UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10243
BP PRUDHOE BAY ROYALTY TRUST
(Exact name of registrant as specified in its charter)
     
DELAWARE   13-6943724
State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)    
     
THE BANK OF NEW YORK, TRUSTEE    
101 BARCLAY STREET    
NEW YORK, NEW YORK   10286
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (212) 815-6908
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
UNITS OF BENEFICIAL INTEREST   NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
     Large Accelerated filer þ       Accelerated filer o       Non-accelerated filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Yes o No þ
     The aggregate market value of Units held by nonaffiliates (computed by reference to the closing sale price in New York Stock Exchange transactions on June 30, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1,709,860,000.
     As of February 28, 2007, 21,400,000 Units of Beneficial Interest were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
 
 

 


 

TABLE OF CONTENTS
         
PART I
    1  
 
       
ITEM 1. BUSINESS
    1  
 
       
INTRODUCTION
    1  
THE TRUST
    2  
THE ROYALTY INTEREST
    6  
THE UNITS
    11  
THE BP SUPPORT AGREEMENT
    12  
THE PRUDHOE BAY UNIT AND FIELD
    13  
INDEPENDENT OIL AND GAS CONSULTANTS’ REPORT
    19  
INDUSTRY CONDITIONS AND REGULATIONS
    24  
CERTAIN TAX CONSIDERATIONS
    24  
 
       
ITEM 2. PROPERTIES
    26  
 
       
ITEM 1A. RISK FACTORS
    27  
 
       
ITEM 1B. UNRESOLVED STAFF COMMENTS
    29  
 
       
ITEM 3. LEGAL PROCEEDINGS
    29  
 
       
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    30  
 
       
PART II
    30  
 
       
ITEM 5. MARKET FOR REGISTRANT’S UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF UNITS
    30  
 
       
ITEM 6. SELECTED FINANCIAL DATA
    31  
 
       
ITEM 7. TRUSTEE’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    31  
 
       
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    33  
 
       
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    34  
 
       
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    46  
 
       
ITEM 9A. CONTROLS AND PROCEDURES
    46  
 
       
ITEM 9B. OTHER INFORMATION
    48  
 
       
PART III
    48  
 
       
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    48  

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ITEM 11. EXECUTIVE COMPENSATION
    49  
 
       
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS
    49  
 
       
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    50  
 
       
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    50  
 
       
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    50  
 
       
SIGNATURES
    52  

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PART I
ITEM 1. BUSINESS
INTRODUCTION
     BP Prudhoe Bay Royalty Trust (the “Trust”) was created as a Delaware business trust by the BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 (the “Trust Agreement”) among The Standard Oil Company (“Standard Oil”), BP Exploration (Alaska) Inc. (“BP Alaska”), The Bank of New York, as trustee (the “Trustee”), and F. James Hutchinson, co-trustee (The Bank of New York (Delaware), successor co-trustee). BP Alaska and Standard Oil are wholly owned subsidiaries of BP p.l.c. (“BP”). The Trustee’s corporate trust offices are located at 101 Barclay Street, New York, New York 10286 and its telephone number is (212) 815-6908.
     The Trust electronically files annual reports on Form 10-K, quarterly reports on Form 10-Q and, when certain events require them, current reports on Form 8-K with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials filed by the Trust with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers (including the Trust) that file electronically with the SEC. The address of the SEC’s web site is http://www.sec.gov .
     The Trust does not have an Internet web site from which information concerning the Trust may be obtained; however the Trustee will provide paper or electronic copies of the Trust’s reports on Form 10-K, Form 10-Q and Form 8-K, and amendments to those reports, free of charge upon request as soon as reasonably practicable after the Trust files them with the SEC. Requests for copies of reports may be made by mail to: The Bank of New York, 101 Barclay Street, New York, NY 10286, Attention: Mr. Remo Reale, Corporate Trust Department; by telephone to: (212) 815-6908; or by e-mail to: rreale@bankofny.com .
     The information in this report relating to the Prudhoe Bay Unit, the calculation of royalty payments and certain other matters has been furnished to the Trustee by BP Alaska.
Forward-Looking Statements
     Various sections of this report contain forward-looking statements (that is, statements anticipating future events or conditions and not statements of historical fact). Words such as “anticipate,” “expect,” “believe,” “intend,” “plan” or “project,” and “should,” “would,” “could,” “potentially,” “possibly” or “may,” and other words that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements in this report are subject to a number of risks and uncertainties beyond the control of the Trustee. These risks and uncertainties include such matters as future changes in oil prices, oil production levels, economic activity, domestic and international political events and developments, legislation and regulation, and certain changes in expenses of the Trust.
     The actual results, performance and prospects of the Trust could differ materially from those expressed or implied by forward-looking statements. Descriptions of some of the risks that could affect the future performance of the Trust appear in the following Item 1A, “RISK FACTORS,” and elsewhere in this report. There may be additional risks of which the Trustee is unaware or which are currently deemed immaterial.

 


 

     In the light of these risks, uncertainties and assumptions, you should not rely unduly on any forward-looking statements. Forward-looking events and outcomes discussed in this report may not occur or may turn out differently. The Trustee undertakes no obligation to update forward-looking statements after the date of this report, except as required by law, and all such forward-looking statements in this report are qualified in their entirety by the preceding cautionary statements.
THE TRUST
Trust Property
     The property of the Trust consists of an overriding royalty interest (the “Royalty Interest”) and cash and cash equivalents held by the Trustee from time to time. The Royalty Interest entitles the Trust to a royalty on 16.4246 percent of the lesser of (i) the first 90,000 barrels * of the average actual daily net production of crude oil and condensate per quarter from the working interest of BP Alaska as of February 28, 1989 in the Prudhoe Bay oil field located on the North Slope in Alaska or (ii) the average actual daily net production of crude oil and condensate per quarter from that working interest. The Prudhoe Bay field is one of four contiguous North Slope oil fields that are operated by BP Alaska and are known collectively as the “Prudhoe Bay Unit.” The Royalty Interest was conveyed to the Trust by an Overriding Royalty Conveyance dated February 27, 1989 from BP Alaska to Standard Oil and a Trust Conveyance dated February 28, 1989 from Standard Oil to the Trust. Copies of the Overriding Royalty Conveyance and the Trust Conveyance are filed with the SEC as exhibits to this report. The Overriding Royalty Conveyance and the Trust Conveyance are referred to collectively as the “Conveyance.”
     The Royalty Interest is a non-operational interest in minerals. The Trust does not have the right to take oil and gas in kind, nor does it have any right to take over operations or to share in any operating decision with respect to BP Alaska’s working interest in the Prudhoe Bay field. BP Alaska is not obligated to continue to operate any well or maintain or attempt to maintain in force any portion of its working interest when, in its reasonable and prudent business judgment, the well or interest ceases to produce or is not capable of producing oil or gas in paying quantities.
Employees
     The Trust has no employees. All administrative functions of the Trust are performed by the Trustee.
Duties and Powers of the Trustee
     The duties of the Trustee are specified in the Trust Agreement and the laws of the State of Delaware. The Bank of New York (Delaware) has been appointed co-trustee in order to satisfy the Delaware Statutory Trust Act’s requirement that the Trust have at least one trustee resident in, or which has its principal place of business in, Delaware. However, The Bank of New York alone is able to exercise the rights and powers granted to the Trustee in the Trust Agreement. A copy of the Trust Agreement is filed with the SEC as an exhibit to this report.
     The basic function of the Trustee is to collect income from the Royalty Interest, to pay all expenses, charges and obligations of the Trust from the Trust’s income and assets, and to pay available cash to Unit holders. Because of the passive nature of the Trust’s assets and the restrictions on the power of the Trustee to incur obligations, the only liabilities that the Trust normally incurs in the conduct of its
 
*   The term “barrel” is a unit of measure of petroleum liquids equal to 42 United States gallons corrected to 60 degrees Fahrenheit temperature.

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operations are the Trustee’s fees and routine administrative expenses, including accounting, legal and other professional fees.
     The Trust Agreement grants the Trustee only the rights and powers necessary to achieve the purposes of the Trust. The Trust Agreement prohibits the Trust from engaging in any business or commercial activity or, with certain exceptions, any investment activity and from using any assets of the Trust to acquire any oil and gas lease, royalty or other mineral interest.
     The Trustee is entitled to be indemnified out of the assets of the Trust for any liability or loss incurred by it in the performance of its duties unless the loss results from its negligence, bad faith or fraud or from expenses incurred in carrying out its duties that exceed the compensation and reimbursement to which it is entitled under the Trust Agreement.
Sales of Royalty Interest; Borrowings and Reserves
     With certain exceptions, the Trustee may sell all or part of the Royalty Interest or an interest therein only if authorized to do so by vote of the holders of 70 percent of the Units outstanding if the sale is to be effected on or before December 31, 2010, or holders of 60 percent of the Units outstanding if the sale is to be effected after 2010. However, if the sale is made in order to pay specific liabilities of the Trust then due and involves a part, but not all or substantially all, of the Trust properties, the sale only needs to be approved by the vote of holders of a majority of the Units. Any sale of Trust properties must be for cash unless otherwise authorized by the Unit holders. The Trustee is obligated to distribute the available net proceeds of any such sale to the Unit holders after establishing reserves for liabilities of the Trust.
     The Trustee has the power to borrow on behalf of the Trust or to sell Trust assets to pay liabilities of the Trust and to establish a reserve for the payment of liabilities without the consent of the Unit holders under the following circumstances:
     The Trustee may borrow from a lender not affiliated with the Trustee if cash on hand is not sufficient to pay current liabilities and the Trustee has determined that it is not practical to pay such liabilities out of funds anticipated to be available in subsequent quarters and that, without such borrowing, the Trust property is subject to the risk of loss or diminution in value. To secure payment of its borrowings on behalf of the Trust, the Trustee is authorized to encumber the Trust’s assets and to carve out and convey production payments. The borrowing must be on terms which (in the opinion of an investment banking firm or commercial banking firm selected by the Trustee) are commercially reasonable when compared to other available alternatives. No distributions to Unit holders may be made until the borrowings by the Trust have been repaid in full.
     If the Trustee is unable to borrow to pay Trust liabilities, the Trustee may sell Trust assets if it determines that the failure to pay the liabilities at a later date will be contrary to the best interest of the Unit holders and that it is not practicable to submit the sale to a vote of the Unit holders. The sale must be made for cash at a price which (in the opinion of an investment banking firm or commercial banking firm selected by the Trustee) is at least equal to the fair market value of the interest sold and is made on commercially reasonable terms when compared to other available alternatives.
     The Trustee has the right to establish a cash reserve for the payment of material liabilities of the Trust which may become due if it determines that it is not practical to pay such liabilities out of funds anticipated to be available in subsequent quarters and that, in the absence of a

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reserve, the Trust property is subject to the risk of loss or diminution in value or the Trustee is subject to the risk of personal liability for such liabilities.
     In order for the Trustee to borrow, sell assets to pay Trust liabilities or establish a reserve for Trust liabilities, the Trustee must receive an unqualified written legal opinion that the contemplated action will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes. If the Trustee is unable to obtain the required legal opinion, it still may proceed with the borrowing or sale, or establish the reserve, if it determines that the failure to do so will be materially detrimental to the Unit holders considered as a whole.
     In 1999, the Trustee established a $1,000,000 cash reserve to provide liquidity to the Trust during any periods in which the Trust does not receive a distribution from BP Alaska. See Item 7 in Part II below.
Irrevocability; Amendment of the Trust Agreement
     The Trust Agreement and the Trust are irrevocable. No person has the power to terminate, revoke or change the Trust Agreement except as described in the following paragraph and below under “Termination of the Trust.”
     The Trust Agreement may be amended without a vote of the Unit holders to cure an ambiguity, to correct or supplement any provision of the Trust Agreement that may be inconsistent with any other provision or to make any other provision with respect to matters arising under the Trust Agreement that does not adversely affect the Unit holders. The Trust Agreement also may be amended with the approval of holders of a majority of the outstanding Units. However, no such amendment may alter the relative rights of Unit holders unless approved by the affirmative vote of holders of 100 percent of the outstanding Units, nor may any amendment reduce or delay the distributions to the Unit holders, alter the voting rights of Unit holders or the number of Units in the Trust, or make certain other changes, unless approved by the affirmative vote of holders of at least 80 percent of the outstanding Units and by the Trustee. The Trustee is required to consent to any amendment approved by the requisite vote of Unit holders unless the amendment affects the Trustee’s rights, duties and immunities under the Trust Agreement. No amendment will be effective until the Trustee has received a ruling from the Internal Revenue Service or an opinion of counsel to the effect that such modification will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes.
Termination of the Trust
     The Trust will terminate: (i) on or before December 31, 2010 if holders of at least 70 percent of the outstanding Units vote to terminate the Trust, or (ii) after December 31, 2010 if either (a) holders of at least 60 percent of the outstanding Units vote to terminate the Trust or (b) the net revenues from the Royalty Interest for two successive years commencing after 2010 are less than $1,000,000 per year (unless the net revenues during the two-year period have been materially and adversely affected by certain extraordinary events).
     Upon termination of the Trust, BP Alaska will have an option to purchase the Royalty Interest at a price equal to the greater of (i) the fair market value of the Trust property as set forth in an opinion of an investment banking firm, commercial banking firm or other entity qualified to give an opinion as to the fair market value of the assets of the Trust, or (ii) the number of outstanding Units multiplied by (a) the closing price of Units on the day of termination of the Trust on the stock exchange on which the Units are

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listed, or (b) if the Units are not listed on any stock exchange but are traded in the over-the-counter market, the closing bid price on the day of termination of the Trust as quoted on the NASDAQ National Market System. The purchase must be for cash unless holders of 70 percent of the Units outstanding (60 percent if the decision to terminate the Trust is made after December 31, 2010) authorize the sale for non-cash consideration and the Trustee has received a ruling from the Internal Revenue Service or an opinion of counsel to the effect that such non-cash sale will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes.
     If BP Alaska does not exercise its option, the Trustee will sell the Trust property on terms and conditions approved by the vote of holders of 70 percent of the outstanding Units (60 percent if the sale is made after December 31, 2010), unless the Trustee determines that it is not practicable to submit the matter to a vote of the Unit holders and the sale is made at a price at least equal to the fair market value of the Trust property as set forth in the opinion of the investment banking firm, commercial banking firm or other entity mentioned above and on terms and conditions deemed commercially reasonable by that firm.
     The Trustee will distribute all available proceeds to the Unit holders after satisfying all existing liabilities of the Trust and establishing adequate reserves for the payment of contingent liabilities.
     Unit holders do not have the right under the Trust Agreement to seek or secure any partition or distribution of the Royalty Interest or any other asset of the Trust or any accounting during the term of the Trust or during any period of liquidation and winding up.
Resignation or Removal of Trustee
     The Trustee may resign at any time or be removed with or without cause by vote of the holders of a majority of the outstanding Units at a meeting called and held in accordance with the Trust Agreement. A successor trustee may be appointed by BP Alaska or, if the Trustee has been removed at a meeting of the Unit holders, the successor trustee may be appointed by the Unit holders at the meeting. Any successor trustee must be a corporation organized, doing business and authorized to exercise trust powers under the laws of the United States, any state thereof or the District of Columbia, or a national banking association domiciled in the United States, in either case having a combined capital, surplus and undivided profits of at least $50,000,000 and subject to supervision or examination by federal or state authorities. Unless the Trust already has a trustee that is a resident of or has a principal office in Delaware, any successor trustee must be a resident of Delaware or have a principal office in Delaware. No resignation or removal of the Trustee will become effective until a successor trustee has accepted appointment.
Voting Rights of Unit Holders
     Unit holders possess certain voting rights, but their voting rights are not comparable to those of shareholders of a corporation. For example, there is no requirement for annual meetings of Unit holders or for periodic reelection of the Trustee.
     A meeting of the Unit holders may be called at any time to act with respect to any matter as to which the Trust Agreement authorizes the Unit holders to act. Any such meeting may be called by the Trustee in its discretion and will be called by the Trustee (i) as soon as practicable after receipt of a written request by BP Alaska or a written request that sets forth in reasonable detail the action proposed to be taken at the meeting and is signed by holders of at least 25 percent of the outstanding Units or (ii) when required by applicable laws or regulations or the New York Stock Exchange. The Trustee will give written notice of any meeting stating the time and place of the meeting and the matters to be acted on not

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more than 60 days nor fewer than 10 days before the meeting to all Unit holders of record on a date not more than 60 days before the meeting at their addresses shown on the records of the Trust. All meetings of Unit holders are required to be held in Manhattan, New York City. Unit holders are entitled to cast one vote on all matters coming before a meeting, in person or by proxy, for each Unit held on the record date for the meeting.
THE ROYALTY INTEREST
     The Royalty Interest is a property right under Alaska law which burdens production, but there is no other security interest in the reserves or production revenues assigned to it. The royalty payable to the Trust for each calendar quarter is the sum of the amounts obtained by multiplying Royalty Production for each day in the calendar quarter by the Per Barrel Royalty for that day. The payment under the Royalty Interest for any calendar quarter may not be less than zero nor more than the aggregate value of the total production of oil and condensate from BP Alaska’s working interest in the Prudhoe Bay Unit for the quarter, net of the State of Alaska royalty and less the value of any applicable payments made to affiliates of BP Alaska.
Royalty Production
     The “Royalty Production” for each day in a calendar quarter is 16.4246 percent of the lesser of (i) the first 90,000 barrels of the actual average daily net production of crude oil and condensate for the quarter from the Prudhoe Bay (Permo-Triassic) Reservoir and saved and allocated to the oil and gas leases owned by BP Alaska in the Prudhoe Bay field as of February 28, 1989 (the “BP Working Interests”), or (ii) the actual average daily net production of crude oil and condensate for the quarter from the BP Working Interests. The Royalty Production is based on oil produced from the oil rim and condensate produced from the gas cap, but not on gas production or natural gas liquids production. The actual average daily net production of oil and condensate from the BP Working Interests for any calendar quarter is the total production of oil and condensate for the quarter, net of the State of Alaska royalty, divided by the number of days in the quarter.
Per Barrel Royalty
     The “Per Barrel Royalty” for any day is the WTI Price for the day less the sum of (i) Chargeable Costs multiplied by the Cost Adjustment Factor and (ii) Production Taxes.
WTI Price
     The “WTI Price” for any trading day is (i) the price (in dollars per barrel) for West Texas intermediate crude oil of standard quality having a specific gravity of 40 API degrees for delivery at Cushing, Oklahoma (“West Texas Intermediate”) quoted for that trading day by whichever of The Wall Street Journal, Reuters, or Platts Oilgram Price Report, in that order, publishes West Texas Intermediate price quotations for the trading day, or (ii) if the price of West Texas Intermediate is not published by one of those publications, the WTI Price will be the simple average of the daily mean prices (in dollars per barrel) quoted for West Texas Intermediate by one major oil company, one petroleum broker and one petroleum trading company designated by BP Alaska, in each case unaffiliated with BP and having substantial U.S. operations, until published price quotations are again available. If prices for West Texas Intermediate are not quoted so as to permit the calculation of the WTI Price, the price of “West Texas Intermediate,” for the purposes of calculating the WTI Price will be the price of another light sweet domestic crude oil of standard quality designated by BP Alaska and approved by the Trustee, with appropriate allowance for transportation costs to the Gulf coast (or another appropriate location) to

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equilibrate its price to the WTI Price. The WTI Price for any day which is not a trading day is the WTI Price for the preceding trading day.
Chargeable Costs
     The “Chargeable Costs” per barrel of Royalty Production for each calendar year are fixed amounts specified in the Conveyance and do not necessarily represent BP Alaska’s actual costs of production. Chargeable Costs per barrel were $11.25 during 2002, $11.75 during 2003, $12.00 during 2004, $12.25 during 2005 and $12.50 during 2006. Chargeable Costs for 2007 and subsequent years are shown in the following table:
                     
Calendar   Chargeable Costs   Calendar   Chargeable Costs
year   per barrel   year   per barrel
2007
  $ 12.75     2014   $ 16.90  
2008
    13.00     2015     17.00  
2009
    13.25     2016     17.10  
2010
    14.50     2017     17.20  
2011
    16.60     2018     20.00  
2012
    16.70     2019     23.75  
2013
    16.80     2020     26.50  
     After 2020, Chargeable Costs increase at a uniform rate of $2.75 per barrel per year.
Cost Adjustment Factor
     The “Cost Adjustment Factor” for a quarter is the ratio of the Consumer Price Index published for the most recently past February, May, August or November to 121.1 (the Consumer Price Index for January 1989). The “Consumer Price Index” is the U.S. Consumer Price Index, all items and all urban consumers, U.S. city average (1982-84 equals 100), as first published, without seasonal adjustment, by the Bureau of Labor Statistics, Department of Labor, without regard to subsequent revisions or corrections. If the average WTI Price for any calendar quarter falls to $18.00 or less, the Cost Adjustment Factor for that quarter will be the Cost Adjustment Factor for the immediately preceding quarter. If the average WTI Price returns to more than $18.00 for a later quarter, adjustments to the Cost Adjustment Factor resume, but with an adjustment to the formula that excludes changes in the Consumer Price Index during the period that adjustments to the Cost Adjustment Factor were suspended.
Production Taxes
     “Production Taxes” are the sum of any severance taxes, excise taxes (including windfall profit tax, if any), sales taxes, value added taxes or other similar or direct taxes imposed upon the reserves or production, delivery or sale of Royalty Production, computed at defined statutory rates.
     Until August 2006, the Production Taxes payable with respect to the Royalty Production were (i) the Alaska Oil Production Tax (the “Old Tax”), which was levied at the flat rate of 15 percent of the gross value of oil at the point of production (the wellhead or field value) and which, as required by the Conveyance, was applied for the purpose of determining the Royalty Interest without regard to the “economic limit factor” (a formula designed to result in low tax rates for smaller low productive fields and higher tax rates for larger highly productive fields), and (ii) a surcharge of $0.03 per barrel of Royalty Production. The Conveyance provides that, in the case of taxes based upon wellhead or field value, the WTI Price less the product of $4.50 multiplied by the Cost Adjustment Factor is deemed to be the wellhead or field value.

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     On August 20, 2006 a new Alaska oil and gas production tax (the “New Tax”) became effective. The New Tax replaced the Old Tax and is retroactive to April 1, 2006. Under the New Tax, producers are taxed on the “production tax value of taxable oil” (gross value at the point of production for the calendar year less the producer’s direct costs of exploring for, developing, or producing oil or gas deposits located within the producer’s leases or properties in Alaska (“Lease Expenditures”) for the year) at a rate equal to the sum of 22.5 percent plus a “progressivity” rate determined by the average monthly production tax value of the oil produced. The progressivity portion of the New Tax is equal to 0.25 percent times the amount by which the simple average for each calendar month of the daily production tax values per barrel of the oil produced during the month exceeds $40 per barrel. In addition, the New Tax increased the surcharge on oil produced from leases or properties in Alaska from $0.03 to $0.04 per barrel.
     In order to resolve uncertainties in the interpretation of the Conveyance resulting from the New Tax, in October 2006 the Trustee entered into a letter agreement with BP Alaska (the “Letter Agreement”), a copy of which is incorporated by reference as Exhibit 4.5 to this report. The Letter Agreement sets forth principles agreed to by BP Alaska and the Trustee to resolve two major issues presented by the New Tax: first, how the amount of the Production Taxes chargeable against the Royalty Interest under the Conveyance is to be determined; and second, the extent, if at all, to which the retroactivity of the New Tax was to be recognized for purposes of computing the Royalty Interest (the “Consensus Principles”).
      Determination of Production Taxes
     The Consensus Principles provide that the amount of Production Taxes (other than the $0.04 per barrel surcharge) chargeable against the Royalty Interest under the Conveyance are to be determined as follows:
     (a) The production tax value per barrel of oil for each day is determined by taking the WTI Price for that day and subtracting the product of the amount of the Chargeable Costs then in effect multiplied by the applicable Cost Adjustment Factor.
     (b) The tax rate for the “progressivity” portion of the New Tax is determined by multiplying 0.25 percent by the amount by which the simple average for each calendar month of the daily production tax values per barrel of oil, determined as described in paragraph (a) above, exceeds $40 per barrel. If that average production tax value per barrel of oil is $40 or less, the “progressivity” rate is zero. The $40 threshold for the applicability of the “progressivity” rate is not subject to adjustment over time.
     (c) The amount of Production Taxes chargeable against the Royalty Interest is determined by multiplying the production tax value per barrel of oil, determined as described in paragraph (a) above, by the Royalty Production under the Conveyance, and then multiplying the product by the percentage rate obtained by adding 22.5 percent to the “progressivity” rate, determined as described in paragraph (b) above.
     The Letter Agreement, incorporated by reference as Exhibit 4.5 to this report, contains a discussion of the rationale for using inflation adjusted Chargeable Costs as a proxy for BP Alaska’s actual Lease Expenditures for purposes of determining Production Taxes chargeable against the Royalty Interest. The Letter Agreement explains that under the New Tax BP Alaska is required to use estimates of Lease Expenditures for purposes of its monthly reporting to the State of Alaska, and that actual Lease Expenditures are determined and reconciled to monthly estimates up to three months after the close of each fiscal year. The use of BP Alaska’s estimated Lease Expenditures for purposes of calculating the Production Taxes applied to quarterly payments of the Royalty Interest could require regular adjustments

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to future royalty payments to compensate for over or under charges of Production Taxes to past royalty payments once actual Lease Expenditures were determined. These adjustments could create unfair benefits for certain Unit holders and unfair detriment to others. BP Alaska expects that inflation adjusted Chargeable Costs will provide a reasonable, although not an exact, approximation of BP Alaska’s Leasehold Expenditures and provide certainty to investors in the Trust Units. BP Alaska cautions, however, that to the extent actual Lease Expenditures for a particular year are higher than adjusted Chargeable Costs for the year, the Trust Units may bear Production Taxes at a higher rate than the rate of New Tax applicable to BP Alaska’s production for the year; conversely, if BP Alaska’s Lease Expenditures for a year are less than adjusted Chargeable Costs for that year, Production Taxes charged against the Royalty Interest may be charged at a lower rate than the rate of New Tax applicable to BP Alaska’s production.
      Retroactivity of New Tax
     In the Consensus Principles the parties agreed that the New Tax would not be applied retroactively to payments by BP Alaska with respect to the Royalty Interest. Production Taxes charged against the Royalty Interest were the amount of Old Tax as calculated under the Conveyance for oil production during the period from April 1 to August 19, 2006, inclusive. For oil produced on August 20, 2006 and thereafter, the Production Taxes charged against the Royalty Interest were the amount of New Tax, determined as described above, for that production. The “progressivity” rate under the New Tax for the month of August 2006 was calculated using the average of the daily WTI Prices for the period from August 20 to August 31, 2006, inclusive.

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Per Barrel Royalty Calculations
     The following table shows how the above-described factors interacted during the past five years to produce the average Per Barrel Royalty paid for the calendar quarters indicated.
                                                 
                    Cost   Adjusted           Average Per
    Average   Chargeable   Adjustment   Chargeable   Production   Barrel
    WTI Price   Costs   Factor   Costs   Taxes(1)   Royalty(2)
2002:
                                               
1 st Qtr
  $ 21.67     $ 11.25       1.369     $ 15.40     $ 2.36     $ 3.91  
2 nd Qtr
    26.28       11.25       1.384       15.57       3.04       7.67  
3 rd Qtr
    28.33       11.25       1.391       15.65       3.34       9.34  
4 th Qtr
    28.25       11.25       1.396       15.70       3.33       9.22  
 
                                               
2003:
                                               
1 st Qtr
    34.08       11.75       1.410       16.57       4.19       13.32  
2 nd Qtr
    29.07       11.75       1.413       16.60       3.44       9.03  
3 rd Qtr
    30.30       11.75       1.421       16.70       3.62       9.98  
4 th Qtr
    31.23       11.75       1.421       16.69       3.76       10.78  
 
                                               
2004:
                                               
1 st Qtr
    35.18       12.00       1.434       17.20       4.34       13.64  
2 nd Qtr
    38.31       12.00       1.456       17.47       4.79       16.05  
3 rd Qtr
    43.78       12.00       1.459       17.51       5.61       20.66  
4 th Qtr
    48.35       12.00       1.471       17.65       6.29       24.41  
 
                                               
2005:
                                               
1 st Qtr
    49.70       12.25       1.477       18.09       6.49       25.12  
2 nd Qtr
    53.09       12.25       1.497       18.34       6.98       27.77  
3 rd Qtr
    63.03       12.25       1.512       18.53       8.46       36.04  
4 th Qtr
    60.01       12.25       1.521       18.63       8.01       33.37  
 
                                               
2006:
                                               
1 st Qtr
    63.36       12.50       1.530       19.13       8.50       35.73  
2 nd Qtr
    70.53       12.50       1.559       19.49       9.56       41.48  
3 rd Qtr
    70.64       12.50       1.570       19.63       10.68       40.34  
4 th Qtr
    60.17       12.50       1.552       19.39       9.31       31.46  
 
(1)   Production Taxes for the third and fourth quarters of 2006 reflect the effect of the new Alaska oil and gas production tax.
 
(2)   Average daily net production of oil and condensate from the BP Working Interests in the third and fourth quarters of 2006 was approximately 62,087 barrels and 87,220 barrels (estimated), respectively; average daily net production exceeded 90,000 barrels in all other periods. See “THE PRUDHOE BAY UNIT AND FIELD – Collection and Transportation of Prudhoe Bay Oil” below.
 
(3)   Dollar amounts in the table have been rounded to two decimal places for presentation and do not reflect the precision of the actual calculations.

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THE UNITS
Units
     Each Unit represents an equal undivided share of beneficial interest in the Trust. The Units do not represent an interest in or an obligation of BP Alaska, Standard Oil or any of their respective affiliates. Units are evidenced by transferable certificates issued by the Trustee. Each Unit entitles its holder to the same rights as the holder of any other Unit. The Trust has no other authorized or outstanding class of securities.
Distributions of Income
     BP Alaska makes quarterly payments to the Trust of the amounts due with respect to the Trust’s Royalty Interest on the fifteenth day following the end of each calendar quarter or, if the fifteenth is not a business day, on the next succeeding business day (the “Quarterly Record Date”). The Trustee pays all expenses of the Trust for each quarter on the Quarterly Record Date to the extent possible, then distributes the excess, if any, of the cash received by the Trust over the Trust’s expenses, net of any additions to or subtractions from the cash reserve established for the payments of estimated liabilities (the “Quarterly Distribution”), to the persons in whose names the Units were registered at the close of business on the Quarterly Record Date.
     The Trust Agreement requires the Trustee to pay the Quarterly Distribution to Unit holders on the fifth day after the Trustee’s receipt of the amount paid by BP Alaska. Cash balances held by the Trustee for distribution to Unit holders are required to be invested in United States government or agency obligations secured by the full faith and credit of the United States (“Government Obligations”) or, if Government Obligations that mature on the date of the distribution to Unit holders are not available, in repurchase agreements secured by Government Obligations with banks having capital, surplus and undivided profits of $100,000,000 or more (which may include The Bank of New York). If time does not permit the Trustee to invest collected funds in Government Obligations or repurchase agreements, the Trustee may invest funds overnight in a time deposit with a bank meeting the foregoing capital requirement (including The Bank of New York).
Reports to Unit Holders
     After the end of each calendar year, the Trustee mails a report to the persons who held Units of record during the year containing information to enable them to make the calculations necessary for federal and Alaska income tax purposes, including the calculation of any depletion or other deduction which may be available to them for the calendar year. In addition, after the end of each calendar year the Trustee mails Unit holders an annual report containing a copy of this Form 10-K and certain other information required by the Trust Agreement.
Limited Liability of Unit Holders
     The Trust Agreement provides that the Unit holders are, to the full extent permitted by Delaware law, entitled to the same limitation of personal liability extended to stockholders of private corporations for profit under Delaware law.
Possible Divestiture of Units
     The Trust Agreement imposes no restrictions on nationality or other status of the persons eligible to hold Units. However, it provides that if at any time the Trust or the Trustee is named a party in any

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judicial or administrative proceeding seeking the cancellation or forfeiture of any property in which the Trust has an interest because of the nationality, or any other status, of any one or more Unit holders, the Trustee may require each holder whose nationality or other status is an issue in the proceeding to dispose of his Units to a party not of the nationality or other status at issue in the proceeding. If any holder fails to dispose of his Units within 30 days after receipt of notice from the Trustee to do so, the Trustee will redeem any Units not so transferred within 90 days after the end of the 30-day period specified in the notice for a cash price equal to the fair market value of the Units. Units redeemed by the Trustee will be cancelled.
     The Trustee may cause the Trust to borrow any amount required to redeem the Units. If the purchase of Units from an ineligible holder by the Trustee would result in a non-exempt “prohibited transaction” under the Employee Retirement Income Security Act of 1970, or under the Internal Revenue Code of 1986, the Units subject to the Trustee’s right of redemption will be purchased by BP Alaska or a designee of BP Alaska.
Issuance of Additional Units
     The Trust Agreement provides that BP Alaska or an affiliate from time to time may assign to the Trust additional royalty interests meeting certain conditions and, upon satisfaction of various other conditions, the Trust may issue up to an additional 18,600,000 Units. BP Alaska has not conveyed any additional royalty interests to the Trust, and the Trust has not issued any additional Units.
THE BP SUPPORT AGREEMENT
     BP agreed to provide financial support to BP Alaska in meeting its payment obligations to the Trust in a Support Agreement dated February 28, 1989 among BP, BP Alaska, Standard Oil and the Trust (the “Support Agreement”). Within 30 days after BP receives notice from the Trustee that the royalty payable with respect to the Royalty Interest or any other amount payable by BP Alaska or Standard Oil has not been paid to the Trustee, BP will cause BP Alaska and Standard Oil to satisfy their respective payment obligations to the Trust and the Trustee under the Trust Agreement and the Conveyance, including contributing to BP Alaska the funds necessary to make such payments. BP is required to make available to BP Alaska and Standard Oil such financial support as BP Alaska, Standard Oil or the Trustee may request in writing. Any Unit holder has the unconditional right to institute suit against BP to enforce BP’s obligations under the Support Agreement.
     Neither BP nor BP Alaska may transfer or assign its rights or obligations under the Support Agreement without the prior written consent of the Trustee, except that BP can arrange for its obligations to be performed by any its affiliates so long as BP remains responsible for ensuring that its obligations are performed in a timely manner.
     BP Alaska may sell or transfer all or part of its working interest in the Prudhoe Bay Unit, although such a transfer will not relieve BP of its responsibility to ensure that BP Alaska’s payment obligations with respect to the Royalty Interest and under the Trust Agreement and the Conveyance are performed.
     BP will be released from its obligation under the Support Agreement upon the sale or transfer of all or substantially all of BP Alaska’s working interest in the Prudhoe Bay Unit if the transferee agrees in writing to assume and be bound by BP’s obligation under the Support Agreement. The transferee’s agreement to assume BP’s obligations must be reasonably satisfactory to the Trustee and the transferee must be an entity having a rating of its unsecured, unsupported long-term debt of at least A3 from Moody’s Investors Service, Inc., a rating of at least A- from Standard & Poor’s, or an equivalent rating

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from at least one nationally-recognized statistical rating organization (after giving effect to the sale or transfer and the assumption of all of BP Alaska’s obligations under the Conveyance and all of BP’s obligations under the Support Agreement).
THE PRUDHOE BAY UNIT AND FIELD
Prudhoe Bay Unit Operation and Ownership
     Since several oil companies besides BP Alaska hold acreage within the Prudhoe Bay field, as well as several contiguous oil fields, the Prudhoe Bay Unit was established to optimize field development. Other owners of these fields include affiliates of Exxon Mobil Corporation, ConocoPhillips and ChevronTexaco Corporation. The Trust’s Royalty Interest pertains only to production from the BP Working Interests in the Prudhoe Bay field and does not include production from the other oil fields included in the Prudhoe Bay Unit.
     The operations of BP Alaska and the other working interest owners in the Prudhoe Bay Unit are governed by an agreement dated April 1, 1977 among the State of Alaska and the working interest owners establishing the Prudhoe Bay Unit (the “Prudhoe Bay Unit Agreement”) and an agreement dated April 1, 1977 among the working interest owners governing Prudhoe Bay Unit operations (the “Prudhoe Bay Unit Operating Agreement”).
     The Prudhoe Bay Unit Operating Agreement specifies the allocation of production and costs to the working interest owners. It also defines operator responsibilities and voting requirements and is unusual in its establishment of separate participating areas for the gas cap and oil rim. Since July 1, 2000, BP Alaska has been the sole operator of the Prudhoe Bay Unit.
     The ownership of the Prudhoe Bay Unit by participating area as of December 31, 2006 is shown in the following table:
                 
    Oil rim   Gas cap
BP Alaska
    26.36 %(a)     26.36 %(b)
Exxon Mobil
    36.40       36.40  
ConocoPhillips
    36.08       36.08  
ChevronTexaco
    1.16       1.16  
 
               
Total
    100.00 %     100.00 %
 
               
 
(a)   The Trust’s share of oil production is computed based on BP Alaska’s ownership interest in the oil rim participating area of 50.68 percent as of February 28, 1989. Subsequent decreases in BP Alaska’s participation in oil rim ownership do not affect calculation of Royalty Production from the BP Working Interests and have not decreased the Trust’s Royalty Interest.
 
(b)   The Trust’s share of condensate production is computed based on BP Alaska’s ownership interest in the gas cap participating area of 13.84 percent as of February 28, 1989. Subsequent increases in BP Alaska’s gas cap ownership do not affect calculation of Royalty Production from the BP Working Interests and have not increased the Trust’s Royalty Interest.
     If BP Alaska fails to pay any costs and expenses chargeable to BP Alaska under the Prudhoe Bay Unit Operating Agreement and the production of oil and condensate is insufficient to pay such costs and expenses, the Royalty Interest is chargeable with a pro rata portion of such costs and expenses and is subject to the enforcement against it of liens granted to the operators of the Prudhoe Bay Unit. However,

13


 

in the Conveyance BP Alaska agreed to pay all costs and expenses chargeable to it and to ensure that no such costs and expenses will be chargeable against the Royalty Interest. The Trust is not liable for any loss or liability incurred by BP Alaska or others attributable to BP Alaska’s working interest in the Prudhoe Bay Unit or to the oil produced from it and BP Alaska has agreed to indemnify the Trust and hold it harmless against any such impositions.
     BP Alaska has the right to amend or terminate the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement and any leases or conveyances with respect to the BP Working Interests in the exercise of its reasonable and prudent business judgment without liability to the Trust. BP Alaska also has the right to sell or assign all or any part of the BP Working Interests, so long as the sale or assignment is expressly made subject to the Royalty Interest and the terms and provisions of the Conveyance.
The Prudhoe Bay Field
     The Prudhoe Bay field is located on the North Slope of Alaska, 250 miles north of the Arctic Circle and 650 miles north of Anchorage. The Prudhoe Bay field extends approximately 12 miles by 27 miles and contains nearly 150,000 productive acres. The Prudhoe Bay field, which was discovered in 1968 by BP and others, has been in production since 1977 and is the largest producing oil field in North America. As of December 31, 2006, approximately 10.9 billion barrels of oil and condensate had been produced from the Prudhoe Bay field.
Field Geology
     The principal hydrocarbon accumulations at Prudhoe Bay are in the Ivishak sandstone of the Sadlerochit Group at a depth of approximately 8,700 feet below sea level. The Ivishak is overlain by four minor reservoirs of varying extent which are designated the Put River, Eileen, Sag River and Shublik (“PESS”) formations. Underlying the Sadlerochit Group are the oil-bearing Lisburne and Endicott formations. The net production allocated to the Royalty Interest pertains only to the Ivishak and PESS formations, collectively known as the Prudhoe Bay (Permo-Triassic) Reservoir, and does not pertain to the Lisburne and Endicott formations.
     The Ivishak sandstone was deposited, commencing some 250 million years ago, during the Permian and Triassic geologic periods. The sediments in the Ivishak are composed of sandstone, conglomerate and shale which were deposited by a massive braided river and delta system that flowed from an ancient mountain system to the north. Oil was trapped in the Ivishak by a combination of structural and stratigraphic trapping mechanisms.
     Gross reservoir thickness is 550 feet, with a maximum oil column thickness of 425 feet. The original oil column is bounded on the top by a gas-oil contact, originally at 8,575 feet below sea level across the main field, and on the bottom by an oil-water contact at approximately 9,000 feet below sea level. A layer of heavy oil and tar overlays the oil-water contact in the main field and has an average thickness of around 40 feet.
Oil Characteristics
     The oil produced from the Prudhoe Bay (Permo-Triassic) Reservoir is a medium grade, low sulfur crude with an average specific gravity of 27 API degrees. The gas cap composition is such that, upon surfacing, a liquid hydrocarbon phase, known as condensate, is formed.

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     The Royalty Interest is based upon oil produced from the oil rim and condensate produced from the gas cap, but not upon gas production (which is currently uneconomic) or natural gas liquids production stripped from gas produced.
Historical Production
     Production from the Prudhoe Bay field began on June 19, 1977, with the completion of the Trans-Alaska Pipeline System (“TAPS”). As of December 31, 2006 there were about 1,120 active producing oil wells, 32 gas reinjection wells, 82 water injection wells and 137 water and miscible gas injection wells in the Prudhoe Bay field. Production from the Prudhoe Bay field reached a peak in 1988 and has declined steadily since then. The average well production rate was about 375 barrels per day in 2002, 350 barrels per day in 2003, 317 barrels per day in 2004, 293 barrels per day in 2005 and 223 barrels per day in 2006.
     BP Alaska’s share of the hydrocarbon liquids production from the Prudhoe Bay field includes oil, condensate and natural gas liquids. Using the production allocation procedures from the Prudhoe Bay Unit Operating Agreement, the Prudhoe Bay field’s total production and the net share of oil and condensate (net of State of Alaska royalty) allocated to the BP Working Interests have been as follows during the past five years:
                                 
    Oil   Condensate
            Net to BP           Net to BP
Calendar           Working           Working
year   Total field   Interests   Total field   Interests
    (thousand barrels per day)
2002
    293.8       130.3       121.5       14.7  
2003
    273.2       121.2       113.8       13.8  
2004
    243.4       107.9       109.0       13.2  
2005
    228.9       101.5       96.4       11.7  
2006
    166.9       74.0       83.0       10.1  
Collection and Transportation of Prudhoe Bay Oil
     Raw crude oil produced from individual production wells located at well pads is diverted to flowlines (pipelines). The flowlines transport the raw crude oil to one of six separation facilities (three on the western side of the Prudhoe Bay Unit and three on the eastern side) where the water and natural gas mixed with the raw crude are removed. The stabilized crude is then sent from the separation facilities through two 34-inch diameter transit lines, one from each half of the Prudhoe Bay Unit, to Pump Station 1, the starting point for TAPS.
     At Pump Station 1, Alyeska Pipeline Service Company, the operator of TAPS, meters the oil and pumps it in the 48-inch diameter pipeline to Valdez, almost 800 miles (1,287 km) to the south, where it is either loaded onto marine tankers or stored temporarily. It takes the oil about seven days to make the trip. TAPS has a capacity of approximately 1.4 million barrels of oil per day.
     On August 7, 2006, BP announced that BP Alaska had begun a shutdown of the Prudhoe Bay Unit following the discovery of unexpectedly severe corrosion and a small spill from the oil transit line on the eastern side of the field. The decision followed the receipt several days earlier of data from a “smart

15


 

pig” run completed in late July. Analysis of the data revealed 16 anomalies in 12 locations in the oil transit line. During follow up inspections of the anomalies, BP Alaska personnel discovered corrosion-related wall thinning which appeared to exceed criteria for continued operation and a leak and small spill estimated at four to five barrels. BP had previously announced plans to replace a three-mile segment of transit line on the western side of the Prudhoe Bay field following inspections conducted after a large spill caused by corrosion discovered in March 2006.
     BP subsequently determined to shut down only the eastern side of the Prudhoe Bay Unit and continue production from the western side of the Unit. The partial shutdown of the field reduced average daily production to approximately half of normal output. On September 22, 2006, BP announced that it had received clearance from the U.S. Department of Transportation to restart production in the eastern half of the Prudhoe Bay Unit. BP has announced plans to completely replace approximately 16 miles of transit lines and to implement federally-required corrosion monitoring practices.
Reservoir Management
     The Prudhoe Bay field is a complex, combination-drive reservoir, with widely varying reservoir properties. Reservoir management involves directing field activities and projects to maximize the economic value of reserves.
     Several different oil recovery mechanisms are currently active in the Prudhoe Bay field, including pressure depletion, gravity drainage/gas cap expansion, water flooding and miscible gas flooding. Separate yet integrated reservoir management strategies have been developed for the areas affected by each of these recovery processes.
Reserve Estimates
     Estimates of proved reserves are inherently imprecise and subjective and are revised over time as additional data become available. Such revisions often may be substantial. BP Alaska’s reserve estimates and production assumptions and projections are predicated upon a reasonable estimate of the allocation of hydrocarbon liquids between oil and condensate according to the procedures of the Prudhoe Bay Unit Operating Agreement. Oil and condensate are physically produced in a commingled stream of hydrocarbon liquids. The allocation of hydrocarbon liquids between the oil and condensate from the Prudhoe Bay field is a theoretical calculation performed in accordance with procedures specified in the Prudhoe Bay Unit Operating Agreement. Due to the differences in percentages between oil and condensate, the overall share of oil and condensate production allocated to the BP Working Interests will vary over time according to the proportions of hydrocarbon liquid being allocated as condensate or as oil. Under the terms of an Issues Resolution Agreement entered into by the Prudhoe Bay Unit owners in October 1990, the allocation procedures have been adjusted to generally allocate condensate in a manner which approximates the anticipated decline in the production of oil until an agreed original condensate reserve of 1,175 million barrels has been allocated to the working interest owners.
     The reserves attributable to the Trust’s Royalty Interest constitute only a part of the overall reserves allocated to the BP Working Interests. BP Alaska has estimated that the net remaining proved reserves attributable to the Trust as of December 31, 2006 were 81.08 million barrels of oil and condensate, of which 69.02 million barrels are proved developed reserves and 12.06 million barrels are proved undeveloped reserves. Using procedures specified in Financial Accounting Standards Board Statement of Financial Standards No. 69, BP Alaska calculated that as of December 31, 2006 production
 
  An electronic device including magnetic flux leakage and ultrasonic thickness testing systems that is propelled through a pipeline to inspect the pipeline wall.

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of oil and condensate from the proved reserves allocated to the Trust’s Royalty Interest will result in estimated future net revenues to the Trust of $1,855.3 million, with a present value of $1,052.0 million. BP Alaska’s estimates of proved reserves and the estimated future net revenues from the Prudhoe Bay Unit have been reviewed by Miller and Lents, Ltd., independent oil and gas consultants, as set forth in their report following this section.
     BP Alaska has undertaken a program of field-wide infrastructure renewal, pipeline replacement, and mechanical improvements to wells. As a consequence of these activities and their required downtime, BP Alaska anticipates that its average net production of oil and condensate from proved reserves will be below 90,000 barrels per day in certain quarters of future years and will fall below 90,000 barrels per day on an annual average basis beginning in 2007. The occurrence of major gas sales could accelerate the decline in net production, due to the consequent decline in reservoir pressure. See Item 1A, “RISK FACTORS.” Based on the WTI Price of $61.06 per barrel on December 31, 2006, current Production Taxes, and the Chargeable Costs adjusted as prescribed by the Overriding Royalty Conveyance, it is estimated that royalty payments to the Trust will continue through the year 2024. BP Alaska expects continued economic production from the Prudhoe Bay field at a declining rate through 2062.
     There is no precise method of forecasting the allocation of reserve volumes between BP Alaska and the Trust. The Royalty Interest is not a working interest and the Trust is not entitled to receive any specific volume of reserves from the BP Working Interests. Rather, reserve volumes attributable to the Trust at any given date are estimated by allocating to the Trust its share of estimated future production from the BP Working Interests based on WTI Prices and other economic parameters in effect on the date of the evaluation.
     The following table shows the net remaining proved reserves of oil and condensate allocated to the BP Working Interests, the net proved reserves allocated to the Trust, and the WTI Prices on the dates indicated:
                         
    Net Proved Reserves    
    BP Working           WTI Price
December 31   Interests (a)   Trust (b)   per barrel
    (million barrels)        
2002
    908.7       85.8     $ 31.23  
2003
    858.7       77.9       32.55  
2004
    941.4       77.4       43.46  
2005
    1,043.0       85.3       61.04  
2006
    912.1       81.1       61.06  
 
(a)   Includes proved undeveloped reserves of 5.5 million barrels at December 31, 2002, 139.9 million barrels at December 31, 2003, 115.4 million barrels at December 31, 2004, 96.0 million barrels at December 31, 2005 and 84.2 million barrels at December 31, 2006.
 
(b)   Includes proved undeveloped reserves of 0.03 million barrels at December 31, 2002, 11.0 million barrels at December 31, 2003, 9.1 million barrels at December 31, 2004, 12.3 million barrels at December 31, 2005 and 12.1 million barrels at December 31, 2006.
     The reserve volumes attributable to the Trust are estimated using an allocation of reserve volumes based on estimated future production and the current WTI Price, and assume no future movement in the Consumer Price Index and no changes to the procedure for calculating Production Taxes. The estimated

17


 

reserve volumes attributable to the Trust will vary if different estimates of production, prices and other factors are used. Even if expected reservoir performance does not change, the estimated reserves, economic life, and future revenues attributable to the Trust may change significantly in the future. This may result from changes in the WTI Price or from changes in other prescribed variables utilized in calculations defined by the Overriding Royalty Conveyance. See Note 10 (unaudited) of the Notes to Financial Statements in Item 8.
     BP Alaska is under no obligation to make investments in development projects which would add additional non-proved resources to proved reserves and cannot make such investments without the concurrence of the Prudhoe Bay Unit working interest owners. The Prudhoe Bay Unit working interest owners regularly assess the technical and economic attractiveness of implementing projects to increase Prudhoe Bay Unit proved reserves.
     In the event of changes in BP Alaska’s current assumptions, oil and condensate recoveries may be reduced from the current estimates, unless recovery projects other than those included in the current estimates are implemented.

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INDEPENDENT OIL AND GAS CONSULTANTS’ REPORT
         
 
  Miller and Lents, Ltd.    
 
  international oil and gas consultants    
 
  founded 1948    
February 14, 2007
The Bank of New York
Trustee, BP Prudhoe Bay Royalty Trust
101 Barclay Street, 8 West
New York, New York 10286
             
 
  Re:   Estimates of Proved Reserves,    
 
      Future Production Rates, and    
 
      Future Net Revenues for the    
 
      BP Prudhoe Bay Royalty Trust    
 
      As of December 31, 2006    
Gentlemen:
     This letter report is a summary of investigations performed in accordance with our engagement by you as described in Section 4.8(d) of the Overriding Royalty Conveyance dated February 27, 1989, between BP Exploration (Alaska) Inc. and The Standard Oil Company. The investigations included reviews of the estimates of Proved Reserves and production rate forecasts of oil and condensate made by BP Exploration (Alaska) Inc. attributable to the BP Prudhoe Bay Royalty Trust as of December 31, 2006. Additionally, we reviewed calculations of the resulting Estimated Future Net Revenues and Present Value of Estimated Future Net Revenues attributable to the BP Prudhoe Bay Royalty Trust.
     The estimates and calculations reviewed were summarized in the report prepared by BP Exploration (Alaska) Inc. and transmitted with a cover letter dated February 12, 2007 addressed to Mr. Remo J. Reale of The Bank of New York and signed by Mr. Todd M. Krier. Reviews were also performed by Miller and Lents, Ltd. during this year or in previous years of (1) the procedures for estimating and documenting Proved Reserves, (2) the estimates of in-place reservoir volumes, (3) the estimates of recovery factors and production profiles for the various areas, pay zones, projects, and recovery processes that are included in the estimate of Proved Reserves, (4) the production strategy and procedures for implementing that strategy, (5) the sufficiency of the data available for making estimates of Proved Reserves and production profiles, and (6) pertinent provisions of the Prudhoe Bay Unit Operating Agreement, the Issues Resolution Agreement, the Overriding Royalty Conveyance, the Trust Conveyance, the BP Prudhoe Bay Royalty Trust Agreement, and other related documents referenced in the Form F-3 Registration Statement filed with the Securities and Exchange Commission on August 7, 1989, by BP Exploration (Alaska) Inc.
     Proved Reserves were estimated by BP Exploration (Alaska) Inc. in accordance with the definitions contained in Securities and Exchange Commission Regulation S-X, Rule 4-10(a). Estimated Future Net Revenues and Present Value of Estimated Future Net Revenues are not intended and should not be interpreted to represent fair market values for the estimated reserves.

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  Miller and Lents, Ltd.    
The Bank of New York
      February 14, 2007
Trustee, BP Prudhoe Bay Royalty Trust
       
     The Prudhoe Bay (Permo-Triassic) Reservoir is defined in the Prudhoe Bay Unit Operating Agreement. The Prudhoe Bay Unit is an oil and gas unit situated on the North Slope of Alaska. The BP Prudhoe Bay Royalty Trust is entitled to a royalty payment on 16.4246 percent of the first 90,000 barrels of the actual average daily net production of oil and condensate for each calendar quarter from the BP Exploration (Alaska) Inc. working interest as defined in the Overriding Royalty Conveyance. The payment amount depends upon the Per Barrel Royalty which in turn depends upon the West Texas Intermediate Price, the Chargeable Costs, the Cost Adjustment Factor, and Production Taxes, all of which are defined in the Overriding Royalty Conveyance. “Barrel” as used herein means Stock Tank Barrel as defined in the Overriding Royalty Conveyance.
     Our reviews do not constitute independent estimates of the reserves and annual production rate forecasts for the areas, pay zones, projects, and recovery processes examined. We relied upon the accuracy and completeness of information provided by BP Exploration (Alaska) Inc. with respect to pertinent ownership interests and various other historical, accounting, engineering, and geological data.
     As a result of our cumulative reviews, based on the foregoing, we conclude that:
  1.   A large body of basic data and detailed analyses are available and were used in making the estimates. In our judgment, the quantity and quality of currently available data on reservoir boundaries, original fluid contacts, and reservoir rock and fluid properties are sufficient to indicate that any future revisions to the estimates of total original in-place volumes should be minor. Furthermore, the data and analyses on recovery factors and future production rates are sufficient to support the Proved Reserves estimates.
 
  2.   The methods and procedures employed to accumulate and evaluate the necessary information and to estimate, document, and reconcile reserves, annual production rate forecasts, and future net revenues are effective and are in accordance with generally accepted geological and engineering practice in the petroleum industry.
 
  3.   Based on our limited independent tests of the computations of reserves, production flowstreams, and future net revenues, such computations were performed in accordance with the methods and procedures described to us.
 
  4.   The estimated net remaining Proved Reserves attributable to the BP Prudhoe Bay Royalty Trust as of December 31, 2006, of 81.08 million barrels of oil and condensate are, in the aggregate, reasonable. Of the 81.08 million barrels of total Proved Reserves, 69.02 million barrels are Proved Developed Reserves, and 12.06 million barrels are Proved Undeveloped Reserves.
 
  5.   Utilizing the specified procedures outlined in Financial Accounting Standards Board Statement of Financial Accounting Standards No. 69, BP Exploration (Alaska) Inc. calculated that as of December 31, 2006 production of the Proved Reserves will result in Estimated Future Net Revenues of $1,855.3 million and Present Value of Estimated Future Net Revenues of $1,052.0 million to the BP Prudhoe Bay Royalty Trust. These estimates are reasonable.
 
  6.   Temporary oil transport bypass lines, installed following the production disruptions of 2006, did not recover full production capacity in the field. This condition is expected to continue into 2007. In July 2006, a number of wells were shut-in that did not conform to the well

20


 

         
 
  Miller and Lents, Ltd.    
The Bank of New York
      February 14, 2007
Trustee, BP Prudhoe Bay Royalty Trust
       
      integrity standards of BP Exploration (Alaska) Inc. and this also had the impact of reducing production capacity. BP Exploration (Alaska) Inc. is now in action on pipeline replacement and a well work program to recover this production capacity.
 
  7.   BP Exploration (Alaska) Inc. has undertaken a program of field-wide infrastructure renewal, pipeline replacement, and well mechanical improvements. As a consequence of these activities and their required downtime, BP Exploration (Alaska) Inc. anticipates that its net production of oil and condensate from Proved Reserves will be below 90,000 barrels per day in certain quarters of future years and will fall below 90,000 barrels per day on an annual average basis beginning in 2007. The BP Exploration (Alaska) Inc. projection of its net production of oil and condensate under its forecast of downtime and operating efficiency is reasonable. Production attributable to the BP Prudhoe Bay Royalty Trust will decline with the BP Exploration (Alaska) Inc. production. However, the Per Barrel Royalty will not have a positive value if the West Texas Intermediate Price is less than the sum of the per barrel Chargeable Costs and per barrel Production Taxes, appropriately adjusted in accordance with the Overriding Royalty Conveyance. Under such circumstances, average daily production attributable to the BP Prudhoe Bay Royalty Trust will have no value and therefore will not contribute to the reserves regardless of BP Exploration (Alaska) Inc.’s net production level.
 
  8.   Based on the West Texas Intermediate Price of $61.06 per barrel on December 31, 2006, current Production Taxes, and the Chargeable Costs adjusted as prescribed by the Overriding Royalty Conveyance, the projection that royalty payments will continue through the year 2024 is reasonable. BP Exploration (Alaska) Inc. expects continued economic production at a declining rate through the year 2062; however, for the economic conditions and production forecast as of December 31, 2006 the Per Barrel Royalty will be zero following the year 2024. Therefore, no reserves are currently attributed to the BP Prudhoe Bay Royalty Trust after that date.
 
  9.   Even if expected reservoir performance does not change, the estimated reserves, economic life, and future revenues attributable to the BP Prudhoe Bay Royalty Trust may change significantly in the future. This may result from changes in the West Texas Intermediate Price or from changes in other prescribed variables utilized in calculations defined by the Overriding Royalty Conveyance.
     Estimates of ultimate and remaining reserves and production scheduling depend upon assumptions regarding expansion or implementation of alternative projects or development programs and upon strategies for production optimization. BP Exploration (Alaska) Inc. has continual reservoir management, surveillance, and planning efforts dedicated to (1) gathering new information, (2) improving the accuracy of its reserves and production capacity estimates, (3) recognizing and exploiting new opportunities, (4) anticipating potential problems and taking corrective actions, and (5) identifying, selecting, and implementing optimum recovery program and cost reduction alternatives. Given this significant effort and ever-changing economic conditions, estimates of reserves and production profiles will change periodically.
     The current estimate of Proved Reserves includes only those projects or development programs that are deemed reasonably certain to be implemented, given current economic and regulatory conditions. Future projects, development programs, or operating strategies different from those assumed in the current estimates may change future estimates and affect recoveries. However, because several complementary and alternative projects are being considered for recovery of the remaining oil in the

21


 

         
 
  Miller and Lents, Ltd.    
The Bank of New York
      February 14, 2007
Trustee, BP Prudhoe Bay Royalty Trust
       
reservoir, a decision not to implement a currently planned project may allow scope expansion or implementation of another project, thereby increasing the overall likelihood of recovering the reserves.
     Future production rates will be controlled by facilities limitations and upsets, well downtime, and the effectiveness of programs to optimize production and costs. BP Exploration (Alaska) Inc. currently expects continued economic production from the reservoir at a declining rate through the year 2062. Additional drilling, workovers, facilities modifications, new recovery projects, and programs for production enhancement and optimization are expected to mitigate but not eliminate the decline in gross oil and condensate production capacity.
     In making its future production rate forecasts, BP Exploration (Alaska) Inc. provided for anticipated downtime and planned facilities upsets. Although allowances for unplanned upsets are also considered in the estimates, the studies do not provide for any impediments to crude oil production as a consequence of major disruptions.
     Under current economic conditions, gas from the Alaskan North Slope, except for minor volumes, cannot be marketed commercially. Oil and condensate recoveries are expected to be greater as a result of continued reinjection of produced gas than the recoveries would be if major volumes of produced gas were being sold. No major gas sale is assumed in the current estimates. If major gas sales are undertaken in the future, BP Exploration (Alaska) Inc. estimates that such sales would not actually commence until ten to eleven years in the future. In the event that major gas sales are initiated, ultimate oil and condensate recoveries may be reduced from the current estimates unless recovery projects other than those included in the current estimates are implemented.
     Large volumes of natural gas liquids are likely to be produced and marketed in the future whether or not major gas sales become viable. Natural gas liquids reserves are not included in the estimates cited herein. The BP Prudhoe Bay Royalty Trust is not entitled to royalty payments from production or sales of natural gas or natural gas liquids.
     The evaluations presented in this report, with the exceptions of those parameters specified by others, reflect our informed judgments based on accepted standards of professional investigation but are subject to those generally recognized uncertainties associated with interpretation of geological, geophysical, and engineering information. Government policies and market conditions different from those reflected in this study or disruption of existing transportation routes or facilities may cause the total quantity of oil or condensate to be recovered, actual production rates, prices received, or operating and capital costs to vary from those reviewed in this report.

22


 

         
 
  Miller and Lents, Ltd.    
The Bank of New York
      February 14, 2007
Trustee, BP Prudhoe Bay Royalty Trust
       
     Miller and Lents, Ltd., is an independent oil and gas consulting firm. None of the principals of this firm have any direct financial interests in BP Exploration (Alaska) Inc. or its parent or any related companies or in the BP Prudhoe Bay Royalty Trust. Our fee is not contingent upon the results of our work or report, and we have not performed other services for BP Exploration (Alaska) Inc. or the BP Prudhoe Bay Royalty Trust that would affect our objectivity.
         
  Very truly yours,

MILLER AND LENTS, LTD.
 
 
  By:   /s/ William P. Koza, P.E.   [ Seal ]
         William P. Koza, P.E.   
         Vice President   
 
WPK/sg

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INDUSTRY CONDITIONS AND REGULATIONS
     The production of oil and gas in Alaska is affected by many state and federal regulations with respect to allowable rates of production, marketing, environmental matters and pricing. Future regulations could change allowable rates of production or the manner in which oil and gas operations may be lawfully conducted.
     In general, BP Alaska’s oil and gas activities are subject to existing federal, state and local laws and regulations relating to health, safety, environmental quality and pollution control. BP Alaska believes that the equipment and facilities currently being used in its operations generally comply with the applicable legislation and regulations. During the past few years, numerous environmental laws and regulations have taken effect at the federal, state and local levels. Oil and gas operations are subject to extensive federal and state regulation and to interruption or termination by governmental authorities due to ecological and other considerations and in certain circumstances impose absolute liability upon lessees for the cost of cleaning up pollutants and for pollution damages resulting from their operations. Although BP Alaska has advised that the existence of legislation and regulation has had no material adverse effect on BP Alaska’s current method of operations, the effect of future legislation and regulations cannot be predicted.
     On December 29, 2006, the President signed into law the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 (the “PIPES Act”), which extends the U.S. Department of Transportation’s oversight to include oil and gas pipelines operating at low pressures. The PIPES Act makes the oil transit lines in the Prudhoe Bay field subject to federal supervision and inspection. See “THE PRUDHOE BAY UNIT AND FIELD – Collection and Transportation of Prudhoe Bay Oil” above.
CERTAIN TAX CONSIDERATIONS
     The following is a summary of the principal tax consequences to Unit holders resulting from the ownership and disposition of Units. The laws and regulations affecting these matters are complex, and are subject to change by future legislation or regulations or new interpretations by the Internal Revenue Service, state taxing authorities or the courts. In addition, there may be differences of opinion as to the applicability or interpretation of present tax laws and regulations. BP Alaska and the Trust have not requested any rulings from the Internal Revenue Service with respect to the tax treatment of the Units, and no assurance can be given that the Internal Revenue Service would concur with the statements below.
     Unit holders are urged to consult their tax advisors regarding the effects on their specific tax situations of owning and disposing of Units.
Federal Income Tax
   Classification of the Trust
     The following discussion assumes that the Trust is properly classified as a grantor trust under current law and is not an association taxable as a corporation.
   General Features of Grantor Trust Taxation
     A grantor trust is not subject to tax, and its beneficiaries (the Unit holders in the case of the Trust) are considered for tax purposes to own the assets of the trust directly. The Trust pays no federal income tax but files an information return reporting all items of income or deduction. If a court were to hold that

24


 

the Trust is an association taxable as a corporation, the Trust would incur substantial income tax liabilities in addition to its other expenses.
   Taxation of Unit Holders
     In computing his federal income tax liability, each Unit holder is required to take into account his share of all items of Trust income, gain, loss, deduction, credit and tax preference, based on the Unit holder’s method of accounting. Consequently, it is possible that in any year a Unit holder’s share of the taxable income of the Trust may exceed the cash actually distributed to him in that year. For example, if the Trustee should add to the reserve for the payment of Trust liabilities or repay money borrowed to satisfy debts of the Trust, the money used to replenish the reserve or to repay the loan is income to and must be reported by the Unit holder, even though the money was not distributed to the Unit holder.
     The Trust makes quarterly distributions to the persons who held Units of record on each Quarterly Record Date. The terms of the Trust Agreement seek to assure to the extent practicable that income, expenses and deductions attributable to each distribution are reportable by the Unit holder who receives the distribution.
     The Trust allocates income and deductions to Unit holders based on record ownership at Quarterly Record Dates. It is not known whether the Internal Revenue Service will accept the allocation based on this method.
   Depletion Deductions
     The owner of an economic interest in producing oil and gas properties is entitled to deduct an allowance for the greater of cost depletion or (if otherwise allowable) percentage depletion on each such property. A Unit holder’s deduction for cost depletion in any year is calculated by multiplying the holder’s adjusted tax basis in his Units (generally his cost less prior depletion deductions) by Royalty Production during the year and dividing that product by the sum of Royalty Production during the year and estimated remaining Royalty Production as of the end of the year. The allowance for percentage depletion generally does not apply to interests in proven oil and gas properties that were transferred after December 31, 1974 and prior to October 12, 1990. The Omnibus Budget Reconciliation Act of 1990 repealed this rule for transfers occurring on or after October 12, 1990. Unit holders who acquired their Units on or after that date may be permitted to deduct an allowance for percentage depletion if such deduction would otherwise exceed the allowable deduction for cost depletion. In order to take percentage depletion, a Unit holder must qualify for the “independent producer” exemption contained in section 613A(c) of the Internal Revenue Code of 1986. Percentage depletion is based on the Unit holder’s gross income from the Trust rather than on his adjusted basis in his Units. Any deduction for cost depletion or percentage depletion allowable to a Unit holder reduces his adjusted basis in his Units for purposes of computing subsequent depletion or gain or loss on any subsequent disposition of Units.
     Unit holders must maintain records of their adjusted basis in their Units, make adjustments for depletion deductions to such basis, and use the adjusted basis for the computation of gain or loss on the disposition of the Units.
Taxation of Foreign Unit Holders
     Generally, a holder of Units who is a nonresident alien individual or which is a foreign corporation (a “Foreign Taxpayer”) is subject to tax on the gross income produced by the Royalty Interest at a rate equal to 30 percent (or at a lower treaty rate, if applicable). This tax is withheld by the Trustee and remitted directly to the United States Treasury. A Foreign Taxpayer may elect to treat the income

25


 

from the Royalty Interest as effectively connected with the conduct of a United States trade or business under Internal Revenue Code section 871 or section 882, or pursuant to any similar provisions of applicable treaties. If a Foreign Taxpayer makes this election, it is entitled to claim all deductions with respect to such income, but a United States federal income tax return must be filed to claim such deductions. This election once made is irrevocable unless an applicable treaty provides otherwise or unless the Secretary of the Treasury consents to a revocation.
     Section 897 of the Internal Revenue Code and the Treasury Regulations thereunder treat the Trust as if it were a United States real property holding corporation. Foreign holders owning more than five percent of the outstanding Units are subject to United States federal income tax on the gain on the disposition of their Units. Foreign Unit holders owning less than five percent of the outstanding Units are not subject to United States federal income tax on the gain on the disposition of their Units, unless they have elected under Internal Revenue Code section 871 or section 882 to treat the income from the Royalty Interest as effectively connected with the conduct of a United States trade or business.
     If a Foreign Taxpayer is a corporation which made an election under Internal Revenue Code section 882(d), the corporation would also be subject to a 30 percent tax under Internal Revenue Code section 884. This tax is imposed on U.S. branch profits of a foreign corporation that are not reinvested in the U.S. trade or business. This tax is in addition to the tax on effectively connected income. The branch profits tax may be either reduced or eliminated by treaty.
Sale of Units
     Generally, a Unit holder will realize gain or loss on the sale or exchange of his Units measured by the difference between the amount realized on the sale or exchange and his adjusted basis for such Units. Gain on the sale of Units by a holder that is not a dealer with respect to such Units will generally be treated as capital gain. However, pursuant to Internal Revenue Code section 1254, certain depletion deductions claimed with respect to the Units must be recaptured as ordinary income upon sale or disposition of such interest.
Backup Withholding
     A payor must withhold 28 percent of any reportable payment if the payee fails to furnish his taxpayer identification number (“TIN”) to the payor in the required manner or if the Secretary of the Treasury notifies the payor that the TIN furnished by the payee is incorrect. Unit holders will avoid backup withholding by furnishing their correct TINs to the Trustee in the form required by law.
State Income Taxes
     Unit holders may be required to report their share of income from the Trust to their state of residence or commercial domicile. However, only corporate Unit holders will need to report their share of income to the State of Alaska. Alaska does not impose an income tax on individuals or estates and trusts. All Trust income is Alaska source income to corporate Unit holders and should be reported accordingly.
ITEM 2. PROPERTIES
     Reference is made to Item 1 for the information required by this item.

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ITEM 1A. RISK FACTORS
     Owners of Units are exposed to risks and uncertainties that are particular to their investment. This Item describes several such risks and uncertainties, but not necessarily all of them.
    Royalty Production from the Prudhoe Bay field is projected to decline and will eventually cease.
     The Prudhoe Bay field has been in production since 1977. Development of the field is largely completed and proved reserves are being depleted. Production of oil and condensate from the field has been declining during recent years and the decline is expected to continue. Royalty payments to the Trust are projected to cease after 2024. Production estimates included in this report are based on economic conditions and production forecasts as of the end of 2006, and also depend on various assumptions, projections and estimates which are continually revised and updated by BP Alaska. These revisions could result in material changes to the projected declines in production. It is possible that economic production from the reserves allocated to the BP Working Interests could decline more quickly and end sooner than is currently projected, especially if construction of a gas pipeline makes it economical to produce natural gas from the Prudhoe Bay field, as discussed in the following paragraphs.
    Construction of a proposed gas pipeline from the North Slope of Alaska to the Midwestern United States could accelerate the decline in Royalty Production from the Prudhoe Bay field.
     In February 2006, the then Governor of Alaska, Frank Murkowski, announced that the State and BP Alaska, ConocoPhilips and Exxon Mobil had reached agreement in principle on a contract to build a natural gas pipeline which would run from Alaska’s North Slope through Canada and into the Midwestern United States. The Alaska legislature failed to approve the proposed contract during the 2006 legislative session, and Governor Murkowski left office at the end of 2006 without the contract having been executed. The new Governor, Sarah Palin, has announced her intention to introduce a bill in March 2007 which will reopen bidding to construct the proposed gas pipeline and set project criteria that energy companies must meet in exchange for inducement incentives from the State to build the pipeline. Construction of a gas pipeline from the North Slope to the continental United States is estimated to take up to ten years.
     Without a pipeline, extraction of natural gas from the Prudhoe Bay field is not economical. Natural gas released by pumping oil is reinjected into the ground, which helps to maintain reservoir pressure and facilitates extraction of oil from the field. If the proposed natural gas pipeline is constructed, it will make it economical to extract natural gas from the Prudhoe Bay field and transport it to the lower 48 states for sale. Extraction of natural gas from the Prudhoe Bay field will lower reservoir pressure. The lowering of the reservoir pressure may accelerate the decline in production from the BP Working Interests and the time at which royalty payments to the Trust will cease. Since the Trust is not entitled to any royalty payments with respect to natural gas production from the BP Working Interests, the Unit holders will not realize any offsetting benefit from natural gas production from the Prudhoe Bay field.
    Royalty payments by BP Alaska to the Trust are unpredictable, because they depend directly on world crude oil prices which have been volatile in recent years.
     During the past decade, crude oil prices have been very volatile. Crude oil prices increased continuously from 2001 to mid-year 2006, with the WTI Price having reached a high of over $77 per barrel during July 2006, before declining to approximately $61 per barrel at year-end. Before 2002, though, crude oil prices went through a period of extreme volatility. In late 1998 and early 1999, spot oil prices fell to a historic lows, reaching between $10 and $11 per barrel in December 1998. As a result, the

27


 

average WTI Price during the fourth quarter of 1998 and the first quarter of 1999 fell below the total adjusted Chargeable Costs and Production Taxes chargeable against Royalty Production and the Trust did not receive royalty distributions from BP Alaska during the first two quarters of 1999.
     Recent moves in crude oil prices have been affected by many factors, including changes in demand by oil-consuming countries, the actions of OPEC to control production by members of the cartel, shifts in inventory management strategies by international oil companies, conservation measures by consumers, increasing effects of the oil futures market, and other unpredictable political, psychological and economic factors such as the war in Iraq and tensions with Iran over its nuclear program. Future domestic and international events and conditions may produce wide swings in crude oil prices over relatively short periods of time. Unit holders thus are subject to the risk that cash distributions with respect to their Units may vary widely from quarter to quarter.
    Prudhoe Bay field oil production could be shut in partially or entirely from time to time as a result of damage to or failures of field pipelines or equipment.
     In August 2006, BP Alaska shut down the eastern side of the Prudhoe Bay Unit following the discovery of unexpectedly severe corrosion and a small spill from the oil transit line on that side of the Unit. As a result of the shutdown, average net production from the BP Working Interests fell below 90,000 barrels per day in both the third and fourth quarters of 2006 and royalty payments received by the Trust from BP Alaska in October 2006 and January 2007 were adversely affected. Earlier, in March of 2006, BP had to temporarily shut down and commence the replacement of a three-mile segment of transit line on the western side of the Prudhoe Bay Unit following discovery of a large oil spill.
     BP has announced plans to completely replace approximately 16 miles of transit lines and to implement federally-required corrosion monitoring practices. However, the discovery of additional defects in Prudhoe Bay Unit oil flowlines and transit lines, and damage to or failures of separation facilities or other critical equipment, could result in future shutdowns of oil production from all or portions of the Prudhoe Bay Unit and have an adverse effect on future royalty payments.
    Oil production from the Prudhoe Bay Unit could be interrupted by damage to the Trans-Alaska Pipeline System from natural disasters, accidents, or deliberate attacks.
     The Trans-Alaska Pipeline System connects the North Slope oil fields to the southern port of Valdez, almost 800 miles away. It is the only way that oil can be transported from the North Slope to market. The pipeline system crosses three mountain ranges, many rivers and streams and thaw-sensitive permafrost. It is susceptible along its length to damage from earthquakes, forest fires and other natural disasters. The pipeline system also is vulnerable to accidental damage and deliberate attacks. If the pipeline or its pumping stations should suffer major damage from natural or man-made causes, production from the Prudhoe Bay Unit could be shut in until the pipeline system can be repaired and restarted. Royalty payments to the Trust could be halted or reduced by a material amount as a result of interruption to production from the Prudhoe Bay Unit.
    Production from the BP Working Interests may be interrupted or discontinued by BP Alaska.
     BP Alaska has no obligation to continue production from the BP Working Interests or to maintain production at any level and may interrupt or discontinue production at any time. The Trust does not have the right to take over operation of the BP Working Interests or share in any operating decisions by BP Alaska concerning the Prudhoe Bay Unit. The operation of the Prudhoe Bay Unit is subject to normal operating hazards incident to the production and transportation of oil in Alaska. In the event of damage to the infrastructure, facilities and equipment in the Prudhoe Bay field which is covered by insurance, BP

28


 

Alaska has no obligation to use insurance proceeds to repair such damage and may elect to retain such proceeds and close damaged areas to production.
    There are potential conflicts of interest between BP Alaska and the Trust that could affect the royalties paid to Unit holders.
     The interests of BP Alaska and the Trust with respect to the Prudhoe Bay Unit could at times be different. The Per Barrel Royalty that BP Alaska pays to the Trust is based on the WTI Price and Chargeable Costs, both of which are amounts contractually defined the Conveyance. The WTI Price does not necessarily correspond to the actual price realized by BP Alaska for crude oil produced from the BP Working Interests, and Chargeable Costs may not bear any relation to BP Alaska’s actual costs of production. The actual per barrel profit realized by BP Alaska on the Royalty Production may differ materially from the Per Barrel Royalty that it is required to pay to the Trust. It is possible under certain circumstances that the relationship between BP Alaska’s actual per barrel revenues and costs could be such that BP Alaska might determine to interrupt or discontinue production in whole or in part from the BP Working Interests even though a Per Barrel Royalty might otherwise be payable to the Trust under the Conveyance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
     The Trust has not received any written comments from the staff of the Securities and Exchange Commission regarding its periodic or current reports under the Exchange Act that remain unresolved.
ITEM 3. LEGAL PROCEEDINGS
      Michael Goldman v. BP P.L.C., et al.
     On November 7, 2006, a Complaint was filed in the United States District Court for the District of Alaska (case number 3:06-CV-00260 TMB), purportedly as a class action by the plaintiff, Michael Goldman, on behalf of the public holders of Units in the Trust, against BP, the Trust, BP Alaska, Standard Oil and other unnamed defendants.
     The substance of the claims for relief asserted against the defendants is: (i) that BP Alaska and Standard Oil materially breached the Trust Agreement and an implied covenant of good faith and fair dealing by failing to reasonably and prudently maintain the working interest in the Prudhoe Bay Unit in that they ignored warnings from experts that the transit pipeline network in the oil field was experiencing accelerated corrosion and failed to employ corrosion prevention chemicals, corrosion detection mechanisms and other industry standard apparatus and procedures to maintain the oil transit lines in accordance with good oil and gas field practices; (ii) that BP tortiously interfered with the Unit holders’ property rights in the Royalty Interest and their expectation of economic advantage and contributed to the partial shutdown of the Prudhoe Bay field by knowingly or recklessly disregarding expert warnings of accelerated corrosion and maintenance failures of the Prudhoe Bay transit pipelines and by concealing such warnings by deleting them from published versions of the experts’ reports; and (iii) that all of the defendants, including the Trust, breached the Support Agreement and an implied covenant of good faith and fair dealing by failing, in the case of BP, to provide financial support to the Trust, and in the case of BP Alaska, Standard Oil and the Trust, by failing to seek to enforce the Support Agreement so as to obtain financial support from BP to pay cash distributions to Unit holders in amounts reflective of pre-shutdown production levels.
     The Complaint seeks, among other things, a judgment against the defendants awarding the plaintiff and the Unit holder class members that he purports to represent compensatory damages in

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amounts to be proven at trial, punitive damages, reasonable costs and expenses incurred in the action, including counsel fees and expert fees, and an injunction to enforce the Support Agreement by requiring the defendants to perform their obligations thereunder, including seeking financial support from BP for the payment of cash distributions to Unit holders with respect to the Royalty Interest in amounts lost due to disruption of production from the Prudhoe Bay Unit.
     The litigation is in its early stages. The action has not been certified by the Court as a class action.
     On January 11, 2007, the Trustee authorized counsel to appear in the action on behalf of the Trust. On February 28, 2007, the Trust moved to dismiss the Complaint on the ground that the Complaint fails to state a claim upon which relief can be granted against the Trust.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     No matters were submitted to a vote of Unit holders during the fourth quarter ended December 31, 2006.
PART II
ITEM 5. MARKET FOR REGISTRANT’S UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF UNITS
     The Units are listed and traded on the New York Stock Exchange under the symbol BPT. The following table shows the high and low sales prices per Unit on the New York Stock Exchange and the cash distributions paid per Unit, for each calendar quarter in the two years ended December 31, 2006.
                         
                    Distributions
    High   Low   Per Unit
2005:
                       
First Quarter
  $ 70.95     $ 46.40     $ 1.544  
Second Quarter
    75.79       56.47       1.545  
Third Quarter
    79.99       69.50       1.728  
Fourth Quarter
    79.90       60.10       2.282  
 
                       
2006:
                       
First Quarter
    72.99       64.26       2.114  
Second Quarter
    80.00       67.05       2.208  
Third Quarter
    91.50       66.34       2.595  
Fourth Quarter
    77.49       69.75       1.675  
     As of February 23, 2007, 21,400,000 Units were outstanding and were held by 698 holders of record. No Units were purchased by the Trust or any affiliated purchaser during the year ended December 31, 2006.
     Future payments of cash distributions are dependent on such factors as the prevailing WTI Price, the relationship of the rate of change in the WTI Price to the rate of change in the Consumer Price Index, the Chargeable Costs, the rates of Production Taxes prevailing from time to time, and the actual Royalty Production from the BP Working Interests. See “THE ROYALTY INTEREST” in Item 1.

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ITEM 6. SELECTED FINANCIAL DATA
     The following table presents in summary form selected financial information regarding the Trust.
                                         
    Year ended December 31
    2006   2005   2004   2003   2002
    (in thousands, except per Unit amounts)
Royalty revenues
  $ 184,864       152,978       82,682       55,986       33,061  
 
                                       
Interest income
  $ 75       37       11       10       23  
 
                                       
Trust administration expenses
  $ 1,057       1,097       976       1,168       822  
 
                                       
Cash earnings
  $ 183,882       151,918       81,717       54,828       32,262  
 
                                       
Cash distributions
  $ 183,883       151,908       81,702       54,867       32,246  
 
                                       
Cash distributions per Unit
  $ 8.593       7.098       3.818       2.564       1.507  
                                         
    December 31
    2006   2005   2004   2003   2002
    (dollar amounts in thousands)
Trust Corpus
  $ 8,853       10,876       12,881       14,730       16,498  
 
                                       
Total Assets
  $ 9,044       11,054       13,052       15,046       17,093  
 
                                       
Units outstanding
    21,400,000       21,400,000       21,400,000       21,400,000       21,400,000  
ITEM 7. TRUSTEE’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
     The Trust is a passive entity. The Trustee’s activities are limited to collecting and distributing the revenues from the Royalty Interest and paying liabilities and expenses of the Trust. Generally, the Trust has no source of liquidity and no capital resources other than the revenue attributable to the Royalty Interest that it receives from time to time. See the discussion under “THE ROYALTY INTEREST” in Item 1 for a description of the calculation of the Per Barrel Royalty, and the discussion under “THE PRUDHOE BAY UNIT AND FIELD – Reserve Estimates” and “INDEPENDENT OIL AND GAS CONSULTANTS’ REPORT” in Item 1 for information concerning the estimated future net revenues of the Trust. However, the Trust Agreement gives the Trustee power to borrow, establish a cash reserve, or dispose of all or part of the Trust property under limited circumstances. See the discussion under “THE TRUST – Sales of Royalty Interest; Borrowings and Reserves” in Item 1.
     In 1999, due to declines in oil prices during the fourth quarter of 1998 and the first quarter of 1999 which resulted in the Trust not receiving cash distributions for two quarters, the Trustee established a $1,000,000 cash reserve to provide liquidity to the Trust during any future periods in which the Trust does not receive a distribution. The Trustee will draw funds from the cash reserve account during any quarter in which the quarterly distribution received by the Trust does not exceed the liabilities and

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expenses of the Trust, and will replenish the reserve from future quarterly distributions, if any. The Trustee anticipates that it will keep this cash reserve program in place until termination of the Trust.
     Amounts set aside for the cash reserve are invested by the Trustee in U.S. government or agency securities secured by the full faith and credit of the United States. Interest income received by the Trust from the investment of the reserve fund is added to the distributions received from BP Alaska and paid to the Unit holders on each Quarterly Record Date.
     Annual decreases in Trust Corpus and total assets are the result of amortization of the Royalty Interest. See Notes 2 and 3 of Notes to Financial Statements in Item 8.
Results of Operations
     Relatively modest changes in oil prices significantly affect the Trust’s revenues and results of operations. Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects OPEC and other producing countries. The effect of changing economic conditions on the demand and supply for energy throughout the world and future prices of oil cannot be accurately projected.
     Royalty revenues are generally received on the Quarterly Record Date (generally the fifteenth day of the month) following the end of the calendar quarter in which the related Royalty Production occurred. The Trustee, to the extent possible, pays all expenses of the Trust for each quarter on the Quarterly Record Date on which the revenues for the quarter are received. For the statement of cash earnings and distributions, revenues and Trust expenses are recorded on a cash basis and, as a result, distributions to Unit holders in each calendar year ending December 31 are attributable to BP Alaska’s operations during the twelve-month period ended on the preceding September 30.
     As long as BP Alaska’s average net production of oil and condensate per quarter from the BP Working Interests exceeds 90,000 barrels a day, the principal factors affecting the Trust’s revenues and distributions to Unit holders are changes in WTI Prices, scheduled annual increases in Chargeable Costs, changes in the Consumer Price Index and changes in Production Taxes. See “THE PRUDHOE BAY UNIT AND FIELD – Collection and Transportation of Prudhoe Bay Oil” in Item 1 for information concerning the recent partial shutdown of the Prudhoe Bay field, which resulted in average net production falling below 90,000 barrels a day during the third and fourth quarters of 2006. BP Alaska has advised the Trustee that it estimates that average net production from the BP Working Interests will fall below 90,000 barrels a day on an annual basis beginning in 2007 as a result of field-wide infrastructure renewal activities.
     BP Alaska estimates Royalty Production from the BP Working Interests for purposes of calculating quarterly royalty payments to the Trust because complete actual field production data for the preceding calendar quarter generally is not available by the Quarterly Record Date. To the extent that average net production from the BP Working Interests is below 90,000 barrels per day in 2007 and future years, calculation by BP Alaska of actual Royalty Production data may result in revisions of prior Royalty Production estimates. Revisions by BP Alaska of its Royalty Production calculations may result in quarterly royalty payments by BP Alaska which reflect adjustments for overpayments or underpayments of royalties with respect to prior quarters. Such adjustments, if material, may adversely affect certain Unit holders who buy or sell Units between the Quarterly Record Dates for the Quarterly Distributions affected.
     The Quarterly Distribution paid by the Trust to Unit holders in January 2007 included $1,736,264 received by the Trust which represented the amount of an underpayment by BP Alaska (plus interest on

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the underpayment) of the royalty payment due in October 2006 with respect to the quarter ended September 30, 2006. See Note 8 of Notes to Financial Statements in Item 8. Because the statement of cash earnings and distributions of the Trust is prepared on a modified cash basis, royalty revenues for the year ended December 31, 2006 do not include the amount of the October 2006 underpayment.
     During the years 2005 and 2006 and the period of 2007 up to the date of this report, WTI Prices have been above the level necessary for the Trust to receive a Per Barrel Royalty. Whether the Trust will be entitled to future distributions during the remainder of 2007 will depend on WTI Prices prevailing during the remainder of the year.
2006 compared to 2005
     Continuing increases in world oil prices drove WTI Prices higher in the fourth quarter of 2005 and the first three quarters of 2006 (the period on which calendar 2006 cash basis revenues were based). WTI Prices averaged 23.5% higher during that period than during the twelve months ended September 30, 2005. As a result, royalty revenues and cash distributions during 2006 rose approximately 21% from 2005, even though revenues were adversely affected by the partial shutdown of the Prudhoe Bay Unit in August 2006. The shutdown was primarily responsible for royalty revenues in the fourth quarter of 2006 falling approximately 27% from average royalty revenues during the first three quarters of the year. Chargeable Costs per barrel increased from $12.25 to $12.50, beginning in the first quarter of 2006. The increase in Chargeable Costs, continued increases in the Cost Adjustment Factor and increases in Production Taxes (which, during the quarter ended September 30, 2006, reflected the new Alaska oil and gas production tax which became effective in August 2006) further reduced the effect of increases in WTI Prices on the Trust’s revenues in 2006.
2005 compared to 2004
     Increases in world oil prices resulted in higher WTI Prices in the fourth quarter of 2004 and the first three quarters of 2005 (the period on which calendar 2005 cash basis revenues were based). WTI Prices averaged 44% higher during that period than during the twelve months ended September 30, 2004. As a result, royalty revenues during 2005 rose approximately 85% from 2004, and cash distributions rose approximately 86%. Chargeable Costs per barrel increased from $12.00 to $12.25, beginning in the first quarter of 2005. The increase in Chargeable Costs, continued increases in the Cost Adjustment Factor and increases in Production Taxes (which averaged approximately 52.5% higher during the twelve months ended September 30, 2005 than in the prior twelve-month period) attenuated the effect of the increase in WTI Prices on the Trust’s revenues in 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Trust is a passive entity and except for the Trust’s ability to borrow money as necessary to pay liabilities of the Trust that cannot be paid out of cash on hand, the Trust is prohibited from engaging in borrowing transactions. The Trust periodically holds short-term investments acquired with funds held by the Trust pending distribution to Unit holders and funds held in reserve for the payment of Trust expenses and liabilities. Because of the short-term nature of these investments and limitations on the types of investments which may be held by the Trust, the Trust is not subject to any material interest rate risk. The Trust does not engage in transactions in foreign currencies which could expose the Trust or Unit holders to any foreign currency related market risk or invest in derivative financial instruments. It has no foreign operations and holds no long-term debt instruments.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BP PRUDHOE BAY ROYALTY TRUST
Index To Financial Statements
     
    Page
     
Report of Independent Registered Public Accounting Firm
  35
 
   
Statements of Assets, Liabilities and Trust Corpus as of December 31, 2006 and 2005
  36
 
   
Statements of Cash Earnings and Distributions for the years ended December 31, 2006, 2005 and 2004
  37
 
   
Statements of Changes in Trust Corpus for the years ended December 31 2006, 2005 and 2004
  38
 
   
Notes to Financial Statements
  39

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Trustee and Holders of Trust Units of BP Prudhoe Bay Royalty Trust:
We have audited the accompanying statements of assets, liabilities, and trust corpus of BP Prudhoe Bay Royalty Trust (the “Trust”) as of December 31, 2006 and 2005, and the related statements of cash earnings and distributions and changes in trust corpus for each of the years in the three-year period ended December 31, 2006. These financial statements are the responsibility of The Bank of New York, as the Trust’s trustee (the “Trustee”). 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 the trustee, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.
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 December 31, 2006 and 2005 and its distributable income and changes in trust corpus for each of the years in the three-year period ended December 31, 2006 in conformity with the modified cash basis of accounting described in Note 2.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007 expressed an unqualified opinion on the trustee’s assessment of, and the effective operation of, internal control over financial reporting.
KPMG LLP
Dallas, Texas
March 1, 2007

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BP Prudhoe Bay Royalty Trust
Statement of Assets, Liabilities and Trust Corpus
(Prepared on a modified basis of cash receipts and disbursements)
(In thousands, except unit data)
                 
    December 31,     December 31,  
    2006     2005  
Assets
               
 
               
Royalty Interest, net (Notes 1, 2 and 3)
  $ 8,034     $ 10,043  
Cash and cash equivalents (Note 2)
    1,010       1,011  
 
           
 
               
Total Assets
  $ 9,044     $ 11,054  
 
           
 
               
Liabilities and Trust Corpus
               
 
               
Accrued expenses
  $ 191     $ 178  
 
               
Trust Corpus (40,000,000 units of beneficial interest authorized, 21,400,000 units issued and outstanding)
    8,853       10,876  
 
           
 
               
Total Liabilities and Trust Corpus
  $ 9,044     $ 11,054  
 
           
See accompanying notes to financial statements.

36


 

BP Prudhoe Bay Royalty Trust
Statements of Cash Earnings and Distributions
(Prepared on a modified basis of cash receipts and disbursements)
(In thousands, except unit data)
                         
    Year Ended December 31,  
    2006     2005     2004  
Royalty revenues
  $ 184,864     $ 152,978     $ 82,682  
Interest income
    75       37       11  
 
                       
Less: Trust administrative expenses
    (1,057 )     (1,097 )     (976 )
 
                 
 
                       
Cash earnings
  $ 183,882     $ 151,918     $ 81,717  
 
                 
 
                       
Cash distributions
  $ 183,883     $ 151,908     $ 81,702  
 
                 
 
                       
Cash distributions per unit
  $ 8.593     $ 7.098     $ 3.818  
 
                 
 
                       
Units outstanding
    21,400,000       21,400,000       21,400,000  
 
                 
See accompanying notes to financial statements.

37


 

BP Prudhoe Bay Royalty Trust
Statements of Changes in Trust Corpus
(Prepared on a modified basis of cash receipts and disbursements)
(In thousands)
                         
    Year Ended December 31,  
    2006     2005     2004  
Trust Corpus at beginning of year
  $ 10,876     $ 12,881     $ 14,730  
Cash earnings
    183,882       151,918       81,717  
Decrease (increase) in accrued expenses
    (13 )     (7 )     145  
Cash distributions
    (183,883 )     (151,908 )     (81,702 )
Amortization of Royalty Interest
    (2,009 )     (2,008 )     (2,009 )
 
                 
 
                       
Trust Corpus at end of year
  $ 8,853     $ 10,876     $ 12,881  
 
                 
See accompanying notes to financial statements.

38


 

BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
(1) Formation of the Trust and Organization
BP Prudhoe Bay Royalty Trust (the “Trust”), a grantor trust, was created as a Delaware statutory trust pursuant to a Trust Agreement dated February 28, 1989 among the Standard Oil Company (“Standard Oil”), BP Exploration (Alaska) Inc. (“BP Alaska”), The Bank of New York (The “Trustee”) and The Bank of New York (Delaware), as co-trustee. Standard Oil and BP Alaska are indirect wholly owned subsidiaries of the BP p.l.c. (“BP”).
On February 28, 1989, Standard Oil conveyed an overriding royalty interest (the “Royalty Interest”) to the Trust. The Trust was formed for the sole purpose of owning and administering the Royalty Interest. The Royalty Interest represents the right to receive, effective February 28, 1989, a per barrel royalty (the “Per Barrel Royalty”) of 16.4246% on the lesser of (a) the first 90,000 barrels of the average actual daily net production of oil and condensate per quarter or (b) the average actual daily net production of oil and condensate per quarter from BP Alaska’s working interest as of February 28, 1989 in the Prudhoe Bay Field (the “Field”), located on the North Slope of Alaska. Trust Unit holders will remain subject at all times to the risk that production will be interrupted or discontinued or fall, on average, below 90,000 barrels per day in any quarter. BP has guaranteed the performance of BP Alaska of its payment obligations with respect to the Royalty Interest.
Effective January 1, 2000, BP Alaska and all other Prudhoe Bay working interest owners cross-assigned interests in the Prudhoe Bay Field pursuant to the Prudhoe Bay Unit Alignment Agreement. BP Alaska retained all rights, obligations, and liabilities associated with the Trust.
The trustees of the Trust are The Bank of New York, a New York corporation authorized to do a banking business, and The Bank of New York (Delaware), a Delaware banking corporation. The Bank of New York (Delaware) serves as co-trustee in order to satisfy certain requirements of the Delaware Trust Act. The Bank of New York alone is able to exercise the rights and powers granted to the Trustee in the Trust Agreement.
The Per Barrel Royalty in effect for any day is equal to the price of West Texas Intermediate crude oil (the “WTI Price”) for that day less scheduled Chargeable Costs (adjusted in certain situations for inflation) and Production Taxes (based on statutory rates then in existence).
The Trust is passive, with the Trustee having only such powers as are necessary for the collection and distribution of revenues, the payment of Trust liabilities, and the protection of the Royalty Interest. The Trustee, subject to certain conditions, is obligated to establish cash reserves and borrow funds to pay liabilities of the Trust when they become due. The Trustee may sell Trust properties only (a) as authorized by a vote of the Trust Unit Holders, (b) when necessary to provide for the payment of specific liabilities of the Trust then due (subject to certain conditions) or (c) upon termination of the Trust. Each Trust Unit issued and outstanding represents an equal undivided share of beneficial interest in the Trust. Royalty payments are received by the Trust and distributed to Trust Unit holders, net of Trust expenses, in the month succeeding the end of each calendar quarter. The Trust will terminate upon the first to occur of the following events:
  a.   On or prior to December 31, 2010: upon a vote of Trust Unit Holders of not less than 70% of the outstanding Trust Units.
 
  b.   After December 31, 2010: (i) upon a vote of Trust Unit Holders of not less than 60% of the outstanding Trust Units, or (ii) at such time the net revenues from the Royalty Interest for two

39


 

BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
      successive years commencing after 2010 are less than $1,000,000 per year (unless the net revenues during such period are materially and adversely affected by certain events).
In order to ensure the Trust has the ability to pay future expenses, the Trust established a cash reserve account which the Trustee believes is sufficient to pay approximately one year’s current and expected liabilities and expenses of the Trust.
(2) Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and reflect the Trust’s assets, liabilities, Corpus, earnings, and distributions, as follows:
  a.   Revenues are recorded when received (generally within 15 days of the end of the preceding quarter) and distributions to Trust Unit Holders are recorded when paid.
 
  b.   Trust expenses (which include accounting, engineering, legal, and other professional fees, trustees’ fees, and out-of-pocket expenses) are recorded on an accrual basis.
 
  c.   Cash reserves may be established by the Trustee for certain contingencies that would not be recorded under generally accepted accounting principles.
 
  d.   Amortization of the Royalty Interest is calculated based on the units of production method. Such amortization is charged directly to the Trust Corpus, and does not affect cash earnings. The daily rate for amortization per net equivalent barrel of oil for the years ended December 31, 2006, 2005 and 2004 was $0.41, $0.37 and $0.37, respectively. The Trust evaluates impairment of the Royalty Interest by comparing the undiscounted cash flows expected to be realized from the Royalty Interest to the carrying value, pursuant to Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). If the expected future undiscounted cash flows are less than the carrying value, the Trust recognizes an impairment loss for the difference between the carrying value and the estimated fair value of the Royalty Interest.
While these statements differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America, the modified cash basis of reporting revenues and distributions is considered to be the most meaningful because quarterly distributions to the Trust Unit Holders are based on net cash receipts. The accompanying modified cash basis financial statements contain all adjustments necessary to present fairly the assets, liabilities and Corpus of the Trust as of December 31, 2006 and 2005, and the modified cash earning and distributions and changes in Trust Corpus for the years ended December 31, 2006, 2005 and 2004. The adjustments are of a normal recurring nature and are, in the opinion of the Trustee, necessary to fairly present the results of operations.
As of December 31, 2006 and 2005, cash equivalents which represent the cash reserve consist of U.S. treasury bills with an initial term of less than three months.
Estimates and assumptions are required to be made regarding assets, liabilities and changes in Trust Corpus resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ, and the difference could be material.

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BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
(3) Royalty Interest
The Royalty Interest is comprised of the following at December 31, 2006 and 2005 (in thousands):
                 
    December 31,  
    2006     2005  
Royalty Interest (at inception)
  $ 535,000     $ 535,000  
Less: Accumulated amortization
    (353,448 )     (351,439 )
Impairment write-down
    (173,518 )     (173,518 )
 
           
 
               
Balance, end of period
  $ 8,034     $ 10,043  
 
           
(4) Income Taxes
The Trust files its federal tax return as a grantor trust subject to the provisions of subpart E of Part I of Subchapter J of the Internal Revenue Code of 1986, as amended, rather than as an association taxable as a corporation. The Trust Unit Holders are treated as the owners of Trust income and Corpus, and the entire taxable income of the Trust will be reported by the Trust Unit Holders on their respective tax returns.
If the Trust were determined to be an association taxable as a corporation, it would be treated as an entity taxable as a corporation on the taxable income from the Royalty Interest, the Trust Unit Holders would be treated as shareholders, and distributions to Trust Unit Holders would not be deductible in computing the Trust’s tax liability as an association.
(5) Alaska Oil and Gas Production Tax
On August 20, 2006 a new Alaska oil and gas production tax (the “New Tax”) became effective. The New Tax replaced an oil production tax levied at the flat rate of 15% of the gross value at the point of production of taxable oil produced from a producer’s leases or properties in the State of Alaska and is retroactive to April 1, 2006.
Under the New Tax, producers are taxed on the “production tax value of taxable oil” (gross value at the point of production for the calendar year less the producer’s direct costs of exploring for, developing, or producing oil or gas deposits located within the producer’s leases or properties in Alaska for the year) at a rate equal to the sum of 22.5% plus a “progressivity” rate determined by the average monthly production tax value of the oil produced. The progressivity portion of the New Tax is equal to 0.25% times the amount by which the simple average for each calendar month of the daily taxable values per barrel of the oil produced during the month exceeds $40 per barrel.
The Trustee and BP Alaska entered into a letter agreement (the “Letter Agreement”) to resolve the major issues associated with the New Tax. The Letter Agreement modified the calculation of Production Taxes in the daily Per Barrel Royalty calculation effective as of August 20, 2006. It also provides that the retroactivity provisions of the New Tax are not applicable to the Per Barrel Royalty calculation for periods prior to August 20, 2006.

41


 

BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
(6) Partial Shutdown of Prudhoe Bay Oil Field
On August 7, 2006, BP announced that BP Alaska had commenced a shutdown of the Prudhoe Bay Field as a result of the discovery of unexpectedly severe corrosion and a small spill from an oil transit line in the Prudhoe Bay Field. BP subsequently determined to shut down only the Eastern Operating Area of the field and continue production from the Western Operating Area. Clearance from the U.S. Department of Transportation to restart production in the Eastern Operating Area was received in September 2006.
(7) Litigation Contingency
In November 2006, a Unit holder of the Trust filed a complaint in the United States District Court for the District of Alaska, purportedly on behalf of a class consisting of all Unit holders of the Trust. The complaint asserts claims against BP, BP Alaska, the Trust and The Standard Oil Company (“Standard Oil”) relating to the shutdown of the Prudhoe Bay field and arising out of the Support Agreement dated February 28, 1989 among BP, BP Alaska, Standard Oil and the Trust. The Trust will incur expenses in connection with the defense of this action, including expenses related to the retention of counsel and of consultants. The Trustee is unable to estimate such expenses, but such expenses may be substantial.
(8) Subsequent Event
On January 16, 2007, the Trust received a payment of $43,205,572 from BP Alaska. This payment consisted of $41,469,307, representing the royalty payment due with respect to the Trust’s Royalty Interest for the quarter ended December 31, 2006, plus $1,736,264, representing the amount of an underpayment by BP Alaska, including interest on the underpayment, of the royalty payment due with respect to the quarter ended September 30, 2006. The royalty payment of $36,144,998 with respect to the third quarter of 2006, which the Trust received on October 16, 2006, was calculated based on estimated average net production of crude oil and condensate during the third quarter of 2006 of approximately 59,300 barrels per day. Actual average net production of crude oil and condensate during the quarter was approximately 62,087 barrels per day. On the basis of the actual production data, the royalty payment owed by BP Alaska with respect to the quarter ended September 30, 2006 was $37,881,262.
(9) Summary of Quarterly Results (Unaudited)
A summary of selected quarterly financial information for the years ended December 31, 2006, 2005, and 2004 is as follows (in thousands, except unit data):
                                 
    2006 Fiscal Quarter
    First   Second   Third   Fourth
Royalty revenues
  $ 45,383       47,539       55,797       36,145  
Interest income
    14       18       22       21  
Trust administrative expenses
    (157 )     (296 )     (279 )     (325 )
 
                               
Cash earnings
    45,240       47,261       55,540       35,841  
Cash distributions
    45,246       47,258       55,538       35,841  
Cash distributions per unit
    2.1143       2.2083       2.5952       1.6748  

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BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
                                 
    2005 Fiscal Quarter
    First   Second   Third   Fourth
Royalty revenues
  $ 33,197       33,413       37,357       49,011  
Interest income
    5       9       11       12  
Trust administrative expenses
    (151 )     (367 )     (388 )     (191 )
 
                               
Cash earnings
    33,051       33,055       36,980       48,832  
Cash distributions
    33,051       33,060       36,971       48,826  
Cash distributions per unit
    1.5444       1.5449       1.7276       2.2816  
                                 
    2004 Fiscal Quarter
    First   Second   Third   Fourth
Royalty revenues
  $ 14,659       18,342       21,566       28,115  
Interest income
    2       3       2       4  
Trust administrative expenses
    (216 )     (324 )     (212 )     (224 )
 
                               
Cash earnings
    14,445       18,021       21,356       27,895  
Cash distributions
    14,343       18,109       21,352       27,898  
Cash distributions per unit
    0.6702       0.8462       0.9978       1.3036  
                         
    Fiscal Year Ended
    2006   2005   2004
Royalty revenues
  $ 184,864       152,978       82,682  
Interest income
    75       37       11  
Trust administrative expenses
    (1,057 )     (1,097 )     (976 )
 
                       
Cash earnings
    183,882       151,918       81,717  
Cash distributions
    183,883       151,908       81,702  
Cash distributions per unit
    8.593       7.098       3.818  
(10) Supplemental Reserve Information and Standardized Measure of Discounted Future Net Cash Flow Relating to Proved Reserves (Unaudited)
Pursuant to Statement of Financial Accounting Standards No. 69, Disclosures About Oil and Gas Producing Activities (“FASB 69”), the Trust is required to include in its financial statements supplementary information regarding estimates of quantities of proved reserves attributable to the Trust and future net cash flows.
Estimates of proved reserves are inherently imprecise and subjective and are revised over time as additional data becomes available. Such revisions may often be substantial. Information regarding estimates of proved reserves attributable to the combined interests of BP Alaska and the Trust were based on reserve estimates prepared by BP Alaska. BP Alaska’s reserve estimates are believed to be reasonable and consistent with presently known physical data concerning the size and character of the Field.
There is no precise method of allocating estimates of physical quantities of reserve volumes between BP Alaska and the Trust, since the Royalty Interest is not a working interest and the Trust does not own and is not entitled to receive any specific volume of reserves from the Field. Reserve volumes attributable to the Trust were estimated by allocating to the Trust its share of estimated future production from the Field, based on the WTI Price on December 31, 2006 ($61.06 per barrel),

43


 

BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
December 31, 2005 ($61.04 per barrel) and December 31, 2004 ($43.46 per barrel). Because the reserve volumes attributable to the Trust are estimated using an allocation of reserve volumes based on the estimated future production and on the current WTI Price, a change in the timing of estimated production or a change in the WTI price will result in a change in the Trust’s estimated reserve volumes. Therefore, the estimated reserve volumes attributable to the Trust will vary if different production estimates and prices are used.
In addition to production estimates and prices, reserve volumes attributable to the Trust are affected by the amount of Chargeable Costs that will be deducted in determining the Per Barrel Royalty. Net proved reserves of oil and condensate attributable to the Trust as of December 31, 2006, 2005 and 2004, based on BP Alaska’s latest reserve estimate at such time and the WTI Prices on December 31, 2006, 2005 and 2004, were estimated to be 81, 85 and 77 million barrels, respectively (of which 69, 73 and 68 million barrels, respectively, are proved developed). Under the provisions of FASB 69, no consideration can be given to reserves not considered proved at the present time.
The standardized measure of discounted future net cash flow relating to proved reserves disclosure required by FASB 69 assigns monetary amounts to proved reserves based on current prices. This discounted future net cash flow should not be construed as the current market value of the Royalty Interest. A market valuation determination would include, among other things, anticipated price changes and the value of additional reserves not considered proved at the present time or reserves that may be produced after the currently anticipated end of field life. At December 31, 2006, 2005 and 2004, the standardized measure of discounted future net cash flow relating to proved reserves attributable to the Trust (estimated in accordance with the provisions of FASB 69), based on the WTI Prices on those dates of $61.06, 61.04 and $43.46, respectively, were as follows (in thousands):
                         
    December 31,  
    2006     2005     2004  
Future net cash flows
  $ 1,855,304     $ 2,095,163     $ 1,130,851  
10% annual discount for estimated timing of cash flows
    (803,320 )     (885,424 )     (454,532 )
 
                 
 
                       
Standardized measure of discounted future net cash flow relating to proved reserves (a)
  $ 1,051,984     $ 1,209,739     $ 676,319  
 
                 
 
(a)   The following are the principal sources of the change in the standardized measure of discounted future net cash flows (in thousands):

44


 

BP Prudhoe Bay Royalty Trust
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
December 31, 2006
                         
    December 31,  
    2006     2005     2004  
Revisions of prior estimates:
                       
Reserve volumes
  $ (94,069 )   $ 2,472     $ 6,123  
WTI price
    29,909       787,204       494,363  
Chargeable costs-inflation
    (23,274 )     (33,736 )     (80,201 )
Production taxes
    1,382       (116,558 )     (72,641 )
Other
    (1,073 )     (370 )     (15 )
 
                 
 
    (87,125 )     639,012       347,629  
 
                       
Royalty income received (b)
    (191,604 )     (173,224 )     (106,160 )
Accretion of discount
    120,974       67,632       39,532  
 
                 
 
                       
Net increase during the year
  $ (157,755 )   $ 533,420     $ 281,001  
 
                 
     
(b)   For the purpose of this calculation, royalty income received for 2006, 2005 and 2004 includes the following:
         
Period October 1, 2006 through December 31, 2006
  $ 43,206  
Period October 1, 2005 through December 31, 2005
  $ 45,246  
Period October 1, 2004 through December 31, 2004
  $ 33,197  
The above royalty income was received by the Trust in January 2007, 2006 and 2005, respectively.
The changes in quantities of proved oil and condensate were as follows (in thousands of barrels):
         
Estimated net proved reserves of oil and condensate at December 31, 2004
    77,404  
Production
    (5,395 )
Reserve estimate revisions
    (1,711 )
Change caused by prices/costs
    15,015  
 
       
 
       
Estimated net proved reserves of oil and condensate at December 31, 2005
    85,313  
Production
    (4,932 )
Reserve estimate revisions
    697  
Change caused by prices/costs
     
 
       
 
       
Estimated net proved reserves of oil and condensate at December 31, 2006
    81,078  
 
       
 
       
Proved reserves:
       
 
       
December 31, 2004
    77,404  
 
       
December 31, 2005
    85,313  
 
       
December 31, 2006
    81,078  
 
       

45


 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
     There have been no changes in accountants and no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the two fiscal years ended December 31, 2006.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     The Trustee has disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. These controls and procedures include but are not limited to controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is accumulated and communicated to the responsible trust officers of the Trustee to allow timely decisions regarding required disclosure.
     Under the terms of the Trust Agreement and the Conveyance, BP Alaska has significant disclosure and reporting obligations to the Trust. BP Alaska is required to provide the Trust such information concerning the Royalty Interest as the Trustee may need and to which BP Alaska has access to permit the Trust to comply with any reporting or disclosure obligations of the Trust pursuant to applicable law and the requirements of any stock exchange on which the Units are issued. These reporting obligations include furnishing the Trust a report by February 28 of each year containing all information of a nature, of a standard and in a form consistent with the requirements of the SEC respecting the inclusion of reserve and reserve valuation information in filings under the Exchange Act and with applicable accounting rules. The report is required to set forth, among other things, BP Alaska’s estimates of future net cash flows from proved reserves attributable to the Royalty Interest, the discounted present value of such proved reserves and the assumptions utilized in arriving at the estimates contained in the report.
     In addition, the Conveyance gives the Trust and its independent accountants certain rights to inspect the books and records of BP Alaska and discuss the affairs, finances and accounts of BP Alaska relating to the BP Working Interests with representatives of BP Alaska; it also requires BP Alaska to provide the Trust with such other information as the Trustee may reasonably request from time to time and to which BP Alaska has access.
     The Trustee’s disclosure controls and procedures include ensuring that the Trust receives the information and reports that BP Alaska is required to furnish to the Trust on a timely basis, that the appropriate responsible personnel of the Trustee examine such information and reports, and that information requested from and provided by BP Alaska is included in the reports that the Trust files or submits under the Exchange Act.
     As of the end of calendar 2006, the trust officers of the Trustee responsible for the administration of the Trust conducted an evaluation of the Trust’s disclosure controls and procedures. Their evaluation considered, among other things, that the Trust Agreement and the Conveyance impose enforceable legal obligations on BP Alaska, and that BP Alaska has provided the information required by those agreements and other information requested by the Trustee from time to time on a timely basis. The officers concluded that the Trust’s disclosure controls and procedures are effective.

46


 

Internal Control Over Financial Reporting
      Management’s Annual Report on Internal Control Over Financial Reporting. The Bank of New York, as Trustee of the Trust, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. The Trustee conducted an evaluation of the effectiveness of the Trust’s internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Based on the Trustee’s evaluation under the COSO criteria, the Trustee concluded that the Trust’s internal control over financial reporting was effective as of December 31, 2006.
     The Trustee’s assessment of the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report set forth in full below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Trustee and Holders of Trust Units of BP Prudhoe Bay Royalty Trust:
We have audited the Trustee’s assessment, included in Trustee’s Report on Internal Control over Financial Reporting under Item 9A of the accompanying Annual Report on Form 10-K, that BP Prudhoe Bay Royalty Trust (the “Trust”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The trustee of BP Prudhoe Bay Royalty Trust is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the trustee’s assessment and an opinion on the effectiveness of the trust’s internal control over financial reporting based on our audit.
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 included obtaining an understanding of internal control over financial reporting, evaluating the trustee’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
The Trust’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 the modified cash basis of accounting. The Trust’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 trust; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the modified cash basis of accounting, and that receipts and expenditures of the Trust are being made only in accordance with authorizations of the trustee; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Trust’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

47


 

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 trustee’s assessment that BP Prudhoe Bay Royalty Trust maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, BP Prudhoe Bay Royalty Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statements of assets, liabilities, and trust corpus of BP Prudhoe Bay Royalty Trust as of December 31, 2006 and 2005, and the related statements of distributable income and changes in trust corpus for each of the years in the three-year period ended December 31, 2006, and our report dated March 1, 2007 expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described the trust’s method of accounting as explained in Note 2 to the financial statements.
KPMG LLP
Dallas, Texas
March 1, 2007
 
      Changes in Internal Control Over Financial Reporting. There has not been any change in the Trust’s internal control over financial reporting identified in connection with the Trustee’s evaluation of the Trust’s internal control over financial reporting that occurred during the Trust’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
     Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
     The Trust has no directors or executive officers. The Trust is administered by the Trustee under the authority granted it in the Trust Agreement. The Trust Agreement grants the Trustee only the rights and powers necessary to achieve the purposes of the Trust. See “THE TRUST – Duties and Powers of Trustee” in Item 1.
     The Trustee may be removed with or without cause by vote of holders of a majority of the Units at a meeting called and held as provided in the Trust Agreement. At the meeting the Unit holders may appoint a successor trustee meeting the requirements set forth in the Trust Agreement. See “THE TRUST – Resignation or Removal of Trustee” in Item 1.

48


 

     The Trust has not adopted a code of ethics. The standards of conduct governing the Trustee are set forth in the Trust Agreement and Delaware law. Ethical standards applicable to the employees of the Trustee are set forth in The Bank of New York’s Code of Conduct which may be found at www.bankofny.com .
     There is no audit committee or committee performing comparable functions responsible for reviewing the audited financial statements of the Trust.
ITEM 11. EXECUTIVE COMPENSATION
     The Trust has no directors, officers or employees to whom it pays compensation. The Trust is administered by employees of the Trustee in the ordinary course of their employment who receive no compensation specifically related to their services to the Trust.
     Under the Trust Agreement, the Trustee is entitled to receive on each Quarterly Record Date a quarterly fee, currently consisting of: (i) a quarterly administrative fee of $.0017 per Unit outstanding on the Quarterly Record Date plus $10.00 for each payment by wire transfer to a Unit holder and (ii) a transfer service fee of $2.34 per Unit holder account as of the Quarterly Record Date. Both the administrative service fee and the transfer service fee are subject to increase in each calendar year by the proportionate increase, if any, during the preceding calendar year in the Consumer Price Index (as defined in the Conveyance; see “THE ROYALTY INTEREST – Cost Adjustment Factor” in Item 1) during the preceding calendar year. The Trustee also bills the Trust for certain reimbursable expenses. There is no compensation committee or committee performing similar functions with authority to determine any compensation of the Trustee other than the fees and reimbursable expenses provided for in the Trust Agreement.
     The compensation received by the Trustee from the Trust during the three fiscal years ended December 31, 2006 was as follows:
                 
            Transfer Agent
            and Registrar
Year ended December 31,   Trustee’s Fees   Fees
2004
  $ 116,378     $ 6,647  
2005
    141,288       7,075  
2006
    147,081       6,860  
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
     No Units are authorized for issuance under any form of equity compensation plan.
Unit Ownership of Certain Beneficial Owners
     As of February 28, 2007, there were no persons known to the Trustee to be the beneficial owners of more than five percent of the Units.

49


 

Unit Ownership of Management
     Neither BP Alaska, Standard Oil, nor BP owns any Units. No Units are owned by The Bank of New York, as Trustee or in its individual capacity, or by The Bank of New York (Delaware), as co-trustee or in its individual capacity.
Changes in Control
     The Trustee knows of no arrangement, including the pledge of Units, the operation of which may at a subsequent date result in a change in control of the Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
     There has been no transaction by the Trust since the beginning of 2006, or any currently proposed transaction in which a related person (as defined in Item 404 of Regulation S-K) had or will have a direct or indirect material interest, except for payment to the Trustee of the fees and reimbursement for expenses prescribed in the Trust Agreement. See Item 11 above.
     The Trust has no independent directors. See Item 10 above.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
     Fees for services performed by KPMG LLP for the years ended December 31, 2006 and 2005 are:
                 
    2006     2005  
Audit
  $ 123,500     $ 113,000  
Audit related
    16,500       16,000  
Tax
    200,000       200,000  
Other
           
 
           
 
  $ 340,000     $ 329,000  
 
           
     The Trust has no audit committee, and as a consequence, has no audit committee pre-approval policy with respect to fees paid to KPMG LLP.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS
     The following financial statements of the Trust are included in Part II, Item 8:
 
Report of Independent Registered Public Accounting Firm
Statements of Assets, Liabilities and Trust Corpus as of December 31, 2006 and 2005
Statements of Cash Earnings and Distributions for the years ended December 31, 2006, 2005 and 2004
Statements of Changes in Trust Corpus for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements

50


 

(b) FINANCIAL STATEMENT SCHEDULES
     All financial statement schedules have been omitted because they are either not applicable, not required or the information is set forth in the financial statements or notes thereto.
(c) EXHIBITS
     
4.1
  BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 among The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of New York, Trustee, and F. James Hutchinson, Co-Trustee.
 
   
4.2
  Overriding Royalty Conveyance dated February 27, 1989 between BP Exploration (Alaska) Inc. and The Standard Oil Company.
 
   
4.3
  Trust Conveyance dated February 28, 1989 between The Standard Oil Company and BP Prudhoe Bay Royalty Trust.
 
   
4.4
  Support Agreement dated as of February 28, 1989, as amended May 8, 1989, among The British Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The Standard Oil Company and BP Prudhoe Bay Royalty Trust.
 
   
4.5
  Letter agreement dated October 13, 2006 between BP Exploration (Alaska) Inc. and The Bank of New York, as Trustee.
 
   
31
  Rule 13a-14(a) certification.
 
   
32
  Section 1350 certification.

51


 

SIGNATURES
      Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    BP PRUDHOE BAY ROYALTY TRUST    
 
           
    By: THE BANK OF NEW YORK, as Trustee    
 
           
 
  By:   /s/ Remo Reale    
 
           
 
      Remo Reale    
 
      Vice President    
March 1, 2007
     The Registrant is a trust and has no officers, directors, or persons performing similar functions. No additional signatures are available and none have been provided.

52


 

INDEX TO EXHIBITS
     
Exhibit No.   Description
 
   
4.1*
  BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 among The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of New York, Trustee, and F. James Hutchinson, Co-Trustee.
 
   
4.2*
  Overriding Royalty Conveyance dated February 27, 1989 between BP Exploration (Alaska) Inc. and The Standard Oil Company.
 
   
4.3*
  Trust Conveyance dated February 28, 1989 between The Standard Oil Company and BP Prudhoe Bay Royalty Trust.
 
   
4.4*
  Support Agreement dated as of February 28, 1989 among The British Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The Standard Oil Company and BP Prudhoe Bay Royalty Trust.
 
   
4.5**
  Letter agreement dated October 13, 2006 between BP Exploration (Alaska) Inc. and The Bank of New York, as Trustee.
 
   
31*
  Rule 13a-14(a) certification.
 
   
32*
  Section 1350 certification.
 
*   Filed herewith.
 
**   Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-10243).

 

 

EXHIBIT 4.1
BP PRUDHOE BAY ROYALTY TRUST AGREEMENT
BY AND AMONG
THE STANDARD OIL COMPANY
AND
BP EXPLORATION (ALASKA) INC.
AND
THE BANK OF NEW YORK, TRUSTEE
AND
F. JAMES HUTCHINSON, CO-TRUSTEE
Dated February 28, 1989

 


 

         
 
INDEX
       
 
Preambles
    1  
 
Article I — Definitions
    3  
 
Article II — Creation, Name and Purpose of Trust
       
 
Section 2.01 - Creation and Name of Trust
    13  
 
Section 2.02 - Purposes
    13  
 
Section 2.03 - Initial Conveyance
    14  
 
Section 2.04 - Additional Conveyance
    15  
 
Section 2.05 - Certificate of Trust
    21  
 
Section 2.06 - Acceptance by Trustee
    21  
 
Section 2.07 - Registration of Units
    21  
 
Article III — Creation of Units and Certificates
       
 
Section 3.01 - Creation of Units
    22  
 
Section 3.02 - Certificates as Evidence of Ownership of Units
    22  
 
Section 3.03 - Rights of Unit Holders
    23  
 
Section 3.04 - Character of Rights
    24  
 
Section 3.05 - Form, Execution and Dating of Certificates
    24  
 
Section 3.06 - Registration and Transfer of Units
    26  
 
Section 3.07 - Mutilated, Destroyed, Lost or Stolen Certificates
    30  
 
Section 3.08 - Protection of Trustee
    31  
 
Section 3.09 - Transfer Agent and Registrar
    31  
 
Section 3.10 - Limitation of Personal Liability of Unit Holders
    31  

 


 

         
 
Article IV — Accounting and Distribution
       
 
Section 4.01 - Fiscal Year and Accounting Method
    32  
 
Section 4.02 - Distributions
    32  
 
Section 4.03 - Income Tax Withholding & Reporting
    34  
 
Section 4.04 - Reports to Unit Holders
    34  
 
Section 4.05 - Information to be Supplied by the Company
    36  
 
Section 4.06 - Information to be Provided to the Company
    37  
 
Article V — Meetings of Unit Holders
       
 
Section 5.01 - Purpose of Meetings
    38  
 
Section 5.02 - Call and Notice of Meetings
    38  
 
Section 5.03 - Voting
    39  
 
Section 5.04 - Conduct of Meetings
    40  
 
Section 5.05 - Voting of Units Held by Company, SOC and Their Respective Affiliates
    41  
 
Article VI — Administration of Trust and Powers of Trustee
       
 
Section 6.01 - General Authority
    41  
 
Section 6.02 - Limited Power to Dispose of Royalty Interest and Other Trust Interests
    44  
 
Section 6.03 - No Power to Engage in Business or Make Investments
    48  
 
Section 6.04 - Payment of Liabilities of Trust
    48  
 
Section 6.05 - Timing of Trust Income and Expenses
    49  
 
Section 6.06 - Limited Power to Borrow
    50  
 
Section 6.07 - Cash Reserves and Cash Held Pending Distribution Date
    52  

 


 

         
 
Section 6.08 - Settlement of Claims
    55  
 
Section 6.09 - Income and Principal
    55  
 
Section 6.10 - Effect of Trustee’s Power on Trust Property
    56  
 
Section 6.11 - No Requirement of Diversification
    56  
 
Section 6.12 - Divestiture of Units
    56  
 
Section 6.13 - Prohibited Transactions
    61  
 
Article VII — Rights and Liabilities of Trustee
       
 
Section 7.01 - General Liability of Trustee
    61  
 
Section 7.02 - Indemnification of Trustee
    62  
 
Section 7.03 - Compensation
    66  
 
Section 7.04 - Other Services and Expenses
    66  
 
Section 7.05 - Reliance on Experts
    68  
 
Section 7.06 - No Security Required
    68  
 
Section 7.07 - Transactions in Multible Capacities
    69  
 
Article VIII — Office of Trustee
       
 
Section 8.01 - Removal of Trustee
    69  
 
Section 8.02 - Resignation of Trustee
    69  
 
Section 8.03 - Appointment of Successor Trustee
    70  
 
Section 8.04 - Rights of a Successor Trustee
    72  
 
Section 8.05 - Merger or Consolidation of Trustee
    73  
 
Section 8.06 - Co-Trustee
    73  
 
Article IX — Terms of Trust and Final Distribution
       
 
Section 9.01 - Termination
    74  
 
Section 9.02 - Disposition of Assets Upon Termination
    76  

 


 

         
Section 9.03 - Distribution of Assets Upon Termination
    79  
 
Article X — Irrevocability and Amendability
       
 
Section 10.01 - Irrevocability
    80  
 
Section 10.02 - Limited Amendability
    81  
 
Section 10.03 - Corrective Amendments
    83  
 
Section 10.04 - Tax Rulings & Opinions
    83  
 
Article XI — Failure to Pay Amounts Due Trustee
    84  
 
Article XII — Miscellaneous
       
 
Section 12.01 - Inspection of Records
    84  
 
Section 12.02 - Filing of this Agreement
    85  
 
Section 12.03 - Disability of Unit Holder
    85  
 
Section 12.04 - Savings Clause
    86  
 
Section 12.05 - Notices
    86  
 
Section 12.06 - Notice and Reports to the Company, SOC or BP
    86  
 
Section 12.07 - Governing Law
    87  
 
Section 12.08 - Counterparts
    87  
 
Section 12.09 - Headings
    88  
 
Section 12.10 - Independent Conduct
    88  
 
Section 12.11 - Determination by the Trustee
    88  
 
Signatures
       
Exhibit A — Form of Initial Conveyance
Exhibit B — Form of Certificate
Exhibit C — Form of Compensation Agreement

 


 

BP PRUDHOE BAY ROYALTY TRUST AGREEMENT
     THIS ROYALTY TRUST AGREEMENT (the “Agreement”), made and entered into as of the 28th day of February, 1989, by and among The Standard Oil Company, an Ohio corporation having its principal office in Cleveland, Ohio (“SOC”), as depositor and trustor, BP Exploration (Alaska) Inc., a Delaware corporation having its principal office in Anchorage, Alaska (formerly Standard Alaska Production Company) (the “Company”), The Bank of New York, a corporation organized under the laws of the State of New York, authorized to do a banking business and having a principal corporate trust office in New York, New York, as trustee and F. James Hutchinson, a resident of the State of Delaware, as co-trustee.
     WHEREAS, the Company is engaged in the business of developing and producing oil and gas and owns mineral interests in lands that contain proved reserves and are currently producing oil and gas; and
     WHEREAS, the Company has determined to convey to SOC the Initial Royalty Interest (hereinafter defined) pursuant to an Overriding Royalty Conveyance (as hereinafter defined); and
     WHEREAS, SOC has determined to offer and sell trust units representing undivided beneficial interests in the Trust, which will own the Initial Royalty Interest; and

 


 

     WHEREAS, SOC has determined to grant to the Trust the Initial Royalty Interest pursuant to a Trust Conveyance (as hereinafter defined) in consideration of the issuance by the Trust of the Trust Units, (as hereinafter defined); and
     WHEREAS, The British Petroleum Company p.l.c. (“BP”) has agreed to support the payment obligations of the Company and SOC as more fully set forth in the Support Agreement (as hereinafter defined); and
     WHEREAS, the Initial Conveyance (as hereinafter defined) is contemporaneously executed and delivered to the Trust;
     NOW, THEREFORE, the Initial Royalty Interest has been granted, assigned and delivered unto the Trust, receipt of which is hereby acknowledged and accepted by the Trustee on behalf of the Trust, to have and to hold, in trust as hereinafter set forth, such property and all other properties, real or personal (including Additional Royalty Interests), which may hereafter be received by the Trust pursuant to this Agreement; and the Company, SOC, The Bank of New York in its capacity as Trustee, and the Co-Trustee (as hereinafter defined) agree that such properties shall be held, administered, paid and delivered for the purposes and subject to the terms and conditions hereinafter provided.
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ARTICLE I
Definitions
     As used herein, the following terms have the meanings indicated:
     Section 1.01. “Affiliate” of a Person means another Person controlled by, controlling or under common control with such Person.
     Section 1.02. “Additional Conveyance” means collectively any instrument(s) pursuant to which one or more Additional Royalty Interests are created or conveyed to the Trust as provided in Section 2.04 hereof.
     Section 1.03. “Additional Royalty Interest” means any royalty interest which is identical in all respects to the Initial Royalty Interest, except for the identity of the parties (other than the Trust), the effective date and the percentage set forth in the definition of Royalty Production in the related Additional Conveyance.
     Section 1.04. “Agreement” means this instrument, as originally executed, or, if amended pursuant to the provisions of Section 10.02 or 10.03 hereof, as so amended.
     Section 1.05. “Beneficial Interest” means the right to share in the benefits and the obligation to share in the detriments resulting from the accomplishment of the purposes of the Trust as expressly set out in this Agreement, and includes without limitation the right to share in distributions during the term of the
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Trust, to share in the final distributions from the Trust and to participate in decisions affecting the Trust only to the extent expressly provided herein, and, except as limited by the provisions of this Agreement, to exercise all other rights of a beneficiary of a business trust created under the Delaware Trust Act.
     Section 1.06. “BP” means The British Petroleum Company p.l.c., its successors and assigns.
     Section 1.07. “Business Day” means any day that is not a Saturday, Sunday, a holiday determined by the New York Stock Exchange as “affecting ‘ex’ dates” or any other day on which banking institutions in New York, New York, or in any other city where the principal corporate trust office of the Trustee may be located, are closed as authorized or required by law.
     Section 1.08. “Certificate” means a certificate issued by the Trust pursuant to ARTICLE III hereof evidencing the ownership of one or more Units.
     Section 1.09. “Code” means the Internal Revenue Code of 1986, as amended, or any successor statute or statutes.
     Section 1.10. “Company” means BP Exploration (Alaska) Inc., a Delaware corporation and includes successors or assigns of the Company.
     Section 1.11. “Conveyance” means collectively the Initial Conveyance and any Additional Conveyance.
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     Section 1.12. “Co-Trustee” shall have the meaning ascribed to it in Section 1.33 hereof.
     Section 1.13. “Delaware Trust Act” means 12 Delaware Code Section 3801 et seq.
     Section 1.14. “Distribution Date” means the date of any distribution pursuant to Section 4.02 hereof.
     Section 1.15. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute or statutes.
     Section 1.16. “Initial Conveyance” means collectively the Overriding Royalty Conveyance and the Trust Conveyance.
     Section 1.17. “Initial Royalty Interest” means the royalty interest being conveyed by the Company to SOC and by SOC to the Trust contemporaneously with the execution and delivery of this Agreement pursuant to the Initial Conveyance.
     Section 1.18. “Insignificant Investor Period” means each period of time prior to the Opinion Date during which benefit plan investors (within the meaning-of Department of Labor regulation section 2510.3-101(f)(2)) do not own a sufficient number of Units of a “class” to cause their equity participation in the Trust to be “significant” (within the meaning of Department of Labor regulation section 2510.3-101(f)(1)).
     Section 1.19. “Officer’s Certificate” means a certificate duly executed on behalf of the Company or SOC, as the case may be, signed by any president, any vice president, any assistant vice
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president, or any treasurer or assistant treasurer, or any certificate reasonably believed by the Trustee to have been so signed.
     Section 1.20. “Opinion Date” means the first date upon which all of the following requirements have been satisfied: (i) the Trust Units have been registered under section 12(b) or section 12(g) of the Securities Exchange Act of 1934; (ii) the Trust Units are widely-held (within the meaning of paragraph (b)(3) of the Regulation); (iii) the Trust Units are freely transferable (within the meaning of paragraph (b)(4) of the Regulation); (iv) the Company has delivered to the Trustee an opinion of nationally recognized ERISA counsel (such counsel to be selected by the Company and approved by the Trustee and such opinion to be reasonably acceptable to the Trust’s counsel) which states, in effect, that the requirements described in clauses (i), (ii) and (iii) above have been satisfied; and (v) the Company has delivered to the Trustee either (a) an opinion of nationally recognized ERISA counsel (such counsel to be selected by the Company and approved by the Trustee and such opinion to be reasonably acceptable to the Trust’s counsel) or (b) an individual prohibited transaction exemption or an advisory opinion issued by the Department of Labor to the Trustee, the Trust or the Company which opinion, exemption or advisory opinion states, in effect, that from and after the date upon which the requirements described in clauses (i), (ii) and (iii) above have been satisfied, the assets of the Trust shall not constitute plan assets (within the meaning
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of the Regulation) with respect to any employee benefit plan (as such term is defined in section 3(3) of ERISA) which became a Unit Holder prior to the date such requirements have been satisfied (provided, however, that if the Company has delivered to the Trustee an opinion of counsel as described in clause (v)(a) above, such opinion must specifically reference and be based primarily upon an advisory opinion or other published announcement of similar authoritative import issued by the Department of Labor which favorably addresses the same issues which are to be addressed in such opinion and which is based upon facts similar to those involving the Trust and such employee benefits plans). The Company shall use its best efforts to obtain promptly, at its expense, from the Department of Labor the individual prohibited transaction exemption or advisory opinion referred to in clause (v)(b) above; provided, however, that if the Company has delivered the opinion of counsel referred to in clause (v)(a) above, then its obligation to use its best efforts to obtain such exemption or advisory opinion shall terminate. For purposes of this Section, the term “Regulation” means Department of Labor regulation section 2510.3-101.
     Section 1.21. “Overriding Royalty Conveyance” means the Overriding Royalty Conveyance from the Company to SOC, the form which is attached hereto as part of Exhibit A.
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     Section 1.22. “Person” means an individual, corporation, partnership, unincorporated association, trust, estate or other organization.
     Section 1.23. “Quarter” means a period of approximately three months beginning on the day after a Quarterly Record Date and continuing through and including the next succeeding Quarterly Record Date, which shall be the Quarterly Record Date for such Quarter; provided, however, that the first Quarter hereunder shall be a period beginning on the date hereof and continuing until April 17, 1989.
     Pursuant to the Conveyance royalty amounts payable to the Trust are calculated on a calendar quarter basis, and each royalty payment is required to be made on the Quarterly Record Date immediately following the close of the calendar quarter during which the related oil production occurs. Therefore, pursuant to the Conveyance royalty payments for the four calendar quarters in each year are due and payable to the Trust on the Quarterly Record Date in April, July and October of such year and in January of the following year. The term “Quarter” as used herein refers to a three-month period which ends on the Quarterly Record Date which occurs approximately one-half month after the end of the corresponding royalty calculation period.
     Section 1.24. “Quarterly Income Amount” for any Quarter means the sum of (a) the cash received by the Trust during the Quarter that is directly attributable to the Royalty Interest, (b)
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any cash available for distribution as a result of the reduction or elimination during the Quarter of any existing cash reserve created pursuant to Section 6.07 hereof and (c) any other cash receipts of the Trust during the Quarter including without limitation any cash received from interest earned pursuant to Section 6.07 hereof, reduced by the sum of (i) the liabilities of the Trust paid during the Quarter and (ii) the amount of any cash used in the Quarter to establish or increase a cash reserve pursuant to Section 6.07 hereof. If (a) prior to the end of a Quarter the Trustee makes a determination of the Quarterly Income Amount which it anticipates will be distributed to Unit Holders of record on the Quarterly Record Date for such Quarter, based on notice provided to the Trustee by the Company pursuant to Section 4.8(e) of the Overriding Royalty Conveyance (and similar provisions of any Additional Conveyance), and (b) the Quarterly Income Amount is not equal to the amount so determined because the amounts stated in such notice were not received on or prior to such Quarterly Record Date, the Trustee shall treat such amounts when received as if they were received on such Quarterly Record Date.
     Notwithstanding anything to the contrary in this Section 1.24, the Quarterly Income Amount for any Quarter shall not include any amount that would have been required to be reported to any stock exchange on which the Units are listed in connection with the establishment of an “ex” date in order to be distributed to Unit Holders who were such on the Quarterly Record Date for
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such Quarter but was not so reported unless the stock exchange agrees to such amount being a part of that Quarter’s Quarterly Income Amount or the Trustee receives an opinion of counsel stating that neither the Trust, the Trustee nor The Bank of New York will be adversely affected by such inclusion. An amount that, pursuant to the preceding sentence, is not included in the Quarterly Income Amount for that Quarter shall be treated as if received during the next Quarter. In this connection, the Trustee shall report quarterly to such stock exchange (so long as reporting is so required by the stock exchange), at the time required by the stock exchange, the amount that, pursuant to the first paragraph of this Section 1.24, the Trustee in good faith reasonably expects to be the Quarterly Income Amount for the Quarter being reported on.
     Section 1.25. “Quarterly Record Date” means the fifteenth day of each January, April, July and October; provided, however, that if such day is not a Business Day then the Quarterly Record Date shall be the next Business Day after such day and provided further that if the Trustee determines that a different date is required to comply with applicable law or the rules or regulations of any stock exchange on which the Units are listed, it means such different date. The first Quarterly Record Date shall be April 17, 1989.
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     Section 1.26. “Record Date Unit Holder” means a Person who was a Unit Holder of record on the Voting Record Date for a meeting of Unit Holders.
     Section 1.27. “Royalty Interest” means the Initial Royalty Interest and any Additional Royalty Interests which may hereafter be granted to the Trust pursuant to this Agreement, taken together.
     Section 1.28. “Royalty Statement” means the statement prepared by the Company and delivered to the Trust pursuant to Section 4.8(f) of the Overriding Royalty Conveyance or the comparable provision of any Additional Conveyance.
     Section 1.29. “Support Agreement” means the Support Agreement dated as of even date herewith by and among BP, the Company, SOC and the Trust.
     Section 1.30. “Trust” means the business trust under the Delaware Trust Act created by and administered under the terms of this Agreement.
     Section 1.31. “Trust Conveyance” means the Trust Conveyance from SOC to the Trust, the form of which is attached hereto as part of Exhibit A.
     Section 1.32. “Trust Estate” means all assets, however and whenever acquired, that may belong to the Trust at any designated time and shall include both income and principal.
     Section 1.33. “Trustee” means collectively (except as otherwise provided in Section 8.06 hereof) The Bank of New York, a
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corporation organized under the laws of the State of New York and authorized to do a banking business and qualified to exercise trust powers, in its capacity as trustee hereunder, and, F. James Hutchinson, in his capacity as co-trustee hereunder. The Bank of New York and F. James Hutchinson shall serve as the initial trustees under this instrument. The term “Trustee” shall include any ancillary or successor trustee or co-trustee hereunder, during the period it is so serving in such capacity. The term “Co-Trustee” means F. James Hutchinson, in his capacity as co-trustee hereunder, and any successor co-trustee hereunder, during the period he or it is serving in such capacity. References to The Bank of New York or to the Trustee, individually, or similar references shall be deemed to be references to The Bank of New York in its individual capacity and not in its capacity as Trustee hereunder and shall be deemed to include its successors or assigns which serve as Trustee in their individual capacities and not in their capacities as successor Trustees hereunder.
     Section 1.34. “Unit” or “Trust Unit” means an undivided fractional interest in the Beneficial Interest determined as hereinafter provided.
     Section 1.35. “Unit Holder” means the owner of one or more Units as shown by the records of the Trustee pursuant to the provisions of ARTICLE III hereof.
     Section 1.36. “Voting Record Date” means a date selected by the Trustee as the record date for determining Unit Holders of
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record entitled to notice of and to vote at a meeting of Unit Holders, as provided in ARTICLE V hereof.
ARTICLE II
Creation, Name and Purpose of Trust
     Section 2.01 — Creation and Name of Trust. The Trust is hereby created under the Delaware Trust Act as a Delaware business trust for the benefit of the Unit Holders. The Trust shall be known as the BP Prudhoe Bay Royalty Trust, and the Trustee may transact all affairs of the Trust in that name. Pursuant to the Trust Conveyance, SOC has granted, bargained, sold, conveyed, assigned, set over and delivered the Initial Royalty Interest to the Trust. The Initial Royalty Interest shall constitute the initial Trust Estate.
     Section 2.02 — Purposes. The purposes of the Trust are (a) to convert the Royalty Interest to cash either (1) by retaining the Royalty Interest and collecting the proceeds from production in accordance with the terms of the Conveyance until production has ceased permanently or the Royalty Interest has otherwise terminated or (2) by selling or otherwise disposing of the Royalty Interest (within the limits stated herein); and (b) to distribute such cash, net of amounts for payment of expenses and liabilities of the Trust, to the Unit Holders as provided herein.
     It is the intention and agreement of SOC, the Company and the Trustee to create a grantor trust for federal income tax purposes of which the Unit Holders are treated as the owners of trust
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income and corpus. As set forth above and amplified herein, the Trust is intended to be a passive entity limited to the receipt of revenues attributable to the Royalty Interest and the distribution of such revenues, after payment of or provision for Trust expenses and liabilities, to the Unit Holders. It is neither the purpose nor the intention of the parties hereto to create, and nothing in this Agreement shall be construed as creating, a partnership, joint venture, joint stock company or similar business association between or among Unit Holders, present or future, or between or among Unit Holders, or any of them, and the Trustee or SOC or the Company.
     Section 2.03. — Initial Conveyance. SOC, as depositor and trustor, has delivered, and the Trustee on behalf of the Trust has accepted, executed copies of the Initial Conveyance. Accordingly, the Initial Royalty Interest described therein constitutes the initial Trust Estate. In consideration of the grant of the Initial Royalty Interest and the execution and delivery of the Support Agreement, the Trustee is hereby directed to execute and deliver on behalf of SOC Certificates representing an aggregate of 21,400,000 Trust Units in such denominations and to the Persons identified by SOC in an Officer’s Certificate delivered to the Trustee; provided, however, that the Trustee shall not be obligated to execute and deliver such Certificates to any Person unless such Person delivers to the Trustee a written instrument evidencing the agreement of such Person with respect to matters
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set forth in subsections (i) through (iv) of the last paragraph of Section 2.04 hereof.
     Section 2.04. — Additional Conveyances. The Company or an Affiliate may from time to time grant, assign and deliver unto the Trust one or more Additional Royalty Interests by executing and delivering to the Trust one or more Additional Conveyances, and, subject to the conditions set forth below, the Trustee shall accept on behalf of the Trust the assignment of such Additional Royalty Interests and the delivery of such Additional Conveyances.
     The obligation of the Trustee to accept the assignment of any such Additional Royalty Interest shall be subject to the condition that the Additional Royalty Interest shall be identical in all respects to the Initial Royalty Interest except for the effective date of the Additional Conveyance (which must be on the first day of a calendar quarter and must be the date of delivery thereof to the Trustee), the percentage set forth in the definition of Royalty Production in the related Additional Conveyance and the identity of the parties (other than the Trust) to the Additional Conveyance (provided that the entity which will make payments to the Trust under any Additional Royalty Interest must be the same entity which will make payments to the Trust under the Initial Royalty Interest). Any Additional Conveyance must be identical in all respects to the Initial Conveyance, except for changes which
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may be necessary to ensure that the Additional Royalty Interest conforms to the conditions set forth herein.
     In consideration of the grant of an Additional Royalty Interest, and in exchange therefor, the Trustee shall issue, upon receipt of an Officer’s Certificate containing the direction of the Company or such Affiliate to issue to the order of the Company or such Affiliate, a number of whole Units in the Trust not to exceed a total of 18,600,000 additional Units determined by the following formula:
                 
 
  Number of Units =     A     x 21,400,000
 
               
 
        16.4246 %    
where “A” equals the percentage set forth in the definition of “Royalty Production” in the related Additional Conveyance. In connection with such issuance, the recipients of such Units and their transferees shall not be treated as Unit Holders of record entitled to distributions with respect to the Quarterly Income Amount for the Quarterly Record Date which occurs during the month in which such Additional Conveyance is effective and shall not be entitled to transfer such Units (other than to the Company or one of its Affiliates) on or prior to such Quarterly Record Date, and the Certificates therefor shall prominently so state.
     The acceptance by the Trustee of any assignment of an Additional Royalty Interest shall be subject to the condition precedent that the Trustee shall have received (a) a ruling from the Internal Revenue Service to the effect that neither the existence
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nor exercise of the right to assign the Additional Royalty Interest, the power to accept such assignment or the issuance of additional Units as herein contemplated will adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes and (b) a ruling from the Internal Revenue Service or an unqualified written opinion of counsel to the Trust to the effect that such assignment will not cause (i) the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes or (ii) the Unit Holders to recognize income, gain or loss attributable to the Royalty Interests as a result of such assignment, except to the extent of any gain or loss attributable to any cash received by the Trust in connection with such assignment.
     In addition, the Trustee shall require that the Company or such Affiliate making the deposit of the Additional Royalty Interest to the Trust pay the expenses of such assignment and contribute a cash reserve equal to the value of the cash reserve, if any, existing on the date such Additional Conveyance is effective multiplied by a fraction whose numerator is the additional number of Units to be issued and whose denominator is the sum of (a) the number of Units outstanding immediately preceding such deposit of the Additional Royalty Interest and (b) the number of Units then to be issued. The Trustee shall invest the cash, if any, deposited with respect to such cash reserve as provided in Section 6.07 hereof in investments maturing on the next succeeding Quarterly
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Record Date, and there shall be included in the Quarterly Income Amount distributed to Unit Holders of record on the Quarterly Record Date which occurs during the month in which such Additional Conveyance is effective an amount equal to the sum of (a) the amount so deposited and (b) the interest earned on such amount from the time it is invested to such Quarterly Record Date.
     Upon acceptance thereof by the Trustee on behalf of the Trust, the Additional Royalty Interest shall constitute a part of the Trust Estate and, to the extent permitted by law, shall be treated by the Trustee, together with the Initial Royalty Interest and all other Additional Royalty Interests previously assigned to the Trust, as constituting one Royalty Interest held for the benefit of all Unit Holders.
     Notwithstanding any other provision of this Agreement, with respect to any Additional Royalty Interest to be conveyed to the Trust prior to the date upon which the requirements of clauses (i), (ii), (iii) and (iv) of Section 1.20 have been satisfied (the “Restriction Date”), the Trustee shall not be required to accept such Additional Royalty Interest on behalf of the Trust unless each Person who is to be issued Units in connection with such conveyance delivers to the Trustee a written instrument evidencing the agreement of such Person:
  (i)   to furnish to the Trustee, from time to time and within five days of its receipt of a written request from the Trustee, complete and correct information in a form and
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      manner reasonably acceptable to the Trustee as to whether such Person is a benefit plan investor (within the meaning of Department of Labor regulation section 2510.3-101(f)(2)) and, if such Person is a benefit plan investor, information as to (a) the identity of the employee benefit plan or plans established or maintained in connection with, or owning an interest in, such benefit plan investor if such benefit plan investor is not a “collective investment fund maintained by a bank” within the meaning of Department of Labor Prohibited Transaction Exemption 80-51 (a “Fund”) nor an insurance company pooled separate account within the meaning of Department of Labor Prohibited Transaction Exemption 78-19 (an “Account”), (b) the identity of the employee benefit plan or plans owning an interest in excess of five percent (with all such plans maintained by the same employer or employee organization treated as a single plan for purposes of this determination) of all of the assets in such benefit plan investor if such benefit plan investor is a Fund or an Account, and (c) the identity of the sponsor of the plan or plans described in subclauses (a) or (b) above, and (d) information as to whether any Person designated by the Trustee as a Person with whom the Trust proposes to engage in a transaction is a “party in interest” (within the meaning
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      of Section 3(14) of ERISA) or a “disqualified person” (within the meaning of Section 4975(e)(2) of the Code), (collectively referred to as a “party in interest”), as to such benefit plan investor (including without limitation, each Plan owning a five percent interest in a Fund or Account),
 
  (ii)   that the Trustee shall be authorized to disclose any information described in clause (i) above which is provided by such Person to the Trustee and which may be necessary, in the sole opinion of the Trustee, in order for the Trustee to perform its duties under this Agreement,
 
  (iii)   to comply in all respects with the recordkeeping and examination requirements of Section III of (a) Department of Labor Prohibited Transaction Exemption 80-51 if such Person is a benefit plan investor which is a Fund, or (b) Department of Labor Prohibited Transaction Exemption 78-19 if such Person is a benefit plan investor which is an Account, and
 
  (iv)   that such Person will not directly or indirectly transfer any of the Units to be issued to such Person prior to the Restriction Date unless the transferee of such Units delivers to the Trustee a written instrument evidencing its agreement with respect to the matters described in clauses (i), (ii) and (iii) above and this
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      clause (iv) as if such transferee had received a direct issuance of Units from the Trust in connection with the conveyance of such Additional Royalty Interest.
     Section 2.05. — Certificate of Trust. The Trustee shall cause to be filed a certificate of trust in the office of the Secretary of State of Delaware in compliance with Section 3810 of the Delaware Trust Act.
     In the event that the Trustee becomes aware that any statement contained or any matter described in the certificate of trust has changed making the certificate false in any material respect, the Trustee shall promptly file a certificate of amendment in the office of the Secretary of State of Delaware in compliance with Section 3810 of the Delaware Trust Act. Upon the termination of the Trust pursuant to Section 9.01 of this Agreement, the Trustee shall file a certificate of cancellation in the office of the Secretary of State of Delaware in compliance with Section 3810 of the Delaware Trust Act.
     Section 2.06. — Acceptance by Trustee. The Trustee, by joining in the execution of this Agreement, accepts the Trust herein created and provided for and accepts all of the rights, powers, privileges, duties and responsibilities of the Trustee hereunder and agrees to exercise and perform the same in accordance with the terms and provisions contained herein.
     Section 2.07. — Registration of the Units. In connection with the contemplated registration of the Units under the
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Securities Act of 1933, as amended, if required by the Securities and Exchange Commission, the Company, or its designee, is hereby granted full power and authority to sign on behalf of the Trust such registration statements and any amendments, including post-effective amendments and any other related documents relating to the Units as may be necessary to effect or to continue in effect such registration.
ARTICLE III
Creation of Units and Certificates
     Section 3.01 — Creation of Units. The entire Beneficial Interest shall initially be divided into 21,400,000 Units.
     If at any time there is assigned to the Trust an Additional Royalty Interest pursuant to Section 2.04 hereof, the Beneficial Interest shall thereafter be considered to be divided into a number of Units equal to the sum of the number of Units existing prior to such assignment and the number of Units created upon such assignment pursuant to Section 2.04 hereof, and upon the acceptance of such assignment, the Trustee shall cause to be issued in accordance with Section 2.04 hereof new Certificates representing the number of Units created upon such assignment.
     Section 3.02 — Certificates as Evidence of Ownership of Units. The ownership of the Units shall be evidenced by Certificates in substantially the form set forth in Exhibit B attached hereto. Except as otherwise provided in Sections 2.04 and 3.08
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hereof and notwithstanding anything else stated herein, the Trustee may for all purposes set forth in this Agreement, including, without limitation, the making of distributions and voting, treat the holder of any Certificate as shown by the records of the Trustee maintained pursuant to Section 3.06 hereof as the owner of the Units evidenced thereby.
     Section 3.03. — Rights of Unit Holders. Except as otherwise specifically provided herein, the Unit Holders shall own pro rata the Beneficial Interest and shall be entitled to participate pro rata in the rights and benefits of Unit Holders under this Agreement. A Unit Holder by assignment or otherwise shall take and hold the same subject to all the terms and provisions of this Agreement and the Conveyance, which shall be binding upon and inure to the benefit of the successors, assigns, legatees, heirs and personal representatives of the Unit Holder. By an assignment or transfer of one or more Units, the assignor thereby shall, effective as of the close of business on the date of transfer and with respect to such assigned or transferred Unit or Units, part with, except as provided in Sections 3.06 and 4.02 hereof in the case of a transfer after a Quarterly Record Date and prior to the corresponding Distribution Date, (a) all of his Beneficial Interest attributable thereto, (b) all of his rights in, to and under such Unit or Units and (c) all interests, rights and benefits under this Agreement of a Unit Holder that are attributable to such Unit or Units as against all other Unit Holders, the Trust
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and the Trustee.
     Section 3.04. — Character of Rights. The sole interest of each Unit Holder shall be his pro rata portion of the Beneficial Interest and the obligations of the Trust expressly created under this Agreement with respect to the Beneficial Interest. Such interest of a Unit Holder is and shall be construed for all purposes (except for tax purposes) to be intangible personal property, and no Unit Holder as such shall have any legal title in or to any real property interest that is a part of the Trust Estate including, without limiting the foregoing, the Royalty Interest or any part thereof. No Unit Holder shall have the right to seek or secure any partition or distribution of the Royalty Interest or any other asset of the Trust Estate or any accounting during the term of the Trust or during the period of liquidation and winding up under Section 9.02 hereof.
     Section 3.05. — Form, Execution and Dating of Certificates. The Certificates may contain such changes of form, but not substance, as the Trustee, from time to time in its discretion, may deem necessary or desirable. In addition, the Certificates shall contain such changes (not inconsistent with the provisions of this Agreement) as from time to time may be required to comply with any rule or regulation of any stock exchange on which the Units are listed. Each Certificate shall be dated the date of its issuance. Each Certificate shall be signed on behalf of the Trust by a duly authorized signatory of the Trustee (which signature may be a
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facsimile to the extent permitted by law or regulations of any stock exchange on which the Units are listed) and may be sealed with the seal of the Trustee or a facsimile thereof.
     Pending the preparation of definitive Certificates, the Trustee shall execute, and the Transfer Agent and Registrar (as provided in Section 3.06 hereof) shall record, countersign and register, temporary Certificates, as directed in an Officer’s Certificate of SOC. Temporary Certificates may contain such references to any provisions of this Agreement as may be appropriate. Every temporary Certificate shall be executed by the Trustee and recorded, countersigned and registered upon the same conditions and in substantially the same manner, and with like effect, as the definitive Certificates.
     As promptly as practicable, the Trustee shall execute and furnish definitive Certificates and thereupon temporary Certificates may be surrendered in exchange therefor without charge to the Unit Holders at the principal corporate trust office of The Bank of New York at which Certificates may be presented for a transfer pursuant to Section 3.06 hereof, and the Transfer Agent and Registrar shall record, countersign and register in exchange for such temporary Certificates a like aggregate amount of definitive Certificates. Until so exchanged, the temporary Certificates shall be entitled to the same benefits under this Agreement as definitive Certificates.
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     Section 3.06 — Registration and Transfer of Units. With respect to the issuance of the initial Certificates representing ownership of the Units (including Certificates issued pursuant to Section 2.04 hereof) and upon subsequent transfer of such Certificates in accordance with the provisions of this Section 3.06, the Trustee shall maintain records that reflect the name and address of the holder of each Certificate, the number of Units represented by each Certificate, the date of issuance and/or transfer of each Certificate, the name of each transferee of a Certificate and any other such information as the Trustee shall deem necessary or advisable.
     Until the Units have been registered under the Securities Act of 1933, as amended (the “Act”), and qualified under the securities laws of the various states in which qualification is required, the Units may not be transferred except pursuant to the provisions of Rule 144 or, if adopted, Rule 144A under the Act or another exemption from registration under the Act, provided that prior to any such proposed transfer (other than a transfer to an affiliated company), the holder of the Trust Units to be transferred shall give written notice to the Company and the Trustee of such holder’s intention to effect such transfer, which notice shall be accompanied by an unqualified written opinion of legal counsel, which counsel (who the Company and the Trustee acknowledge may be counsel in the employ of the transferring Unit Holder) and opinion (in form, scope and substance) shall be reasonably
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satisfactory to the Company and the Trustee, to the effect that the proposed transfer of such Trust Units may be effected without registration under the Act and applicable state securities laws. Further, until the requirements of clauses (i), (ii), (iii) and (iv) of Section 1.20 have been satisfied (and for purposes of this agreement, such requirements shall be deemed to be satisfied simultaneously with the delivery of the opinion required by clause (iv) of Section 1.20), the Units may not be transferred unless the Trustee shall have received a written instrument from the proposed transferee evidencing its agreement with respect to the matters described in clauses (i), (ii), (iii) and (iv) of the last paragraph of Section 2.04 hereof (applied without regard to whether the Units were originally acquired in connection with an Additional Conveyance or the Initial Conveyance). Except as set forth in the preceding sentences of this paragraph and as set forth in Section 2.04 hereof, all Units shall be freely transferable, but (except as otherwise provided in Section 6.12 hereof) no transfer of any Unit shall be effective as against the Trustee prior to entry on the records of the Trustee upon the surrender of the Certificate or Certificates evidencing ownership of such Unit or Units (or upon compliance with the provisions of Section 3.07 hereof) and compliance with such reasonable regulations and requirements, including but not limited to such instruments of transfer, including signature guarantees of a broker or bank located, or having a correspondent located, within New York City,
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as the Trustee may prescribe. Certificates shall be presented for transfer at the principal corporate trust office of The Bank of New York or at such office or agency of the Trustee as the Trustee shall maintain (and hereby agrees to maintain) in the Borough of Manhattan, in the event the Units are listed on any stock exchange.
     The Trustee hereby appoints The Bank of New York as Transfer Agent and Registrar for the registration of transfer of Units. The Trustee may in its sole discretion remove The Bank of New York as Transfer Agent and Registrar and appoint such one or more other Transfer Agents and Registrars as it deems appropriate.
     No service charge will be made by the Trustee to the transferor or transferee of a Certificate for any transfer of a Unit evidenced by the transferred Certificate, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation to such transfer. Until any such transfer, the Trustee may treat the holder of any Certificate as shown by its records as the owner of the Units evidenced thereby and shall not be charged with notice of any claim or demand respecting such Certificate or the interest represented thereby by any other party. Any such transfer of a Unit as evidenced by a transfer of a Certificate shall, as to the Trustee, transfer to the transferee of the Certificate as of the close of business on the date of transfer all of the undivided right, title and interest of the transferor in and to the Beneficial Interest,
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provided that, as to the Trustee, a transfer of a Certificate after any Quarterly Record Date shall not transfer to the transferee of such Certificate the right of the transferor of the Certificate to any sum payable to the transferor as the holder of record of the Certificate on such Quarterly Record Date. However, nothing stated herein shall affect the right of the Trustee to act in accordance with Sections 3.07 and 6.12 hereof.
     Notwithstanding the foregoing, in the event that the Trust receives an amount which will comprise, in whole or in part, a Quarterly Income Amount on a day other than a Quarterly Record Date, the Trustee may notify Unit Holders of the fact of such receipt by any means, including a press release, which the Trustee deems appropriate in the circumstances.
     As to matters affecting the title, ownership, warranty or transfer of Certificates, Article 8 of the Uniform Commercial Code, the Uniform Act for Simplification of Fiduciary Security Transfers and other statutes and rules with respect to the transfer of securities, each as adopted and then in force in the State of Delaware, shall govern and apply. The death of any Unit Holder shall not entitle such Unit Holder’s transferee to an accounting or valuation for any purpose, but as to the Trustee, the transferee of a deceased Unit Holder shall succeed to all rights of the deceased Unit Holder under this Agreement upon proper proof of title satisfactory to the Trustee.
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     Upon the Trustee’s receipt of written notice of the death of a Unit Holder, the Trustee may refuse to effect the transfer of any Units held by such deceased Unit Holder until it has received satisfactory evidence of compliance with all tax, probate and other requirements of applicable law.
     Section 3.07 — Mutilated, Destroyed, Lost or Stolen Certificates. In the event that any Certificate is mutilated, destroyed, lost or stolen, the Trustee shall, if the conditions in this section are met and the Trustee has not received notice that such Certificate has been acquired by a bona fide holder, issue to the holder of such Certificate as shown by the records of the Trustee a new Certificate in exchange and substitution for the mutilated Certificate or in lieu of and substitution for the Certificate so destroyed, lost or stolen. In every case, the applicant for a substituted Certificate shall furnish to the Trust and the Trustee such security or indemnity as the Trustee may reasonably require to save the Trust and the Trustee harmless and, in every case of destruction, loss or theft, the applicant shall also furnish to the Trustee evidence to the Trustee’s reasonable satisfaction of the destruction, loss or theft of such Certificate. Upon the issuance of any substituted Certificate, the Trustee may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other reasonable expenses incurred in connection therewith.
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     Section 3.08 — Protection of Trustee. The Trustee shall be protected in acting upon any notice, stock power, Royalty Statement, Officer’s Certificate, opinion of counsel, report of certified public accountant, any petroleum engineer or auditor or other expert, credential, certificate, instrument of assignment or transfer or other document or instrument reasonably believed by the Trustee to be genuine and correct and to be signed or sent by the proper party or parties. The Trustee is specifically authorized to rely upon the application of Article 8 of the Uniform Commercial Code, the Uniform Act for Simplification of Fiduciary Security Transfers and other statutes and rules with respect to the transfer of securities, each as adopted and then in force in the State of Delaware, as to all matters affecting title, ownership, warranty or transfer of Certificates and the Units represented thereby, without any personal liability for such reliance, and the indemnity granted pursuant to Section 7.02(a) hereof shall specifically extend to any matters arising as a result thereof.
     Section 3.09 — Transfer Agent and Registrar. Any references in this ARTICLE III to the rights and duties of the Trustee with respect to the transfer or registration of Certificates shall also be deemed to be references to the Transfer Agent and Registrar acting hereunder.
     Section 3.10 — Limitation of Personal Liability of Unit Holders. Unit Holders shall, to the full extent permitted by Section 3803 of the Delaware Trust Act, be entitled to the same
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limitation of personal liability extended to stockholders of private corporations for profit under the laws of the State of Delaware.
ARTICLE IV
Accounting and Distribution
     Section 4.01 — Fiscal Year and Accounting Method. Except as otherwise required pursuant to Section 4.03 hereof, the fiscal year of the Trust shall be the calendar year. The Trustee shall maintain the books of the Trust on a cash basis, in accordance with generally accepted accounting practices, except to the extent that such books must be kept on any other basis pursuant to applicable law.
     Section 4.02 — Distributions. On the fifth day after the Trustee’s receipt in same day finally collected funds of amounts to be received on a Quarterly Record Date for each Quarter in each year during the term of the Trust or if such day is not a Business Day on the next succeeding Business Day, the Trustee shall distribute the Quarterly Income Amount for the Quarter to which such Quarterly Record Date relates to the Unit Holders of record on such Quarterly Record Date (except those Unit Holders which, pursuant to Section 2.04 hereof, are not treated as Unit Holders of record entitled to distributions with respect to the Quarterly Income Amount for such Quarterly Record Date) in proportion to the Units owned by each such Unit Holder; provided that during any
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period prior to the Opinion Date which is not an Insignificant Investor Period, the Trustee shall distribute such Quarterly Income Amount (including amounts referred to in the last sentence of this Section 4.02) on or as soon as practicable following the Quarterly Record Date and such amounts shall be held uninvested in a non-interest bearing account. Payment of each Unit Holder’s pro rata portion of the Quarterly Income Amount shall be made by check or draft mailed to each of the Unit Holders. Notwithstanding the foregoing, payments of $100,000 or more shall be made to any Unit Holder who enters into an agreement with the Trustee providing for such payments by wire transfer in immediately available funds to an account of such Unit Holder as specified in the agreement. The Trustee shall, upon the request of any such Unit Holder, enter into such an agreement unless such agreement adversely affects The Bank of New York’s own rights, duties or immunities under this Agreement or otherwise, in which case the Trustee may, but shall not be obligated to, enter into such an agreement. Except as otherwise provided in any such agreement, if, pursuant to the last sentence of the first paragraph of Section 1.24, the Trustee treats amounts received after a Quarterly Record Date as if they were received on such Quarterly Record Date, the distributions of such amounts shall be made on the fifth day after the date of receipt thereof by the Trust in finally collected same day funds or if such day is not a Business Day, on the next succeeding Business Day.
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     Section 4.03 — Income Tax Withholdings and Reporting. For federal and Alaska state income tax purposes, the Trustee shall effect such withholdings and file such returns and statements as in its judgment are required to comply with applicable provisions of the Code and the regulations thereunder and any Alaska state income tax laws and regulations thereunder.
     Section 4.04 — Reports to Unit Holders. As promptly as practicable following the end of each calendar year of the Trust, but no later than 90 days following the end of each calendar year, the Trustee shall mail to each Person who was a Unit Holder of record at any time during such calendar year a report containing sufficient information to enable Unit Holders to make all calculations necessary for federal and Alaska tax purposes, including the calculation of any depletion deduction which may be available to them for such calendar year.
     As promptly as practicable following the end of each Quarter during the term of the Trust, but no later than 60 days following the end of each such Quarter, the Trustee shall mail to each Person who was a Unit Holder of record on the Quarterly Record Date immediately preceding the distribution of such report a report showing in reasonable detail on a cash basis the assets and liabilities, receipts and disbursements and income and expenses of the Trust and the Royalty Production (as that term is defined in the overriding Royalty Conveyance) for such Quarter.
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     Within 90 days following the end of each calendar year (or at such earlier time as may be required by any stock exchange on which the Units are listed), the Trustee shall mail to each Person who was a Unit Holder of record on the Quarterly Record Date immediately preceding the distribution of such report an annual report containing (a) financial statements audited by a nationally recognized firm of independent public accountants retained by the Trust for such purposes, (b) a certification by such firm stating whether or not all fees and expenses paid by the Trust to the Trustee from the beginning of such calendar year through the first Quarterly Record Date in the next following year were calculated and paid in accordance with this Agreement and setting forth any exceptions as may be noted by such firm, (c) such information as the Trustee deems appropriate from a letter of the Independent Accountants (as such term is defined in the Overriding Royalty Conveyance) which has been provided to the Trustee stating whether or not, based on procedures set forth in detail in such letter (i) the Company has complied in all material respects with the terms and provisions of the Overriding Royalty Conveyance, Article Three and Article Four, Sections 4.1 to 4.7 inclusive, and comparable provisions of any Additional Conveyance, and (ii) the amounts payable to the Trust in respect of the Royalty Interest have been accurately computed, and setting forth any exceptions to the foregoing matters as may be noted by such firm (d) a letter of the Independent Petroleum Engineers (as such term is defined in
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the Overriding Royalty Conveyance) setting forth a summary of such firm’s determinations regarding the Company’s methods, procedures and estimates referred to in Section 4.8(d) of the Overriding Royalty Conveyance (and similar provisions of any Additional Conveyance) and (e) copies of the latest annual report or reports, if any, with respect to the Units filed with the Securities and Exchange Commission or, if no such report is filed, a summary of the information furnished to the Trustee pursuant to Section 4.8(c) of the Overriding Royalty Conveyance (and similar provisions of any Additional Conveyance). The Trust shall engage annually a nationally recognized firm of independent public accountants, a firm of Independent Accountants (which may be the same firm as the nationally recognized firm of independent public accountants) and a firm of Independent Petroleum Engineers in order to furnish such services as are required to permit the Trustee to perform its obligations under this Section 4.04.
     The Trustee shall mail to Unit Holders any other reports or statements, financial or otherwise, required to be provided to Unit Holders by law or governmental regulation or the requirements of any stock exchange on which the Units are listed.
     Section 4.05 — Information to be Supplied by the Company. The Company shall provide to the Trustee on a timely basis upon request such information not known or otherwise available to the Trustee concerning the Royalty Interest (including information with respect to the properties burdened by the Royalty
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Interest) as shall be necessary to permit the Trustee to comply with respect to the Trust with the reporting obligations of the Trust pursuant to the Securities Exchange Act of 1934, as amended, the requirements of any stock exchange on which the Units are listed and this Agreement and for any other reasonable purpose of the Trust.
     The Company hereby agrees to indemnify The Bank of New York, the Trustee and the Trust, against any loss, liability, damage and expense (including reasonable attorneys’ fees) incurred by The Bank of New York, the Trustee or the Trust as a result of or arising out of any of the information provided to the Trustee by the Company pursuant to this Section 4.05 being untimely, incorrect, misleading or untrue in any material respect.
     Section 4.06 — Information to be Provided to the Company. To the extent the Company is required to file any report with respect to the Trust with any stock exchange on which the Units are listed or any governmental authority, the Trustee will provide to the Company on a timely basis upon the Company’s request such information with respect to the Trust and the Trustee that is not within the knowledge of the Company and that is necessary to the Company’s ability to make such filing or such report. The Company shall be indemnified by the Trustee (which shall in turn be indemnified to the extent provided pursuant to Section 7.02(a) hereof) against any loss, liability, damage and expense (including reasonable attorneys’ fees) incurred by the Company as a result of
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or arising out of any of the information provided to the Company by the Trustee pursuant to this Section 4.06 being untimely or incorrect or untrue in any material respect. Any indemnification by the Trustee of the Company pursuant to this Section 4.06, except for indemnification which relates to any such information concerning The Bank of New York, shall be limited to amounts actually received by the Trustee for such purposes from the Trust Estate.
ARTICLE V
Meetings of Unit Holders
     Section 5.01 — Purpose of Meetings. A meeting of the Unit Holders may be called at any time and from time to time pursuant to the provisions of this ARTICLE V to act with respect to any matter regarding which the Unit Holders are authorized to act by the express terms of this Agreement.
     Section-5.02 — Call and Notice of Meetings. Any such meeting of the Unit Holders may be called by the Trustee in its discretion and will be called by the Trustee (i) as soon as practicable after receipt of a written request by the Company or (ii) as soon as practicable after receipt of a written request that sets forth in reasonable detail the action proposed to be taken at such meeting and is signed by unit Holders owning not less than 25 percent of the then outstanding units or (iii) as may be required by applicable law or regulations of any stock exchange on which the Units
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are listed. Except as may be otherwise required by applicable law or by any stock exchange on which the Units are listed, written notice signed by the Trustee (which signature may be a facsimile) of every meeting of the Unit Holders setting forth the time and place of such meeting and in general terms the matters proposed to be acted upon at such meeting shall be given in person or by mail not more than 60 nor fewer than 10 days before such meeting is to be held to all Unit Holders of record on a date (“Voting Record Date”) selected by the Trustee, which Voting Record Date shall not be more than 60 days before the date of such meeting. If such notice is given to any Unit Holder by mail, it shall be directed to him at his last address as shown by the records of the Trustee and shall be deemed to have been duly given when so addressed and deposited in the United States mail, postage prepaid. No matter other than that stated in the notice shall be acted upon at any meeting. All such meetings shall be held at such time and place in the Borough of Manhattan, The City of New York, as the notice of any such meeting may designate.
     Section 5.03 — Voting. Only a Person who was a Unit Holder on the Voting Record Date (“Record Date Unit Holder”) shall be entitled to be present, speak or vote at any such meeting. A person appointed by an instrument in writing as a proxy for such Record Date Unit Holder shall be entitled at such meeting to exercise all rights exercisable by such Record Date Unit Holder as if such Record Date Unit Holder attended such meeting and exer-
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cised such rights in person. In addition, any representative of the Company and the Trustee shall be entitled to be present, speak and generally to participate in any such meeting. All references in this Agreement to Record Date Unit Holders shall mean either such Record Date Unit Holder or his duly appointed proxy.
     At any such meeting, the presence in person or by proxy of Record Date Unit Holders holding Certificates representing a majority of the Units outstanding on the Voting Record Date shall constitute a quorum and, unless otherwise provided in this Agreement, any matter shall be deemed to have been approved if it is approved by the Vote of Record Date Unit Holders holding Certificates representing a majority of the Units represented at the meeting. Each Record Date Unit Holder shall be entitled to one vote for each Unit represented by the Certificate or Certificates held by him. The Trustee, subject to all applicable laws, may solicit from and vote proxies of Unit Holders entitled to vote at any meeting thereof.
     Section 5.04 — Conduct of Meetings. The Trustee may make such reasonable regulations as it may deem advisable governing the conduct of any such meeting including, without limitation, provisions governing the appointment of proxies, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidences of the right to vote, the preparation and use at the meeting of a list of the Persons
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entitled to vote at the meeting and the appointment of a chairman and secretary of the meeting.
     Section 5.05. Voting of Units Held by Company, SOC and Their Respective Affiliates. SOC and the Company agree that, at any meeting of Unit Holders, they will vote or cause to be voted any Units held of record or beneficially by the Company, SOC or any Affiliate of either of them in the same proportion as the Units voted by other Unit Holders voting at such meeting.
ARTICLE VI
Administration of Trust and Powers of Trustee
     Section 6.01 — General Authority. Subject to the limitations set forth in this Agreement, the Trustee is authorized to and shall take such actions as in its judgment are necessary, desirable or advisable to achieve the purposes of the Trust, including the appointment of an ancillary trustee or trustees under this Agreement, the solicitation and voting of proxies at meetings of Unit Holders, the taking of appropriate action to enforce the terms of the Conveyances and the Support Agreement (including the institution of any actions or proceedings at law or in equity necessary to the foregoing) and the authority to agree to modifications of the terms of the Conveyances or the Support Agreement or to settle disputes with respect thereto, so long as (i) the Trustee shall have received an unqualified written opinion of counsel to the Trust to the effect that such modification or
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settlement will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes, and (ii) such modifications or settlements do not alter the nature of or the amount or time of receipt of payments under the Royalty Interest. The Trustee shall not be (i) obligated or permitted to make any investment or operating decision or otherwise physically inspect the properties burdened by the Royalty Interest or (ii) obligated to prevent drainage or any other event or state of facts which damages or diminishes the value of the Royalty Interest. The Trustee is authorized to execute the Trust Conveyance and the Support Agreement on behalf of the Trust. The Trustee is authorized to and shall take such actions as in its judgment are necessary or advisable to give such approvals as may be appropriate under the Conveyance, and to make such requests as in its judgment are necessary or advisable under Section 4.8 of the Overriding Royalty Conveyance or any comparable provision of any Additional Conveyance, in order to preserve and protect the Trust Estate and to discharge its other duties hereunder.
     The Company and the Trustee are hereby authorized to make and shall be responsible for all filings on behalf of the Trust with the Securities and Exchange Commission required by the Exchange Act and with the Securities and Exchange Commission or such other
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governmental authorities required by applicable law or regulation with respect to the Units as may be specified from time to time in an Officer’s Certificate delivered to the Trustee. It is the expectation of the Company that the Units may, in the future, be listed on the New York Stock Exchange or another stock exchange. In this regard, the Company will advise the Trustee of any actions that the Trustee should take in connection with effectuating such listing and, unless the Trustee shall determine that such actions are not in the best interest of the Trust, the Trustee shall take such actions. If listing is accomplished, the Trustee will take all actions necessary to maintain such listing including compliance with the rules of the stock exchange and the filing of any reports required by the stock exchange; provided, however, that if at any time the Company shall have informed the Trustee in writing that, in the opinion of the Company, such listing is not in the best interest of the Unit Holders or the interests of the Unit Holders would be better served by listing the Units on another stock exchange as specified by the Company, then the Trustee shall as soon as practicable call a meeting of Unit Holders in accordance with the provision of ARTICLE V hereof and submit to a vote of Unit Holders at such meeting a proposal to delist the Units, or to delist the Units and list the Units on another stock exchange as specified by the Company; if such proposal is a approved at such meeting by the affirmative vote of the Record Date Unit Holders
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holding Certificates representing a majority of the Units represented at such meeting in accordance with ARTICLE V, the Company will seek to accomplish the delisting, or the delisting and listing on such other stock exchange, without the involvement of the Trustee, but if the Company determines that action by the Trustee is necessary, the Company will instruct the Trustee regarding what actions the Trustee must take in order to accomplish such delisting, or delisting and listing on such other stock exchange; in such event the Trustee shall take such action, if any, as shall be specified by the Company in order to accomplish the delisting of the Units from their then current stock exchange or such delisting and listing of the Units on such other stock exchange. The Company agrees to consider, on a periodic basis, whether or not such listing is in the best interest of the Unit Holders and whether the interests of the Unit Holders would be better served by listing the Units on another stock exchange, and the Company agrees that if it should reach either conclusion it will furnish appropriate notice in writing to the Trustee.
     The Trustee may not dispose of all or any portion of the Royalty Interest except as provided in Sections 6.O2, 6.06 or 9.02 hereof.
     Section 6.02 — Limited Power to Dispose of Royalty Interest and Other Trust Interests. (a) The Trustee shall not sell or otherwise dispose of all or any part of the Trust Estate, in-
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cluding all or any part of the Royalty Interest, or any interest therein, except that
     (i) the Trustee shall make cash distributions to Unit Holders and pay the liabilities of the Trust as provided herein,
     (ii) the Trustee shall sell or otherwise dispose of all or a part of the Royalty Interest or an interest therein if, prior thereto, such sale or other disposition and all material terms and conditions thereof (including, if practicable, the record date for determining Unit Holders of record entitled to receive any cash to be distributed as a result of such sale) are approved by the affirmative vote of the Record Date Unit Holders holding Certificates representing 70% of the Units outstanding on the Voting Record Date if such sale is to be effected on or prior to December 31, 2010, or 60% of the Units outstanding on the Voting Record Date if such sale is to be effected thereafter, in each case at a meeting duly called and held in accordance with the provisions of ARTICLE V hereof (provided that if the terms or conditions of such sale or other disposition adversely affect The Bank of New York’s own rights, duties or immunities under this Agreement or otherwise, the Trustee may in its discretion, but shall not be obligated to, effect such sale or other disposition); provided, however, that if such sale is effected in order to provide for the payment of specific liabilities of the Trust then due and involves a part, but not all or substantially all, of the Trust Estate, such sale shall be approved by the affirmative vote of the Record
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Date Unit Holders holding Certificates representing a majority of the Units outstanding on the Voting Record Date for such meeting,
     (iii) the Trustee shall mortgage, pledge, grant security interests in or otherwise encumber the Trust Estate, or a portion thereof, if required pursuant to Section 6.06 or 6.12 hereof,
     (iv) the Trustee shall dispose of the Trust Estate if required pursuant to Section 9.02 hereof,
     (v) the Trustee shall sell for cash the Trust Estate, or a portion thereof, if and to the extent that
     (1) the Trustee is unable to effect a borrowing by the Trust, as specified in sections 6.06 or Section 6.12 hereof,
     (2) the Trustee determines that it is not practicable to submit such sale and all material terms and conditions thereof to a vote of the Unit Holders pursuant to clause (ii) of this paragraph (a) above,
     (3) such sale is effected in order to provide for the payment of specific liabilities of the Trust then due, and the cash on hand is insufficient to discharge such liabilities,
     (4) the Trustee determines that the failure to pay such liabilities at such time will be contrary to the best interest of the Unit Holders and that such sale is necessary to provide for the payment of such liabilities,
     (5) the sale is effected at a price which, in the opinion of an investment banking firm, commercial banking firm or other Person qualified to render such opinion and selected by the
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Trustee, is at least equal to the fair market value of the interest sold, and the sale is effected pursuant to terms and conditions which, in the opinion of such investment banking firm, commercial banking firm or other Person, are commercially reasonable when compared to alternatives available to the Trust, and
     (6) the Trustee has received an unqualified written opinion of counsel to the Trust to the effect that such sale will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes; provided, however, that if the Trustee is unable to obtain such opinion the Trustee shall nevertheless effect such sale if the Trustee determines that the failure to effect such sale will be materially detrimental to the Unit Holders considered as a whole.
     (b) The Trustee shall distribute any cash received as a result of any such sale pursuant to clause (ii) of paragraph (a) above, subject to the need to pay any liabilities of the Trust or to establish or increase any cash reserves pursuant to Section 6.07 hereof, or any cash received as a result of a sale pursuant to clause (v) of paragraph (a) which is in excess of the amount needed to discharge liabilities of the Trust then due, to Unit Holders of record as specified in connection with the Unit Holder vote or, if there is no Unit Holder vote or no record date for determining Unit Holders of record entitled to receive any cash to
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be distributed as a result of such sale is so specified, to Unit Holders as part of the Quarterly Income Amount distributed with respect to the first Quarterly Record Date following the date of any such sale (unless such sale occurs on a Quarterly Record Date or within ten days prior to a Quarterly Record Date in which event the distribution may be on such Quarterly Record Date unless the Trustee determines that such an immediate distribution would prevent the Trust from complying with applicable law or any regulation of any stock exchange on which the Units are listed).
     Section 6.03 — No Power to Engage in Business or Make Investments. Notwithstanding any provision of the Delaware Trust Act, the Trustee shall not cause the Trust to engage in any business, commercial or investment activity of any kind whatsoever, except for investment activity permitted in Section 6.07 hereof, and shall not under any circumstances use any portion of the Trust Estate to acquire any oil and gas lease, royalty or other mineral interest or, except as permitted in Sections 6.07 and 6.12, acquire any other asset. The Trustee shall not accept any contribution to the Trust other than the Initial Royalty Interest, any Additional Royalty Interest and any cash required to be deposited pursuant to Section 2.04 hereof; provided that nothing herein shall be construed to prevent the Trust from receiving the benefits of the Conveyance and the Support Agreement.
     Section 6.04 — Payment of Liabilities of Trust. The Trustee is authorized to and shall first apply all money received by it
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(other than amounts contributed under Section 2.04 hereof with respect to any cash reserve) for the payment of all liabilities of the Trust, including but not limited to all expenses, taxes and liabilities incurred of all kinds, compensation to it for its services and reimbursement of its expenses pursuant to Sections 7.03 and 7.04 hereof and compensation to such parties as may be consulted pursuant to Section 7.05 hereof.
     Section 6.05 — Timing of Trust Income and Expenses. The Trustee will use reasonable efforts to cause the Unit Holders to recognize income (including any income from interest earned on investments made in accordance with this Agreement or from any sale of the Royalty Interest, except as may be specified in a vote of Unit Holders in the case of a sale pursuant to clause (ii) of paragraph (a) of Section 6.02 hereof) and expenses on Quarterly Record Dates. The Trustee will invoice the Trust for services rendered by the Trustee and, to the extent provided in Section 7.04 hereof, reimbursement of expenses incurred by the Trustee relating to the Trust only on a Quarterly Record Date and shall cause the Trust to pay such invoice only on the Quarterly Record Date on which such invoice is rendered and will use reasonable efforts to cause all Persons to whom the Trust becomes liable to invoice the Trust for such liability on a Quarterly Record Date and to cause the Trust to pay such liability on the Quarterly Record Date on which such liability is invoiced. In connection with the requirements of any stock exchange on which the Units are
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listed, the Trustee will, if required by such stock exchange, use reasonable efforts to determine the Quarterly Income Amount and report such amount to such stock exchange at such time as may be required by such stock exchange; provided that the Trustee shall not be required to calculate any amounts payable pursuant to the Conveyance. Nothing in this Section 6.05 shall be construed as requiring the Trustee to cause payment to be made for Trust liabilities on any date other than on such date as in its sole discretion it shall deem to be in the best interests of the Unit Holders.
     Section 6.06 — Limited Power to Borrow. If at any time the amount of cash on hand (which amount shall not include any amounts which have been reported to a stock exchange on which the Units are listed or otherwise publicly announced as the amount which will be paid to Unit Holders with respect to a Quarterly Record Date and which amounts have not been paid) is not sufficient to pay liabilities of the Trust then due (including any amount payable upon redemption of Units pursuant to Section 6.12 hereof), the Trustee shall borrow from another Person not affiliated with the Trustee, on a secured or unsecured basis, such amounts as are required after use of any available Trust funds to pay such liabilities as have become due; provided that the Trustee shall effect such borrowing only under the following conditions:
     (a) the Trustee shall have determined that it is not practical to pay such liabilities on subsequent Quarterly Record Dates
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out of funds anticipated to be available on such dates and that, in the absence of such borrowing, the Trust Estate is subject to the risk of loss or diminution in value;
     (b) the borrowing is effected pursuant to terms and conditions which, in the opinion of an investment banking firm, commercial banking firm or other Person qualified to render such opinion and selected by the Trustee, are commercially reasonable when compared to alternatives available to the Trust, and
     (c) the Trustee shall have received an unqualified written opinion of counsel to the Trust to the effect that such borrowing will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes; provided, however, that if the Trustee is unable to obtain such opinion the Trustee shall nevertheless effect such borrowing if the Trustee determines that the failure to effect such borrowing will be materially detrimental to the Unit Holders considered as a whole.
     To secure payment of such indebtedness, the Trustee is authorized to mortgage, pledge, grant security interests in or otherwise encumber (and to include as a part thereof any and all terms, powers, remedies, covenants and provisions deemed necessary or advisable in the Trustee’s discretion including, without limitation, the power of sale with or without judicial proceedings) the Trust Estate, or any portion thereof, including the Royalty
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Interest and to carve out and convey production payments. The Trustee is prohibited from borrowing in its capacity as Trustee or on behalf of the Trust except as provided in this Section 6.06 and in Section 6.12(d) hereof. In the event of such borrowings, no further Trust distributions shall be made until the indebtedness created by such borrowings has been paid in full.
     Section 6.07 — Cash Reserves and Cash Held Pending Distribution Date. The Trustee shall establish a cash reserve for the payment of material liabilities of the Trust which may become due, but only under the following conditions: (a) the Trustee shall have determined that it is not practical to pay such liabilities on subsequent Quarterly Record Dates out of funds anticipated to be available on such dates and that, in the absence of such reserve, the Trust Estate is subject to the risk of loss or diminution in value or The Bank of New York is subject to the risk of personal liability for such liabilities and (b) the Trustee shall have received an unqualified written opinion of counsel to the Trust to the effect that the establishment and maintenance of such reserve will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes; provided however, that if the Trustee is unable to obtain such opinion the Trustee shall nevertheless establish such reserve if the Trustee determines that
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the failure to establish such reserve will be materially detrimental to the Unit Holders considered as a whole or will subject The Bank of New York to the risk of personal liability for such liabilities.
     Collected cash balances being held by the Trustee as a reserve for liabilities shall be invested (i) in obligations issued by (or unconditionally guaranteed by) the United States or any agency or instrumentality thereof (provided such obligations are secured by the full faith and credit of the United States) or (ii) if such obligations maturing as required in the last sentence of this paragraph are not available, in repurchase agreements (1) with any bank, having capital, surplus and undivided profits of $100,000,000 or more; (2) which are secured by collateral of the type specified in (i) above which collateral (a) is in the possession of the Trustee either directly or through the Federal Reserve book-entry account of the Trustee individually or a third party acting solely as agent for the Trustee, (b) is not subject to any third party claims, (c) has a market value (determined at the execution date of the relevant repurchase agreement) at least equal to the principal amount invested in the repurchase agreement; and (3) which have a fixed rate of return. Any such obligation or repurchase agreement must mature (x) on the next succeeding Quarterly Record Date or, if the due date of the liability with respect to which the reserve is established is known, on the due date of such liability and (y) must be held to maturity
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unless there is an earlier default. In the event of a default thereon prior to maturity, the Trustee may liquidate such investment and reinvest in another obligation of the type and maturity date specified in this Section 6.07, provided that the rate of return thereon is not in excess of the rate of return specified in the investment so liquidated.
     Collected cash balances being held by the Trustee for distribution at the next Distribution Date shall be invested (i) in obligations issued by (or unconditionally guaranteed by) the United States or any agency or instrumentality thereof (provided such obligations are secured by the full faith and credit of the United States) or (ii) if such obligations with a maturity date on such Distribution Date are not available, in repurchase agreements as described in the immediately preceding paragraph; provided that any such obligation or repurchase agreement must mature on such Distribution Date and must be held to maturity, except as provided in the last sentence of the previous paragraph.
     Except as otherwise provided in Section 4.02 hereof, in the event funds are received by the Trustee at a time that does not allow it sufficient time to invest in obligations or repurchase agreements of the type and maturity specified in this Section 6.07 with interest accruing from the day such funds are received by the Trustee, the Trustee shall, if practicable, invest such funds overnight in a time deposit with a bank having capital, surplus and undivided profits of $100,000,000 or more and shall, on the
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following day, reinvest such funds (and any interest earned thereon) in obligations or repurchase agreements of the type and maturity so specified.
     Notwithstanding the foregoing, prior to the Opinion Date and during any period which is not an Insignificant Investor Period, none of the investments described in this section shall be purchased from The Bank of New York.
     Section 6.08 — Settlement of Claims. The Trustee is authorized to prosecute and defend, and to settle by arbitration or otherwise, any claim of or against the Trustee, the Trust or the Trust Estate, to waive or release rights of any kind and to pay or satisfy any debt, tax or claim upon any evidence by it deemed sufficient, without the joinder or consent of any Unit Holder.
     Section 6.09 — Income and Principal. The Trustee shall not be required to keep separate accounts or records for income and principal or maintain any reserves for depletion of any mineral assets in the Trust Estate. To the extent that such separate accounts or records are kept, the Trustee may allocate the receipts, disbursements and reserves of the Trust between income and principal in the discretion of the Trustee, and the Trustee’s discretion need not accord with the provision of any requirement of applicable law. Regardless of any such characterization, however, the Trustee shall not make any distribution, accumulate any funds or maintain any reserve except as expressly provided in this Agreement.
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     Section 6.10 — Effect of Trustee’s Power on Trust Property. The powers granted the Trustee under this Agreement may be exercised upon such terms as the Trustee deems advisable and may affect Trust properties.
     Section 6.11 — No Requirement of Diversification. The Trustee shall be under no obligation to diversify the Trust’s assets or to dispose of any wasting assets.
     Section 6.12 — Divestiture of Units. If at any time the Trust or the Trustee is made a party in any judicial or administrative proceeding which seeks the cancellation or forfeiture of any property in which the Trust has an interest because of the nationality, or any other status, of any one or more Unit Holders, the following procedures will be applicable:
     (a) The Trustee will promptly give written notice (“Notice”) of the existence of such controversy to each Unit Holder (“Ineligible Holder”) whose nationality or other status is an issue in the proceeding and will mail a copy of such notice to SOC and the Company. The Notice will contain a reasonable summary of such controversy and will constitute a demand to each Ineligible Holder that he dispose of his Units to a party that would not be an Ineligible Holder, within 30 days after the date of the Notice.
     (b) If any Ineligible Holder fails to dispose of his Units as required by the Notice, the Trustee shall have the right to redeem and shall redeem any such Units at any time during the 90
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days after the expiration of the 30-day period specified in the Notice. The redemption price on a per Unit basis will be determined as of the last Business Day (“determination day”) preceding the end of the 30-day period specified in the Notice and will equal the following per Unit amount:
     (1) if the Units are then listed on a stock exchange, the price will equal the closing price of the Units on such stock exchange (or, if the Units are then listed on more than one stock exchange, on the largest such stock exchange in terms of the volume of Units traded thereon during the preceding 12 months, or for the period the Units have been traded on such stock exchange if less than 12 months) on the determination day if any units were sold on such stock exchange on such day or, if not, on the last day preceding the determination day on which any Units were sold on such stock exchange, or
     (2) if the Units are not then listed on any stock exchange but are traded in the over-the-counter market, the price will equal the closing bid price on the determination date as quoted on the National Market System of the National Association of Securities Dealers Automatic Quotation System if the Units are so quoted or, if not, the mean between the closing bid and asked prices for the Units in the over-the-counter market on the determination day, if quotations for such prices on such day are available or, if not, on the last
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day preceding the determination day for which such quotations are available, or
     (3) if the Units are neither listed nor traded in the over-the- counter market, the price shall equal the price which, in the written opinion of a recognized firm of investment bankers selected by the Trustee, is the fair market value of the Units. The Trustee in relying on the opinion of such investment banking firm, shall have full authorization and be entitled to the full protection provided by Section 7.05 hereof. If the Trustee cannot obtain an opinion from an investment banking firm which in the Trustee’s sole discretion is competent to render such opinion, then the Trustee may obtain (and rely on) the opinion of any other advisor or expert which the Trustee in its sole discretion believes to have sufficient competence to render such opinion. Such redemption (or sale) will be accomplished by tender of the above cash price to the Ineligible Holder at his address as shown on the records of the Trustee, either in person or by mail as provided in Section 12.05 hereof, accompanied by notice of cancellation. Concurrently with such tender the Trustee shall cancel or cause to be cancelled all Certificates representing Units then owned by such Ineligible Holder and for which tender has been made. In the event the tender is refused by the Ineligible Holder or if he cannot be located after reasonable efforts to do so, the tendered but
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unclaimed sum shall be held by the Trustee in a non-interest bearing account, uninvested and in trust for the benefit of such Ineligible Holder, until proper claim for same has been made by such holder, but subject to applicable laws concerning unclaimed property.
     (c) During any period prior to the Opinion Date which is not an Insignificant Investor Period, if the redemption provided in paragraph (b) of this Section 6.12, if effected by the Trust, would constitute a non-exempt “prohibited transaction” within the meaning of section 406 of ERISA or section 4975 of the Code, the Units subject to the Trust’s right of redemption shall be purchased by the Company or by another Person eligible to purchase such Units and designated by the Company in a transaction which does not constitute such a non-exempt “prohibited transaction.” Such purchase shall be accomplished by tender of the cash price referred to in paragraph (b) to the Ineligible Holder at his address as shown on the records of the Trustee, either in person or by mail as provided in Section 12.05 hereof, accompanied by notice that the Units will be transferred to the purchaser. In the event the tender is refused by the Ineligible Holder or if he cannot be located after reasonable efforts to do so, the Company shall cause the tendered but unclaimed sum to be placed in a non-interest bearing account, uninvested and in trust for the benefit of such Ineligible Holder, until a
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proper claim for same has been made by such holder, but subject to applicable laws concerning unclaimed property. Upon receipt by the Trustee of notice from the Company or the purchaser that the tender has been refused or that the Ineligible Holder has not been located after reasonable efforts to do so and that the tendered but unclaimed sum has been placed in trust as provided herein, the Trustee shall cause to be transferred to the purchaser the Units purchased and shall issue to the purchaser Certificates representing such Units. Such transfer and issuance shall be effected notwithstanding the fact that the Certificates representing the Units purchased have not been presented to the Trustee for cancellation, and from and after the date of such transfer such Certificates shall only represent the right to receive the funds held in trust for the benefit of such Ineligible Holder.
     (d) The Trustee may cause the Trust to borrow any amount required to redeem Units in accordance with the procedures described in paragraph (b) above, or if the Trustee is unable to effect such borrowing the Trustee may cause the Trust to sell a portion of the Trust Estate for cash in order to obtain funds to effect such redemption; provided that the Trustee shall effect such borrowing only upon the terms and conditions specified in Section 6.06 hereof and shall effect
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such sale only under the conditions specified in Section 6.02 hereof.
     Section 6.13 — Prohibited Transactions. Notwithstanding any power, right, duty or obligation of the Trustee under this Agreement, the Trustee shall not cause or permit the Trust to participate in any transaction which would constitute a non-exempt “prohibited transaction” within the meaning of section 406 of ERISA or section 4975 of the Code. During any period prior to the Opinion Date which is not an Insignificant Investor Period, (a) the Company shall provide to the Trustee on a timely basis any and all information reasonably requested by the Trustee concerning the relationship of the Company and its Affiliates to certain Unit Holders specified by the Trustee and any information listing parties-in-interest furnished by Unit Holders, (b) the Trustee shall review all such information provided by the Company as well as any relevant information the Trustee may receive from a Unit Holder concerning its status as an ERISA-covered entity and the identification of parties-in-interest under ERISA with respect to such Unit Holder, and (c) the Trustee shall make reasonable inquiry of each Person desiring to enter into a transaction with the Trust as to whether such Person is a party-in-interest under ERISA with respect to ERISA-covered Unit Holders.
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ARTICLE VII
Rights and Liabilities of Trustee
     Section 7.01 — General Liability of Trustee. The Trustee is empowered to act in its discretion and shall not be personally or individually liable for any act or omission except in the case of negligence, bad faith or fraud. No action taken or suffered in good faith by the Trustee in reliance upon and in accordance with the written opinion of any counsel or the written advice of any other expert shall in any event constitute negligence, bad faith or fraud within the purview of this Agreement.
     The Trustee shall not be answerable for the negligence of any experts, provided that the Trustee has selected such experts with due care in good faith.
     It is acknowledged that the Trustee has taken the Trust Estate as is and without examination. The Trustee shall have no responsibility for any statements made or omitted in any disclosure documents relating to the Units or the Trust Estate and, except as may be required by law, no duty to verify the accuracy or completeness of the same.
     The Bank of New York and the Trustee will have no duties whatsoever except such duties as are set forth in this Agreement, and no implied covenant or obligation shall be read into this Agreement against the Trustee.
     Section 7.02 — Indemnification of Trustee.
     (a) The Bank of New York and the Trustee (including its
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agents and employees) shall be indemnified by, and receive reimbursement from (i) the Company (1) during any period prior to the Opinion Date which is not an Insignificant Investor Period, (2) whenever the assets of the Trust are insufficient or not permitted by applicable law to provide such indemnity and (3) after the termination of the Trust to the extent that the Trustee did not have actual knowledge, or should not have reasonably known, of a potential claim against the Trustee for which a reserve could have been established and used to satisfy such claim in accordance with Section 9.03 prior to the final distribution of assets of the Trust upon its termination or to the extent any such reserve was insufficient and (ii) the Trust Estate during any other period, against and from any and all liability, expense, claim, damage or loss (including reasonable legal fees and expenses) incurred by it, individually or as Trustee, in the administration of the Trust and the Trust Estate or any part or parts thereof, or in the doing of any act done or performed or omission occurring on account of its being Trustee or any consequence thereof, including without limitation, those resulting from any non-exempt prohibited transaction or its resignation as Trustee, except (1) such liability, expense, claim, damage or loss arising from the Trustee’s negligence, bad faith or fraud and (2) any loss resulting from the Trustee’s expenses (direct or indirect) in acting
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hereunder exceeding the compensation and reimbursement provided for pursuant to Sections 7.03, 7.04 and 7.05 hereof. From and after the Opinion Date and during any Insignificant Investor Period, the Trustee shall have a lien upon the Trust Estate to secure it for such indemnification and reimbursement and for compensation to be paid to it; provided, however, that any such lien on the Royalty Interest shall be deemed released upon a sale or other disposition of the same. Except as provided in Section 3.07 hereof, neither the Trustee nor any agent or employee of the Trustee shall be entitled to any reimbursement or indemnification from any Unit Holder for any liability, expense, claim, damage or loss incurred by the Trustee or any such agent or employee. Notwithstanding the foregoing, the Trustee shall not be entitled to indemnity from the Trust Estate with respect to matters for which it is entitled to indemnity pursuant to paragraph (b) of this Section 7.02.
     (b) The Company will indemnify and hold the Trustee, individually and as Trustee, and the Trust harmless from and against any losses, claims, damages or liabilities to which the Trustee, individually or as Trustee, or the Trust may become subject, under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based
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upon an untrue statement or alleged untrue statement of a material fact contained in any offering circular, private placement memorandum or similar document or the registration statement or any prospectus relating to the registration of the Units under the Securities Act of 1933, as amended, or in any report or other document filed pursuant to the Securities Exchange Act of 1934, as amended, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Trustee, individually and as Trustee, or the Trust for any legal or other expenses reasonably incurred by the Trustee, individually and as Trustee, or the trust in connection with investigating or defending any such action or claim; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the registration statement or any prospectus or such amendment or supplement in reliance upon and in conformity with information furnished to the Company by the Trustee, individually or as Trustee. The foregoing indemnity and hold harmless agreement shall inure to the benefit of all offi-
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cers, directors and controlling persons of the Trustee, individually and as Trustee.
     (c) All indemnifications of The Bank of New York and the Trustee by the Company under this Agreement shall survive the termination of the Trust and the termination of this Agreement. Moreover, any provision in this Agreement that provides for the indemnification of The Bank of New York and the Trustee or that limits the liability of The Bank of New York and the Trustee shall also apply with respect to any Transfer Agent and Registrar.
     Section 7.03 — Compensation. The Trustee shall receive from the Trust Estate compensation for its services as set forth in Exhibit C attached hereto and, to the extent provided in Sections 7.04 and 7.05 hereof, reimbursement of expenses incurred as Trustee of the Trust and as Transfer Agent and Registrar of the Certificates representing the Units. In the event that any Person serving as Trustee is not also serving as Transfer Agent and Registrar, the compensation payable pursuant to Exhibit C shall be allocated among such Persons as the Trustee shall determine.
     Section 7.04 — Other Services and Expenses. Charges for performing any services not contemplated or specifically covered in Exhibit C will be charged to the Trust on the basis of the Trustee’s then prevailing rate for such services; provided, however, that during any period prior to the Opinion Date which is not an Insignificant Investor Period, any services rendered by the
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Trustee in enforcing the terms and conditions of the Conveyance or the Support Agreement shall not be deemed to be services not contemplated or specifically covered in Exhibit C; and provided further that services by the Trustee on behalf of the Trust in connection with the defense of any litigation against the Trust or the Trustee, in connection with any audit of the books and records of the Trust by the Internal Revenue Service, in connection with any investigation by the Securities and Exchange Commission or other governmental bodies involving the Trust and other matters which increase the obligations of the Trustee beyond those contemplated by this Agreement and are not the result of discretionary action on the part of the Trustee shall constitute services not contemplated or specifically covered in Exhibit C.
     The initial organizational costs of the Trust, including the printing of the initial Certificates, the Trustee’s acceptance fee, out of pocket expenses and the fees of legal counsel of the Trustee, will be paid by the Company. During any period prior to the opinion Date which is not an Insignificant Investor Period, the Trustee shall cause the Trust to pay directly out of the Trust Estate all expenses, taxes and liabilities incurred and relating to the Trust, including but not limited to fees and expenses incurred for experts hired pursuant to Section 7.05 hereof; provided, however, that The Bank of New York may incur, and shall be reimbursed out of the Trust Estate for, the actual cost to The Bank of New York of all of its out-of-pocket costs and expenses
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for printing, microfiche, postage, delivery and pick-up, long distance telephone, travel and other similar costs and expenses which are incurred in connection with the performance of its duties as Trustee or Transfer Agent and Registrar. From and after the Opinion Date and during any Insignificant Investor Period, The Bank of New York may incur any out-of-pocket costs and expenses in the discharge of its duties as Trustee or Transfer Agent and Registrar (or may, but shall not be required to, cause the Trust to pay any or all of such expenses directly out of the Trust Estate), including but not limited to fees and expenses incurred for experts hired pursuant to Section 7.05 hereof; provided, however, that The Bank of New York shall be reimbursed out of the Trust Estate at actual cost to The Bank of New York.
     Section 7.05 — Reliance on Experts. The Trustee shall consult with accountants, counsel and petroleum engineers as specifically provided herein and may otherwise consult with counsel (including its own counsel), accountants, geologists, engineers and other parties deemed by the Trustee to be qualified as experts on the matters submitted to them. The Trustee is authorized to rely on the advice of such experts as provided in Section 7.01 hereof and to make payments of all reasonable fees for services or expenses thus incurred out of the Trust Estate.
     Section 7.06 — No Security Required. No bond or other security shall be required of the Trustee.
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     Section 7.07 — Transactions in Multiple Capacities. To the extent permitted by applicable law and except as otherwise provided herein, the Trustee shall not be prohibited in any way in exercising its powers or from dealing with The Bank of New York in any other capacity, fiduciary or otherwise.
ARTICLE VIII
Office of Trustee
     Section 8.01 — Removal of Trustee. The Trustee may be removed as Trustee hereunder, with or without cause, by the affirmative vote at a meeting duly called and held in accordance with the provisions of ARTICLE V hereof of Record Date Unit Holders holding Certificates representing a majority of the Units represented at the meeting. Subsequent to such vote, any Trustee being removed shall have only those duties and obligations such Trustee would have if such Trustee had commenced a resignation as described in Section 8.02 hereof.
     Section 8.02 — Resignation of Trustee. (a) Any Trustee may at any time resign for any reason whatsoever, with or without cause, and without the necessity of any court proceeding. Any such resignation may be commenced by giving notice to the Company. Such notice to the Company shall be promptly confirmed in writing, and shall be followed by the giving of written notice to each of the Unit Holders at such Unit Holder’s last address as shown by the records of the Trust at the time such notice is given by
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first-class mail. Any resigning Trustee shall account to its successor for the administration of the Trust as may be reasonably required by the successor Trustee. Any and all successors to any resigning Trustee shall be fully protected in relying upon such accounting. Any resignation shall be effective upon the appointment of and acceptance of the appointment by a successor Trustee.
     (b) At no time subsequent to any Trustee’s commencement of a resignation (as described above) shall such Trustee have any duties or obligations with respect to any filings under the Securities Act of 1933, as amended, or any successor statute or statutes or the rules and regulations thereunder, and subsequent to the commencement of a resignation, the resigning Trustee shall have only those other duties and obligations expressly set forth herein or contemplated hereby.
     (c) No Trustee commencing a resignation shall have any liability for any consequences, expenses, damages, or effects of any kind whatsoever including, without limitation, any delay in or non-commencement of any SEC registration, in whole or in part, arising out of or relating to its commencing a resignation or in invoking its rights and privileges with respect thereto as set forth above.
     Section 8.03 — Appointment of Successor Trustee. If the Trustee has given notice of its intention to resign, a successor Trustee shall be appointed by the Company; provided, that if the Trustee has been removed by a vote of Unit Holders pursuant to
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Section 8.01 hereof, a successor Trustee may be appointed by the Unit Holders at such meeting. Notice of the appointment of a successor Trustee shall be given by the resigning Trustee within ten days of receipt of notice of such appointment to each Unit Holder as of the date of the appointment of the successor Trustee at each Unit Holder’s last address as shown by the records of the Trustee.
     In the event that a successor Trustee has not been appointed within 60 days after the commencement of a resignation or occurrence of a vacancy, a successor Trustee may be appointed by any state court of Delaware, upon the application of any Unit Holder. In the event any such application is filed, any such court may appoint a temporary successor Trustee at any time after such application is filed with it which shall, pending the final appointment of a successor Trustee, have such powers and duties as the court appointing such temporary successor Trustee shall provide in its order of appointment, consistent with the provisions of this Agreement. In the event such court shall deem it necessary, the court may appoint such temporary successor Trustee or successor Trustee on such terms as to compensation as it shall deem necessary and reasonable notwithstanding any provision herein to the contrary. In no event shall any Trustee which has commenced a resignation as described in preceding Section 8.02 have any duty or obligation to appoint or apply for the appointment of
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any successor Trustee or be eligible to be named as a successor Trustee.
     A Trustee appointed under the provisions of this Section 8.03 shall be a corporation organized and doing business under the laws of the United States, any state thereof or the District of Columbia authorized under such laws to exercise trust powers or a national banking association domiciled in the United States, in either case which has a capital, surplus and undivided profits (as of the end of its last fiscal year prior to its appointment) of at least $50,000,000 and subject to supervision or examination by federal or state authorities. Unless the Trust already has a Trustee that is a resident of or has a principal office in the State of Delaware, then any Trustee appointed under this Section 8.03 shall be such a resident or have such a principal office.
     Section 8.04 — Rights of Successor Trustee. Immediately upon the appointment of any successor Trustee (including a temporary successor Trustee), all rights, titles, duties, powers and authority of the resigning Trustee hereunder shall be vested in and undertaken by the successor Trustee which shall be entitled to receive from the Trustee which it succeeds, in addition to the accounting referred to in Section 8.02 hereof, all of the Trust Estate held by it hereunder and all records and files in connection therewith. No successor Trustee shall be obligated to examine or seek alteration of any accounting of any preceding Trustee, nor shall any successor Trustee be liable personally for failing
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to do so or for any act or omission of any preceding Trustee. The preceding sentence shall not prevent any successor Trustee or anyone else from taking any action otherwise permissible in connection with any such accounting.
     Section 8.05. — Merger or Consolidation of Trustee. Neither a change of name of the Trustee, any merger or consolidation of the Trustee with or into another bank or trust company nor the transfer of its trust operations to a separate corporation shall affect the Trustee’s right, obligation or capacity to act hereunder. Any such successor shall continue as the Trustee hereunder.
     Section 8.06 — Co-Trustee.
     (a) The Co-Trustee has been appointed as trustee and joined as a party hereunder in order to satisfy the requirements of Section 3807 of the Delaware Trust Act. In the event of the resignation or removal of the Co-Trustee, there shall be appointed a successor Co-Trustee hereunder who shall meet the requirements of Section 3807 of the Delaware Trust Act unless at the time of such resignation or removal at least one other Trustee acting hereunder satisfies such requirements. Any successor Co-Trustee shall be appointed in the manner set forth in Section 8.03 hereof.
     (b) Notwithstanding any other term or provision hereof to the contrary, The Bank of New York, in its capacity as Trustee, alone may exercise the rights and powers granted to the Trustee herein and shall be solely charged with the performance of the
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duties herein declared on the part of the Trustee to be had and exercised or to be performed; provided, however, that if The Bank of New York, in its capacity as Trustee, deems it necessary or desirable for the Co-Trustee to act in a particular matter, the Co-Trustee shall have and exercise the rights and powers granted herein and shall be charged with the performance of the duties herein declared on the part of the Trustee to be had and exercised or to be performed, but only in such particular matter, and the foregoing shall not relieve The Bank of New York, in its capacity as Trustee, from any liability or obligation of the Trustee to any Unit Holder.
     (c) The Bank of New York, in its capacity as Trustee, alone may execute and deliver, on behalf of the Trust, any writing, document or instrument which the Trustee is required to execute and deliver, including, without limitation, the Conveyance, the Certificates and any writing, document or instrument of a purely ministerial nature.
ARTICLE IX
Term of Trust and Final Distribution
     Section 9.01. — Termination. The Trust shall terminate upon the first to occur of the following events or times:
(a) on or prior to December 31, 2010, a decision to terminate the Trust by the affirmative vote at a meeting duly called and held in accordance with the provisions of ARTICLE
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V hereof of the Record Date Unit Holders holding Certificates representing 70 percent of the Units outstanding on the Voting Record Date; or
(b) after December 31, 2010 either
     (i) at such time as the sum of the net revenues from the Royalty Interest for two successive years commencing with any year after 2010 are less than $1,000,000 per year, unless the net revenues during such period have been materially and adversely impacted by an event constituting “Force Majeure” as defined below; or
     (ii) a decision to terminate the Trust by the affirmative vote at a meeting duly called and held in accordance with the provisions of ARTICLE V hereof of the Record Date Unit Holders holding Certificates representing 60 percent of the Units outstanding on the Voting Record Date.
     The term “Force Majeure” shall mean, without limitation, the following:
     (i) acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States or of the State of Alaska or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; civil disturbances; riots; epidemics; sabotage; war, whether or not declared; landslides; lightning; earthquakes; fires; hurricanes; winds; tornados;
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storms; droughts; floods; arrests; restraint of government and people; explosions; breakage, malfunction or accident to facilities, machinery, transmission pipes or canals; partial or entire failure of utilities; shortages of labor, materials, supplies or transportation; or
     (ii) any other cause, circumstance or event (other than depletion of the petroleum reservoir in which the Trust has an interest) not reasonably within the control of the Company.
     Section 9.02. — Disposition of Assets Upon Termination. Subject to the proviso set forth below, upon termination of the Trust, the Trustee shall sell for cash (unless by the affirmative vote of the Record Date Unit Holders holding Certificates representing 70 percent of the Units outstanding on the Voting Record Date if the decision to terminate the Trust was made on or prior to December 31, 2010, or 60 percent of the Units outstanding on the Voting Record Date if the decision to terminate the Trust was made thereafter, the Unit Holders approve the sale for a specified non-cash consideration, in which event the Trustee may, but shall not be required to, attempt to consummate such non-cash sale, but only if the Trustee shall have received a ruling from the Internal Revenue Service or an unqualified written opinion of counsel to the Trust to the effect that such non-cash sale will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to
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be treated as unrelated business taxable income for federal income tax purposes) in one or more sales all the assets other than cash then held in the Trust Estate; provided however that as soon as practical following termination of the Trust the Trustee shall obtain an opinion of an investment banking firm, commercial banking firm or other Person qualified to render such opinion and selected by the Trustee as to the fair market value of the Trust Estate on the day of termination of the Trust; and provided further, that upon receipt of such opinion the Trustee shall notify the Company thereof, and the Company shall have the right, exercisable by notice to the Trustee within thirty days of receipt of such notice, to purchase the assets of the Trust at a price equal to the greater of (i) the fair market value of the Trust Estate as set forth in such opinion or (ii) the number of then outstanding Trust Units times the following per Unit amount:
     (A) if the Units are then listed on a stock exchange, the price will equal the closing price of the Units on such stock exchange (or, if the Units are then listed on more than one stock exchange, on the largest such stock exchange in terms of the volume of Units traded thereon during the preceding twelve months, or for the period the Units have been traded on such stock exchange if less than twelve months) on the day of termination of the Trust if any Units were sold on such stock exchange on such day or, if not, on the last day preceding the day of termination
( 77 )

 


 

of the Trust on which any Units were sold on such stock exchange, or
     (B) if the Units are not then listed on any stock exchange but are traded in the over-the-counter market, the price will equal the closing bid price on the day of termination of the Trust as quoted by the National Market System of the National Association of Securities Dealers Automated Quotation System if the Units are so quoted or, if not, the mean between the closing bid and asked prices for the Units in the over-the-counter market on the day of termination of the Trust, if quotations for such prices on such day are available or, if not, on the last day preceding the day of termination of the Trust for which such quotations are available.
If the Units are neither listed nor traded in the over-the-counter market, the price shall equal the fair market value of the Trust Estate as set forth in such opinion.
     In rendering such opinion, such firm or other Person shall take into account the cash owned by the Trust, the liabilities of the Trust, the costs incident to the sale of the Royalty Interest, the other costs of termination of the Trust and such other factors as such firm or other Person rendering such opinion shall deem relevant.
     In the event that the Company does not exercise its option, the Trustee shall effect any such sale (a) pursuant to procedures or material terms and conditions approved by the affirmative vote
( 78 )

 


 

of the Record Date Unit Holders holding Certificates representing 70 percent of the Units outstanding on the Voting Record Date if such sale is effected on or prior to December 31, 2010, or 60 percent of Units outstanding on the Voting Record Date if such sale is effected thereafter, in each case at a meeting duly called and held in accordance with the provisions of ARTICLE V hereof (provided that if the procedures, terms or conditions of such sale adversely affect The Bank of New York’s own rights, duties or immunities under this Agreement or otherwise, the Trustee may in its discretion, but shall not be obligated to, effect such sale pursuant to such procedures or terms or conditions) or (b) without a vote of the Unit Holders if (i) the Trustee determines that it is not practicable to submit such procedures or terms and conditions to a vote of the Unit Holders pursuant to clause (a) above and (ii) such sale is effected at a price which is at least equal to the fair market value of the Trust Estate as set forth in such opinion and pursuant to terms and conditions which, in the opinion of such firm or other Person rendering such opinion on the fair market value of the Trust Estate are commercially reasonable when compared to alternatives available to the Trust.
     Section 9.03. — Distribution of Assets upon Termination. The Trustee shall as promptly as practicable send notice by first class mail of the date (which shall be not more than 10 Business Days after the date such notice is sent) on which it will distribute the proceeds of any such sale, and on such date shall dis-
( 79 )

 


 

tribute such proceeds and any other cash in the Trust Estate in proportion to the Units owned by each such Unit Holder upon surrender of the Certificate evidencing such Units, after paying, satisfying and discharging all of the existing liabilities of the Trust including fees of the Trustee, or, if necessary, setting up reserves in such amounts as the Trustee in its discretion deems appropriate to provide for payment of contingent liabilities. Any such reserve shall be established in accordance with the procedures specified in Section 6.07 hereof. From and after the date of distribution set forth in such notice to Unit Holders, any amounts held by the Trustee pending distribution shall be held uninvested in a non-interest bearing account.
     Upon making final distribution to the Unit Holders, the Trustee shall be under no further liability except as provided in Section 7.01 hereof. For the purposes of liquidating and winding up the affairs of the Trust at its termination, the Trustee shall continue to act as Trustee and may exercise each power until its duties have been fully performed and the Trust Estate has been finally distributed.
ARTICLE X
Irrevocability and Amendability
     Section 10.01 — Irrevocability. This Agreement and Trust are intended to be and are irrevocable. No Person shall have the
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right or power to terminate, revoke, alter, amend or change this Agreement or any provisions hereof except as expressly provided in ARTICLE IX hereof or in this ARTICLE X.
     Section 10.02 — Limited Amendability. Any provision of this Agreement (other than this Section 10.02) may be amended by the vote at a meeting duly called and held in accordance with the provisions of ARTICLE V hereof of the Record Date Unit Holders holding Certificates representing a majority of the Units outstanding on the Voting Record Date, but no such amendment shall be effective unless and until consented to in writing by the Trustee (provided, however, that the Trustee will so consent unless such amendment affects The Bank of New York’s own rights, duties or immunities under this Agreement or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, agree to such amendment), and in no event may an amendment be made which would:
     (a) alter the rights of the Unit Holders as against each other;
     (b) reduce or delay the distributions to the Unit Holders provided for in Sections 2.04, 4.02, 6.02 and 9.02 hereof;
     (c) permit the Trustee to distribute the Royalty Interest in kind either during the continuation of the Trust or during the period of liquidation and winding up under Section 9.02 hereof;
( 81 )

 


 

     (d) provide the Trustee with the power to engage in business or investment activities (this prohibition is not intended to limit the authority of the Trustee specifically provided in this Agreement);
     (e) adversely affect the characterization of the Trust as a business trust under the Delaware Trust Act or as a grantor trust for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes;
     (f) alter the voting requirements set forth in Sections 6.02, 8.01, 9.01 and 10.02 hereof;
     (g) alter the number of Units in the Trust; or
     (h) alter the nature of or the amount or time of receipt of payments under the Royalty Interest;
unless such amendment is approved (1) by the vote at a meeting duly called and held in accordance with the provisions of ARTICLE V hereof of the Record Date Unit Holders holding Certificates representing at least 80 percent of the Units outstanding on the Voting Record Date in the case of subsections (b) through (h) inclusive above and 100 percent of such Units in the case of subsection (a) above, and (2) by the Trustee (provided, however, that the Trustee will so consent unless such amendment affects The Bank of New York’s own rights, duties or immunities under this Agreement or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, agree to such amendment).
( 82 )

 


 

     Any amendment of Sections 4.05 or Section 7.02(b) shall, in addition to the above requirements, also require the consent of the Company.
     Section 10.03 — Corrective Amendments. Notwithstanding Section 10.02 hereof, SOC, the Company and the Trustee (without the consent of the Unit Holders) may from time to time and at any time enter into an agreement amending the terms of this Agreement or any other agreement relating to the establishment or administration of the Trust to cure any ambiguity or to correct or supplement any provision contained herein or therein which may be defective or inconsistent with any other provision contained herein or therein, to make any other provision with respect to matters arising hereunder or thereunder that do not adversely affect the Unit Holders or which may be required by law in connection with the registration of the Units for resale.
     Section 10.04 — Tax Rulings and Opinions. No amendment to this Agreement permitted by Sections 10.02 or 10.03 hereof shall be effective until the Trustee shall have received a ruling from the Internal Revenue Service or an unqualified written opinion of counsel to the Trust to the effect that such amendment will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes.
( 83 )

 


 

ARTICLE XI
Failure to Pay Amounts Due Trustee
     If, for any reason the royalty payable with respect to the Royalty Interest or any amount payable by the Company hereunder is not paid to the Trustee as provided in the Conveyance or hereunder, the Trustee shall as soon as practicable notify BP by facsimile transmission or telex. The Trustee shall not exercise any remedies it may have against the Company for failure to pay any amounts unless BP fails to cause to be paid such amounts pursuant to its obligations under the Support Agreement within 30 days of notice to BP as set forth in the preceding sentence. Notice to the Company or BP shall be made to the notice addresses specified in Section 12.06 hereof.
ARTICLE XII
Miscellaneous
     Section 12.01 — Inspection of Records. Each Unit Holder and his duly authorized agents, attorneys and accountants shall have the right upon request during reasonable business hours at his own cost and expense to examine and inspect the books and records of the Trustee relating to the Trust, including lists of Unit Holders, for any proper purpose, except information which the Conveyance requires the Trustee to keep confidential.
     The Trustee, or its authorized representative, shall have the right during reasonable business hours at the cost and expense of
( 84 )

 


 

the Trust to inspect the Company’s books and records relating to the properties burdened by the Royalty Interest and to discuss with representatives of the Company the affairs, finances and accounts of the Company relating to the properties burdened by the Royalty Interest.
     Section 12.02 — Filing of this Agreement. Except as otherwise required by law, neither this Agreement nor any executed copy hereof need be filed in any jurisdiction in which any of the properties comprising the Trust Estate is located, but the same may be filed for record in any jurisdiction by the Trustee. In order to avoid the necessity of filing this Agreement for record, the Trustee agrees that for the purpose of vesting the record title in any successor Trustee, the retiring Trustee will, upon appointment of any successor Trustee, execute and deliver to such successor Trustee appropriate assignments or conveyances.
     Section 12.03 — Disability of Unit Holder. Except as otherwise provided in Section 4.02 hereof, any payment or distribution to a Unit Holder may be made by check of the Trustee drawn to the order of the Unit Holder, regardless of whether or not the Unit Holder is a minor or under other legal disability, without the Trustee having further responsibility with respect to such payment or distribution. This Section 12.03 shall not be deemed to prevent the Trustee from making any payment or distribution by any other method that is appropriate under law.
( 85 )

 


 

     Section 12.04 — Savings Clause. If any provision of this Agreement should be held illegal or invalid, such invalidity or illegality shall not affect the remaining provisions of this Agreement, or any other property interests, and each provision of this Agreement shall exist separately and independently, and shall be applied to property interests separately and independently, of every other provision, and this Agreement shall be construed as if such illegal or invalid provision had never existed.
     Section 12.05 — Notices. Any notice or demand which by any provision of this Agreement is required or permitted to be given or served upon the Trustee by any Unit Holder may be given or served by being deposited, postage prepaid and by registered or certified mail, in a post office or letter box addressed (until another address is designated by notice given by the Trustee to the Unit Holders and the Company) to the Trustee at 21 West Street, 12th Floor, New York, NY 10286, Attention: Corporate Trust, Trustee Administration. Any notice or other communication by the Trustee to any Unit Holders shall be deemed to have been sufficiently given, for all purposes, when deposited, postage prepaid, in a post office or letter box addressed to said holder at his last address as shown by the records of the Trustee.
     Section 12.06 — Notice and Reports to the Company, SOC or BP. Whenever any notice, communication or report is given by the Trustee to Unit Holders pursuant to the provisions of this Agreement or is otherwise required to be provided to Unit Holders
( 86 )

 


 

pursuant to the provisions of this Agreement or is required to be provided to the Company, SOC or BP, the Trustee shall provide, by in-hand delivery or by certified or registered mail, such notice, communication or report to the Company at the following address:
BP Exploration (Alaska) Inc.
c/o BP America Inc.
200 Public Square
Cleveland, OH 44114-2375
Attention: Treasurer
or to SOC at the following address:
The Standard Oil Company
c/o BP America Inc.
200 Public Square
Cleveland, OH 44114-2375
Attn: Treasurer
or to BP at the following address:
The British Petroleum Company p.l.c.
Brittanic House, Moor Lane
London EC24 9BU, England
Attention: Secretary
FAX: 011-44-879-2341
or at such other address as the Company, SOC or BP, as the case may be, may from time to time advise the Trustee in writing.
     Section 12.07 — Governing Law. The Trust hereby created is a Delaware business trust, and the laws of Delaware shall control with respect to the construction, administration and validity of the Trust. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware without regard to conflicts of law rules.
     Section 12.08 — Counterparts. This Agreement may be executed in a number of counterparts, each of which shall constitute an
( 87 )

 


 

original, but such counterparts shall together constitute but one and the same instrument.
     Section 12.09 — Headings. The headings of the Sections and Articles of this Agreement are inserted for convenience only and shall not constitute a part hereof.
     Section 12.10. — Independent Conduct. SOC, the Company, The Bank of New York and the Co-Trustee on behalf of all future Unit Holders hereby reserve and retain the right to engage in all businesses and activities of any kind whatsoever (irrespective of whether the same may be in competition with the Trust), and to acquire and own all assets however acquired and whenever situated and to receive compensation or profit thereof, for their own respective accounts and without in any manner being obligated to disclose or offer such businesses, activities, assets, compensation or profit to each other or to the Trust.
     Section 12.11 — Determination by the Trustee. In the event that the Trustee is required to take action or permitted not to take action under Sections 6.02(a)(ii), 9.02(b) and 10.02 (except for any amendment to Sections 7.03, 7.04 or the last sentence of Section 7.05 hereof) which is conditioned upon a determination by the Trustee that the action to be taken or omitted does not or will not adversely affect The Bank of New York’s rights, duties or immunities under this Agreement or otherwise, the Trustee shall not, in making such determination, take into consideration the loss of Trustee’s fees or the loss of other financial benefits
( 88 )

 


 

(other than the right to reimbursement of expenses or indemnities against liabilities) which may result from any termination of the Trust or other event which would cause The Bank of New York to cease to serve as Trustee hereunder as a result of such action. The loss of such fees or such other financial benefits shall not be deemed to constitute an adverse impact on The Bank of New York’s own rights, duties or immunities under this Agreement or otherwise.
( 89 )

 


 

     IN WITNESS WHEREOF, SOC has caused this Agreement to be executed by its duly authorized Chairman and Chief Executive officer and its seal to be hereunto affixed and attested by its duly authorized Secretary and the Company has caused this Agreement to be executed by its duly authorized Treasurer and its seal to by hereunto affixed and attested by its duly authorized Secretary and the Trustee has caused this Agreement to be executed by its duly authorized Assistant Vice President and its seal to be hereunto affixed and attested by its duly authorized Assistant Vice President and the Co-Trustee has executed this Agreement as of the 28th day of February, 1989.
           
ATTEST:   THE STANDARD OIL COMPANY
 
       
/s/ J. M. Casarik
 
Secretary
  By:   /s/ James H. Ross
 
 
       
ATTEST:   BP EXPLORATION (ALASKA) INC.
 
       
/s/ J. M. Casarik
 
Secretary
  By:   /s/ E. Whitehead
 
 
       
ATTEST:   THE BANK OF NEW YORK, Trustee
 
       
/s/ David A. Sampson
 
  By:   /s/ W. N. Gitlin
 
 
       
/s/ Eric A. Mazie
 
Witness
      /s/ F. James Hutchinson
 
F. James Hutchinson, Co-Trustee

 


 

         
STATE OF OHIO
)      
 
)     SS  
COUNTY OF CUYAHOGA
)      
     BEFORE ME, the undersigned authority, a Notary Public in and for said County and State, on this day personally appeared J. H. Ross, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged before me that the same was the act of The Standard Oil Company, an Ohio corporation, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therin stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 28th day of February, 1989.
       
 
  /s/ JoAnn Motuza
 
   
 
  Notary Public
 
  My commission expires:
 
   
 
 
JoANN MOTUZA
 
 
Notary Public, State of Ohio
 
  Recorded in Cuyahoga County
 
 
My Comm. Expires 9-14-92

 


 

         
STATE OF OHIO
)      
 
)     SS  
COUNTY OF CUYAHOGA
)      
     BEFORE ME, the undersigned authority, a Notary Public in and for said County and State, on this day personally appeared E. Whitehead, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged before me that the same was the act of the said BP Exploration (Alaska) Inc., a Delaware corporation, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therein stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 28th day of February, 1989.
       
 
  /s/ JoAnn Motuza
 
   
 
  Notary Public
 
  My commission expires:
 
   
 
 
JoANN MOTUZA
 
 
Notary Public, State of Ohio
 
  Recorded in Cuyahoga County
 
 
My Comm. Expires 9-14-92

 


 

         
STATE OF NEW YORK
)      
 
     ss.:  
COUNTY OF NEW YORK
)      
     Before me, a notary public in and for said County, personally appeared Walter N. Gitlin, known to me to be the person who, as Assistant Vice President of The Bank of New York, the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that he did so sign said instrument in the name and upon behalf of said corporation as such officer and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therein stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 23rd day of February, 1989.
       
 
  /s/ Virginia Barazotti
 
   
 
  Notary Public, in and for
 
  New York
 
  My Commission Expires:
 
   
 
 
VIRGINIA BARAZOTTI
 
  Notary Public, State of New York
 
 
No. 41-4734647
 
 
Qualified in Queens County
 
  Certificate filed in New York County
 
 
Commission Expires Nov. 30, 1989

 


 

         
STATE OF DELAWARE
)           )SS  
COUNTY OF NEW CASTLE
)      
     BEFORE ME, the undersigned authority, a Notary Public in and for said County and State, on this day personally appeared James Hutchinson, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged before me that he is a resident of the State of Delaware and that he executed the same as his free and voluntary act for the purposes and consideration therein expressed and in the capacity therein stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 17th day February, 1989.
     
 
  /s/ Lisa M. Harrison
[SEAL]
  Notary Public
 
   
 
  My commission expires:
 
   
 
  MY COMMISSION EXPIRES
 
       AUGUST 8, 1990

 


 

EXHIBIT A
[OMITTED]
     See Exhibits 4.2 and 4.3 to the Annual Report on Form 10-K of the BP Prudhoe Bay Royalty Trust for the fiscal year ended December 31, 2006 (File No. 1-10243)

 


 

EXHIBIT B
PPN 056663* 207
     
Number ___   ___Units
CERTIFICATE FOR UNITS OF BENEFICIAL INTEREST
IN BP PRUDHOE BAY ROYALTY TRUST
Created by, Issued Under and Subject to the BP Prudhoe Bay Royalty Trust Agreement effective as of February 28, 1989. This Certificate of Beneficial Interest is transferable in the City of New York, New York.
___
     THE UNITS REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO MANDATORY REDEMPTION BY THE TRUSTEE OR MANDATORY PURCHASE AND TRANSFER UNDER CERTAIN CIRCUMSTANCES IF A PROCEEDING IS COMMENCED SEEKING FORFEITURE OF TRUST PROPERTIES DUE TO A UNIT HOLDER’S INELIGIBILITY TO OWN UNITS BY REASON OF THE NATIONALITY OR OTHER STATUS OF SUCH HOLDER.
___
     UNTIL THE UNITS REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND QUALIFIED UNDER THE SECURITIES LAWS OF VARIOUS STATES, THEY MAY NOT BE TRANSFERRED UNLESS THE TRUSTEE AND THE COMPANY HAVE RECEIVED (1) AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE AND THE COMPANY TO THE EFFECT THAT THE PROPOSED TRANSFER MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS AND (2) AN INSTRUMENT FROM THE TRANSFEREE AGREEING TO PROVIDE CERTAIN INFORMATION FROM TIME TO TIME WITH REGARD TO ERISA, AS DEFINED IN THE ROYALTY TRUST AGREEMENT.
     THIS CERTIFIES THAT ___is the owner of ___Units of Beneficial Interest (“Units”) in that certain Trust known and designated as the BP Prudhoe Bay Royalty Trust, created and established under the terms of the above referenced Royalty Trust Agreement by and among The Standard Oil Company, an Ohio corporation with its principal office in Cleveland, Ohio, BP Exploration (Alaska) Inc., a Delaware corporation having its principal office in Anchorage, Alaska (the “Company”), The Bank of New York, a New York corporation, authorized to do a banking business and having a principal corporate trust office in New York, New York, as Trustee (the “Trustee”), and F. James Hutchinson, a resident of the State of Delaware as Co-Trustee, a duplicate original of which Royalty Trust Agreement is, for the

 


 

information of all concerned, held by said Trustee at its principal corporate trust office in New York, New York. Said Royalty Trust Agreement is hereby referred to and made a part of this Certificate for all purposes, and the owner of this Certificate by accepting the same consents to, and becomes bound by, all the terms and provisions of said Royalty Trust Agreement and the provisions herein. The Units represented by this Certificate are transferable on the records of the Trustee by the holder hereof in person, or by duly authorized attorney, upon surrender of this Certificate, properly endorsed, to the Trustee. This Certificate shall not be valid until countersigned and registered by the Transfer Agent and Registrar.
     WITNESS the seal of the Trustee and the signature of its duly authorized signatory.
Date:                                          
     
 
                                            , as Trustee
 
   
 
  By                                                               
 
                 Authorized Signatory
Countersigned and Registered:
Transfer Agent and Registrar
By                                                               
          Authorized Signatory
- 2 -

 


 

ASSIGNMENT
     For value received                                           hereby sell(s), assign(s) and transfer(s)unto                                                                Units of Beneficial Interest represented by the within Certificate, and do(es) hereby constitute and appoint irrevocably                      Attorney to transfer said Units on the records of within named The Bank of New York, Trustee, with full power of substitution in the premises.
     Date:                                          
     
 
   
 
 
 
 
   
 
   
Signature Guaranteed:

 
Bank or Broker located
or having a correspondent
located within New York City
 
 
NOTICE — The signature to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement, or any change whatsoever.
 
By:                                                               
          Authorized Officer
   
- 3 -

 


 

EXHIBIT C
COMPENSATION OF THE BANK OF NEW YORK
(As Trustee and Transfer Agent and Registrar)
I. Introductory Note. The Bank of New York (the “Bank”) is serving as a Trustee of the BP Prudhoe Bay Royalty Trust and as Transfer Agent and Registrar of the Units issued pursuant thereto. Capitalized terms which are not otherwise defined in this Exhibit C shall have the meanings ascribed to them in the BP Prudhoe Bay Royalty Trust Agreement (the “Agreement”). The fee described in Part III hereof is intended to compensate the Bank for all services rendered in its capacity as Trustee. Fees for the Bank’s services as Transfer Agent and Registrar are provided for in Part IV hereof.
II. Certain Definitions
     (1) “Administrative Services” means the duties of the Bank, as Trustee, to (a) receive, collect and account for payments in respect of the Royalty, (b) invest all collected cash balances as required by the Agreement, (c) pay all expenses and fees of the Trust, (d) calculate and distribute quarterly all Quarterly Income Amounts, (e) file such state and federal income tax returns as the Trustee considers necessary or appropriate to comply with applicable law, (f) supply all data to Unit Holders necessary to enable them to prepare their Alaska and federal income tax returns, (g) respond to inquiries from Unit Holders concerning the Trust and refer those concerning the Royalty to the Company, (h) secure the hiring and consulting with experts to the extent the Trustee is required or chooses to do so, (i) secure the preparation of and file all reports, notices and statements as may be required to comply with applicable securities laws and regulations and the rules of any stock exchange on which the Units may be listed and (j) maintain communications with the Company respecting the Trust.
     (2) “Extraordinary Services” means substantially increased administrative duties or responsibilities including, without limitation, (a) any requirement for the establishment of record dates more frequently than once a Quarter, or more than one distribution per Quarter (b) expanded tax or regulatory requirements, (c) the sale of assets by or the dissolution and liquidation of the Trust, (d) except as otherwise provided in the Agreement with respect to any period prior to the Opinion Date, which is not an Insignificant Investor Period, enforcing through any action, suit, proceeding or arbitration the terms and conditions of the Support Agreement or the Conveyance, defending litigation against the Trustee or the Trust and in connection with any governmental audit

 


 

or investigation and other matters which increase the obligations of the Trustee beyond those contemplated by the Agreement which are not the result of discretionary action on the part of the Trustee, and (e) meetings pursuant to Article V of the Agreement.
III. Quarterly Fees
     The Bank, as Trustee, shall be entitled to receive on each Quarterly Record Date a Quarterly Fee calculated as follows:
     The Quarterly Fee for Administrative Services shall be the sum of (i) $.0011 per Unit outstanding on such Quarterly Record Date and (ii) $10.00 for each payment by wire transfer to a Unit Holder. Such Quarterly Fee shall be increased for each calendar year commencing after December 31, 1990 by the proportionate increase, if any, during the preceding calendar year in the Consumer Price Index as defined in the Overriding Royalty Conveyance during the preceding calendar year.
     The Quarterly Fee for Extraordinary Services shall be the Bank’s current fee for similar or analogous services at the time such Extraordinary Services are rendered.
IV. Transfer Service Fees
     An additional fee will be charged by the Bank, as Transfer Agent and Registrar, for services related to the transfer and registration of Units. The fees to be paid and services to be rendered by the Bank, as Transfer Agent and Registrar, pursuant to this Part IV are as follows:
     A fee of $1.50 per Quarter times the number of Unit Holder accounts as of the Quarterly Record Date for:
(1) Issuance and registration of all certificates.
(2) The complete maintenance of all Unit Holder accounts.
(3) The processing of all transfers including those requiring special handling, i.e., regular, irregular, non-legal items, legal items and documentary transfers.
(4) The processing of all stop transfer orders including placement, maintenance and removal.
(5) The posting of all Certificates’issued and cancelled.
(6) The processing of the distributions of the Quarterly Income Amounts to Unit Holders.
(7) The distribution of all required tax forms and returns and the solicitation of taxpayer identification numbers or social security numbers as required.
(8) The mailing of quarterly and annual reports to the Unit Holders as required by Section 4.04 of the Agreement.
- 2 -

 


 

     Certificates issued each month in excess of 1/12th of the number of holders at the end of the previous year will be billed at $1.25 each.
     Any additional transfer services will be charged on the Bank’s current fee schedule in effect at the time such services are rendered.
     The fee for transfer services will remain as stated herein until December 31, 1990 and thereafter, shall be increased in the same manner as the Trustee’s Quarterly Fee for Administrative Services.
     The fees set forth herein of the Trustee, Registrar, and Transfer Agent shall be in addition to any amounts payable as indemnification or reimbursement under the Agreement or the Support Agreement.
- 3 -

 


 

     IN WITNESS WHEREOF, SOC has caused this Agreement to be executed by its duly authorized Chairman and Chief Executive Officer and its seal to be hereunto affixed and attested by its duly authorized Secretary and the Company has caused this Agreement to be executed by its duly authorized Treasurer and its seal to hereunto affixed and attested by its duly authorized Secretary and the Trustee has caused this Agreement to be executed by its duly authorized Assistant Vice President and its seal to be hereunto affixed and attested by its duly authorized Assistant Vice President and the Co-Trustee has executed this Agreement as of the 28th day of February, 1989.
           
ATTEST:   THE STANDARD OIL COMPANY
 
       
/s/ J. M. Casarik
  By:   /s/ James H. Ross
 
       
Secretary
       
 
       
ATTEST:   BP EXPLORATION (ALASKA) INC.
 
       
/s/ J. M. Casarik
  By:   /s/ E. Whitehead
 
       
Secretary
       
 
       
ATTEST:   THE BANK OF NEW YORK, Trustee
 
       
/s/ David A. Sampson
  By:   /s/ W. N. Gitlin
 
       
 
       
/s/ Eric A. Mazie
      /s/ F. James Hutchinson
 
       
Witness
      F. James Hutchinson, Co-Trustee

 


 

         
STATE OF OHIO
  )    
 
  )     SS
COUNTY OF CUYAHOGA 
  )    
     BEFORE ME, the undersigned authority, a Notary Public in and for said County and State, on this day personally appeared J. H. Ross, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged before me that the same was the act of The Standard Oil Company, an Ohio corporation, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therin stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 28th day of February, 1989.
     
 
  /s/ JoAnn Motuza
 
   
 
  Notary Public
 
  My commission expires:
 
   
 
 
JoANN MOTUZA
 
 
Notary Public, State of Ohio
 
  Recorded in Cuyahoga County
 
 
My Comm. Expires 9-14-92

 


 

         
STATE OF OHIO
  )    
 
  )     SS
COUNTY OF CUYAHOGA
  )    
     BEFORE ME, the undersigned authority, a Notary Public in and for said County and State, on this day personally appeared E. Whitehead, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged before me that the same was the act of the said BP Exploration (Alaska) Inc., a Delaware corporation, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therein stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 28th day of February, 1989.
     
 
  /s/ JoAnn Motuza
 
   
 
  Notary Public
 
  My commission expires:
 
   
 
 
JoANN MOTUZA
 
 
Notary Public, State of Ohio
 
  Recorded in Cuyahoga County
 
 
My Comm. Expires 9-14-92

 


 

         
STATE OF NEW YORK
)      
 
      ss.:  
COUNTY OF NEW YORK
)      
     Before me, a notary public in and for said County, personally appeared Walter N. Gitlin, known to me to be the person who, as Assistant Vice President of The Bank of New York, the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that he did so sign said instrument in the name and upon behalf of said corporation as such officer and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therein stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 23rd day of February, 1989.
       
 
  /s/ Virginia Barazotti
 
   
 
  Notary Public, in and for
 
  New York
 
  My Commission Expires:
 
   
 
 
VIRGINIA BARAZOTTI
 
 
Notary Public, State of New York
 
 
No. 41-4734647
 
 
Qualified in Queens County
 
  Certificate filed in New York County
 
 
Commission Expires Nov. 30, 1989

 


 

         
STATE OF DELAWARE
)           )SS  
COUNTY OF NEW CASTLE
)      
     BEFORE ME, the undersigned authority, a Notary Public in and for said County and State, on this day personally appeared James Hutchinson, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged before me that he is a resident of the State of Delaware and that he executed the same as his free and voluntary act for the purposes and consideration therein expressed and in the capacity therein stated.
     GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 17th day February, 1989.
     
 
  /s/ Lisa M. Harrison
[SEAL]
  Notary Public
 
   
 
  My commission expires:
 
   
 
  MY COMMISSION EXPIRES
 
       AUGUST 8, 1990

 

 

EXHIBIT 4.2
OVERRIDING ROYALTY CONVEYANCE
Dated February 27, 1989
Between
BP EXPLORATION (ALASKA) INC.
(“Grantor”)
and
THE STANDARD OIL COMPANY
(“Grantee”)
RECORD THIS INSTRUMENT IN THE BARROW RECORDING DISTRICT.
BP EXPLORATION (ALASKA) INC. (a) was formerly known as (1) STANDARD ALASKA PRODUCTION COMPANY, (2) SOHIO ALASKA PETROLEUM COMPANY, (3) SOHIO NATURAL RESOURCES COMPANY, and (4) SOHIO PETROLEUM COMPANY and (b) is successor-in- interest by merger to (1) BP ALASKA EXPLORATION INC. and (2) BP OIL CORPORATION (which was formerly known as BP EXPLORATION U.S.A. INC.); please index all eight of these names in the Grantor Index. THE STANDARD OIL COMPANY is known in Alaska as SOCO INC.; please index both of these names in the Grantee Index.
THE LANDS AFFECTED BY THIS INSTRUMENT ARE DESCRIBED IN EXHIBIT A ATTACHED HERETO.
ADDRESSES OF THE PARTIES TO THIS INSTRUMENT ARE SET FORTH IN SECTION 10.4 OF THIS INSTRUMENT.
     
RETURN THIS INSTRUMENT TO:
  GUESS & RUDD
 
  510 L Street, Suite 700
 
  Anchorage, Alaska 99501
 
  Attention: Joseph J. Perkins, Jr.

 


 

OVERRIDING ROYALTY CONVEYANCE
     THIS INSTRUMENT OF CONVEYANCE, dated the 27th day of February, 1989, between BP Exploration (Alaska) Inc., a Delaware corporation (Grantor), and The Standard Oil Company, an Ohio corporation known as SOCO Inc. (Grantee).
WITNESSETH:
     WHEREAS, Grantor desires to grant to Grantee an overriding royalty interest (as hereinafter more fully defined, called the “Royalty Interest”) from and out of the Subject Interests and to transfer and convey the Royalty Interest unto Grantee as of the Effective Date herein provided, to the end and effect that the Royalty Interest shall burden and apply to the Subject Interests as of such Effective Date; and
     WHEREAS, Grantee desires to accept such Royalty Interest;
     NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements herein contained, the parties agree as follows:
ARTICLE ONE
DEFINITIONS AND REFERENCES
     Average Per Barrel Royalty for any calendar quarter shall be the average of the Per Barrel Royalty for each of the days in such calendar quarter and in the three preceding calendar quarters. With respect to the first three calendar quarters after the Effective Date, the Average Per Barrel Royalty shall be calculated for any preceding quarter as if the Royalty interest had been conveyed to Grantee prior to the beginning of the earliest preceding calendar quarter necessary to obtain an average of the present calendar quarter and the three preceding calendar quarters, using Chargeable Costs equal to $4.50 per Barrel and a Cost Adjustment Factor of 1.0 for calendar quarters prior to the Effective Date.
     Barrel shall mean 42 United States gallons corrected to 60 degrees Fahrenheit temperature in accordance with ASTM-IP Petroleum Measurements Tables, American Edition, ASTM Designation D-1250, and with deductions for full basic sediment and water content as determined by recognized API standards.
     BP shall mean The British Petroleum Company, p.l.c., an English company whose principal office is at Britannic House, Moor Lane, London EC2Y 9BU England.
     Business Day shall mean any day that is not a Saturday, Sunday, a holiday determined by the New York Stock Exchange as “affecting ‘ex’ dates” or any other day on which banking institutions in New York, New York, or in any other city where the principal corporate trust office of the Trustee may be located, are closed as authorized or required by law.
     Chargeable Costs shall have the meaning stated in Section 4.4.
     Consumer Price Index shall have the meaning stated in Section 4.5.

 


 

     Conveyance shall mean this overriding royalty conveyance.
     Cost Adjustment Factor shall have the meaning stated in Section 4.5.
     Current Reserves shall mean the Proved Reserves as of December 31, 1987, which is 2,035.6 million Stock Tank Barrels.
     Effective Date shall mean 12:01 o’clock A.M. Alaska Time Zone on February 28, 1989. The calendar quarter in which the Effective Date occurs shall be deemed the first calendar quarter.
     Equivalent Financial Standing shall mean a Person having a rating assigned to outstanding unsecured, unsupported long term debt from Moody’s Investors Service of at least A3 or from Standard & Poor’s Corporation of at least A- or an equivalent rating from at least one nationally-recognized statistical rating agency, after giving effect to the sale or transfer to such Person of all or substantially all of the Subject Interests and the assumption by such Person of all of Grantor’s obligations under this Conveyance.
     Gas Cap Area Participation shall have the meaning stated in the Prudhoe Bay Unit Operating Agreement.
     Gas Cap Participating Area shall have the meaning stated in the Prudhoe Bay Unit Agreement.
     Grantee shall mean The Standard Oil Company, an Ohio corporation, while it owns all or any part of or interest in the Royalty Interest and any other Person or Persons who acquire legal title to all or any part of or interest in the Royalty Interest. The Standard Oil Company is known in Alaska as SOCO INC.
     Grantor shall mean BP Exploration (Alaska) Inc., a Delaware corporation while it owns all or any part of or interest in the Subject Interests and any other Person or Persons who acquire all or any part of or interest in the Subject Interests. BP Exploration (Alaska) Inc. (a) was formerly known as (i) Standard Alaska Production Company, (ii) Sohio Alaska Petroleum Company, (iii) Sohio Natural Resources Company and (iv) Sohio Petroleum Company and (b) is successor-in-interest by merger to (i) BP Alaska Exploration Inc. and (ii) BP Oil Corporation (which was formerly known as BP Exploration U.S.A. Inc.).
     Independent Accountants shall mean such firm of independent certified public accountants as may be designated by Grantee and approved by Grantor in the exercise of its reasonable business judgment, except that Grantee may not designate the firm of independent certified public accountants then utilized by Grantor.
     Independent Petroleum Engineers shall mean Miller and Lents, Ltd. or such other firm of independent petroleum engineers as may be designated by Grantee and approved by Grantor in the exercise of its reasonable business judgment.
     Interest Rate shall mean a varying rate per annum equal to the interest rate publicly announced in New York City by The Bank of New York from time to time as its prime commercial lending rate.
     Lands shall mean the lands described in Exhibit A.
     Lease shall mean and include an oil and gas lease described in Exhibit A issued by the State of Alaska and any new oil and gas leases which may be acquired by or for the benefit of Grantor on any Lands within one year after the expiration of the applicable oil

2


 

and gas lease or leases described in Exhibit A covering such Lands or any subsequent lease covering such Lands and in each case shall include, but not by way of limitation, the entire leasehold estate, working interest and operating rights and all and any other interests of Grantor, together with all rights, privileges and appurtenances related thereto and all and any extensions or renewals thereof.
     Lessor’s Royalty shall mean the royalty reserved to the State of Alaska as lessor pursuant to each Lease.
     Lower Lower Net Profits Royalty Interest shall mean that portion of the Net Profits Royalty Interest conveyed to The Standard Oil Company by that certain Instrument of Conveyance and Assignment by and between BP Alaska Inc. and The Standard Oil Company dated June 18, 1987, and subsequently conveyed to BP Exploration (Alaska) Inc. by that certain Lower Lower NPRI Conveyance between The Standard Oil Company and BP Exploration (Alaska) Inc. dated February 27, 1989, and merged into the leasehold estates of BP Exploration (Alaska) Inc. in the leases described therein.
     Minimum Per Barrel Royalty shall be $8.92 per Barrel, as more fully described in Section 4.7.
     Minimum Royalty Period shall mean the period ending September 30, 1991.
     Net Profits Royalty Interest shall mean the overriding royalty interest described in Section 2.1 of that certain instrument titled Conveyances Between BP Alaska Inc. and BP Oil Corporation, dated August 1, 1969, as amended, which overriding royalty interest comprises the Upper Net Profits Royalty Interest owned by BP Alaska Inc. on the Effective Date, the Upper Lower Net Profits Royalty Interest owned by The Standard Oil Company on the Effective Date, and the Lower Lower Net Profits Royalty Interest merged into certain leasehold estates of BP Exploration (Alaska) Inc.
     Oil shall mean (i) for so long as the Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement are in effect, crude oil and condensate that are produced from the Prudhoe Bay (Permo-Triassic) Reservoir and saved and allocated to the Subject Interests as Separator Liquid Production (as defined in the Prudhoe Bay Unit Operating Agreement) from the Oil Rim Participating Area and the Gas Cap Participating Area of the Prudhoe Bay Unit and taken in kind or otherwise disposed of by Grantor in accordance with the Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement, and (ii) at all times after the expiration or termination of the Prudhoe Bay Unit Agreement or the Prudhoe Bay Unit Operating Agreement, crude oil and condensate that are produced from the Prudhoe Bay (Permo-Triassic) Reservoir and saved and allocated to or otherwise attributable to the Subject Interests. All other gaseous and liquid hydrocarbons and other marketable substances produced in association with such crude oil and condensate that are recoverable from such formations or from other reservoirs in the Prudhoe Bay Unit and allocated to or otherwise attributable to the Subject Interests, including natural gas liquids, shall be excluded.
     Oil Rim Area Participation shall have the meaning stated in the Prudhoe Bay Unit Operating Agreement.
     Oil Rim Participating Area shall have the meaning stated in the Prudhoe Bay Unit Agreement.
     Per Barrel Royalty shall have the meaning stated in Section 4.2.
     Person shall mean any individual, corporation, partnership, trust, estate or other entity, organization or association.

3


 

     Production Taxes shall mean the sum of any severance taxes, excise taxes (including windfall profit tax), sales taxes, value added taxes or other similar or direct taxes imposed upon the reserves or production, delivery or sale of Royalty Production, as specified and calculated in Section 4.6.
     Proved Reserves shall mean Grantor’s estimate (to the extent that such estimate has been determined to be reasonable by the Independent Petroleum Engineers pursuant to Section 4.8 (d), unless Grantee has waived in writing its right pursuant to Section 4.8 (d) to cause the Independent Petroleum Engineers to determine whether Grantor’s estimate of Proved Reserves is reasonable) of the quantities of crude oil and condensate that (i) geological and engineering data demonstrate with reasonable certainty to be recoverable in future years under existing economic and operating conditions (i.e. prices and costs as of the date the estimate is made; prices shall include consideration of changes in existing prices provided only by contractual arrangements, but not price escalations based on future conditions) from the Prudhoe Bay (Permo-Triassic) Reservoir in the Prudhoe Bay Unit and (ii) will be allocated to the Subject Interests as Separator Liquid Production (as defined in the Prudhoe Bay Unit Operating Agreement) from the Oil Rim Participating Area and the Gas Cap Participating Area of the Prudhoe Bay Unit pursuant to the terms and provisions of the Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement. In estimating the Proved Reserves, Grantor will be guided by the following principles:
     (i) Reservoirs are considered proved if economic productibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (a) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.
     (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the “proved” classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based.
     (iii) Estimates of proved reserves do not include the following:
     (a) oil that may become available from known reservoirs but is classified separately as “indicated additional reserves”;
     (b) crude oil and condensate the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors;
     (c) crude oil and condensate that may occur in undrilled prospects;
     (d) crude oil and condensate that may be recovered from oil shales, coal, gilsonite and other such sources.
     Prudent Standard shall have the meaning stated in Section 7.1.
     Prudhoe Bay (Permo-Triassic) Reservoir shall have the meaning stated in the Prudhoe Bay Unit Agreement.

4


 

     Prudhoe Bay Unit is the oil and gas unit situated on the North Slope of Alaska in which the Subject Interests have been heretofore unitized for the production of oil and gas.
     Prudhoe Bay Unit Agreement shall mean the agreement dated April 1, 1977, as amended, among the State of Alaska and the Prudhoe Bay Unit Working Interest Owners (as defined in said agreement) establishing the Prudhoe Bay Unit.
     Prudhoe Bay Unit Operating Agreement shall mean the agreement dated April 1, 1977, as amended, among the Prudhoe Bay Unit Working Interest Owners (as defined in said agreement) governing Prudhoe Bay Unit operations.
     Quarterly Record Date shall mean the fifteenth day of each January, April, July and October; provided, however, that if such day is not a Business Day then the Quarterly Record Date shall be the next Business Day after such day and provided further that if Grantor is notified by Grantee that it has determined that a different date is required to comply with applicable law or the rules and regulations of any stock exchange on which the units of beneficial interest of the Trust are listed, it means such different date. The first Quarterly Record Date shall be April 17, 1989.
     Redetermination Settlement Agreement shall mean that certain agreement titled Redetermination Settlement Agreement among ARCO Alaska, Inc., Exxon Corporation, Sohio Alaska Petroleum Company and BP Alaska Exploration Inc., dated June 30, 1982.
     Royalty Interest shall mean the overriding royalty interest described in Section 2.1.
     Royalty Production for each day in a calendar quarter shall be 16.4246% of the lesser of (1) the first 90,000 Barrels of Grantor’s actual average daily production of Oil for such quarter and (2) Grantor’s actual average daily production of Oil for such quarter. Grantor’s actual average daily production of Oil for any calendar quarter shall be the total production of Oil for such quarter, net of Lessor’s Royalty, divided by the number of days in such quarter.
     Royalty Statement means the statement prepared by Grantor for delivery to Grantee pursuant to Section 4.8 (f).
     Stock Tank Barrel means a Barrel of stabilized Oil at a temperature of 60 degrees Fahrenheit and pressure of 14.7 psia.
     Subject Interests shall mean each kind and character of right, title, claim or interest owned by Grantor in the Leases insofar as the Leases affect the Lands, as such Subject Interests are now affected by the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Redetermination Settlement Agreement and the Net Profits Royalty Interest (excluding the Lower Lower Net Profits Royalty Interest), and as such Subject Interests are now or may later be affected by applicable law, judicial decree, arbitration, redetermination or actions of governmental agencies having jurisdiction in the matter.
     Trust shall mean the BP Prudhoe Bay Royalty Trust, a business trust under the Delaware Trust Act administered under the terms of the BP Prudhoe Bay Royalty Trust Agreement among The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of New York, Trustee, and F. James Hutchinson, Co-Trustee, dated February 28, 1989.

5


 

     Trustee shall mean, at the time of determination, the Trustee of the Trust other than the Co-Trustee thereunder or any ancillary trustee.
     Upper Lower Net Profits Royalty Interest shall mean that portion of the Net Profits Royalty Interest conveyed to The Standard Oil Company by that certain Instrument of Conveyance and Assignment by and between BP Alaska Inc. and The Standard Oil Company dated June 18, 1987, but not subsequently conveyed to BP Exploration (Alaska) Inc. by that certain Lower Lower NPRI Conveyance between The Standard Oil Company and BP Exploration (Alaska) Inc. dated February 27, 1989.
     Upper Net Profits Royalty Interest shall mean that portion of the Net Profits Royalty Interest not conveyed to The Standard Oil Company by that certain Instrument of Conveyance and Assignment by and between BP Alaska Inc. and The Standard Oil Company dated June 18, 1987.
     WTI Price shall have the meaning stated in Section 4.3.
     All references to Articles, Sections or other subdivisions refer to the corresponding Articles, Sections and other subdivisions of this Conveyance, and the words this Conveyance, herein, hereof, hereby, hereunder and words of similar import refer to this Conveyance as a whole and not to any particular Article, Section or other subdivision hereof.
ARTICLE TWO
OVERRIDING ROYALTY CONVEYANCE
     Section 2.1 Conveyance. Grantor, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration to it paid by Grantee, the receipt and sufficiency of which are hereby acknowledged, has bargained, sold, granted, conveyed, transferred, assigned, set over and delivered, and by these presents does hereby bargain, sell, grant, convey, transfer, assign, set over and deliver unto Grantee an overriding royalty interest (the Royalty Interest) consisting of the right to receive a Per Barrel Royalty for each Barrel of Royalty Production, if, as and when there is Royalty Production, as more fully provided herein. Grantee shall have no right to take Oil in kind.
     TO HAVE AND TO HOLD the Royalty Interest unto Grantee, its successors and assigns, for the term set forth in Section 10.2; subject, however, to the terms and provisions of this Conveyance.
ARTICLE THREE
PAYMENT
     Section 3.1 Payment. The aggregate payments from Grantor to Grantee under the Royalty Interest for any calendar quarter will equal, except for the first calendar quarter as set forth in Section 4.1, the sum of the product for each day of such calendar quarter of (1) the Royalty Production and (2) the Per Barrel Royalty; provided, that the total payment under the Royalty Interest for any calendar quarter (including any quarter during the Minimum Royalty Period) shall not be (1) less than zero or (2) more than the aggregate value of the total production of Oil for such calendar quarter, net of Lessor’s Royalty and less the value of any applicable payments made to the owners of the Net Profits Royalty Interest (excluding the Lower Lower Net Profits Royalty Interest).

6


 

     Grantor hereby agrees to pay to Grantee on the Quarterly Record Date following the end of each calendar quarter all payments that are then due to Grantee under the Royalty Interest in respect of such calendar quarter (including, without limitation, all payments, if any, that are due pursuant to the Minimum Per Barrel Royalty provisions of Section 4.7). Grantor will make all payments due to Grantee by wire transfer (or such other manner as Grantor and Grantee may agree) to an account designated by Grantee in finally collected same day funds.
     Section 3.2 Overpayment. If at any time Grantor inadvertently pays Grantee more than the amount due, Grantee shall not be obligated to return any such overpayment, but the amount or amounts otherwise payable to Grantee for any subsequent period or periods shall be reduced by such overpayment, plus an amount equal to the product of (i) the amount of such overpayment, (ii) the Interest Rate, and (iii) a fraction, the numerator of which is the number of days from the date of the overpayment to the date of the payment subject to reduction as a result of such overpayment, and the denominator of which is 360 days.
     Section 3.3 Underpayment. If at any time Grantor inadvertently pays Grantee less than the amount due, Grantor shall pay to Grantee, in accordance with the provisions of the next succeeding sentence, the amount of such underpayment, together with interest thereon in an amount equal to the product of (i) the amount of such underpayment, (ii) the Interest Rate, and (iii) a fraction, the numerator of which is the number of days from the date of the underpayment to the date of the payment subject to increase as a result of such underpayment, and the denominator of which is 360 days. Grantor will make all payments due to Grantee pursuant to this Section 3.3 on the Quarterly Record Date next following the calendar quarter in which the underpayment in question is discovered by wire transfer (or such other manner as Grantor and Grantee may agree) to an account designated by Grantee in finally collected same day funds. Should Grantor knowingly fail to pay to Grantee when due the entire amount owing pursuant to Section 3.1. Grantor shall pay to Grantee interest as provided in this Section 3.3 and, in addition to and not in lieu of such interest, all damages to which Grantee shall be entitled as a result of such knowing failure to pay.
ARTICLE FOUR
COMPUTATION OF ROYALTY
     Section 4.1 Calculation of Royalty Amount. The Royalty Interest entitles Grantee to receive, for the first calendar quarter ending March 31, 1989, the sum of the product for each day in such quarter from the Effective Date to the end of such quarter of, and for each calendar quarter thereafter the sum of the product for each day in such quarter of, (1) the Royalty Production and (2) the Per Barrel Royalty, subject to the Minimum Per Barrel Royalty provisions of Section 4.7; provided, that the payment under the Royalty Interest for any calendar quarter (including any quarter during the Minimum Royalty Period) shall not be (1) less than zero or (2) more than the aggregate value of the total production of Oil for such calendar quarter, net of Lessor’s Royalty and less the value of any applicable payments made to the owners of the Net Profits Royalty Interest (excluding the Lower Lower Net Profits Royalty Interest).
     Section 4.2 Per Barrel Royalty. The Per Barrel Royalty in effect for any day shall equal the WTI Price for such day less the sum of (1) the product of the Chargeable Costs and the Cost Adjustment Factor and (2) Production Taxes.
     Section 4.3 WTI Price. WTI Price for any trading day shall mean (1) the latest price (expressed in dollars per Barrel) for West Texas intermediate crude oil of

7


 

standard quality having a specific gravity of 40 degrees API for delivery at Cushing, Oklahoma (West Texas Crude), quoted for such trading day by the Dow Jones International Petroleum Report (which is published in The Wall Street Journal) or if the Dow Jones International Petroleum Report does not publish such quotes, then such price as quoted by Reuters, or if Reuters does not publish such quotes, then such price as quoted in Platt’s Oilgram Price Report, or (2) if for any reason such publications do not publish such price, then the WTI Price will mean, until (1) shall again be applicable, the simple average of the daily mean prices expressed in dollars per Barrel) quoted for West Texas Crude by one major oil company, one petroleum broker and one petroleum trading company, in each case unaffiliated with Grantor. Such major oil company, petroleum broker and petroleum trading company shall have substantial United States operations and will be designated by Grantor from time to time in an officer’s certificate delivered to Grantee. In the event that prices for West Texas Crude shall not be quoted so as to permit the calculation of WTI Price, West Texas Crude, for the purpose of calculating the WTI Price first for (1) and then (2) above, shall mean such other light sweet domestic crude oil of standard quality as shall be designated by Grantor in an officer’s certificate delivered to Grantee and approved by Grantee in the exercise of its reasonable business judgment with appropriate allowance for transportation costs to the Gulf Coast (or other appropriate location) to equilibrate such price to the WTI Price as contemplated hereunder. The WTI Price for any day which is not a trading day shall be the WTI Price for the next preceding day which is a trading day.
     Section 4.4 Chargeable Costs. The Chargeable Costs per Barrel of Royalty Production shall be the amount set forth in the following table opposite the calendar year stated:
             
For the   Chargeable
Year Ending   Costs Per
December 31   Barrel
  1989       4.50  
  1990       4.50  
  1991       4.50  
  1992       6.00  
  1993       6.75  
  1994       8.00  
  1995       8.25  
  1996       8.50  
  1997       8.85  
  1998       9.30  
  1999       9.80  
  2000       10.00  
  2001       10.75  
  2002       11.25  
  2003       11.75  
  2004       12.00  
  2005       12.25  
  2006       12.50  
  2007       12.75  
  2008       13.00  
  2009       13.25  
  2010       14.50  
  2011       16.60  
  2012       16.70  
  2013       16.80  
  2014       16.90  

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For the   Chargeable  
Year Ending   Costs Per  
December 31   Barrel  
  2015       17.00  
  2016       17.10  
  2017       17.20  
  2018       20.00  
  2019       23.75  
  2020       26.50  
  thereafter     increasing by $2.75 each year
     Chargeable Costs shall be subject to a maximum reduction of $1.20 per year in years subsequent to 1995 in the following circumstances, irrespective of whether the number of Proved Reserves added during any applicable period is a positive number, a negative number, or zero:
     (a) If, by December 31, 1995, 100,000,000 or more Stock Tank Barrels (STB) of Proved Reserves have not been added to Current Reserves (before taking into account any production therefrom) then for each year 1996 through 2000, inclusive, Chargeable Costs as set forth in the table above shall be reduced, as of January 1 in each such year, by an amount equal to the lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator of which shall be the difference between 100,000,000 STB of Proved Reserves and the actual number of STB of Proved Reserves so added to Current Reserves from January 1, 1988 through December 31, 1995, and the denominator of which shall be 100,000,000 STB of Proved Reserves.
     (b) If, between January 1, 1996 and December 31, 2000, an additional 200,000,000 STB of Proved Reserves (that is, 200,000,000 STB of Proved Reserves in addition to the 100,000,000 STB of Proved Reserves that are referred to in Section 4.4 (a)) have not been added to Current Reserves (before taking into account any production therefrom) then for each year from 2001 through 2005, inclusive, Chargeable Costs as set forth in the table above shall be reduced, as of January 1 in each such year, by an amount equal to the lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator of which shall be the difference between (1) 200,000,000 STB of Proved Reserves and (2) the sum of (i) the actual number of STB of Proved Reserves so added to Current Reserves from January 1, 1996 through December 31, 2000 plus (ii) the excess, if any, of the number of STB of Proved Reserves so added to Current Reserves from January 1, 1988 through December 31, 1995 over 100,000,000 STB of Proved Reserves (provided that the sum of (i) and (ii) shall not exceed 200,000,000 STB of Proved Reserves), and the denominator of which shall be 200,000,000 STB of Proved Reserves.
     (c) The tests set forth in (i) and (ii) below shall be utilized to calculate the reduction, if any, in Chargeable Costs for the year 2006 and each year thereafter. If the calculations under both such tests produce a reduction in Chargeable Costs, the greater of such reductions shall apply. If the calculation under one of such tests produces a reduction in Chargeable Costs but the calculation under the other test does not, the calculation that produces the reduction shall apply. In applying the tests below, it is the intention of Grantor and Grantee that test (i) allow as a credit toward the 400,000,000 STB of Proved Reserves that must be added to Current Reserves during the period set forth in such test an amount equal to the excess, if any, of the number of STB of Proved Reserves added to Current Reserves prior to December 31, 2000 over 300,000,000 STB of Proved Reserves, while test (ii) sets a level of only 100,000,000 STB of Proved Reserves that must be added to Current Reserves during the period set forth in such test, but does not allow a credit for additions of STB of Proved Reserves accrued prior to December 31, 2000.

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     (i) If, between January 1, 2001 and December 31, 2005, an additional 400,000,000 STB of Proved Reserves (that is, 400,000,000 STB of Proved Reserves in addition to the 100,000,000 STB of Proved Reserves that are referred to in Section 4.4(a) and the 200,000,000 STB of Proved Reserves that are referred to in Section 4.4(b)) have not been added to Current Reserves (before taking into account any production therefrom), then for the year 2006 and each year thereafter Chargeable Costs as set forth in the table above shall be reduced, as of January 1 of each such year, by an amount equal to the lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator of which shall be the difference between (1) 400,000,000 STB of Proved Reserves and (2) the sum of (i) the actual number of STB of Proved Reserves so added to Current Reserves from January 1, 2001 through December 31, 2010 plus (ii) the excess, if any, of the number of STB of Proved Reserves so added to Current Reserves from January 1, 1988 through December 31, 2000 over 300,000,000 STB of Proved Reserves (provided that the sum of (i) and (ii) shall not exceed 400,000,000 STB of Proved Reserves) and the denominator of which shall be 400,000,000 STB of Proved Reserves.
     (ii) If between January 1, 2001 and December 31, 2005, an additional 100,000,000 STB of Proved Reserves (that is, 100,000,000 STB of Proved Reserves in addition to any and all STB of Proved Reserves that are added to Current Reserves prior to January 1, 2001) have not been added to Current Reserves (before taking into account any production therefrom), then for the year 2006 and each year thereafter Chargeable Costs as set forth in the table above shall be reduced, as of January 1 of each such year, by an amount equal to the lesser of (A) $1.20 or (B) the product of $1.20 and a fraction, the numerator of which shall be the difference between 100,000,000 STB of Proved Reserves and the number of STB of Proved Reserves added to Current Reserves from January 1, 2001 through December 31, 2005 and the denominator of which shall be 100,000,000 STB of Proved Reserves.
     Grantor shall report to Grantee the amount of Proved Reserves added in any year, taking into account the reductions, if any, to Proved Reserves resulting from modifications of Grantor’s estimates which were made of Proved Reserves for prior years, it being agreed that only the net amount of Proved Reserves (that is, additions net of reductions resulting from modifications of previous estimates of Proved Reserves) shall be utilized in determining whether the requisite number of STB of Proved Reserves have been added pursuant to the provisions of this Section 4.4.
     Section 4.5 Cost Adjustment Factor. The Cost Adjustment Factor shall mean the ratio of (1) the Consumer Price Index published for the most recently past February, May, August or November, as the case may be, to (2) the Consumer Price Index published most recently prior to the Effective Date, provided, however, that (a) if for any calendar quarter the average WTI Price was $18.00 or less, then in such event the Cost Adjustment Factor for such quarter shall be the Cost Adjustment Factor for the immediately preceding quarter, and (b) the Cost Adjustment Factor for any calendar quarter in which the average WTI Price exceeds $18.00, after a calendar quarter during which the average WTI Price is equal to or less than $18.00, and for each following calendar quarter in which the average WTI Price is greater than $18.00, shall be the product of (x) the Cost Adjustment Factor for the most recently past calendar quarter in which the average WTI Price is equal to or less than $18.00 and (y) a fraction, the numerator of which shall be the Consumer Price Index published for the most recently past February, May, August or November, as the case may be, and the denominator of which shall be the Consumer Price Index published for the most recently past February, May, August or November during a quarter in which the average WTI Price was equal to or less than $18.00. The Consumer Price Index shall mean the U.S. Consumer Price Index, all items and all urban consumers, U.S. city average, 1982-84 equals 100, as first published, without seasonal adjustment, by the Bureau of Labor Statistics,

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Department at Labor, without regard to subsequent revisions or corrections by such Bureau.
     Section 4.6 Production Taxes. Production Taxes in existence on the Effective Date or subsequently imposed shall be computed at defined statutory rates. In the case of taxes based upon wellhead or field value, WTI Price less the product of $4.50 times the Cost Adjustment Factor shall be deemed to be the wellhead or field value. At the Effective Date the Production Taxes payable with respect to the Royalty Production are the Alaska Oil and Gas Properties Production Tax (“Alaska Production Tax”) and the Alaska Oil and Gas Conservation Tax (“Alaska Conservation Tax”). For the purposes of the Royalty Interest, the Alaska Production Tax shall be computed without regard to the “economic limit factor” as the greater of the “percentage of value amount” (based on the statutory rate and the wellhead value as defined above) and the “cents per barrel amount” as such terms are used with respect to such tax. Grantor hereby agrees to pay to the appropriate taxing authorities when due all Production Taxes in respect of the Royalty Interest, except those Production Taxes which Grantor is contesting in good faith and which Grantor is not required to then pay by law. As of the Effective Date, the statutory rate for the purpose of calculating the “percentage of value amount” is 15% with respect to the Alaska Production Tax and four mills per Barrel of Oil production with respect to the Alaska Conservation Tax.
     Section 4.7 Minimum Royalty. If, with respect to any calendar quarter during the Minimum Royalty Period, the Average Per Barrel Royalty is less than $8.92 per Barrel, Grantor will make an additional payment to Grantee at the time specified in Section 3.1 equal to the sum of the product for each day of such calendar quarter of (1) the difference between the Minimum Per Barrel Royalty and the Average Per Barrel Royalty and (2) the Royalty Production; provided, that the total payments under the Royalty Interest for any calendar quarter (including any payments under this Section 4.7) shall not exceed the aggregate value of the total production of Oil for such calendar quarter, net of Lessor’s Royalty and less the value of any applicable payments made to the owners of the Net Profits Royalty Interest (excluding the Lower Lower Net Profits Royalty Interest).
     Section 4.8 Information and Reports. Grantor shall:
     (a) provide Grantee with such information concerning the Royalty Interest as Grantee may need and to which Grantor has access to permit Grantee (i) to comply with any reporting or disclosure obligations of Grantee pursuant to applicable law and the requirements of any stock exchange in which the securities of Grantee are listed, (ii) to prepare Alaska, federal and other income tax returns and (iii) to prepare reports required to be forwarded by Grantee to its security holders;
     (b) provide Grantee and the Independent Accountants (the expenses of such Independent Accountants to be borne by Grantee) with access, at the office of Grantor during reasonable business hours, to inspect Grantor’s books and records, which books and records shall be true and correct in all material respects and sufficient to enable the Independent Accountants to verify the correctness of the amounts paid and payable to Grantee as the owner of the Royalty Interest and to discuss with representatives of Grantor the affairs, finances and accounts of Grantor relating to the Leases and the Subject Interests; provided that Grantee and the Independent Accountants shall keep the information therein confidential except for information which Grantee is required by law to disclose;
     (c) furnish to Grantee on or before February 28 of each year a report containing all information of a nature, of a standard and in a form consistent with the requirements of the Securities and Exchange Commission respecting the inclusion of

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reserve and reserve valuation information in filings under the Securities Act of 1933 and the Securities Exchange Act of 1934 and with applicable accounting rules. Such report shall set forth, among other things, Grantor’s estimates of future net cash flows from Proved Reserves attributable to the Royalty Interest, the discounted present value thereof, the assumptions utilized in arriving at the estimates contained therein, and the estimate of the quantities of Proved Reserves (including reductions of Proved Reserves as a result of modification of Grantor’s estimates of Proved Reserves from prior years) added to Current Reserves during the preceding year. Current Reserves shall not be reduced by production of Oil since December 31, 1987;
     (d) unless such right is waived in writing by Grantee, provide to the Independent Petroleum Engineers (the expenses of such Independent Petroleum Engineers to be borne by Grantee) all access and information which the Independent Petroleum Engineers deem necessary to determine whether the methods and procedures employed by Grantor to accumulate and evaluate the necessary information and to estimate and document the Proved Reserves and annual production rate forecasts and to prepare the report referred to in Section 4.8 (c) are effective and in accordance with generally accepted geological and engineering practices in the petroleum industry and whether Grantor’s estimate of the quantities of Proved Reserves set forth in such report are, in the aggregate, reasonable, and if not, to determine and specify that portion of Grantor’s estimate of Proved Reserves that, in the opinion of the Independent Petroleum Engineers, is reasonable, it being agreed that in the event of a material disagreement with respect to the correct quantities of Proved Reserves, the opinion of the Independent Petroleum Engineers shall govern for all purposes of this Conveyance; in carrying out their investigation the Independent Petroleum Engineers may review, among other things they deem relevant, (i) Grantor’s procedures for estimating and documenting Proved Reserves, (ii) Grantor’s estimates of in-place reservoir volumes, (iii) Grantor’s estimates of recovery factors and production profiles for the various areas, pay zones, projects and recovery processes that are included in Grantor’s estimate of Proved Reserves, (iv) Grantor’s production strategy and procedures for implementing that strategy, (v) the sufficiency of data available for making estimates of Proved Reserves and production profiles, and (vi) pertinent provisions of the Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement; provided, that the Independent Petroleum Engineers shall keep the information so provided confidential except for information which is required by law to be disclosed;
     (e) provide Grantee on a date no later than twelve calendar days prior to each Quarterly Record Date (unless otherwise agreed by Grantee) information as to the amount to be paid to Grantee on the next Quarterly Record Date.
     (f) provide to Grantee, and to Grantee’s designee, a Royalty Statement within five working days after the end of each calendar quarter which shall consist of a computation, supported by data required to perform the computations hereunder, of the amount to be paid to Grantee at the next Quarterly Record Date;
     (g) provide Grantee with such other information as Grantee may reasonably request from time to time and to which Grantor has access.
     All costs and expenses incurred by Grantor in providing reports and information under this Conveyance shall be borne by Grantor.
     Section 4.9 Indemnification. Grantor hereby agrees to indemnify and save harmless Grantee from and against any expense (including, without limitation, the expense of suit and attorneys’ fees), claim, damage, loss or liability incurred by Grantee as a result of or arising out of the information provided to Grantee by Grantor pursuant to

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Section 4.8 being untimely provided or incorrect or untrue or misleading in any material respect.
ARTICLE FIVE
NON-LIABILITY OF GRANTEE
     Section 5.1 Non-Expense Bearing Interest; Non-Liability of Grantee; Indemnification. It is the express intent of Grantor and Grantee that the Royalty Interest shall constitute (and this Conveyance shall conclusively be construed for all purposes as creating) a non-expense bearing interest for all purposes. Grantor and Grantee acknowledge that, pursuant to the terms of the Prudhoe Bay Unit Operating Agreement, if Grantor fails to pay any costs or expenses chargeable to Grantor under the Prudhoe Bay Unit Operating Agreement and the production of Oil is insufficient to pay such costs and expenses, then the Royalty Interest is chargeable with a pro rata portion of such cost and expenses and is subject to the enforcement against it of liens granted to the unit operators of the Prudhoe Bay Unit. However, as more fully set forth in Section 7.2, Grantor has agreed to pay timely all costs and expenses chargeable to it pursuant to the Prudhoe Bay Unit Operating Agreement and to insure that no such costs and expenses will be chargeable against the Royalty Interest. Grantor and Grantee acknowledge that in no event shall Grantee ever be liable or responsible in any way for any expense, claim, damage, loss, obligation or liability incurred by Grantor or Grantee or others attributable to the Subject Interests or to Oil produced therefrom (including, without limitation, those incurred in connection with or attributable to the developing, exploring, drilling, equipping, testing, operating, reworking, maintaining, plugging or abandoning of any well or the storing, handling, treating or marketing of the production therefrom), and Grantor hereby agrees to indemnify and save harmless Grantee from and against any such expense (including, without limitation, the expense of suit and attorneys’ fees), claim, damage, loss, obligation and liability, irrespective of whether same arises pursuant to the provisions of the Prudhoe Bay Unit Operating Agreement or otherwise.
ARTICLE SIX
UNITIZATION
     Section 6.1 Prudhoe Bay Unit. The Subject Interests have been heretofore unitized for the production of oil and gas in the Prudhoe Bay Unit. The Subject Interests are and shall be subject to the terms and provisions of the Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement, the Leases, and any other type of contract, conveyance, or Instrument, recorded or unrecorded, relating to the Subject Interests or Grantor’s interest therein in effect at the Effective Date.
     Section 6.2 Right to Amend. Grantor shall have the right and power to alter, change, amend or terminate the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases, and any other type of contract, conveyance, or instrument, recorded or unrecorded, as heretofore or hereafter entered into, as to all or any part of the Subject Interests, upon such terms and provisions as Grantor shall in its sole discretion determine, but, if Grantor exercises such right and power in breach of the Prudent Standard, it will, and hereby agrees to, indemnify and save harmless Grantee from and against any and all expense (including, without limitation, the expense of suit and attorneys’ fees), claim, damage, loss, obligation and liability incurred by Grantee as a result of or arising out of Grantor’s exercise of the aforesaid right and power in breach of the Prudent Standard. If and whenever, through the exercise of such right and power,

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or pursuant to any law hereafter enacted or any rule, regulation or order of any governmental body or official hereafter promulgated, any of the Subject Interests are altered, changed, amended or terminated in any manner, the Royalty Interest insofar as it affects such Subject Interests shall also be altered, changed, amended or terminated, and in any such event such Royalty Interest, insofar as it is affects such Subject Interests, shall apply to and affect only the Royalty Production which is allocated to such Subject Interests, but no such alteration, change, amendment or termination shall affect the definition of Royalty Production as set forth in Article One or the method of making payments under the Royalty Interest as set forth in Article Three or the method of computing the payments under the Royalty Interest as set forth in Article Four. Grantee hereby agrees that it will never challenge the right and power of the Grantor to so alter, change, amend or terminate the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases and any other type of contract conveyance or instrument, recorded or unrecorded, as heretofore or hereafter entered into, as to all or any part of the Subject Interests, upon such terms and provisions as Grantor shall in its sole discretion determine, but nothing in this Section 6.2 shall be construed to release Grantor from its indemnity obligation to Grantee as set forth in the first sentence of this Section 6.2 and in other provisions of this Conveyance or to deny Grantee any of the benefits to which it is entitled under this Conveyance or at law or in equity.
ARTICLE SEVEN
OPERATION OF SUBJECT INTERESTS
     Section 7.1 Prudent Operator Standard. Grantor agrees, to the extent it has the legal right to do so under the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases and applicable law affecting or pertaining to the Subject Interests, that it will conduct and carry on the development, exploration, production, maintenance and operation of the Subject Interests with reasonable and prudent business judgment, in accordance with the provisions of this Article Seven and good oil and gas field practices, as a reasonable and prudent operator, and without regard to the existence of the Royalty Interest or any other royalty, overriding royalty, or other interest created subsequent to the Effective Date (the “Prudent Standard”). However, nothing contained in this Section 7.1 shall be deemed to prevent or restrict Grantor from electing not to participate in any operation which is to be conducted under the terms of either the Prudhoe Bay Unit Agreement or the Prudhoe Bay Unit Operating Agreement if such election is made by Grantor in accordance with the Prudent Standard. Grantor shall not be obligated to continue to produce Oil from the Subject Interests in the Prudhoe Bay Unit or to maintain such production at any particular level so long as Grantor acts in accordance with Prudent Standard. Notwithstanding anything elsewhere herein to the contrary, Grantor shall never be liable to Grantee for the manner in which Grantor performs its duties hereunder as long as Grantor has acted in accordance with the Prudent Standard. Grantee shall have no right to operate or direct operations of the Subject Interests.
     Section 7.2 Assurances. (1) Grantor agrees, to the extent it has the legal right to do so under the terms of the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases and applicable law affecting or pertaining to the Subject Interests, that it will perform all material obligations to be performed by it (including without limitations making timely payment of all costs and expenses chargeable to it pursuant to any applicable agreement to insure that the Royalty Interest is not charged with any portion of any such costs or expenses and that no lien or security interest is enforced against the Royalty Interest by virtue of any matter arising by through or under Grantor) under all material contracts and agreements applicable to the Subject Interests and the production and transportation to market of Oil (including, without

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limitation, the Prudhoe Bay Unit Agreement and the Prudhoe Bay Unit Operating Agreement) and will use its best efforts (by taking such action as is available to it by contract, at law, or in equity) to enforce the performance under such contracts and agreements of the other parties thereto.
     (ii) The provisions set forth in this Conveyance that require Grantor to perform certain duties or take certain actions (but subject to the express and implied limitations in this Conveyance) that can only be performed or taken by the operator of the Prudhoe Bay Unit, acting under the direction and supervision of the working interest owners of the Prudhoe Bay Unit, or the operators of facilities or pipelines separate from the Prudhoe Bay Unit, shall be construed to require Grantor to use its best efforts (by taking such action as is available to it by contract (including, without limitation, exercising its right to vote and to initiate proposals), at law or in equity) to cause the operator to perform the duty or to take the action in question. Without limitation of the generality of the foregoing, if the operator elects, pursuant to the applicable operating agreement, to become a nonconsenting party with respect to such duty or action, and if Grantor may cause such duty or action to be performed or taken by becoming a consenting party under the applicable operating agreement, then Grantor shall so elect to become a consenting party unless a reasonable and prudent operator, acting in accordance with good oil and gas field practices and without regard to the existence of the Royalty Interest or any other royalty, overriding royalty or other interest created subsequent to the Effective Date, would refuse to undertake the performance of the duty or the taking of the action in question.
     Section 7.3 Abandonment of Properties. Nothing herein contained shall obligate Grantor to continue to operate any well or maintain in force or attempt to maintain in force any of the Subject Interests when, in Grantor’s opinion, formed in accordance with the Prudent Standard, such well or Subject Interest ceases to produce or is not capable of producing oil or gas in paying quantities. The expiration of a Subject Interest in accordance with the terms and conditions applicable thereto shall not be considered to be a voluntary surrender or abandonment thereof.
     Section 7.4 Non-Operating Interest In Minerals. It is the express intent of Grantor and Grantee that the Royalty Interest shall constitute (and this Conveyance shall conclusively be construed for all purposes as creating) a non-operating interest in minerals for all purposes. Without limitation of the generality of the immediately preceding sentence, Grantor and Grantee acknowledge that Grantee has no right or power to participate in the selection of a drilling contractor, to propose the drilling of a well, to determine the timing or sequence of drilling operations, to commence or shut down production, to take over operations or to share in any operating decision whatsoever (including, without limitation, the alteration, change, amendment or termination of the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases or any other type of contract, conveyance, or instrument, recorded or unrecorded, as heretofore or hereafter entered into, as to all or any part of the Subject Interests hereunder). Grantor and Grantee hereby expressly negate any intent to create (and this Conveyance shall never be construed as creating) a mining or other partnership or joint venture.
ARTICLE EIGHT
GOVERNMENT REGULATION
     Section 8.1 Government Regulations. All obligations of Grantor hereunder shall be subject to all applicable laws, regulations and rules of the State of Alaska and the United States of America and all other governmental agencies or authorities having

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jurisdiction in the matter (except those being contested in good faith). Grantor shall be entitled to use its reasonable discretion in making filings, for itself and on behalf of Grantee, with any governmental body, agency, board or commission having jurisdiction, affecting the Subject Interests or the Royalty Interest, provided that any such filings shall be limited to notice required in connection with the grant or transfer of the Royalty Interest.
     Section 8.2 Government Approval. This Conveyance shall not be effective until approved by the Commissioner of the Department of Natural Resources, State of Alaska, or his designee.
ARTICLE NINE
ASSIGNMENTS
     Section 9.1 Assignment by Grantor. Grantor shall have the right to assign, sell, transfer, convey, mortgage or pledge the Subject Interests, or any part thereof, provided that same is expressly made subject to the Royalty Interest and the terms and provisions of this Conveyance and that a certified copy of the recorded instrument accomplishing same is promptly furnished to Grantee by Grantor. From and after the effective date of any such assignment, sale, transfer or Conveyance by Grantor, the grantee thereunder shall succeed to all the requirements upon and responsibilities of Grantor hereunder as to the interests so acquired by such grantee, and, from and after said effective date, Grantor shall be relieved of such requirements and responsibilities, excepting only for those accrued or due for performance prior to such effective date and except as otherwise provided in Section 9.2. The kind of notice provided herein shall be exclusive, and no other kind, whether actual or constructive, shall be binding on Grantee.
     Section 9.2 Effect of Assignment by Grantor. Notwithstanding any provision of this Conveyance to the contrary, no assignment, sale, transfer, conveyance, mortgage or pledge of the Subject Interests, or any part thereof, shall adversely affect any of Grantee’s rights hereunder, including, without limitation, the amount, computation or method of payment of the Royalty Interest, it being the intent of Grantor and Grantee that for the purpose of determining the Royalty Interest payable to Grantee no disposition will be deemed to have been effected during the term of this Conveyance. Should Grantor dispose of its interest in the Subject Interests as to some of the Subject Interests, or as to some part thereof, then, effective as of the date of such disposition, BP Exploration (Alaska) Inc. shall automatically be designated by all owners of the Subject Interests as their agent, throughout the term of this Conveyance, (i) to make all designations that Grantor is entitled to make pursuant to Section 4.3, (ii) to obtain all information and take such other steps as may be necessary to permit the Independent Petroleum Engineers and the Independent Accountants and Grantor to perform their respective obligations and duties under this Conveyance (including, without limitation, the calculations to be made pursuant to Article Three and Article Four) and (iii) to make all payments and to deliver and receive all communications on behalf of Grantor, it being agreed that during such time, if any, that the Subject Interests are owned by more than one Person, Grantee shall never be obligated without its consent to receive payments from or to deliver or receive communications under this Conveyance from or to any Grantor other than BP Exploration (Alaska) Inc.; provided, however, that BP Exploration (Alaska) Inc. shall be released from its obligations under this Conveyance upon the sale or transfer by it of all or substantially all of the Subject Interests, if the transferee is of Equivalent Financial Standing and unconditionally agrees to assume and be bound by all of BP Exploration (Alaska) Inc.’s obligations under this Conveyance in a writing in form and substance reasonably satisfactory to Grantee.

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     Section 9.3 Assignment by Grantee. Grantee has the right to assign the Royalty Interest in whole or in part. No such assignment will affect the method of computing the Royalty Interest, and if more than one Person becomes entitled to participate in the Royalty Interest, Grantor may withhold from such other Person payments to which such Person would otherwise be entitled hereunder and the furnishing of any data or information which Grantor is required by the terms hereof to furnish Grantee until Grantor is furnished a recordable instrument executed by or binding upon all Persons interested in the Royalty Interest designating one Person who is to receive such payments, data and information.
     Section 9.4 Change In Ownership. No change of ownership or right to receive payment of the Royalty Interest, or of any part thereof, however accomplished, shall be binding upon Grantor until notice thereof shall have been furnished by the Person claiming the benefit thereof, and then only with respect to payments thereafter made. Notice of sale or assignment shall consist of a certified copy of the recorded instrument accomplishing the same; notice of change of ownership or right to receive payment accomplished in any other manner (for example by reason of incapacity, death or dissolution) shall consist of certified copies of such documents and complete proceedings as are legally binding and conclusive of the rights of all parties. Until such notice shall have been furnished to Grantor as above provided, the payment or tender of all sums payable on the Royalty Interest may be made in the manner provided herein precisely as if no such change in interest or ownership or right to receive payment had occurred. The kind of notice herein provided shall be exclusive, and no other kind, whether actual or constructive, shall be binding on Grantor.
     Section 9.5 Rights of Mortgagee or Trustee. If Grantee shall at any time execute a mortgage or deed of trust covering all or part of the Royalty Interest, subject to the notice provisions of Section 9.4, the mortgagee(s) or trustee(s) therein named or the holder of any obligation secured thereby shall be entitled, to the extent such mortgage or deed of trust so provides, to exercise all the rights, remedies, powers and privileges conferred upon Grantee by the terms of this Conveyance, but the provisions of this Section 9.5 shall in no way be deemed or construed to impose upon Grantor any obligation or liability undertaken by Grantee under such mortgage or deed of trust or under the obligation secured thereby.
ARTICLE TEN
MISCELLANEOUS
     Section 10.1 Proportionate Reduction. In the event of failure or deficiency in title of the State of Alaska to any of the Lands which affects any of the Subject Interests, or any modification of the Subject Interests as provided in Article Six, the portion of the Royalty Production from such affected or modified Subject Interests out of which the Royalty Interest attributable to such Subject Interests shall be payable shall be reduced in the same proportion that such Subject Interests are reduced, but such failure or deficiency in title shall not affect the definition of Royalty Production as set forth in Article One or the method of paying the Royalty Interest as set forth in Article Three or the method of computing the payments to be made under the Royalty Interest as act forth in Article Four.
     Section 10.2 Term. Subject to the limitations stated herein, this Conveyance shall remain in force so long as any of the Subject Interests are in effect, provided, however, that all warranties and indemnities set forth in this Conveyance shall survive for the maximum period permitted by law.

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     Section 10.3 Further Assurances. Should any additional instrument of assignment or conveyance be required to describe more specifically any interests subject hereto or to vest in any Person to whom Grantee assigns the Royalty Interest in whole or in part the benefit of all covenants, representations, warranties and indemnities made by Grantor to or for the benefit of Grantee pursuant to this Conveyance, Grantor agrees to execute and deliver the same. Also, if any other or additional instruments are required in connection with the transfer of interests in the Leases to comply with applicable law, regulations, the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement or any other applicable agreements, Grantor will execute and deliver the same.
     Section 10.4 Notices. Any notice, request, demand, report, statement or other instrument which may be required or permitted to be given to any party hereto or other Person succeeding to any interest of a party hereto shall be deemed sufficiently given if in writing and delivered to such party or Person or to an officer of such party or Person or deposited in the United States mail in a sealed envelope, first class mail, with postage prepaid, addressed to such party or Person at its or his address stated in this Conveyance, or at such other address as the party or Person to be addressed shall have designated by written notice to each such party or Person. Each party’s proper address shall be deemed to be that set forth herein below until such party gives to the other party, in the manner above prescribed, notice of a new address, after which such new address shall be deemed the proper address until changed in like manner. Notice shall be deemed given when actually received by the party or Person to which such notice was intended.
         
 
  Grantor:   BP Exploration (Alaska) Inc.
 
           P.O. Box 196612
 
           900 East Benson Boulevard
 
           Anchorage, Alaska 99519-6612
 
       
 
  Grantee:   The Standard Oil Company
 
           200 Public Square
 
           Cleveland, Ohio 44114-2375
     Section 10.5 Covenants and Warranties with Respect to Participating Interest and Net Profits Royalty Interest. Grantor hereby covenants and warrants that its Oil Rim Area Participation as of the Effective Date is 50.6848339% and its Gas Cap Area Participation as of the Effective Date is 13.8398950%, that as of the Effective Date its Oil Rim Area Participation and its Gas Cap Area Participation is subject only to the Net Profits Royalty Interest (exclusive of the Lower Lower Net Profits Royalty Interest) and that such interests are subject to change or adjustment only as provided herein or as may be provided under the terms of the Prudhoe Bay Unit Operating Agreement and the Prudhoe Bay Unit Agreement, including, without limitation, any adjustments which might result from the final redetermination of hydrocarbon pore volume as provided in Article 37 of the Prudhoe Bay Unit Operating Agreement. Grantor further covenants that if the existence of the Net Profits Royalty Interest or the making of any payments under the Net Profits Royalty Interest results in a decrease in any payment to Grantee under the Royalty Interest, Grantor shall and hereby agrees to pay Grantee, in addition to and independent of payments required to be made to Grantee under the Royalty Interest, the amount of any such decrease, together with interest thereon in an amount equal to the product of (i) the amount of such decrease, (ii) the Interest Rate, and (iii) a fraction, the numerator of which is the number of days from the date of such decrease until the date of payment to Grantee of the amount owing pursuant to this Section 10.5 and the denominator of which is 360 days, together with such other damages (but not including interest) to which Grantee may be entitled under this Conveyance, or at law or in equity, it being the

18


 

express intent of Grantor and Grantee that Grantee is not to be prejudiced in any way by the existence of or the making of any payments under the Net Profits Royalty Interest.
     Section 10.6 Other Covenants. Grantor hereby covenants and warrants that it is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, is qualified to transact business and is in good standing in the State of Alaska and is qualified with the Alaska Department of Natural Resources to hold interests in state oil and gas leases; that it has the legal right and authority to bargain, grant, sell, convey, transfer, assign, set over and deliver the Royalty Interest to Grantee and that it has the legal right and authority to execute, deliver and perform this Conveyance; that the execution, delivery and performance of this Conveyance by it (i) does not require the consent of any other Person except as set forth in Section 8.2; (ii) does not require any action by or filing with any governmental body, agency, or official that has not been accomplished, other than the filings which are required under the terms of the Leases and the terms of applicable statutes of the State of Alaska and the administrative regulations of the Alaska Department of Natural Resources, which filings will be promptly made upon execution of this Conveyance; and, (iii) will not violate or conflict with any law, statute, regulation, agreement, judgment, injunction, order, decree or other instrument to which Grantor is subject or is party or by which Grantor or the Leases or the Subject Interests are bound and that this Conveyance is a valid and binding agreement of Grantor, enforceable against Grantor in accordance with its terms. Grantor hereby binds itself and its successors and assigns to forever defend the title to the Royalty Interest unto Grantee and its successors and assigns against every Person claiming the same or any part thereof by, through or under Grantor, but not otherwise. This Conveyance is made with full substitution and subrogation of Grantee in and to all covenants, representations and warranties by others heretofore given or made in respect of the Leases or the Subject Interests.
     Section 10.7 Binding Effect. This Conveyance and all of the rights and obligations hereunder (including, without limitation, those arising out of the covenants, representations, warranties and indemnities made by Grantor to or for benefit of Grantee pursuant to this Conveyance) shall bind and inure to the benefit of the successors and assigns of Grantor and Grantee.
     Section 10.8 Headings for Convenience. The headings used in this Conveyance are inserted for convenience only and shall be disregarded in construing this Conveyance.
     Section 10.9 Counterparts. This Conveyance may be executed in several original counterparts. Each such counterpart shall for all purposes be deemed an original, and all such counterparts shall constitute but one and the same Conveyance.
     Section 10.10 Interest Affecting Real Property. The Royalty Interest created and transferred by this Conveyance is an interest affecting real property within the meaning of AS 40.17.110(b)(59). The parties intend that the covenants contained in this Conveyance run with and burden the Lands and the Subject Interests to the maximum extent possible under applicable law.
     Section 10.11 Waiver; Estoppel. The failure of Grantor or Grantee to insist upon strict performance of any provision of this Conveyance shall not constitute a waiver of or estoppel against asserting the right to require such performance in the future, nor shall a waiver or estoppel in any one instance constitute a waiver or estoppel with respect to a later breach of a similar nature or otherwise.
     Section 10.12 Right to Information. The Standard Oil Company shall remain entitled throughout the term of this Conveyance to receive from Grantor a copy of

19


 

all information that is furnished to Grantee by Grantor, irrespective of the assignment by The Standard Oil Company of the Royalty Interest in whole to any other Person.
     Section 10.13 Indemnification. Grantor hereby agrees to indemnify and save harmless Grantee from and against any expense (including, without limitation, the expense of suit and attorneys’ fees), claim, damage, loss or liability incurred by Grantee as a result of or arising out of the breach by Grantor of any of its representations, warranties or covenants set forth in this Conveyance.
     Section 10.14 Independent Payments. All payments to which Grantee is entitled by reason of the indemnities set forth in this Conveyance by Grantor to Grantee or by reason of any breach by Grantor of its representations, warranties or covenants shall be in addition to and independent of all payments required to be made to Grantee under the Royalty Interest.
     Section 10.15 Governing Law. The validity, effect and construction of this Conveyance shall be governed by the laws of the State of Alaska.
     Section 10.16 Amendment. This Conveyance may not be amended, altered or modified except pursuant to a written Instrument executed by Grantor and Grantee.

20


 

     IN WITNESS WHEREOF, the parties hereto have caused this Conveyance to be duly executed as of the day and year first written.
                 
        GRANTOR:    
[SEAL]
               
 
               
Attest:       BP Exploration (Alaska) Inc.    
 
               
/s/ John A. Reeder
 
Assistant Secretary
      By   /s/ G.N. Nelson
 
G.N. Nelson, President
   
 
               
        GRANTEE:    
[SEAL]
               
 
               
Attest:       The Standard Oil Company    
 
               
/s/ J.M. Cesarik
 
      By   /s/ James H. Ross
 
   
ACKNOWLEDGMENT
     
STATE OF ALASKA
   )
 
   )   ss
THIRD JUDICIAL DISTRICT
   )
     Before me, a notary public, in and for the State of Alaska, personally appeared G.N. Nelson, known to me to be the person who, as President of BP Exploration (Alaska) Inc., the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that he did so sign said instrument in the name and upon behalf of said corporation as such officer; that the same is his free act and deed as such officer, and the free and corporate act and deed of said corporation; that he was duly authorized thereunto by its board of directors; and that the seal affixed to said instrument is the corporation seal of said corporation. In testimony whereof, I have hereunto subscribed my name, and affixed my official seal, at Anchorage, Alaska, this 20th day of February, 1989.
         
[SEAL]
  /s/ Keri L. Hopkins
 
Notary Public in and for Alaska
   
 
       
 
  My Commission Expires: 1-14-93    
     
STATE OF OHIO
   )
 
   )   ss
COUNTY OF CUYAHOGA
   )
     Before me, a notary public, in and for said county, personally appeared James H. Ross and J.M. Cesarik, known to me to be the persons who, as Chairman and Chief Executive Officer and Corporate Secretary, respectively, of The Standard Oil Company, the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that they did so sign said instrument in the name and upon behalf of said corporation as such officers, respectively; that the same is their free act and deed as such officers, respectively, and the free and corporate act and deed of said corporation; that they were duly authorized thereunto by its board of directors; and that the seal affixed to said instrument is the corporation seal of said corporation. In testimony whereof, I have hereunto subscribed my name, and affixed my official seal, at Cleveland, Ohio this 15th day of February, 1989.
         
[SEAL]
  /s/ JoAnn Motuza
 
Notary Public in and for Ohio
   
 
       
 
  My Commission Expires:    
JoANN MOTUZA
Notary Public, State of Ohio
Recorded in Cuyahoga County
My Comm. Expires 9-14-92

21


 

EXHIBIT A
OVERRIDING ROYALTY CONVEYANCE
STATE OF ALASKA
                     
            Grantor’s   Recorded
PBU   Lease   Lands   Working   Book/
Tract   Serial No.   Description   Interest   Page*
16   ADL-25637  
Secs. 13,24
    50 %   42/609
       
T12N-R10E, UM
           
       
 
           
47   ADL-28260  
Secs. 1,2,11,12
    100 %**   52/40
       
T11N-R13E, UM
           
       
 
           
25   ADL-28277  
Secs. 26,35,36
    100 %**   52/44
       
T12N-R13E, UM
           
       
 
           
24   ADL-28278  
Secs. 27,28,33,34
    100 %**   52/50
       
T12N-R13E, UM
           
       
 
           
23   ADL-28279  
Secs. 29,30,31,32
    100 %**   52/56
       
T12N-R13E, UM
           
       
 
           
44   ADL-28280  
Secs. 1,2,11,12
    100 %**   52/62
       
T11N-R13E, UM
           
       
 
           
45   ADL-28281  
Secs. 3,4,9,10
    100 %**   52/68
       
T11N-R13E, UM
           
       
 
           
46   ADL-28282  
Secs. 5,6,7,8
    100 %**   52/74
       
T11N-R13E, UM
           
       
 
           
57   ADL-28283  
Secs. 17,18,19,20
    100 %**   52/80
       
T11N-R13E, UM
           
       
 
           
58   ADL-28284  
Secs. 15,16,21,22
    100 %**   52/86
       
T11N-R13E, UM
           
       
 
           
59   ADL-28285  
Secs. 13,14,23,24
    100 %**   52/92
       
T11N-R13E, UM
           
       
 
           
76   ADL-28286  
Secs. 25,26,35,36
    100 %**   52/98
       
T11N-R13E, UM
          29/178
       
 
           
77   ADL-28287  
Secs. 27,28,33,34
    100 %**   47/235
       
T11N-R13E, UM
           
       
 
           
60   ADL-28305  
Secs. 17,18,19,20
    100 %**   47/223
       
T11N-R14E, UM
           
       
 
           
74   ADL-28309  
Secs. 27,28,33,34
    100 %**   42/336
       
T11N-R14E, UM
           

 


 

                     
            Grantor’s   Recorded
PBU   Lease   Lands   Working   Book/
Tract   Serial No.   Description   Interest   Page*
75   ADL-28310  
Secs. 29,30,31,32
    100 %**   47/241
       
T11N-R14E, UM
           
       
 
           
90   ADL-28311  
Secs. 1,2,11,12
    100 %**   47/229
       
T10N-R14E, UM
           
       
 
           
89   ADL-28312  
Secs. 3,4,9,10
    100 %**   52/104
       
T10N-R14E, UM
           
       
 
           
101   ADL-28315  
Secs. 13,14,23,24
    100 %**   52/110
       
T10N-R14E, UM
           
       
 
           
38   ADL-28320  
Secs. 1,2,11,12
    100 %**   47/199
       
T11N-R15E, UM
           
       
 
           
100   ADL-28330  
Secs. 17,18,19,20
    100 %**   52/116
       
T10N-R15E, UM
           
       
 
           
99   ADL-28331  
Secs. 15,16,21,22
    100 %**   52/122
       
T10N-R15E, UM
           
       
 
           
110   ADL-28333  
Secs. 25,26,35,36
    100 %**   42/341
       
T10N-R15E, UM
           
       
 
           
108   ADL-28335  
Secs. 29,30,31,32
    100 %**   52/128
       
T10N-R15E, UM
           
       
 
           
66   ADL-28339  
Secs. 17,18,19
    100 %**   47/193
       
T11N-R16E, UM
           
       
 
           
69   ADL-28343  
Secs. 30,31,32
    100 %**   42/356
       
T11N-R16E, UM
           
       
 
           
111   ADL-28349  
Secs. 29,30,31
    100 %**   42/370
       
T10N-R16E, UM
           
       
 
           
31   ADL-34630  
Secs. 25,26,35,36
    100 %**   47/205
       
T12N-R15E, UM
           
 
*   All book and page references are to the lease records of the Noatak-Kobuk Recording District, except: (i) Lease ADL 25637 is recorded in the Miscellaneous Records of the Fairbanks Recording District; and (iii)[sic] Lease ADL 28286 is recorded both in the Lease Records of the Noatak-Kobuk Recording District (Book 52/page 98) and the Lease Records of the Fairbanks Recording District (Book 29/page 178).
 
**   The interest of BP Exploration (Alaska) Inc. in these leases is subject to the Net Profits Royalty Interest (excluding the Lower Lower Net Profits Royalty Interest).

 

 

EXHIBIT 4.3
TRUST CONVEYANCE
Dated February 28, 1989
Between
THE STANDARD OIL COMPANY
(“Grantor”)
and
BP PRUDHOE BAY ROYALTY TRUST
(“Grantee”)
RECORD THIS INSTRUMENT IN THE BARROW RECORDING DISTRICT.
THE STANDARD OIL COMPANY is known in Alaska as SOCO INC.; please index both of these names in the Grantor Index. BP PRUDHOE BAY ROYALTY TRUST should be indexed in the Grantee Index.
THE LANDS AFFECTED BY THIS INSTRUMENT ARE DESCRIBED IN EXHIBIT A ATTACHED HERETO.
ADDRESSES OF THE PARTIES TO THIS INSTRUMENT ARE SET FORTH IN SECTION 4.2 OF THIS INSTRUMENT.
     
RETURN THIS INSTRUMENT TO:
  GUESS & RUDD
 
  510 L Street, Suite 700
 
  Anchorage, Alaska 99501
 
  Attn: Joseph J. Perkins, Jr.

 


 

TRUST CONVEYANCE
     THIS CONVEYANCE, dated the 28th day of February, 1989, between The Standard Oil Company, an Ohio corporation known in Alaska as SOCO INC. (Grantor) and the BP Prudhoe Bay Royalty Trust, a business trust under the Delaware Trust Act administered under the terms of the BP Prudhoe Bay Royalty Trust Agreement among The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of New York, Trustee, and F. James Hutchinson, Co-trustee (Grantee).
WITNESSETH:
     WHEREAS, Grantor is the owner of a certain Royalty Interest covering certain lands and leases situated in the Prudhoe Bay area of the State of Alaska more fully described in Exhibit A to this Conveyance; and
     WHEREAS, Grantor desires to transfer and convey the Royalty Interest unto Grantee as of the Effective Date herein provided; and
     WHEREAS, Grantee desires to accept the Royalty Interest as of the Effective Date herein provided;
     NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements herein contained, the parties hereto agree as follows:
SECTION ONE
DEFINITIONS
     For the purposes of this Conveyance, the following words, terms and phrases shall have the following meanings:
     Conveyance shall mean this Trust Conveyance.
     Effective Date shall mean 12:01 o’clock A.M. Alaska Time Zone on February 28, 1989.
     Grantee shall mean the BP Prudhoe Bay Royalty Trust while it owns all or any part of or interest in the Royalty Interest and any other Person or Persons who acquire legal title to all or any part of or interest in the Royalty Interest.
     Grantor shall mean The Standard Oil Company, an Ohio corporation known in Alaska as SOCO Inc.
     Leases shall have the meaning stated in the Overriding Royalty Conveyance.

 


 

     Overriding Royalty Conveyance Grantee shall have the same meaning as the definition of “Grantee” set forth in the Overriding Royalty Conveyance.
     Overriding Royalty Conveyance Grantor shall have the same meaning as the definition of “Grantor” set forth in the Overriding Royalty Conveyance.
     Overriding Royalty Conveyance shall mean that certain Overriding Royalty Conveyance dated February 27, 1989, executed and delivered by BP Exploration (Alaska) Inc., as Grantor, and The Standard Oil Company, as Grantee, covering certain lands and leases situated in the Prudhoe Bay area of the State of Alaska more particularly described in Exhibit A to the Overriding Royalty Conveyance. A copy of the Overriding Royalty Conveyance is attached hereto as Exhibit B. The Overriding Royalty Conveyance is recorded in Book 54, Pages 469-495, Barrow Recording District.
     Person shall mean an individual, corporation, partnership, trust, estate or other entity, organization or association.
     Royalty Interest shall mean the overriding royalty interest conveyed to Overriding Royalty Conveyance Grantee by the Overriding Royalty Conveyance.
     Subject Interests shall have the meaning stated in the Overriding Royalty Conveyance.
SECTION TWO
CONVEYANCE
     Grantor, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration to it paid by Grantee, the receipt and sufficiency of which are hereby acknowledged, by these presents does hereby bargain, sell, grant, convey, transfer, assign, set over and deliver unto Grantee, its successors and assigns the Royalty Interest and all rights and benefits to which Overriding Royalty Conveyance Grantee is entitled under or pursuant to the Overriding Royalty Conveyance (including, without limitation, the rights and benefits arising out of the covenants, representations, warranties and indemnities made by Overriding Royalty Conveyance Grantor to or for the benefit of Overriding Royalty Conveyance Grantee pursuant to the Overriding Royalty Conveyance), to have and to hold forever.
SECTION THREE
COVENANTS AND WARRANTIES
     Grantor hereby covenants and warrants that it is a corporation duly organized, validly existing, and in good standing under the laws of the State of Ohio, is qualified to transact business and is in good standing in the State of Alaska, and is qualified with the Alaska Department of Natural Resources to hold interests in state oil and gas leases; that it has the legal right and authority to bargain, grant, sell, convey, transfer, assign, set over and deliver the Royalty Interest to Grantee and that it has legal right and authority

2


 

to execute, deliver and perform this Conveyance; that the execution, delivery and performance of this Conveyance by it (i) does not require the consent of any other Person; (ii) does not require any action by or filing with any governmental body, agency, or official that has not been accomplished, other than the filings which may be required under the terms of the Leases and the terms of the applicable statutes of the State of Alaska and the administrative regulations of the Alaska Department of Natural Resources, which filings will be promptly made by Grantor upon the execution of this Conveyance; and, (iii) will not violate or conflict with any law, statute, regulation, agreement, judgment, injunction, order, decree or other instrument to which Grantor is subject or is party or by which Grantor or the Leases or the Subject Interests are bound; and that this Conveyance is a valid and binding agreement of Grantor, enforceable against Grantor in accordance with its terms. Grantor hereby binds itself and its successors and assigns to forever defend the title to the Royalty Interest unto Grantee and its successors and assigns against every Person claiming the same or any part thereof by, through or under Grantor, but not otherwise. This Conveyance is made with full substitution and subrogation of Grantee in and to all covenants, representations and warranties by others heretofore given or made in respect of the Leases or the Subject Interests.
SECTION FOUR
MISCELLANEOUS
     Section 4.1 Further Assurances. Should any additional instruments of assignment or conveyance be required to describe more specifically any interests subject hereto, or to vest in Grantee the benefit of all covenants, representations, warranties and indemnities by others heretofore given or made in respect of the Royalty Interest or the Leases or the Subject Interests (including, without limitation, those made by Overriding Royalty Conveyance Grantor to or for the benefit of Overriding Royalty Conveyance Grantee pursuant to the Overriding Royalty Conveyance), Grantor agrees to execute and deliver the same. Also, if any other or additional instruments are required in connection with the transfer of the Royalty Interest to comply with applicable law or regulations, Grantor will execute and deliver the same.
     Section 4.2 Notices. Any notice, request, demand, report, statement or other instrument which may be required or permitted to be given to any party hereto or other Person succeeding to any interest of a party hereto shall be deemed sufficiently given if in writing and delivered to such party or Person or to an officer of such party or Person or deposited in the United States mail in a sealed envelope, first class mail, with postage prepaid, addressed to such party or Person at its or his address stated in this Conveyance, or at such other address as the party or Person to be addressed shall have designated by written notice to each other party or Person. Each party’s proper address shall be deemed to be that set forth herein below until such party gives to the other party, in the manner above prescribed, notice of a new address, after which such address shall be deemed the proper address until changed in like manner. Notice shall be deemed given when actually received by the party or Person to which such notice was intended.
         
 
  Grantor:   The Standard Oil Company
 
      200 Public Square
 
      Cleveland, Ohio 44114-2375

3


 

         
 
  Grantee:   BP Prudhoe Bay Royalty Trust,
 
      The Bank of New York, Trustee
 
      21 West Street, 12th Floor
 
      New York, New York 10286
 
      Attention: Corporate Trust Department
     Section 4.3 Binding Effect. This Conveyance and all of the rights and obligations hereunder shall bind and inure to the benefit of the successors and assigns of Grantor and Grantee.
     Section 4.4 Headings for Convenience. The headings used in this Conveyance are inserted for convenience only and shall be disregarded in construing this Conveyance.
     Section 4.5 Counterparts. This Conveyance may be executed in several original counterparts. Each such counterpart shall for all purposes be deemed an original, and all such counterparts shall constitute but one and the same Conveyance.
     Section 4.6 Governing Law. The validity, effect and construction of this Conveyance shall be governed by the laws of the State of Alaska.

4


 

     IN WITNESS WHEREOF, the parties hereto have caused this Conveyance to be duly executed as of the day and year first written.
                 
        GRANTOR:    
 
               
Attest:       The Standard Oil Company    
 
               
/s/ J.M. Cesarik
 
      By   /s/ J.H. Ross
 
   
J.M. Cesarik,       J.H. Ross, Chairman and    
Corporate Secretary       Chief Executive Officer    
 
               
        GRANTEE:    
 
               
Attest:       BP PRUDHOE BAY ROYALTY TRUST    
 
               
        By The Bank of New York    
 
               
/s/ David G. Sampson
      By   /s/ W.N. Gitlin    
 
               
David G. Sampson       Walter N. Gitlin    
Assistant Vice President       Assistant Vice President    
ACKNOWLEDGMENT
     
STATE OF OHIO
   )
 
   )    ss
COUNTY OF CUYAHOGA
   )
     Before me, a notary public, in and for said county, personally appeared J.H. Ross and J.M. Cesarik, known to me to be the persons who, as Chairman and Chief Executive Officer and Corporate Secretary, respectively, of The Standard Oil Company, the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that they did so sign said instrument in the name and upon behalf of said corporation as such officers, respectively; that the same is their free act and deed as such officers, respectively, and the free and corporate act and deed of said corporation; that they were duly authorized thereunto by its board of directors; and that the seal affixed to said instrument is the corporation seal of said corporation. In testimony whereof, I have hereunto subscribed my name, and affixed my official seal, at Cleveland, Ohio, this 15th day of February, 1989.
         
[SEAL]
  /s/ JoAnn Motuza
 
Notary Public in and for Ohio
   
 
       
 
  My Commission Expires:    
JoANN MOTUZA
Notary Public, State of Ohio
Recorded in Cuyahoga County
My Comm. Expires 9-14-92
     
STATE OF NEW YORK
   )
 
   )    ss
COUNTY OF NEW YORK
   )
     Before me, a notary public, in and for said county, personally appeared Walter N. Gitlin and David C. Sampson, known to me to be the persons who, as Assistant Vice Presidents of The Bank of New York, the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that they did so sign said instrument in the name and upon behalf of said corporation as such officers; that the same is their free act and deed as such officers, and the free and corporate act and deed of said corporation; that they were duly authorized thereunto by its board of directors; and that the seal affixed to said instrument is the corporation seal of said corporation. In testimony whereof, I have hereunto subscribed my name, and affixed my official seal, at New York, New York this 23rd day of February, 1989.
         
 
  /s/ Virginia Barazotti
 
Notary Public in and for New York
   
 
       
 
  My Commission Expires:    
VIRGINIA BARAZOTTI
Notary Public, State of New York
No. 42-4734842
Qualified in Queens County
Certificate filed in New York County
Commission Expires Nov. 30, 1989

5


 

EXHIBIT A
TRUST CONVEYANCE
STATE OF ALASKA
                     
            ORCG’s   Recorded
PBU   Lease   Lands   Working   Book/
Tract   Serial No.   Description   Interest*   Page**
16   ADL-25637  
Secs. 13,24
    50 %   42/609
       
T12N-R10E, UM
           
       
 
           
47   ADL-28260  
Secs. 1,2,11,12
    100 %***   52/40
       
T11N-R13E, UM
           
       
 
           
25   ADL-28277  
Secs. 26,35,36
    100 %***   52/44
       
T12N-R13E, UM
           
       
 
           
24   ADL-28278  
Secs. 27,28,33,34
    100 %***   52/50
       
T12N-R13E, UM
           
       
 
           
23   ADL-28279  
Secs. 29,30,31,32
    100 %***   52/56
       
T12N-R13E, UM
           
       
 
           
44   ADL-28280  
Secs. 1,2,11,12
    100 %***   52/62
       
T11N-R13E, UM
           
       
 
           
45   ADL-28281  
Secs. 3,4,9,10
    100 %***   52/68
       
T11N-R13E, UM
           
       
 
           
46   ADL-28282  
Secs. 5,6,7,8
    100 %***   52/74
       
T11N-R13E, UM
           
       
 
           
57   ADL-28283  
Secs. 17,18,19,20
    100 %***   52/80
       
T11N-R13E, UM
           
       
 
           
58   ADL-28284  
Secs. 15,16,21,22
    100 %***   52/86
       
T11N-R13E, UM
           
       
 
           
59   ADL-28285  
Secs. 13,14,23,24
    100 %***   52/92
       
T11N-R13E, UM
           
       
 
           
76   ADL-28286  
Secs. 25,26,35,36
    100 %***   52/98
       
T11N-R13E, UM
          29/178
       
 
           
77   ADL-28287  
Secs. 27,28,33,34
    100 %***   47/235
       
T11N-R13E, UM
           
       
 
           
60   ADL-28305  
Secs. 17,18,19,20
    100 %***   47/223
       
T11N-R14E, UM
           
       
 
           

 


 

                     
            ORCG’s   Recorded
PBU   Lease   Lands   Working   Book/
Tract   Serial No.   Description   Interest*   Page**
74   ADL-28309  
Secs. 27,28,33,34
    100 %***   42/336
       
T11N-R14E, UM
           
       
 
           
75   ADL-28310  
Secs. 29,30,31,32
    100 %***   47/241
       
T11N-R14E, UM
           
       
 
           
90   ADL-28311  
Secs. 1,2,11,12
    100 %***   47/229
       
T10N-R14E, UM
           
       
 
           
89   ADL-28312  
Secs. 3,4,9,10
    100 %***   52/104
       
T10N-R14E, UM
           
       
 
           
101   ADL-28315  
Secs. 13,14,23,24
    100 %***   52/110
       
T10N-R14E, UM
           
       
 
           
38   ADL-28320  
Secs. 1,2,11,12
    100 %***   47/199
       
T11N-R15E, UM
           
       
 
           
100   ADL-28330  
Secs. 17,18,19,20
    100 %***   52/116
       
T10N-R15E, UM
           
       
 
           
99   ADL-28331  
Secs. 15,16,21,22
    100 %***   52/122
       
T10N-R15E, UM
           
       
 
           
110   ADL-28333  
Secs. 25,26,35,36
    100 %***   42/341
       
T10N-R15E, UM
           
       
 
           
108   ADL-28335  
Secs. 29,30,31,32
    100 %***   52/128
       
T10N-R15E, UM
           
       
 
           
66   ADL-28339  
Secs. 17,18,19
    100 %***   47/193
       
T11N-R16E, UM
           
       
 
           
69   ADL-28343  
Secs. 30,31,32
    100 %***   42/356
       
T11N-R16E, UM
           
       
 
           
111   ADL-28349  
Secs. 29,30,31
    100 %***   42/370
       
T10N-R16E, UM
           
       
 
           
31   ADL-34630  
Secs. 25,26,35,36
    100 %***   47/205
       
T12N-R15E, UM
           
 
*   “OCRG” means Overriding Royalty Conveyance Grantor.
 
**   All book and page references are to the lease records of the Noatak-Kobuk Recording District, except: (i) Lease ADL 25637 is recorded in the Miscellaneous Records of the Fairbanks Recording District; and (iii) [sic] Lease ADL 28286 is recorded both in the Lease Records of the Noatak-Kobuk

 


 

    Recording District (Book 52/page 98) and the Lease Records of the Fairbanks Recording District (Book 29/page 178).
 
***   The interest of BP Exploration (Alaska) Inc. in these leases is subject to the “Net Profits Royalty Interest” (excluding the “Lower Lower Net Profits Royalty Interest”)(as said terms are defined in the Overriding Royalty Conveyance).

 

 

EXHIBIT 4.4
[COMPOSITE COPY]
SUPPORT AGREEMENT
AMONG
THE BRITISH PETROLEUM COMPANY p.l.c.
AND
BP EXPLORATION (ALASKA) INC.
THE STANDARD OIL COMPANY
AND
BP PRUDHOE BAY ROYALTY TRUST

 


 

THIS SUPPORT AGREEMENT made as of February 28, 1989
     
AMONG
  THE BRITISH PETROLEUM COMPANY p.l.c. (“BP”), an English company whose principal office is at Britannic House, Moor Lane, London EC2Y 9BU England,
 
   
 
  BP EXPLORATION (ALASKA) INC., a Delaware corporation having its principal office in Anchorage, Alaska (the “Company”),
 
   
 
  THE STANDARD OIL COMPANY, an Ohio corporation having its principal office in Cleveland Ohio (“SOC”),
 
   
AND
  BP PRUDHOE BAY ROYALTY TRUST, a Delaware business trust (the
 
   
 
  “Trust”), having The Bank of New York, a New York corporation, authorized to do a banking business, as a Trustee (the “Trustee”), under the BP Prudhoe Bay Royalty Trust Agreement, dated February 28, 1989, by and among SOC, the Company, the Trustee and a co-trustee (the “Royalty Trust Agreement”).
WHEREAS
1.   The Company and SOC are indirect, wholly-owned subsidiaries of BP; and
 
2.   SOC shall grant and convey to the Trust the Initial Royalty Interest


 

     
 
  in consideration of the issuance by the Trust, at SOC’s direction, of Trust Units representing units of beneficial interest in the Trust; and
 
3.   In order to induce the initial purchasers of Trust Units to purchase such Trust Units and in order to induce The Bank of New York and F. James Hutchinson to act as trustees under the Royalty Trust Agreement, BP shall provide financial support to the Company and SOC in meeting their respective payment obligations under the Initial Royalty Interest, any Additional Royalty Interests, the Royalty Trust Agreement and the Conveyance to the Trust, the Trustee, the Transfer Agent and the Registrar (in each case as defined in the Royalty Trust Agreement).
 
4.   The Trust, in consideration of the conveyance of the Initial Royalty Interest to the Trust and the above-mentioned financial support of BP and SOC, shall issue 21,400,000 Trust Units in connection with the establishment of the Trust pursuant to the Royalty Trust Agreement and accept the benefits of the financial support and guarantee which BP has agreed to make available on the terms hereinafter contained.
NOW THEREFORE IT IS HEREBY AGREED as follows:
1.   DEFINITIONS
 
    In this Agreement, unless the context otherwise requires, the following terms shall have the following meanings:
“Conveyance” means, collectively, the Overriding

-2-


 

Royalty Conveyance dated February 27, 1989 between the Company and SOC conveying the Initial Royalty Interest to SOC, the Trust Conveyance dated the date hereof between SOC and the Trust conveying the Initial Royalty Interest to the Trust and any Additional Conveyance (as defined in the Royalty Trust Agreement).
“Equivalent Financial Standing” means a Person having a rating assigned to outstanding unsecured, unsupported long term debt from Moody’s Investors Service of at least A3 or from Standard & Poor’s Corporation of at least A- or an equivalent rating from at least one nationally-recognized statistical rating organization (after giving effect to the sale or transfer to such Person of all or substantial all of the Company’s working interest in the PBU a the assumption by such Person of all of the Company’s obligations under the Conveyance and of all of BP’s obligations hereunder).
“PBU” means the Prudhoe Bay Unit, as defined in the Conveyance.
“Person” means any individual, corporation, partnership, trust, estate or other entity, organization or association.

-3-


 

“Royalty Interests” means the Initial Royalty Interest and any Additional Royalty Interests (in each case as defined in the Royalty Trust Agreement) conveyed to the Trust pursuant to the Initial Conveyance or any Additional Conveyance (in each case as defined in the Royalty Trust Agreement.)
2.   SCOPE OF UNDERTAKING
 
(a)   Subject to the terms hereof BP shall, within 30 days of notice to BP pursuant to Article XI of the Royalty Trust Agreement, (i) cause the Company to perform its payment obligations under the Royalty Interests pursuant to the Conveyance and (ii) cause the Company and SOC to satisfy their respective payment obligations to the Trustee, Transfer Agent and Registrar and their respective payment obligation to the Trust under the Royalty Trust Agreement (including without limitation, the obligation to make payments as indemnification), including, in each case, without limitation, contributing to the Company or SOC or causing to be contributed to the Company or SOC by an affiliate of BP such funds as are necessary to make such payments. BP’s obligations under the foregoing undertaking are unconditional.
 
(b)   For purposes of BP’s obligations under this Support Agreement, no assignment, sale, transfer, conveyance, mortgage or pledge or other disposition of the Royalty

-4-


 

Interests shall relieve (i) the Company of its obligations under the Royalty Trust Agreement or the Conveyance, (ii) SOC of its obligations under the Royalty Trust Agreement or (iii) BP of its obligations under this Support Agreement.
3.   DURATION
 
    This Agreement shall be deemed to have come into full force and effect on the date first above written and shall continue thereafter until the earlier of (a) the termination of the Royalty Interests and all obligations of the Company under the Conveyance and of the Company and SOC under the Royalty Trust Agreement or (b) all or substantially all of the Company’s working interest in the PBU is sold or transferred to a transferee of Equivalent Financial Standing in accordance with the provisions of Section 5(d) hereof.
 
4.   SUPPORT TO BE PROVIDED BY BP
 
    Pursuant to BP’s undertaking described in Section 2 hereof BP shall make available to the Company and SOC, and the Company and SOC shall receive such financial support as the Company, SOC or the Trustee may from time to time request from BP in writing.
 
5.   ASSIGNMENT AND DELEGATION
 
(a)   Neither BP nor the Company nor SOC shall transfer or assign its rights or obligations under this Agreement without the prior written consent of the

-5-


 

  Trust.
 
(b)   Notwithstanding (a) above BP shall however be free to arrange for its obligations hereunder to be performed by any affiliate of BP (with the exception of the Company) provided that BP shall remain responsible for ensuring that such obligations are performed in a timely manner.
 
(c)   The Company may sell or transfer all or part of its working interest in the PBU, although such a transfer will not relieve BP of its responsibility to ensure that the Company’s payment obligations with respect to the Royalty Interests and under the Royalty Trust Agreement and the Conveyance are performed.
 
(d)   BP shall be released from its obligation under the Agreement upon the sale or transfer of all or substantially all of the Company’s working interest in the PBU, if the transferee is of Equivalent Financial Standing and unconditionally agrees to assume and be bound by BP’s obligation under this Agreement in a writing in form and substance reasonably satisfactory to the Trustee.
 
6.   ENFORCEABILITY*
 
    This Agreement may be enforced by the Trustee, for the benefit of the Trust, or for its own benefit or for the benefit of the Transfer Agent or Registrar at any time when the Company or SOC has failed to pay amounts due the Trust or
 
*   Section 6 is as amended by a letter agreement dated May 8, 1989 among the Trustee, BP, SOC and the Company.

-6-


 

the Trustee, individually, or as Trustee, or the Transfer Agent or Registrar, as described in the Royalty Trust Agreement, or has otherwise failed to perform its respective payment obligations under and pursuant to the Royalty Interests or the Royalty Trust Agreement or the Conveyance.
Notwithstanding any other provision of this Agreement or the Royalty Trust Agreement, the holder of any Trust Units shall have the right, which is unconditional, to institute suit against BP for the enforcement of BP’s obligation under Section 2 of this Agreement to cause the Company to perform its payment obligations under the Royalty Interests pursuant to the Conveyance.
BP agrees that upon the filing of any such suit to which the Trustee is not already a party BP will give notice to the Trustee of the fact of such filing as soon as reasonably practicable.
7.   NOTICES
Any communications by a party to another shall be sufficiently made if sent by post (by airmail where airmail is possible), postage paid, or by telegraph, telex or facsimile to the address hereinafter specified and shall be deemed to have been made when received.
Unless otherwise specified by not fewer than 15 days’ notice in writing to the party in question, the address to which communications shall be sent shall be:
     
BP -
  THE BRITISH PETROLEUM COMPANY p.l.c.
 
  Britannic House, Moor Lane
 
  London EC2Y 9BU, England
 
  Attention: Secretary
 
   
the Company -
  BP EXPLORATION (ALASKA) INC.
 
  c/o BP AMERICA INC.
 
  200 Public Square
 
  Cleveland, Ohio 44114
 
  Attention: Treasurer
 
   
SOC -
  The Standard Oil Company
 
  c/o BP America Inc.
 
  200 Public Square
 
  Cleveland, Ohio 44114
 
  Attention: Treasurer
 
   
the Trustee -
  The Bank of New York
 
  21 West Street, 12th Floor
 
  New York, New York 10286
 
  Attention: Corporate Trust
 
                   Trustee Administration

-7-


 

8.   SUBMISSION TO JURISDICTION
 
    BP agrees that any legal suit, action or proceeding arising out of or based upon this Agreement may be instituted in any state or Federal Court in the Borough of Manhattan, The City of New York, New York, United States of America, and waives, to the extent it may effectively do so, any objection which it may have now or hereafter to the laying of the venue of any such suit, action or proceeding, and irrevocably submits to the jurisdiction of any such court in any such suit, action or proceeding. BP has designated and appointed BP America Inc. (or any successor corporation) as BP’s authorized agent to accept and acknowledge on its behalf in any such suit, action or proceeding in any such court and agrees that service of process upon said agent at its office at 667 Madison Avenue, 22nd Floor, New York, New York 10021, attention of the General Counsel (or at such other address in the Borough of Manhattan, The City of New York, as BP may designate by written notice to the Company and the Trustee), and written notice of said service to BP, mailed or delivered to it at its notice address specified in Section 7 hereof, shall be deemed in every respect effective service of process upon BP in any such suit, action or proceeding and shall be taken and held to be valid personal service upon BP, whether or not BP shall then be doing, or at any time shall have done, business within the State of New York, and any such service of process shall be of the same force and validity as if service were made upon BP according to the

-8-


 

laws governing the validity and requirements of such service in such State, and waives all claim of error by reason of any such service. Said designation and appointment shall be irrevocable until this Agreement shall have been satisfied and discharged. BP agrees to take all action as may be necessary to continue the designation and appointment of BP America Inc. or any successor corporation in full force and effect so that BP shall at all times have an agent for service of process for the above purposes in the Borough of Manhattan, The City of New York, New York, United States of America.
9.   APPLICABLE LAW
The construction, validity and performance of this Agreement shall be governed by the laws of the State of New York.

-9-


 

IN WITNESS WHEREOF the undersigned authorized officers have executed this Agreement the day and year first hereinbefore written:
         
for and on behalf of
   )    
THE BRITISH PETROLEUM
   )   /s/ D.A.G. Simon
COMPANY p.l.c.
   )    
         
for and on behalf of
   )   /s/ G.N. Nelson
BP EXPLORATION (ALASKA) INC.
   )    
         
for and on behalf of
   )    
THE BP PRUDHOE BAY ROYALTY TRUST
   )   /s/ W.N. Gitlin
by THE BANK OF NEW YORK, as Trustee
   )    
         
for and on behalf of
   )   /s/ [Signature illegible]
THE STANDARD OIL COMPANY
   )    

 

 

EXHIBIT 31
CERTIFICATION
I, Remo Reale, certify that:
1.     I have reviewed this annual report on Form 10-K of BP Prudhoe Bay Royalty Trust, for which The Bank of New York acts as Trustee;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, cash earnings and distributions and changes in the Trust corpus of the registrant as of, and for, the periods presented in this report;
 
4.     I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.     I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors:
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 


 

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 1, 2007
         
 
  /s/ Remo Reale    
 
 
Remo Reale
   
 
  Vice President    
 
  The Bank of New York    

 

 

EXHIBIT 32
CERTIFICATION PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
     The undersigned, Remo Reale, is an authorized officer of The Bank of New York, the trustee of BP Prudhoe Bay Royalty Trust (the “registrant”).
     This statement is being furnished in connection with the filing by the registrant of the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2006 (the “Report”).
     By execution of this statement, I certify that:
  (A)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
 
  (B)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant as of the dates and for the periods covered by the Report.
Date: March 1, 2007
         
 
  By:   /s/ Remo Reale
 
     
Remo Reale
 
      Vice President