPEAN OIL ROYALTY TRUST
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among North European Oil Royalty Trust, the S&P 500 Index
and a Peer Group
$140
$120
$100
$80
$60
$40
$20
$0
10/06
10/07
10/08
10/09
10/10
10/11
North European Oil Royalty Trust
S&P 500
Peer Group
2
3
*$100 invested on 10/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending October 31.
Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
NORTH EUROPEAN OIL ROYALTY TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To 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, 2011 and 2010, 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, 2011 . 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, 2011 and 2010, 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, 2011, 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, 2011, 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 30, 2011 expressed an unqualified opinion .
WeiserMazars LLP
New York, NY
December 30, 2011
24
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
OCTOBER 31, 2011 AND 2010
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 2011 and 2010
TRUST CORPUS (Notes 1 and 2)
UNDISTRIBUTED EARNINGS
Total Liabilities and Trust Corpus
ASSETS
2011
2010
$ 5,971,866
$ 5,211,965
1
1
$ 5,971,867
$ 5,211,966
LIABILITIES AND TRUST CORPUS
2011
2010
$ 5,881,977
$ 5,146,731
1
1
89,889
65,234
$ 5,971,867
$ 5,211,966
The accompanying notes are
an integral part of these financial statements .
2
5
2
6
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2011, 2010, AND 2009
German gas, sulfur and oil royalties received
Interest income
$ 25,148,523
26,233
$ 19,645,331
7,359
$ 28,724,078
11,471
Trust Income
25,174,756
19,652,690
28,735,549
2011
2010
2009
Non-related party expenses
Related party expenses
( 872,233)
( 106,616)
( 810,681)
( 121,744)
( 909,660)
( 126,661)
Trust Expenses
Net Income
Net income per unit
Distributions per unit paid or to be paid
to unit owners
( 978,849)
( 932,425)
( 1,036,321)
$ 24,195,907
$ 18,720,265
$ 27,699,228
$ 2 .63
$ 2 .63
$ 2 .04
$ 2 .04
$ 3 .01
$ 3 .01
The accompanying notes are
an integral part of these financial statements .
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2011, 2010 AND 2009
2011
2010
2009
BALANCE, beginning of year
$ 65,234
$ 93,773
$ 58,221
NET INCOME
LESS:
Current year distributions paid
or to be paid to unit owners
BALANCE, end of year
24,195,907
18,720,265
27,699,228
24,261,141
18,814,038
27,757,449
24,171,252
18,748,804
27,663,676
$ 89,889
$ 65,234
$ 93,773
The accompanying notes are
an integral part of these financial statements .
2
7
2
8
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2011, 2010 AND 2009
SOURCES OF CASH AND CASH EQUIVALENTS:
2011
2010
2009
German gas, sulfur and oil
royalties received
Interest income
USES OF CASH AND CASH EQUIVALENTS:
Payment of Trust Expenses
Distributions paid
$ 25,148,523
$ 19,645,331
$ 28,724,078
26,233
25,174,756
7,359
11,471
19,652,690
28,735,549
978,849
932,425
1,036,321
23,436,006
24,414,855
17,094,497
33,637,560
18,026,922
34,673,881
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS, during the year
759,901
1,625,768
( 5,938,332)
CASH AND CASH EQUIVALENTS,
beginning of year
CASH AND CASH EQUIVALENTS,
end of year
5,211,965
3,586,197
9,524,529
$ 5,971,866
$ 5,211,965
$ 3,586,197
The accompanying notes are
an integral part of these financial statements .
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NORTH EUROPEAN OIL ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2011, 2010, AND 2009
(1) Summary of significant accounting policies:
Basis of accounting -
The accompanying financial statements of North European Oil Royalty Trust (the “Trust”)
are prepared in accordance with the rules and regulations of the SEC . Financial statement
balances and financial results are presented 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 and state 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 . The Trust has no state income tax obligations .
Cash and cash equivalents -
Included in cash and cash equivalents are amounts deposited in bank accounts, money
market 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, 2011, the uninsured amounts held in the Trust’s U .S . bank accounts were approximately
$5,359,000 . In addition, approximately $6,912 was held in the Trust’s German account at October
31, 2011 .
29
NORTH EUROPEAN OIL ROYALTY TRUST
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, 2011, 2010 and 2009, there were 9,190,590 units of beneficial interest
outstanding .
New accounting pronouncements –
The Trust is not aware of any recently issued, but not yet effective, accounting standards
that would be expected to have a significant impact on the Trust’s financial position or results of
operations .
Reclassifications -
Certain amounts in the financial statements of prior periods have been reclassified to conform
to the current period presentation for comparative purposes .
(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
$29,039, $24,067 and $27,470 in fiscal 2011, 2010 and 2009, 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 $77,577, $97,677, and
$94,191 in fiscal 2011, 2010 and 2009, 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 $5,000 in fiscal 2009 . 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 .
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NORTH EUROPEAN OIL ROYALTY TRUST
(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 2011, 2010 and 2009
calendar years .
5) Subsequent Events:
Based upon advice of its German counsel, the Trust, along with the parallel royalty holder
with a similar royalty agreement, asserted a claim for royalties on the amounts received from the
sale by BEB Erdgas und Erdol GmbH of its North German gas distribution and transmission pipeline
system . Efforts to resolve the claim were not successful . The parallel royalty holder filed an action
in the District Court of Hannover, Germany, Civil Chamber against Oldenburgische Erdolgesellschaft
GmbH, an affiliate of BEB . Subsequently, German counsel advised the Trustees that on December
31, 2011 the prescription, or statute of limitations, period for a claim would expire . In the face of
that pending expiration, and after unsuccessfully seeking a waiver of the statute of limitations, the
Trustees, on December 16, 2011, filed an application to join as a party plaintiff to the complaint
previously filed by the parallel royalty holder . In joining the existing action, the Trust seeks a royalty
on sales proceeds in the amount of Euros 5 .66 million . Based on the advice of German counsel,
the Trust believes it will be permitted to join as a party to the existing action and that there are
reasonable grounds to support the claim . However, there can be no assurance that the joinder will
be permitted or that any recovery will be obtained .
31
NORTH EUROPEAN OIL ROYALTY TRUST
NORTH EUROPEAN OIL ROYALTY TRUST
(6) Quarterly results (unaudited):
The tables below summarize the quarterly results and distributions of the Trust for the fiscal
years ended October 31, 2011 and 2010:
Fiscal 2011 by Quarter and Year
Fourth
Second
Third
First
Year
Royalties received
$5,396,283
$6,965,508
$6,744,676
$6,042,056
$25,148,523
Net income
$5,084,139
$6,678,994 $6,566,627
$5,866,147
$24,195,907
Net income per unit
$0 .55
$0 .73
$0 .71
$0 .64
$2 .63
Distributions paid
or to be paid
Distributions per unit
paid or to be paid
to unit owners
$5,054,825
$6,709,131
$6,525,319
$5,881,977
$24,171,252
$0 .55
$0 .73
$0 .71
$0 .64
$2 .63
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 .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
32
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, 2011 . Based on that evaluation, the Managing Director concluded
that the Trust’s disclosure controls and procedures were effective as of October 31, 2011 .
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, 2011 . 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, 2011 . Management’s assessment of the effectiveness of our internal control over
financial reporting as of October 31, 2011 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
To the 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, 2011, 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 .
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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, 2011, 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, 2011, 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, 2011 and our report dated December 30, 2011 expressed an unqualified opinion
thereon .
WeiserMazars LLP
New York, NY
December 30, 2011
34
NORTH EUROPEAN OIL ROYALTY TRUST
P .O . Box 456
Red Bank, New Jersey 07701
(732) 741-4008
IMPORTANT – 2011 TAX LETTER
RETAIN THIS LETTER FOR PREPARATION OF YOUR
2011 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, 2012
E
R
E
H
T
U
O
R
A
E
T
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 2011 . 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 2011 is 9.5073%. 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 2011, 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, 2011 through December 31, 2011, you will
be considered to have received and expended, on the cash basis, the respective totals for each
35
NORTH EUROPEAN OIL ROYALTY TRUST
unit shown in the following schedule . On the other hand, if you owned units for only a portion of that
period, 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 .
January 2011
February
March
April
May
June
July
August
September
October
November
December
TOTAL 2011
Income Per Unit
Expenses Per Unit
$ 0 .3688
0 .2254
0 .2519
0 .2806
0 .2456
0 .2455
0 .2428
0 .1912
0 .2236
0 .2425
0 .2189
0 .2106
$ 0 .0093
0 .0157
0 .0071
0 .0083
0 .0103
0 .0043
0 .0048
0 .0096
0 .0050
0 .0045
0 .0176
0 .0136
$ 2 .9474
$ 0 .1101
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 .095073 . 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 2011 .
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 2011 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
36
DOLLAR ROYALTIES
WESTERN AND EASTERN OLDENBURG
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Dollar Royalties by Fiscal Year
EASTERN OLDENBURG WESTERN OLDENBURG
35
30
25
20
15
10
5
0
S
R
A
L
L
O
D
N
O
I
L
L
I
M
3
7
North European Oil Royalty Trust P .O . Box 456, Red Bank, NJ 07701
NORTH EUROPEAN OIL ROYALTY TRUST
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
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
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 .
10 Commerce Drive
Cranford, N .J . 07016
Tel: (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 .
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 2011 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 2011 10-K, other pertinent filings and documents are available at the Trust’s website, www.neort.com