Item 1. Business
Item 1. Business.
General
VOC Energy Trust (the “Trust”) was formed in November 2010 by VOC Brazos Energy Partners, L.P. (“VOC Brazos”). Much of the information disclosed in this Form 10-K has been provided to the Trust by VOC Brazos, including information associated with the Underlying Properties (as defined below) such as production and well counts, major producing areas, customer relationships, competition, marketing and post-production services, and certain information on which reserve data is based.
The Trust is a statutory trust created under the Delaware Statutory Trust Act pursuant to a trust agreement dated November 3, 2010 (as amended and restated on May 10, 2011, the “Trust Agreement”) among VOC Brazos, as trustor, The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), and Wilmington Trust Company, as Delaware trustee (the “Delaware Trustee”). The Trust does not have any employees, and the business and affairs of the Trust are managed by the Trustee. The Trust maintains its offices at the office of the Trustee, at 601 Travis Street, Floor 16, Houston, Texas 77002. The telephone number of the Trustee is 1-855-802-1094. The Delaware Trustee has only minimal rights and duties as are necessary to satisfy the requirements of the Delaware Statutory Trust Act.
The Trustee does not maintain a website for filings by the Trust with the Securities and Exchange Commission (the “SEC”). Electronic filings by the Trust with the SEC are available free of charge through the SEC’s website at www.sec.gov and at http://voc.q4web.com/home/default.aspx .
On May 10, 2011, VOC Brazos and the Trust completed an initial public offering of units of beneficial interest in the Trust (the “Trust Units”). In connection with the closing of the initial public offering, on May 10, 2011, VOC Brazos conveyed a net profits interest to the Trust, which entitles the Trust to receive 80% of the net proceeds (calculated as described below) from the sale and production of substantially all of the interests in oil and natural gas properties in the states of Kansas and Texas held by VOC Brazos as of May 10, 2011 (the “net profits interest”), pursuant to the Conveyance of Net Profits Interest dated as of May 10, 2011 (the “Conveyance”). VOC Brazos’ net interests in such properties, after deduction of all royalties and other burdens on production thereon as of May 10, 2011, is referred to in this Form 10-K as the “Underlying Properties.” As of December 31, 2024, the Underlying Properties included interests in 722 gross (444.7 net) producing wells and included 80,935 gross (50,160.7 net) acres.
The net profits interest will terminate on the later to occur of (1) December 31, 2030, or (2) the time from and after January 1, 2011 when 10.6 MMBoe have been produced from the Underlying Properties and sold (which amount is the equivalent of 8.5 MMBoe in respect of the Trust’s right to receive 80% of the net proceeds from the Underlying Properties pursuant to the net profits interest), and the Trust will soon thereafter wind up its affairs and terminate. As of December 31, 2024, cumulatively, since inception, the Trust has received payment for approximately 7.3 MMBoe of the Trust’s 8.5 MMBoe interest.
The Trust will make quarterly cash distributions of substantially all of its quarterly cash receipts, after deducting the Trust’s administrative expenses, on or about 45 days following the completion of each quarter through (and including) the quarter ending December 31, 2030. Because payments to the Trust will be generated by depleting assets and the Trust has a finite life with the production from the Underlying Properties diminishing over time, a portion of each distribution will represent a return of the original investment in the Trust Units.
The amount of Trust revenues and cash distributions to Trust unitholders will depend on, among other things:
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oil sales prices and, to a lesser extent, natural gas sales prices;
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volumes of oil and natural gas produced and sold attributable to the Underlying Properties;
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property and production taxes;
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development expenses;
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lease operating expenses; and
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administrative expenses of the Trust.
The Trust was created to acquire and hold the net profits interest for the benefit of the Trust unitholders. The net profits interest is passive in nature and neither the Trust nor the Trustee has any control over or responsibility for costs relating to the operation of the Underlying Properties. The business and affairs of the Trust are managed by the Trustee, and neither VOC Brazos nor any of its affiliates has the ability to manage or influence the operations of the Trust. Vess Oil Corporation (“Vess Oil”), L.D. Drilling, Inc. and Davis Petroleum, Inc. (collectively, the “VOC Operators”) are currently the operator or contract operator of substantially all of the Underlying Properties. Effective September 1, 2022, Vess Oil took over, from Davis Petroleum, Inc., operations of the Underlying Properties in which VOC Brazos had an ownership interest; and effective July 1, 2023, Vess Oil took over, from L.D. Drilling, Inc., operations of the Underlying Properties in which VOC Brazos had an ownership interest. VOC Brazos does not, as a matter of course, make public projections as to future sales, earnings or other results relating to the Underlying Properties.
Description of the Trust Units
Each Trust Unit is a unit of beneficial interest in the Trust and is entitled to receive cash distributions from the Trust on a pro rata basis. Each Trust unitholder has the same rights regarding each of his or her Trust Units as every other Trust unitholder has regarding his or her units. The Trust Units are in book-entry form only and are not represented by certificates. The Trust had 17,000,000 Trust Units outstanding as of March 20, 2025.
Distributions and Income Computations
Each quarter, the Trustee determines the amount of funds available for distribution to the Trust unitholders. Available funds are the excess cash, if any, received by the Trust from the net profits interest and other sources (such as interest earned on any amounts reserved by the Trustee) in that quarter, over the Trust’s expenses for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future expenses. Quarterly cash distributions during the term of the Trust are made by the Trustee on or before the 45th day following the end of each quarter to the Trust unitholders of record on the 30th day following the end of each quarter (or the next succeeding business day).
Unless otherwise advised by counsel or the Internal Revenue Service (the “IRS”), the Trustee will treat the income and expenses of the Trust for each quarter as belonging to the Trust unitholders of record on the quarterly record date. For federal income tax purposes, Trust unitholders must take into account items of income, gain, loss, deduction and credit consistent with their methods of accounting and without regard to the taxable year or accounting method employed by the Trust and without regard to the quarter in which the Trust makes distributions related to those items to the Trust unitholders. Variances between taxable income and cash distributions may occur. For example, the Trustee could establish a reserve in one quarter using funds that would be included in income in the quarter in which the reserve is created but may not result in a tax deduction or a distribution until a later quarter or possibly in a later taxable year. Similarly, the Trustee could also make a payment in one quarter that would be amortized for income tax purposes over several quarters. See “— Federal Income Tax Matters.”
Periodic Reports
The Trustee files all required Trust federal and state income tax and information returns. The Trustee prepares and provides the tax information that Trust unitholders need to correctly report their share of the income and deductions of the Trust. The Trustee also causes to be prepared and filed reports required to be filed under the Exchange Act and by the rules of any securities exchange or quotation system on which the Trust Units are listed or admitted to trading, and also causes the Trust to comply with the provisions of the Sarbanes-Oxley Act of 2002, including but not limited to, by establishing, evaluating and maintaining a system of internal control over financial reporting in compliance with the requirements of Section 404 thereof.
Each Trust unitholder and his or her representatives may examine, for any proper purpose, during reasonable business hours, the records of the Trust and the Trustee.
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Liability of Trust Unitholders
Under the Delaware Statutory Trust Act, Trust unitholders are entitled to the same limitation of personal liability extended to stockholders of private corporations for profit under the General Corporation Law of the State of Delaware. Courts in jurisdictions outside of Delaware, however, may not give effect to such limitation.
Voting Rights of Trust Unitholders
The Trustee or Trust unitholders owning at least 10% of the outstanding Trust Units may call meetings of Trust unitholders. The Trust is responsible for all costs associated with calling a meeting of Trust unitholders unless such meeting is called by Trust unitholders, in which case the Trust unitholders calling the meeting are responsible for all such costs. Meetings must be held in such location as the Trustee designates in the notice of such meeting. The Trustee must send written notice of the time and place of the meeting and the matters to be acted upon to all of the Trust unitholders at least 20 days and not more than 60 days before the meeting. Trust unitholders representing a majority of Trust Units outstanding must be present or represented by proxy to have a quorum. Each Trust unitholder is entitled to one vote for each Trust Unit owned.
Unless otherwise required by the Trust Agreement, a matter may be approved or disapproved by the vote of Trust unitholders owning a majority of the Trust Units at a meeting where there is a quorum. This is true even if holders owning a majority of the total Trust Units did not approve it. The affirmative vote of the holders of a majority of the outstanding Trust Units is required to:
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dissolve the Trust;
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remove the Trustee or the Delaware Trustee;
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amend the Trust Agreement (except with respect to certain matters that do not adversely affect the rights of Trust unitholders in any material respect);
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merge or consolidate the Trust with or into another entity; or
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approve the sale of all or any material part of the assets of the Trust.
In addition, the Trustee may make certain amendments to the Trust Agreement without approval of the Trust unitholders. The Trustee must consent before all or any part of the Trust assets can be sold except in connection with the dissolution of the Trust or limited sales directed by VOC Brazos in conjunction with its sale of Underlying Properties.
Duration of the Trust; Sale of the Net Profits Interest
The Trust will remain in existence until shortly after the liquidation date, which is the later to occur of (1) December 31, 2030 or (2) the time when 10.6 MMBoe (which is the equivalent of 8.5 MMBoe in respect of the Trust’s right to receive 80% of the net proceeds from the Underlying Properties pursuant to the net profits interest) have been produced and sold. The net profits interest will terminate on the liquidation date, at which point the Trust will dissolve and commence winding up its business and affairs.
The Trust will dissolve and commence winding up its business and affairs prior to the liquidation date if:
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the Trust sells the net profits interest;
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annual cash proceeds received by the Trust attributable to the net profits interest are less than $1 million for each of two consecutive years;
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the holders of a majority of the outstanding Trust Units vote in favor of dissolution; or
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there is a judicial dissolution of the Trust.
Upon dissolution prior to the liquidation date, the Trustee would sell all of the Trust’s assets, which are limited to the net profits interest, and do not include the Underlying Properties, either by private sale or public auction, and distribute the net proceeds of the sale to the Trust unitholders.
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Computation of Net Proceeds
The provisions of the Conveyance governing the computation of the net proceeds are detailed and extensive. The following information summarizes the material information contained in the Conveyance related to the computation of the net proceeds. For more detailed provisions concerning the net profits interest, please see the Conveyance, which is included as an exhibit to this Form 10-K.
Net Profits Interest
The net profits interest was conveyed to the Trust by VOC Brazos on May 10, 2011 by means of a conveyance instrument that has been recorded in the appropriate real property records in each county in Kansas and Texas where the oil and natural gas properties to which the Underlying Properties relate are located. The net profits interest burdens the net interest owned by VOC Brazos in the Underlying Properties in existence as of May 10, 2011.
The amounts paid to the Trust for the net profits interest are based on the definitions of “gross proceeds” and “net proceeds” contained in the Conveyance and described below. Under the Conveyance, net proceeds are computed quarterly, and 80% of the aggregate net proceeds attributable to a computation period will be paid to the Trust on or before the 30th day of the month following the computation period. VOC Brazos will not pay to the Trust any interest on the net proceeds held by VOC Brazos prior to payment to the Trust. The Trustee will make distributions to Trust unitholders quarterly, if sufficient funds are available. See “— Description of the Trust Units — Distributions and Income Computations.”
“Gross proceeds” means the aggregate amount received by VOC Brazos from sales of oil and natural gas produced from the Underlying Properties (other than amounts received for certain future non-consent operations). However, gross proceeds does not include consideration for the transfer or sale of any Underlying Property by VOC Brazos or any subsequent owner to any new owner. Gross proceeds also does not include any amount for oil or natural gas lost in production or marketing or used by the owner of the Underlying Properties in drilling, production and plant operations. Gross proceeds includes payments for future production if they are not subject to repayment in the event of insufficient subsequent production.
“Net proceeds” means gross proceeds less the following:
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all payments to mineral owners or landowners, such as royalties, overriding royalties or other burdens against production, delay rentals, shut-in oil and natural gas payments, minimum royalty or other payments for drilling or deferring drilling;
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any taxes paid by the owner of an Underlying Property to the extent not deducted in calculating gross proceeds, including estimated and accrued general property (ad valorem), production, severance, sales, gathering, excise and other taxes;
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any extraordinary taxes or windfall profits taxes that may be assessed in the future that are based on profits realized or prices received for production from the Underlying Properties;
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costs paid by an owner of a property comprising the Underlying Properties under any joint operating agreement pursuant to the terms of the Conveyance;
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all other costs and expenses, development costs and liabilities of drilling, recompleting, workovers, operating and producing oil and natural gas, including allocated expenses such as labor, vehicle and travel costs and materials and any plugging and abandonment liabilities (net of any capital costs for which a reserve had already been made to the extent such development costs are incurred during the computation period) other than costs and expenses for certain future non-consent operations;
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costs or charges associated with gathering, treating and processing oil and natural gas (provided, however, that any proceeds attributable to treatment or processing will offset such costs or changes, if any);
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any overhead charge incurred pursuant to any operating agreement relating to an Underlying Property;
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costs for recording the Conveyance and costs estimated to record the termination and for the release of the Conveyance;
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amounts previously included in gross proceeds but subsequently paid as a refund, interest or penalty;
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costs and expenses for renewals or extensions of leases; and
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at the option of VOC Brazos (or any subsequent owner of the Underlying Properties), amounts reserved for approved development, maintenance or operating expenditures, including well drilling, recompletion and workover costs, which amounts will at no time exceed $1.0 million in the aggregate, and will be subject to the limitations described below (provided that such costs shall not be debited from gross proceeds when actually incurred).
Certain non-production revenues, including salvage value for equipment related to plugged and abandoned wells, as detailed in the Conveyance, offset the costs outlined above in calculating the net proceeds. If any excess amounts have not been used to offset costs at the time when the later to occur of (1) December 31, 2030 or (2) the time when 10.6 MMBoe (which is the equivalent of 8.5 MMBoe in respect of the net profits interest) have been produced from the Underlying Properties and sold, then Trust unitholders will not be entitled to receive the benefit of such excess amounts.
During each twelve-month period beginning on the later to occur of (1) December 31, 2027 and (2) the time when 9.8 MMBoe have been produced from the Underlying Properties and sold (which is the equivalent of 7.8 MMBoe in respect of the net profits interest), which we refer to herein, in either case, as the “Capital Expenditure Limitation Date,” the sum of the development expenditures and amounts reserved for approved development expenditure projects for such twelve-month period may not exceed the Average Annual Capital Expenditure Amount. The “Average Annual Capital Expenditure Amount” means the quotient of (x) the sum of the development expenditures and amounts reserved for approved development expenditure projects with respect to the three twelve-month periods ending on the Capital Expenditure Limitation Date, divided by (y) three. Commencing on the Capital Expenditure Limitation Date, and each anniversary of the Capital Expenditure Limitation Date thereafter, the Average Annual Capital Expenditure Amount will be increased by 2.5% to account for expected increased costs due to inflation.
As is customary in the oil and natural gas industry, VOC Brazos pays an overhead fee to the VOC Operators to operate the Underlying Properties on behalf of VOC Brazos. The operating activities include various engineering, accounting and administrative functions.
The fee is based on a monthly charge per active operated well, which totaled $1.8 million paid to the VOC Operators in 2022, $2.0 million paid in 2023, and $2.1 million paid in 2024 for all of the Underlying Properties for which VOC Brazos was designated as the operator. The fee is adjusted annually and will increase or decrease each year based on changes in the Overhead Adjustment Index (“OAI”) published by the Council of Petroleum Accountants Society (“COPAS”) for that year.
If the net proceeds for any computation period is a negative amount, the Trust will receive no payment for that period, and any such negative amount plus accrued interest at the prime rate will be deducted from gross proceeds in the following computation period for purposes of determining the net proceeds for that following computation period.
Gross proceeds and net proceeds are calculated on a cash receipts and cash disbursements basis except that certain costs, primarily ad valorem taxes and expenditures of a material amount, may be determined on an accrual basis.
Additional Provisions
If a controversy arises as to the sales price of any production, then for purposes of determining gross proceeds:
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amounts withheld or placed in escrow by a purchaser are not considered to be received by the owner of the Underlying Property until actually collected;
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amounts received by the owner of the Underlying Property and promptly deposited with a nonaffiliated escrow agent will not be considered to have been received until disbursed to it by the escrow agent; and
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•
amounts received by the owner of the Underlying Property and not deposited with an escrow agent will be considered to have been received.
The Trustee is not obligated to return any cash received from the net profits interest. Any overpayments that VOC Brazos makes to the Trust due to adjustments to prior calculations of net proceeds or otherwise will reduce future amounts payable to the Trust until VOC Brazos recovers the overpayments plus interest at the prime rate.
The Conveyance generally permits VOC Brazos to transfer without the consent or approval of the Trust unitholders all or any part of its interest in the Underlying Properties, subject to the net profits interest. The Trust unitholders are not entitled to any proceeds of a sale or transfer of VOC Brazos’ interest unless certain conditions set forth in the following paragraph are satisfied. Except in certain cases where the net profits interest is released, following a sale or transfer, the Underlying Properties will continue to be subject to the net profits interest, and the net proceeds attributable to the transferred property will be calculated as part of the computation of net proceeds described in this Form 10-K.
In addition, VOC Brazos may, without the consent of the Trust unitholders, require the Trust to release the net profits interest associated with any lease that accounts for no more than 0.25% of the total production from the Underlying Properties in the prior 12 months and provided that the net profits interest covered by such releases cannot exceed, during any 12-month period, an aggregate fair market value to the Trust of $500,000. These releases will be made only in connection with a sale by VOC Brazos to a non-affiliate of the relevant Underlying Properties and are conditioned upon the Trust receiving an amount equal to the fair value to the Trust of such net profits interest. Any net sales proceeds paid to the Trust are distributable to Trust unitholders for the quarter in which they are received.
As the designated operator of a property comprising the Underlying Properties, VOC Brazos may enter into farm-out, operating, participation and other similar agreements to develop the property. VOC Brazos may enter into any of these agreements without the consent or approval of the Trustee or any Trust unitholder.
VOC Brazos and any transferee of an Underlying Property will have the right to abandon its interest in any well or property if it reasonably believes the well or property ceases to produce or is not capable of producing in commercially paying quantities. In making such decisions, VOC Brazos or any transferee of an Underlying Property is required under the applicable conveyance to operate, or to use commercially reasonable efforts to cause the operators of the Underlying Properties to operate these properties as would a reasonably prudent operator in the State of Kansas or Texas under the same or similar circumstances would act if it were acting with respect to its own properties, disregarding the existence of the net profits interest as a burden on such property. Upon termination of the lease, the portion of the net profits interest relating to the abandoned property will be extinguished.
VOC Brazos must maintain books and records sufficient to determine the amounts payable for the net profits interest to the Trust. Quarterly and annually, VOC Brazos must deliver to the Trustee a statement of the computation of the net proceeds for each computation period. The Trustee has the right to inspect and copy the books and records maintained by VOC Brazos during normal business hours and upon reasonable notice.
Federal Income Tax Matters
The following is a summary of certain U.S. federal income tax matters that may be relevant to Trust unitholders. This summary is based upon current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed Treasury regulations thereunder and current administrative rulings and court decisions, all of which are subject to changes that may or may not be retroactively applied. No attempt has been made in the following summary to comment on all U.S. federal income tax matters affecting the Trust or the Trust unitholders.
The summary is limited to Trust unitholders who are individual citizens or residents of the United States. Accordingly, the following summary has limited application to domestic corporations and persons subject to specialized federal income tax treatment. Each Trust unitholder should consult his or her own tax advisor with respect to his or her particular circumstances.
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Classification and Taxation of the Trust
Tax counsel to the Trust advised the Trust at the time of formation that, for federal income tax purposes, in its opinion the Trust will be treated as a grantor trust and not as an unincorporated business entity. No ruling has been or will be requested from the IRS with respect to the federal income tax treatment of the Trust, including as to the status of the Trust as a grantor trust for such purposes. Thus, no assurance can be provided that the tax treatment of the Trust would be sustained by a court if contested by the IRS or another taxing authority. The remainder of the discussion below is based on tax counsel’s opinion, at the time of formation, that the Trust will be classified as a grantor trust for federal income tax purposes. As a grantor trust, the Trust will not be subject to federal income tax at the trust level. Rather, each Trust unitholder will be considered for federal income tax purposes to own its proportionate share of the Trust’s assets directly as though no trust were in existence. The income of the Trust is deemed to be received or accrued by the Trust unitholder at the time such income is received or accrued by the Trust, rather than when distributed by the Trust. Each Trust unitholder will be subject to tax on its proportionate share of the income and gain attributable to the assets of the Trust and will be entitled to claim its proportionate share of the deductions and expenses attributable to the assets of the Trust, subject to applicable limitations, in accordance with the Trust unitholder’s tax method of accounting and without regard to the taxable year or accounting method employed by the Trust.
The Trust will allocate items of income, gain, loss, deductions and credits to Trust unitholders based on record ownership at each quarterly record date. It is possible that the IRS or another taxing authority could disagree with this allocation method and could assert that income and deductions of the Trust should be determined and allocated on a daily, prorated or other basis, which could require adjustments to the tax returns of the Trust unitholders affected by this issue and result in an increase in the administrative expense of the Trust in subsequent periods.
Classification of the Net Profits Interest
Tax counsel to the Trust also advised the Trust at the time of formation that, for federal income tax purposes, based upon representations made by VOC Brazos regarding the expected economic life of the Underlying Properties and the expected duration of the net profits interest, in its opinion the net profits interest should be treated as a “production payment” under Section 636 of the Code or otherwise as a debt instrument. On the basis of that advice, the Trust will treat the net profits interest as indebtedness subject to Treasury regulations applicable to contingent payment debt instruments, and by purchasing Trust Units, a Trust unitholder will agree to be bound by the Trust’s application of those regulations, including the Trust’s determination of the rate at which interest will be deemed to accrue on the net profits interest. No assurance can be given that the IRS or another taxing authority will not assert that the net profits interest should be treated differently. Any such different treatment could affect the amount, timing and character of income, gain or loss in respect of an investment in Trust Units and could require a Trust unitholder to accrue income at a rate different than that determined by the Trust.
Widely Held Fixed Investment Trust Reporting Information
The Trustee assumes that some Trust Units are held by middlemen, as such term is broadly defined in Treasury regulations (and includes custodians, nominees, certain joint owners, and brokers holding an interest for a custodian in street name). Therefore, the Trustee considers the Trust to be a non-mortgage widely held fixed investment trust (“WHFIT”) for U.S. federal income tax purposes. The Bank of New York Mellon Trust Company, N.A., 601 Travis Street, Floor 16, Houston, Texas 77002, telephone number 1-855-802-1094, is the representative of the Trust that will provide tax information in accordance with applicable Treasury regulations governing the information reporting requirements of the Trust as a WHFIT. Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of Trust unitholders, and not the Trustee of the Trust, are solely responsible for complying with the information reporting requirements under the Treasury regulations with respect to such Trust Units, including the issuance of IRS Forms 1099 and certain written tax statements. Trust unitholders whose Trust Units are held by middlemen should consult with such middlemen regarding the information that will be reported to them by the middlemen with respect to the Trust Units. Any generic tax information provided by the Trustee of the Trust is intended to be used only to assist Trust unitholders in the preparation of their federal and state income tax returns.
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Available Trust Tax Information
In compliance with the reporting requirements for WHFITs and the dissemination of Trust tax reporting information, the Trustee provides a generic tax information reporting booklet that is intended to be used only to assist Trust unitholders in the preparation of their 2024 federal and state income tax returns. The projected payment schedule for the net profits interest is included with the tax information booklet. This tax information booklet, when available, can be obtained at https://voc.q4web.com/home/default.aspx .
Description of the Underlying Properties
The Underlying Properties consist of VOC Brazos’ net interests in substantially all of its oil and natural gas properties after deduction of all royalties and other burdens on production thereon as of May 10, 2011, which properties are located in the states of Kansas and Texas. The VOC Operators are currently the operators or contract operators of substantially all of the Underlying Properties.
VOC Brazos’ interests in the properties comprising the Underlying Properties require VOC Brazos to bear its proportionate share along with the other working interest owners of the costs of development and operation of such properties. The Underlying Properties are burdened by non-working interests owned by third parties consisting primarily of overriding royalty and royalty interests retained by the owners of the land subject to the working interests. These landowners’ royalty interests typically entitle the landowner to receive 12.5% of the revenue derived from oil and natural gas production resulting from wells drilled on the landowner’s land, without any deduction for drilling costs or other costs related to production of oil and natural gas. A working interest percentage represents a working interest owner’s proportionate ownership interest in a property in relation to all other working interest owners in that property, whereas a net revenue interest percentage is a working interest owner’s percentage of production after reducing such percentage by the percentage of burdens on such production such as royalties and overriding royalties.
Based on the reserve report, the net profits interest would entitle the Trust to receive net proceeds from the sale of production of not less than 10.6 MMBoe of proved reserves attributable to the Underlying Properties expected to be produced over the term of the Trust. The Trust is entitled to receive 80% of the net proceeds from the sale of production of oil and natural gas attributable to the Underlying Properties that are produced during the term of the Trust, whereas total reserves as reflected on the summary reserve reports and attributable to the Underlying Properties include all reserves expected to be economically produced during the economic life of the Underlying Properties.
In general, the producing wells included in the Underlying Properties have stable production profiles and their production is long-lived. Based on the reserve report, annual production from the Underlying Properties is expected to decline at an average annual rate of 7.4% over the next 20 years assuming no additional development drilling or other development expenditures are made on the Underlying Properties after 2032. VOC Brazos expects total development expenditures for the Underlying Properties through December 31, 2032 will be approximately $36.4 million, which it expects will partially offset the natural decline in production otherwise expected to occur with respect to the Underlying Properties as described in more detail below.
Reserves
The engineering department of Vess Oil Corporation, who serves as contract operator for VOC Brazos, maintains oversight and compliance responsibility for the internal reserve estimate process and, in accordance with internal policies and procedures, provides appropriate data to independent third party engineers for the annual estimation of year-end reserves. This engineering department accumulates historical production data for the Underlying Properties, calculates historical lease operating expenses and differentials, updates working interests and net revenue interests, and obtains logs, 3-D seismic and other geological and geophysical information. This data is forwarded to Cawley, Gillespie & Associates, Inc. (“CG&A”), thereby allowing CG&A to prepare estimated proved reserves in their entirety based on such data.
Estimates of the proved oil and gas reserves attributable to the Trust as of December 31, 2022, 2023 and 2024 are based on reports prepared by CG&A. CG&A has been in business since 1961 and serves many organizations and individuals in the petroleum industry, including owners and operators of oil and gas
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properties, exploration groups, planners, and professionals in investment and finance. One of the principal businesses of CG&A is providing detailed assessment of producing reservoirs. CG&A is an independent firm of petroleum engineers, geologists, geophysicists and petrophysicists and does not own an interest in the Underlying Properties and is not employed on a contingent basis. Mr. W. Todd Brooker, President, is the technical person at CG&A who is primarily responsible for overseeing CG&A’s preparation of the reserve estimates. Mr. Brooker is a graduate of the University of Texas at Austin with a Bachelor of Science degree in Petroleum Engineering and has 33 years of experience in petroleum engineering. He is a licensed professional engineer in the State of Texas (License #83462).
Oil and gas proved reserves are disclosed by significant geographic area, using the 12-month average beginning-of-month price for the year, based on the use of reliable technologies to estimate proved oil and gas reserves, if those technologies have been demonstrated to result in reliable conclusions about reserves volumes. Reserve and related information for 2022, 2023 and 2024 is presented consistent with these requirements.
Proved Reserves of VOC Energy Trust. The following table sets forth, as of December 31, 2024, estimated proved reserves attributable to the Trust derived from the reserve report. A summary of the reserve report is included below.
Oil
(MBbls)
Natural
gas
(MMcf)
Oil
equivalents
(MBoe)
Proved Developed
1,524
1,020
1,694
Proved Undeveloped
353
168
381
Total Proved
1,877
1,188
2,075
Information concerning historical changes in net proved reserves attributable to the Trust, and the calculation of the standardized measure of discounted future net revenues related thereto, is contained in Note J to the financial statements of the Trust included in this Form 10-K. VOC Brazos has not filed reserve estimates covering the Underlying Properties with any other federal authority or agency.
The following table summarizes the changes in estimated proved reserves attributable to the Trust for the periods indicated.
VOC Energy Trust
Oil
(MBbl)
Natural
Gas
(MMcf)
Oil
Equivalents
(MBoe)
Proved Reserves:
Balance, December 31, 2021
3,249
2,199
3,614
Revisions of previous estimates
(15 )
37
(7 )
Production (1)
(410 )
(250 )
(451 )
Balance, December 31, 2022
2,824
1,986
3,156
Revisions of previous estimates
(158 )
(410 )
(227 )
Production (1)
(387 )
(220 )
(424 )
Balance, December 31, 2023
2,279
1,356
2,505
Revisions of previous estimates
(46 )
41
(39 )
Production (1)
(356 )
(209 )
(391 )
Balance, December 31, 2024
1,877
1,188
2,075
Proved Developed Reserves:
Balance, December 31, 2021
2,421
1,429
2,658
Balance, December 31, 2022
2,226
1,712
2,512
Balance, December 31, 2023
1,860
1,154
2,052
Balance, December 31, 2024
1,524
1,020
1,694
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VOC Energy Trust
Oil
(MBbl)
Natural
Gas
(MMcf)
Oil
Equivalents
(MBoe)
Proved Undeveloped Reserves:
Balance, December 31, 2021
828
770
956
Proved undeveloped reserves converted to proved developed by drilling
(33 )
(15 )
(35 )
Additional proved undeveloped reserves added
23
0
23
Revisions of previous estimates
(220 )
(481 )
(300 )
Balance, December 31, 2022
598
274
644
Proved undeveloped reserves converted to proved developed by drilling
0
0
0
Additional proved undeveloped reserves added
111
48
119
Revisions of previous estimates
(290 )
(120 )
(310 )
Balance, December 31, 2023
419
202
453
Proved undeveloped reserves converted to proved developed by drilling
0
0
0
Additional proved undeveloped reserves added
157
83
171
Revisions of previous estimates
(223 )
(117 )
(243 )
Balance, December 31, 2024
353
168
381
(1)
Reflects sales volumes produced during the noted year regardless of whether royalty payments thereon have been remitted to the Trust by VOC Brazos.
None of the proved undeveloped reserves have remained undeveloped for five years or more after they were initially disclosed as proved undeveloped reserves.
The reserves above represent the Trust’s 80% net profits interest in the Underlying Properties for the remainder of the term of the Trust.
The following table sets forth the estimates of total proved reserves and forecasts of economics attributable to the Underlying Properties as of December 31, 2024 for the remainder of the term of the Trust, as presented in the summary prepared by CG&A of its reserve report as of December 31, 2024 for the Trust. The estimates of proved reserves have not been filed with or included in reports to any federal authority or agency. The discounted cash flow value shown in the table is not intended to represent the current market value of the estimated oil and natural gas reserves attributable to the Trust’s interests.
Proved
Developed
Producing
Proved
Developed
Non-Producing
Proved
Undeveloped
Total
Proved
(dollars in thousands)
Net Reserves
Oil (MBbl)
1,892.9
12.2
441.4
2,346.5
Gas (MMcf)
935.2
0.0
111.0
1,046.2
NGL (MBbl)
87.3
0.0
25.4
112.7
Revenue
Oil
$
136,731.3
$
867.6
$
32,714.7
$
170,313.6
Gas
1,151.4
0.0
69.9
1,221.3
NGL
1,777.9
0.0
497.9
2,275.8
Severance Taxes
3,303.9
39.3
1,545.3
4,888.6
Ad Valorem Taxes
3,602.7
52.1
1,181.5
4,836.2
Operating Expenses
68,492.9
39.9
1,872.6
70,405.4
Future Development Costs
330.0
78.0
35,801.8
36,209.8
80% Net Profits Interest Net Operating Income (NPI) (1)
$
51,144.9
$
526.6
$
(5,694.9 )
$
45,976.6
80% NPI (2)
$
40,563.3
$
419.2
$
(6,202.0 )
$
34,780.5
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(1)
Before interest and taxes.
(2)
Discounted at 10%.
The net profits interest entitles the Trust to receive 80% of the net proceeds attributable to the Underlying Properties. The net profits interest will terminate on the later to occur of (1) December 31, 2030, or (2) the time when 10.6 MMBoe have been produced from the Underlying Properties and sold, and the Trust will soon thereafter wind up its affairs and terminate. Based on the reserve report for the year ended December 31, 2024, CG&A estimated that the net profits interest would terminate on December 31, 2030 based on the calculation that 10.6 MMBoe would have been produced from the Underlying Properties and sold (which amount is the equivalent of 8.5 MMBoe in respect of the Trust’s right to receive 80% of the net proceeds from the Underlying Properties pursuant to the net profits interest) prior to this date.
Oil and gas prices were adjusted to a WTI Cushing oil price of $75.48 per Bbl and a Henry Hub natural gas price of $2.13 per MMBtu. As specified by the SEC, these prices are 12-month averages based upon the price on the first day of each month during 2024. The price adjustments were based on oil price differentials forecast at −$4.50 per Bbl for all Kansas Underlying Properties. For Texas properties, oil price differentials were applied at −$1.00 per Bbl for the Kurten (Woodbine) Field and Madisonville West Field wells, −$2.50 per Bbl for the Sand Flat Unit Field Wells and −$4.50 per Bbl for the Hitts Lake North Field wells. Oil price differentials were not escalated. Gas and NGL price differentials varied by property as provided by VOC Brazos and were also not escalated. The base price differentials may include local basis differentials, transportation, gas shrinkage, gas heating value (BTU content) and/or crude quality and gravity corrections. Operating expenses, workover expenses, COPAS overhead charges and investments were forecast on a per property basis as furnished by VOC Brazos. Expenses and investments were held constant in accordance with SEC rules and guidelines.
For Kansas properties, severance taxes were applied at 4.33 percent of revenue until exemption levels were forecasted to be reached. The severance tax rate was dropped to zero when a rate of 6 Bbl/day per well was reached or when gross gas production value reached $87/day per gas well. Severance taxes were forecasted at 4.6 percent of oil revenue and 7.5 percent of gas and NGL revenue for properties in Texas. Ad valorem taxes for Kansas properties were applied at 6.0 percent of revenue but dropped to 2.0 percent as properties qualified for the tax exemption. Kansas oil and gas conservation taxes were included within the severance tax estimates. Ad valorem taxes were applied at 3.29 percent of revenue (after severance taxes) for the Texas properties.
The estimates of proved oil and natural gas reserves attributable to the Underlying Properties are based on estimates prepared by CG&A. Rules and guidelines established by the SEC regarding the present value of future net revenues were used to prepare these reserve estimates. Oil and natural gas reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner, and estimates of other engineers might differ materially from those included in the report. The accuracy of any reserve estimate is a function of the quality of available data and engineering, and estimates may justify revisions based on the results of drilling, testing, and production activities. Accordingly, reserve estimates are inherently imprecise and should not be construed as representing the actual quantities of future production or cash flows to be realized from oil and natural gas properties or the fair market value of such properties.
Producing Acreage and Well Counts
For the following data, “gross” refers to the total wells or acres in which VOC Brazos owns a working interest and “net” refers to gross wells or acres multiplied by the percentage working interest owned by VOC Brazos. Although many of VOC Brazos’ wells produce both oil and natural gas, a well is categorized as an oil well or a natural gas well based upon the ratio of oil to natural gas production.
The Underlying Properties are interests in developed properties located in oil and natural gas producing regions of Kansas and Texas. The following is a summary of the approximate acreage of the Underlying Properties at December 31, 2024.
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Gross
Net
(acres)
Developed Acreage:
Kansas
57,242
33,319.4
Texas
23,693
16,841.3
Total
80,935
50,160.7
Undeveloped Acreage:
—
—
The following is a summary of the producing wells on the Underlying Properties as of December 31, 2024:
Operated Wells
Non-Operated
Wells
Total
Gross
Net
Gross
Net
Gross
Net
Oil
680
432.9
32
7.6
712
440.5
Natural gas
7
3.5
3
0.7
10
4.2
Total
687
436.4
35
8.3
722
444.7
The following is a summary of the number of developmental wells drilled by VOC Brazos on the Underlying Properties during the last three years. VOC Brazos did not drill any exploratory wells during the periods presented.
Year Ended December 31,
2022
2023
2024
Gross
Net
Gross
Net
Gross
Net
Completed:
Oil wells
2
0.2
—
—
—
—
Natural gas wells
—
—
—
—
—
—
Non-productive
—
—
—
—
—
—
Total
2
0.2
—
—
—
—
In 2022, two wells were drilled and completed. Total capital expenditures for these wells were $1,655,613.
In 2023, no wells were drilled and completed.
In 2024, no wells were drilled and completed.
VOC Brazos continues to develop further proved undeveloped reserves pursuant to its planned development and workover program. See “Item 7. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations — Planned Development and Workover Program” for more information regarding VOC Brazos’ joint venture agreement with Hawkwood Energy East Texas, LLC, the Hawkwood Earning Wells, and the Hawkwood Development Wells (each as defined therein).
The following table shows the average sales prices per Bbl of oil and Mcf of natural gas produced and the production costs and production and property taxes per Boe received by the Trust from the Underlying Properties.
Year Ended December 31,
2022
2023
2024
Sales prices:
Oil (per Bbl)
$
89.35
$
75.33
$
76.66
Natural gas (per Mcf)
$
6.80
$
4.68
$
2.95
Lease operating expense (per Boe)
$
24.74
$
26.17
$
29.07
Production and property taxes (per Boe)
$
3.47
$
3.74
$
3.51
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Major Producing Areas
The following table summarizes the estimated proved reserves by operating area attributable to the Underlying Properties according to the reserve report and the corresponding pre-tax PV-10 value as of December 31, 2024.
Proved Reserves (1)
Operating Area
Oil
(MBbls)
Natural
Gas
(MMcf)
Total
(MBoe)
% of
Total
Reserves
Pre-Tax
PV-10%
Value (2)
% of
Pre-Tax
PV-10%
Value
(In Thousands)
Kansas (149 Fields)
Fairport
464
0
464
7.3 %
$
7,693
10.3 %
Marcotte
165
0
165
2.6
2,676
3.6
Chase-Silica
118
0
118
1.8
1,912
2.6
Bindley
128
0
128
2.0
1,875
2.5
Mueller
90
0
90
1.4
1,610
2.2
Codell
68
0
68
1.1
1,567
2.1
Rosa Northwest
58
0
58
0.9
1,358
1.8
Diebolt
93
0
93
1.5
1,294
1.7
Wesley
36
0
36
0.5
748
1.0
Zurich
36
0
36
0.6
741
1.0
Lippoldt
30
0
30
0.5
728
1.0
Other
946
303
997
15.6
10,289
13.8
Kansas Total
2,232
303
2,283
35.8
32,491
43.6
Texas (4 Fields)
Kurten
2,808
3,778
3,437
54.0
29,539
39.6
Hitts Lake North
401
0
401
6.3
8,662
11.6
Sand Flat
234
5
235
3.7
3,601
4.8
Madisonville West
12
25
16
0.2
270
0.4
Texas Total
3,455
3,808
4,089
64.2
42,072
56.4
Total
5,687
4,111
6,372
100.0 %
$
74,563
100.0 %
(1)
In accordance with the rules and regulations promulgated by the SEC, the proved reserves presented above were determined using the twelve-month unweighted arithmetic average of the first-day-of-the-month price for the period from January 1, 2024 through December 1, 2024 and were held constant for the life of the properties. This yielded a base price for oil of $75.48 per barrel and a base price for natural gas of $2.13 per MMBtu.
(2)
Because the Trust bears no federal tax expense and taxable income is passed through to the Trust unitholders, no provision for federal or state income taxes is included in the summary reserve reports and therefore the standardized measure of discounted future net cash flows attributable to the Underlying Properties is equal to the pre-tax PV-10 value. PV-10 may not be considered a GAAP financial measure as defined by the SEC and is derived from the standardized measure of discounted future net cash flows, which is the most directly comparable GAAP financial measure. The pre-tax PV-10 value and the standardized measure of discounted future net cash flows do not purport to present the fair value of the oil and natural gas reserves attributable to Underlying Properties.
Kansas. As of December 31, 2024, proved reserves attributable to the portion of the Kansas Underlying Properties were approximately 2.3 MMBoe and were located in three primary areas: Central
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Kansas Uplift, Western Kansas and South-Central Kansas. As of December 31, 2024, the VOC Operators operated 98.4% of the total proved reserves attributable to the Kansas Underlying Properties based on PV-10 value.
The major fields in the Central Kansas Uplift include Fairport Field, Marcotte Field and Chase-Silica Field, all of which are producing primarily from the Arbuckle and Lansing Kansas City zones. The major fields in Western Kansas include the Bindley, Griston SW and Rosa Northwest fields, which are producing primarily from the Mississippian, Morrow, Lansing Kansas City and Cherokee zones. The major fields in South Central Kansas include the Gerberding, Spivey Grabs and Alford fields, which are producing primarily from the Mississippian, Simpson and Lansing Kansas City zones.
Texas. As of December 31, 2024, proved reserves attributable to the Texas Underlying Properties were approximately 4.1 MMBoe and are located in two areas: Central Texas and East Texas. As of December 31, 2024, the VOC Operators operated approximately 99.1% of the total proved reserves attributable to the Texas Underlying Properties based on PV-10 value.
Central Texas production is attributable to the Kurten Woodbine Unit, which is producing primarily from the EagleBine Interval, Buda and Georgetown zones. East Texas properties include the Sand Flat field and Hitts Lake North field, each of which is producing primarily from the Paluxy and Chisum zones.
The following table summarizes the production by product for the years indicated for the only field, Kurten, that contains 15% or more of total proved reserves attributable to the Underlying Properties from the above table:
Oil
(MBbl)
Natural
Gas
(MMcf)
Oil
Equivalents
(MBoe)
2022
124
172
153
2023
107
146
131
2024
94
150
119
Marketing and Post-Production Services
Pursuant to the terms of the Conveyance, VOC Brazos has the responsibility to market, or cause to be marketed, the oil and natural gas production attributable to the Underlying Properties. The terms of the Conveyance do not permit VOC Brazos to charge any marketing fee when determining the net proceeds calculated under the net profits interest. As a result, the net proceeds to the Trust from the sales of oil and natural gas production from the Underlying Properties are determined based on the same price that VOC Brazos receives for oil and natural gas production attributable to VOC Brazos’ remaining interest in the Underlying Properties.
Texas is a mature oil producing state with a well-developed crude oil refining, transportation and marketing infrastructure. According to the Texas Railroad Commission, more than 6,300 operators reported aggregate oil production of approximately 1.923 billion barrels for the State of Texas during 2024. There were 34 operating oil refineries located in Texas in 2024 with combined capacity to refine over 6.28 million barrels of oil per day. With oil production in the state of Texas averaging approximately 5.27 million barrels of oil per day, Texas refineries are net importers of crude oil. As a result, oil producers in Texas benefit from competitive marketing conditions for their oil production as a result of the high demand from the crude oil marketing companies and refineries located in Texas.
Kansas is a mature oil producing state with a well-developed transportation infrastructure for crude oil transportation and marketing. According to the Kansas Geological Society, more than 1,300 operators reported aggregate oil production of approximately 26.9 million barrels for the state of Kansas in 2024. Kansas is home to three oil refineries located in McPherson, El Dorado and Coffeyville, Kansas. These refineries have combined capacity to refine approximately 408,200 barrels of oil per day. With oil production in the state of Kansas averaging approximately 74,000 barrels of oil per day, Kansas is a net importer of crude oil. As a result, Kansas operators benefit from the competitive marketing conditions for their oil production as a result of the high demand from the refineries located in Kansas.
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Vess Oil Corporation generally sells production from the Underlying Properties to several purchasers, including MV Purchasing, LLC, an affiliate of VOC Brazos (“MV Purchasing”), under short-term arrangements using market-sensitive pricing. These sales to purchasers are under terms ranging from one month to six months, using market-sensitive pricing. Five purchasers, including MV Purchasing, have been purchasing substantially all of the crude oil production, and a substantial portion of the crude oil production may continue to be acquired by one or more single purchasers. For the years ended December 31, 2022, 2023 and 2024, MV Purchasing purchased 35%, for each year, of the production sold from the Underlying Properties. VOC Brazos does not believe that loss of any of these parties as a purchaser would have a material adverse impact on the business of VOC Brazos, as substitute purchasers are generally available; however, a purchaser’s failure to pay for purchased crude oil could have a significant adverse impact on VOC Brazos’ business.
Oil production is typically transported by truck from the field to the closest gathering facility or refinery. VOC Brazos sells the majority of the oil production from the Underlying Properties under short-term arrangements using market sensitive pricing. The price received by VOC Brazos for the oil production from the Underlying Properties is usually based on the NYMEX price applied to equal daily quantities on the month of delivery, which price is then reduced for differentials based upon delivery location and oil quality. The average differential for oil production during the years ended December 31, 2022, 2023 and 2024 received by the Trust from the Underlying Properties was $2.49, $2.91 and $2.58 per barrel, respectively.
All natural gas produced by VOC Brazos is marketed and sold to third-party purchasers. The natural gas is sold on a contract basis and, in all but one case, the contracts are in their secondary terms and are on a month-to-month basis. In all cases, the contract price is based on a percentage of a published regional index price, after adjustments for Btu content, transportation and related charges. Vess Oil Corporation currently sells all of its natural gas production attributable to the Kurten Woodbine Unit in Texas to ET Gathering & Processing LLC on a year-to-year basis. Vess Oil Corporation currently sells all of its natural gas production attributable to wells in Kingman County, Kansas to Durango Midstream and Superior Midstream on a month-to-month basis. All of the natural gas production in Barber County, Kansas is currently sold to Targa Resources Corp. on a month-to-month basis.
VOC Brazos does not have any volume commitments or take or pay arrangements.
Sale and Abandonment of Underlying Properties
VOC Brazos and any transferee of any of an Underlying Property will have the right to abandon its interest in any well or property if it reasonably believes a well or property ceases to produce or is not capable of producing in commercially paying quantities. To reduce the potential conflict of interest between VOC Brazos and the Trust in determining whether a well is capable of producing in commercially paying quantities, VOC Brazos is required under the applicable conveyance to use commercially reasonable efforts to cause the operators of the Underlying Properties to operate these properties as would a reasonably prudent operator acting with respect to its own properties, disregarding the existence of the net profits interest as a burden on such property. Upon termination of the lease, the portion of the net profits interest relating to the abandoned property will be extinguished. For the years ended December 31, 2022, 2023 and 2024, VOC Brazos plugged and abandoned 16, 7 and 6 wells, respectively, located on leases within the Underlying Properties based on its determination that such wells could no longer produce oil or natural gas in commercially economic quantities.
VOC Brazos generally may sell all or a portion of its interests in the Underlying Properties, subject to and burdened by the net profits interest, without the consent of the Trust unitholders. In addition, VOC Brazos may, without the consent of the Trust unitholders, require the Trust to release the net profits interest associated with any lease that accounts for no more than 0.25% of the total production from the Underlying Properties in the prior 12 months and provided that the net profits interest covered by such releases cannot exceed, during any 12-month period, an aggregate fair market value to the Trust of $500,000. These releases will be made only in connection with a sale by VOC Brazos to a non-affiliate of the relevant Underlying Properties and are conditioned upon the Trust receiving an amount equal to the fair value to the Trust of such net profits interest. Any net sales proceeds paid to the Trust are distributable to Trust unitholders for the quarter in which they are received. No Underlying Properties were sold, and therefore no
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net sales proceeds were paid to the Trust for its share of interest in any such Underlying Properties, during 2023 or 2024. VOC Brazos has not identified any of the Underlying Properties for sale as of December 31, 2024.
Title to Properties
The Underlying Properties are subject to certain burdens that are described in more detail below. To the extent that these burdens and obligations affect VOC Brazos’ rights to production and the value of production from the Underlying Properties, they have been taken into account in calculating the Trust’s interests and in estimating the size and the value of the reserves attributable to the Underlying Properties.
VOC Brazos’ interests in the Underlying Properties are typically subject, in one degree or another, to one or more of the following:
•
royalties, overriding royalties and other burdens, express and implied, under oil and natural gas leases;
•
overriding royalties, production payments and similar interests and other burdens created by VOC Brazos or its predecessors in title;
•
a variety of contractual obligations arising under operating agreements, farm-out agreements, production sales contracts and other agreements that may affect the Underlying Properties or their title;
•
liens that arise in the normal course of operations, such as those for unpaid taxes, statutory liens securing unpaid suppliers and contractors and contractual liens under operating agreements that are not yet delinquent or, if delinquent, are being contested in good faith by appropriate proceedings;
•
pooling, unitization and communitization agreements, declarations and orders;
•
easements, restrictions, rights-of-way and other matters that commonly affect property;
•
conventional rights of reassignment that obligate VOC Brazos to reassign all or part of a property to a third party if VOC Brazos intends to release or abandon such property; and
•
rights reserved to or vested in the appropriate governmental agency or authority to control or regulate the Underlying Properties and the net profits interest therein.
VOC Brazos has informed the Trustee that VOC Brazos believes that the burdens and obligations affecting the Underlying Properties are conventional in the industry for similar properties. VOC Brazos also has informed the Trustee that VOC Brazos believes that the existing burdens and obligations do not, in the aggregate, materially interfere with the use of the Underlying Properties and do not materially adversely affect the value of the net profits interest.
VOC Brazos recorded the Conveyance in Kansas and Texas in the real property records in each Kansas or Texas county in which the Underlying Properties are located. Although under Texas law it is well-established that the recording in the appropriate real property records of an interest such as the net profits interest constitutes the Conveyance of a fully vested real property interest to the Trust, the law in Kansas is less certain. VOC Brazos and the Trust believe that the recording in the appropriate real property records in Kansas of the net profits interest should constitute the conveyance of a fully vested real property interest, interests in hydrocarbons in place or to be produced or a production payment as such is defined under the United States Bankruptcy Code. In a bankruptcy of VOC Brazos, creditors of VOC Brazos would be able to claim the net profits interest as an asset of the bankruptcy estate to satisfy obligations to them if the conveyance of the net profits interest did not constitute the conveyance of a real property interest or interests in hydrocarbons in place or to be produced under applicable state law or a production payment, in which case the Trust would be an unsecured creditor of VOC Brazos at risk of losing the entire value of the net profits interest to senior creditors.
VOC Brazos believes that its title to the Underlying Properties is, and the Trust’s title to the net profits interest is, good and defensible in accordance with standards generally accepted in the oil and gas industry, subject to such exceptions as are not so material to detract substantially from the use or value of such properties
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or royalty interests. Please see “Item 1A. Risk Factors — Financial Risks — The Trust Units may lose value as a result of title deficiencies with respect to the Underlying Properties.”
Competition and Markets
The oil and natural gas industry is highly competitive. VOC Brazos competes with major oil and natural gas companies and independent oil and natural gas companies for oil and natural gas, equipment, personnel and markets for the sale of oil and natural gas. Many of these competitors are financially stronger than VOC Brazos, but even financially troubled competitors can affect the market because of their need to sell oil and natural gas at any price to attempt to maintain cash flow. The Trust is subject to the same competitive conditions as VOC Brazos and other companies in the oil and natural gas industry.
Oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil, natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas.
Future price fluctuations for oil and natural gas will directly impact Trust distributions, estimates of reserves attributable to the Trust’s interests and estimated and actual future net revenues to the Trust. In view of the many uncertainties that affect the supply and demand for oil and natural gas, neither the Trust nor VOC Brazos can make reliable predictions of future oil and natural gas supply and demand, future product prices or the effect of future product prices on the Trust.
Regulation
The production of oil and gas from the Underlying Properties is affected by many state and federal regulations with respect to allowable rates of production, drilling permits, well spacing, 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.
FERC Regulation
Historically, the transportation and sale for resale of natural gas in interstate commerce has been regulated by the Federal Energy Regulatory Commission, or the “FERC,” under the Natural Gas Act of 1938, or NGA, the Natural Gas Policy Act of 1978, or NGPA, and regulations issued under those statutes. Over the last two decades, the FERC has issued orders and adopted regulations resulting in a restructuring of the natural gas industry. The principal elements of this restructuring were the requirement that interstate pipelines separate, or “unbundle,” into individual components the various services offered on their systems, with all transportation services to be provided on a non-discriminatory basis, and the prohibition against an interstate pipeline providing gas sales services except through separately organized affiliates. In various rulemaking proceedings following its initial unbundling requirement, the FERC has refined its regulatory program applicable to interstate pipelines in various respects, and it has announced that it will continue to monitor these and other regulations to determine whether further changes are needed. In addition to rulemaking proceedings, the FERC establishes new policies and regulations through policy statements and adjudications of individual pipeline matters. Further, additional changes to regulations may occur based on actions taken by the United States Congress and/or the courts.
In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at market prices, Congress could reenact price controls in the future. Deregulation of wellhead natural gas sales began with the enactment of the NGPA and culminated in adoption of the Natural Gas Wellhead Decontrol Act which removed all price controls affecting wellhead sales of natural gas effective January 1, 1993.
Sales of crude oil, condensate, and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future. Sales of crude oil are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is subject to rate and access regulation. The FERC regulates interstate oil pipeline transportation
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rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be just and reasonable and may not be unduly discriminatory or confer any undue preference upon any shipper. Rates generally are cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances.
Although the price at which VOC Brazos sells oil and natural gas is not currently subject to federal rate regulation and, for the most part, is not subject to state regulation, with regard to physical sales of natural gas and oil, VOC Brazos is required to observe anti-market manipulation laws and related regulations enforced by the FERC and/or the Commodity Futures Trading Commission and the Federal Trade Commission. If VOC Brazos were to violate the anti-market manipulation laws and regulations, VOC Brazos could also be subject to related third-party damage claims by, among others, sellers, royalty owners and taxing authorities.
As to these various developments, VOC Brazos has advised the Trust that the on-going and evolving nature of these regulatory initiatives makes it impossible to predict their ultimate impact on the prices, markets or terms of sale of natural gas related to the Trust.
State and Other Regulation
In general, the jurisdictions in which royalty properties are located have statutory provisions regulating the production and sale of crude oil and natural gas. The regulations often require permits for the drilling of wells but extend also to the spacing of wells, the prevention of waste of oil and gas resources, the rate of production, prevention and clean-up of pollution and other matters.
Environmental Matters and Regulation
General. The operations of the Underlying Properties are subject to stringent and complex federal, regional, state and local laws and regulations governing environmental protection as well as the discharge of materials into the environment. These laws and regulations may impose significant obligations on VOC Brazos’ operations, including requirements to, among other things:
•
obtain permits to conduct regulated activities;
•
restrict the types, quantities and concentration of various substances that can be released or emitted into the environment in the performance of drilling and production activities;
•
limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands and other protected areas;
•
initiate remedial activities or corrective actions to mitigate pollution from former or current operations, such as restoration of drilling pits and plugging of abandoned wells;
•
apply specific health and safety criteria addressing workover protection; and
•
impose substantial liabilities on VOC Brazos for pollution resulting from VOC Brazos’ operations.
Failure to comply with environmental laws and regulations may result in the assessment of administrative, civil and criminal sanctions, including monetary penalties, the imposition of investigatory and remedial obligations, and the issuance of injunctions limiting or prohibiting some or all of VOC Brazos’ operations. Moreover, these laws, rules and regulations may restrict the rate of oil and natural gas production below the rate that would otherwise be possible. The regulatory burden on the oil and natural gas industry increases the cost of doing business in the industry and consequently affects profitability. VOC Brazos believes that it is in substantial compliance with all existing environmental laws and regulations applicable to its current operations and that its continued compliance with existing requirements will not have a material adverse effect on the cash distributions to the Trust unitholders. However, the clear trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus, any changes in environmental laws and regulations or re-interpretation of enforcement policies that result in more stringent and costly emission or discharge limits or waste handling, disposal or remediation obligations could have a material adverse effect on VOC Brazos’ development expenditures, results of operations and financial position. VOC Brazos may be unable to pass on those increases to its customers.
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The following is a summary of the more significant existing environmental, health and safety laws and regulations, each as amended from time to time, to which VOC Brazos’ business operations are subject:
Hazardous Substances and Wastes. The Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”), also known as the Superfund law, and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain classes of persons who are considered to be jointly and severally responsible for the release of a “hazardous substance” into the environment. These persons include current and prior owners or operators of the site where the release occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be liable for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. CERCLA also authorizes the U.S. Environmental Protection Agency (“EPA”) and, in some instances, third parties to act in response to threats to the public health or the environment and then to seek to recover from the responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment. Although petroleum, natural gas, and natural gas liquids are excluded from the definition of “hazardous substance” under CERCLA, VOC Brazos handles materials in the course of its operations that may be regulated as CERCLA hazardous substances, despite the so-called “petroleum exclusion.”
VOC Brazos also generates solid and hazardous wastes that are subject to the requirements of the Resource Conservation and Recovery Act, as amended (“RCRA”), and comparable state statutes. RCRA imposes strict requirements on the generation, storage, treatment, transportation and disposal of hazardous wastes. In the course of its operations, VOC Brazos generates petroleum hydrocarbon wastes and ordinary industrial wastes that may be classified as hazardous wastes under RCRA and comparable state laws. Drilling fluids, produced waters, and most of the other wastes associated with the exploration, production, and development of crude oil or natural gas are currently regulated under RCRA as non-hazardous wastes. While many exploration and production wastes are exempt from regulation as hazardous waste, these wastes are generally subject to non-hazardous waste regulation under RCRA and applicable state regulations. Many state governments have specific regulations and guidance for exploration and production wastes, including the wastes associated with hydraulic fracturing activities.
The real properties upon which VOC Brazos conducts its operations have been used for oil and natural gas exploration and production for many years. Although VOC Brazos believes that it has utilized operating and disposal practices that were standard in the industry at the time, petroleum hydrocarbons and wastes may have been disposed of or released on or under the real properties upon which VOC Brazos conducts its operations, or on or under other, offsite locations, where these petroleum hydrocarbons and wastes have been taken for treatments or disposal. In addition, the Underlying Properties may have been operated by third parties or by previous owners or operators whose treatment and disposal or release of hazardous substances, wastes or hydrocarbons was not under VOC Brazos’ control. These properties and the substances disposed or released thereon may be subject to CERCLA, RCRA and analogous state laws. Under these laws, VOC Brazos could be required to investigate, remove or remediate previously disposed wastes, to clean up contaminated property, and to perform response actions to prevent future contamination.
Water Discharges and Hydraulic Fracturing. The federal Clean Water Act (“CWA”) and analogous state laws impose restrictions and strict controls on the discharge of pollutants into “waters of the United States” and waters within the scope of state law, respectively. Pursuant to the CWA and applicable state laws, permits must be obtained to discharge pollutants into regulated waters. Any such discharge of pollutants into regulated waters must be performed in accordance with the terms of the permit issued by the EPA or the applicable state agency or both. The discharge of wastewater from most onshore oil and gas activities exploration and production activities is currently prohibited east of the 98 th meridian. Additionally, in June 2016, the EPA issued a final rule implementing wastewater pretreatment standards that prohibit onshore unconventional oil and natural gas extraction facilities from sending wastewater directly to publicly owned treatment works (“POTW”). Unconventional extraction facilities are in certain circumstances allowed by federal regulations to send wastewater to an off-site private centralized wastewater treatment (“CWT”) facility in most circumstances. CWT facilities can either discharge treated water directly to surface waters or send it to a POTW. In 2018, the EPA concluded a study of the treatment and discharge of oil and gas
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wastewater that could lead to changes in requirements for discharge of produced water under federal regulations, including more stringent requirements or a prohibition on discharge of produced water from CWT facilities. Any restriction of disposal options for hydraulic fracturing waste and other changes to CWA discharge requirements may result in increased costs.
The discharge of dredge and fill material in waters of the United States, including wetlands, is also prohibited unless authorized by a permit issued under CWA Section 404 by the U.S. Army Corps of Engineers (“USACE”). CWA Section 401 provides that the applicant for a Section 404 USACE permit for the discharge of dredge and fill material must seek a Section 401 water quality certification by applying to the state in which the discharge will occur for the state to determine if the discharge will comply with the state’s approved water quality program. In some instances, this process could result in a delay in issuance of the permit, more stringent permit requirements, or denial of the permit.
How the EPA and the USACE define “waters of the United States” (“WOTUS”), which defines the extent of geographic jurisdiction under the CWA, can impact VOC Brazos’ regulatory and permitting obligations under the CWA. In 2023, the EPA and the USACE issued a final rule (the “2023 rule”) that is described by the EPA and the USACE as following the 1986 regulations as modified by subsequent U.S. Supreme Court decisions and guidance issued by the EPA and USACE interpreting the decisions. Shortly thereafter, the Supreme Court issued its decision in Sackett II which overturned a substantial portion of the basis for the 2023 rule. The USACE and the EPA subsequently amended the 2023 rule and excluded a number of types of wetlands and streams from CWA jurisdiction, but the rule is subject to litigation regarding the sufficiency of the agencies’ interpretation of the Sackett II decision. The 2023 rule is presently in effect in about half of the states while it is enjoined in the other half. In those states where the rule is enjoined, the EPA and the USACE define WOTUS in accordance with an earlier regulatory definition adjusted in light of the Supreme Court’s Sackett II decision. VOC Brazos’ regulatory obligations and permitting costs will continue to be subject to remaining uncertainty around the definition of WOTUS and the scope of CWA regulation, given the ongoing litigation.
USACE Nationwide Permits (“NWPs”) are a streamlined form of permitting used to authorize activities related to development activities with minimal individual or cumulative adverse effects in wetlands or other waters of the United States under the CWA. Some NWPs are also used to authorize activities that impact traditional navigable waters under the Rivers and Harbors Act. NWP 12 will expire in March 2026 and be replaced with a new version. In addition, a federal court in Washington, D.C. is currently hearing a challenge to NWP 12. An adverse decision in the litigation may restrict or remove the ability to use NWP 12 to permit regulated impacts, resulting in the need to apply for a more time-consuming individual permit. This could result in additional cost and time for permitting projects.
In February 2025, the USACE began implementing emergency permitting procedures as directed by President Trump’s Executive Order Declaring a National Energy Emergency. This may result in substantially decreased timeframes for receiving Section 404 permits in the case of energy projects subject to the Executive Order.
The Oil Pollution Act of 1990, as amended (“OPA”), which amends the CWA, establishes standards for prevention, containment and cleanup of oil spills into waters of the United States. The OPA requires measures to be taken to prevent the accidental discharge of oil into waters of the United States from onshore production facilities. Measures under the OPA and the CWA include inspection and maintenance programs to minimize spills from oil storage and conveyance systems; the use of secondary containment systems to prevent spills from reaching nearby waterbodies; proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill; and the development and implementation of spill prevention, control and countermeasure (“SPCC”) plans to prevent and respond to oil spills. The OPA also subjects owners and operators of facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a spill. VOC Brazos has developed and implemented SPCC plans for the Underlying Properties as required under the CWA.
It is customary to recover oil and natural gas from deep shale and tight sand formations through the use of hydraulic fracturing, combined with sophisticated horizontal drilling. Hydraulic fracturing involves the injection of water, sand and chemical additives under pressure into rock formations to stimulate gas production. The federal Energy Policy Act of 2005 amended the Underground Injection Control provisions
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of the federal Safe Drinking Water Act to exclude certain hydraulic fracturing activities from the definition of “underground injection.” At present, hydraulic fracturing is regulated at the state and local level. Due to public concerns raised regarding potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal, state and local level and in some states have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Repeal of the exemption would allow the EPA to promulgate new regulations. Many states have adopted rules that required operators to disclose chemicals and water volumes associated with hydraulic fracturing. In addition, the EPA finalized a study of the potential environmental impacts of hydraulic fracturing activities in 2016, finding that under certain circumstances the “water cycle” activities associated with hydraulic fracturing could impact drinking water resources. More recently, the injection of water produced as a result of hydraulic fracturing has been associated with seismic activity leading to restrictions on injection in some areas. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements could make it more difficult or costly for VOC Brazos to perform hydraulic fracturing activities. Moreover, required disclosure without protection for trade secret or proprietary products could discourage service companies from using such products and as a result impact the degree to which some oil and gas wells may be efficiently and economically completed or brought into production. Finally, VOC Brazos believes that enactment of legislation regulating hydraulic fracturing at the federal level may have a material adverse effect on its business.
Air Emissions. The Clean Air Act, as amended (“CAA”), and comparable state laws and regulations restrict the emission of air pollutants from many sources and also impose various monitoring and reporting requirements. These laws and regulations may require VOC Brazos to obtain pre-approval for the construction or modification of certain projects or facilities expected to produce or significantly increase air emissions, and to comply with stringent air permit or regulatory requirements or utilize specific equipment or technologies to control emissions. Obtaining permits has the potential to delay the development of VOC Brazos’ properties.
The EPA has established pollution control standards for oil and gas sources under the CAA. In 2012 and 2016, the EPA adopted federal New Source Performance Standards (“NSPS”) that require the reduction of volatile organic compound and sulfur dioxide emissions from certain fractured and refractured natural gas wells for which well completion operations are conducted and further require that most wells use reduced emission completions, also known as “green completions.” These regulations also establish specific requirements regarding emissions from production-related wet seal and reciprocating compressors, pumps, and from pneumatic controllers and storage vessels, and for equipment leaks. These NSPS apply to sources that are newly constructed or modified after the rules’ applicability dates. More recently, the EPA adopted a final rule in 2024 that will directly regulate volatile organic compound and methane emissions from oil and gas sources constructed or modified after December 2022 and will require reductions in both pollutants through its regulation of flaring, compressors, pumps, storage vessels, process controllers, well completions and liquids unloading, and equipment leaks. Additionally, the EPA for the first time adopted emissions guidelines that will apply to existing oil and gas sources and that require reductions in volatile organic compound and methane emissions that are largely equivalent to the requirements for new sources. The existing source emissions guidelines are to be implemented through state plans, with expected compliance dates for existing sources arriving in 2029.
The EPA is also charged with establishing National Ambient Air Quality Standards (“NAAQS”), the implementation of which can indirectly impact VOC Brazos’ operations. The CAA directs the EPA to review each NAAQS every five years to ensure that the standards are protective of public health and welfare. This process routinely results in the tightening of those standards, and in October 2015, the EPA lowered the ozone NAAQS from 75 to 70 parts per billion. In December 2020, the EPA published a final rule that retained without revision the 2015 NAAQS ozone standard. More recently, however, in February 2024, the EPA announced a final rule that will lower the annual standard for fine particulate matter from 12 micrograms per cubic meter to 9 micrograms per cubic meter. State or federal implementation of the NAAQS could result in stricter permitting or regulatory requirements, delay or prohibit VOC Brazos’ ability to obtain such permits, and result in increased expenditures for pollution control equipment.
The 2024 presidential election in the United States may impact the air quality-related requirements that apply to VOC Brazos. The Trump Administration may adopt a different approach to many actions taken
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under the prior presidential administration, including the 2024 revisions to the emissions standards and guidelines for new and existing sources in the oil and gas industry, as well as the 2024 changes to the NAAQS for fine particulate matter. The outcome of the Trump Administration’s evaluation of the prior administration’s regulatory approach is not certain at this time, but President Trump has made it clear that his energy agenda prioritizes an increase in domestic oil and gas production.
VOC Brazos may be required to incur certain capital expenditures for air pollution control equipment or other air emissions-related issues., VOC Brazos currently does not expect that such requirements will have a material adverse effect on its operations.
Climate Change. In response to its 2009 finding that emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”) may present an endangerment to public health and the environment, the EPA has issued regulations to restrict emissions of greenhouse gases under existing provisions of the CAA. These regulations include limits on tailpipe emissions from motor vehicles, preconstruction and operating permit requirements for certain large stationary sources, and methane emissions standards for certain new, modified and reconstructed oil and gas sources — as well as the EPA’s methane emissions guidelines for existing oil and gas sources that were adopted in 2024. The EPA also has adopted rules requiring the reporting of GHG emissions from specified large greenhouse gas emission sources in the United States, as well as certain onshore oil and natural gas production facilities, on an annual basis. On January 20, 2025, President Trump announced the withdrawal of the United States from the Paris Climate Agreement. President Trump also issued an executive order directing the EPA to review the legality and continuing applicability of its 2009 GHG endangerment finding. The outcome of that review is not currently known; however, it has the potential to eliminate the basis for the EPA’s regulation of GHGs under the CAA.
The EPA has established GHG standards for oil and gas sources based on the GHG endangerment finding. In 2024, the EPA adopted a final rule that will directly regulate volatile organic compound and methane emissions from new oil and gas sources and will require reductions in GHG and volatile organic compound emissions through its regulation of flaring, compressors, pumps, storage vessels, process controllers, well completions and liquids unloading, and equipment leaks. At the same time, the EPA adopted emissions guidelines that will apply to existing oil and gas sources and that require reductions in volatile organic compound and methane emissions that are largely equivalent to the requirements for new sources. The existing source emissions guidelines are to be implemented through state plans, with expected compliance dates for existing sources arriving in 2029.
The Inflation Reduction Act of 2002 (the “IRA”) included new Clean Air Act section 136(c) directing the EPA to collect the Waste Emissions Charge (“WEC”) from facilities in the oil and gas sector that report more than 25,000 tons of carbon dioxide equivalent emissions in a calendar year. The charge will first apply to methane emissions from calendar year 2024. The charge is determined by comparing actual reported methane emissions to statutorily established “methane intensity figures” that are based on gas production or throughput, with a charge assessed for every ton of methane emissions that exceeds the facility’s allowable emissions based on the applicable methane intensity figure. The charge will be $900 per ton for 2024 emissions and will increase to $1,200 and then $1,500 per ton in subsequent years. The program includes key exemptions, most notably a regulatory compliance exemption that applies to and exempts the emissions from facilities that are subject to and in complete compliance with EPA’s new or existing source methane requirements. The EPA adopted new rules to implement the WEC program in November 2024; however, the fate of the WEC and the EPA rules implementing the WEC is unclear. In February 2025, the United States House of Representatives and Senate both passed resolutions to repeal the EPA’s 2024 WEC rules under the Congressional Review Act (“CRA”), and on March 14, 2025 President Trump signed the resolution repealing those rules under the CRA. In addition, the United States House of Representatives and Senate may be considering amendment or repeal of certain portions of the IRA, including the statutory provisions establishing the WEC.
In addition to the federal actions, more than one third of the states have begun taking actions to control and/or reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Although most of the state level initiatives to date have focused on large sources of GHG emissions, such as coal fired electric plants, it is possible that smaller sources of emissions could become subject to GHG emission limitations or allowance purchase requirements in the future. For example, the states of Colorado and New Mexico have adopted rules
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regulating GHGs from the oil and gas industry that are based on the federal standards. Congress may in the future consider adopting other legislation to reduce emissions of greenhouse gases. Any one of these climate change regulatory and legislative initiatives could have a material adverse effect on VOC Brazos’ business, capital expenditures, financial condition and results of operations .
The adoption and implementation of regulations imposing reporting obligations on, or limiting emissions of GHGs from, VOC Brazos’ equipment and operations could require VOC Brazos to incur costs to reduce emissions of GHGs associated with its operations or could adversely affect demand for the oil and natural gas it produces. Legislation or regulations that may be adopted to address climate change could also affect the markets for VOC Brazos’ products by making its products more or less desirable than competing sources of energy. To the extent that its products are competing with higher GHG-emitting energy sources, VOC Brazos’ products may become more desirable in the market with more stringent limitations on GHG emissions. To the extent that its products are competing with lower GHG-emitting energy, VOC Brazos’ products may become less desirable in the market with more stringent limitations on greenhouse gas emissions. VOC Brazos cannot predict with any certainty at this time how these possibilities may affect its operations.
The operations of the Underlying Properties are not adversely impacted by the current state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact the operations of the properties.
Finally, some scientists have theorized that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such significant physical effects were to occur, they could have an adverse effect on VOC Brazos’ assets and operations and cause VOC Brazos to incur costs in preparing for and responding to them. Additionally, energy needs could increase or decrease as a result of extreme weather conditions, depending on the duration and magnitude of those conditions.
Endangered Species Act. The federal Endangered Species Act, as amended (“ESA”), prohibits taking of listed endangered, and in some cases threatened, species. Under the ESA, federal agencies are obligated to consult with the U.S. Fish and Wildlife Service or National Marine Fisheries Service if an agency’s actions, including permit actions, may affect listed species or designated critical habitat. If endangered species are located in areas of the Underlying Properties where seismic surveys, development activities or abandonment operations may be conducted, the work could be prohibited or delayed or expensive mitigation may be required, depending on the implications for protected species and designated critical habitat. On August 27, 2019, the U.S. Fish and Wildlife Service published a final rule adopting several changes to the federal regulations that implement the ESA, including changes to the procedures and criteria for listing or removing species from the Lists of Endangered and Threatened Wildlife and Plants and for designating critical habitat. The Biden Administration rescinded one of the rules adopted by the prior administration, dealing with critical habitat, and issued a revised rule making changes to the federal consultation process. These changes could make a federal review process occasioned by the application for permits, rights of way, or leases more complex in certain circumstances. In addition, designation of new species as threatened or endangered could cause VOC Brazos to incur additional costs arising from species protection measures, could result in limitations on activities, and could require a more complex regulatory compliance process. In January 2025, the Trump Administration directed the use of the emergency consultation procedures for permitting for energy projects in the Declaring a National Energy Emergency Executive Order.
National Environmental Policy Act. The National Environmental Policy Act (“NEPA”) requires the federal government to undertake an environmental review prior to making a decision on most proposed federal actions — such as permits, leases, and rights-of-way. Until 2025, agencies undertook NEPA reviews pursuant to binding regulations issued by the White House Council on Environmental Quality (“CEQ”) as well as pursuant to the federal agency’s own NEPA procedures. CEQ issued its rules after being directed to do so by an Executive Order issued in the Carter Administration. After two federal courts held that CEQ did not have authority to issue binding regulations, the Trump Administration revoked the Carter Administration Executive Order and directed CEQ to withdraw the regulations. In their place, agencies are directed to develop procedures that hew to the statutory text over the course of 2025 with the goal of having them finalized in early 2026. In the meantime, agencies will continue to use their own NEPA procedures and may
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continue to follow the CEQ regulations, using them as guidance. This may result in delays and uncertainty in permitting reviews as agencies adjust to a new NEPA approach.
Employee Health and Safety. The operations of VOC Brazos are subject to a number of federal and state laws and regulations, including the federal Occupational Safety and Health Act, or “OSHA,” and comparable state statutes, whose purpose is to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require in certain circumstances that information be maintained concerning hazardous materials used or produced in VOC Brazos’ operations and that this information be provided to employees, state and local government authorities and citizens. VOC Brazos believes that it is in substantial compliance with all applicable laws and regulations relating to worker health and safety.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.