Royale Energy, Inc.

Royale Energy, Inc. (“Royale” or the “Company”) is an independent oil and natural gas producer incorporated under the laws of Delaware. Royale’s principal lines of business are the production and sale of oil and natural gas, acquisition of oil and gas lease interests and proved reserves, drilling of both exploratory and development wells, and sales of fractional working interests in wells to be drilled by Royale. Royale was incorporated in Delaware in 2017 and is the successor by merger (as described below) to Royale Energy Funds, Inc., a California corporation formed in 1983. On December 31, 2024, Royale and its consolidated subsidiaries had 11 full-time employees.

Royale Business

Royale and its subsidiaries own wells, leases, and proved and non-proved reserves of oil and gas located mainly in Mitchell County and Ector County, Texas and in the Sacramento Basin and San Joaquin Basin in California, as well as in, Oklahoma. Royale also owns an overriding royalty interest in a discovery in Alaska. Royale usually sells a portion of the working interest in each well it drills or participates with third-party participants and retains a portion of the prospect for its own account. Selling part of the working interest to others allows Royale to reduce its drilling risk by owning a diversified inventory of properties with less of its own funds invested in each drilling prospect, than if Royale owned all the working interest and paid all drilling and development costs of each prospect itself. Royale generally sells working interests in its prospects to accredited investors (as defined in Regulation D of the SEC) in securities offerings exempt from registration with federal and state securities regulators. The prospects are typically bundled into multi-well investments, which permit the third-party investors to diversify their investments by investing in several wells instead of investing in single well prospects.

During its fiscal year ended December 31, 2024, Royale continued to explore and develop oil and natural gas properties with concentration in Texas. In 2024, Royale participated in the drilling of four gross (0.0722 net) wells, which were all commercially productive. Royale’s estimated total reserves were approximately 1.8 BCFE (billion cubic feet equivalent) at both December 31, 2024 and 2023. According to the reserve reports prepared by Netherland, Sewell & Associates, Inc., Royale’s independent petroleum engineers, the net reserve value of its proved developed and undeveloped reserves was approximately $11.0 million at December 31, 2024, based on the average Henry Hub natural gas price spot price of $2.13 per MCF and for oil volumes, the average West Texas Intermediate price of $76.32 per barrel as applied on a field-by-field basis. Netherland, Sewell & Associates, Inc. supplied reserve value estimates for all of the Company’s California, Texas, and Oklahoma properties.

Proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain.

Proved developed reserves are estimated quantities of oil, natural gas and natural gas liquids (“NGL”) that geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved developed producing reserves are reserves that can be expected to be recovered from existing wells and completions with existing equipment and operating methods.

Proved developed nonproducing reserves are hydrocarbons in a potentially producing horizon penetrated by a wellbore, the production of which has been postponed pending completion activities and the installation of surface equipment or gathering facilities or pending the production of hydrocarbons from another formation penetrated by the wellbore. The hydrocarbons are classified as proved developed but nonproducing reserves.

Net reserve value does not represent the fair market value of our reserves on that date, and we cannot be sure what return we will eventually receive on our reserves. Net reserve value of proved developed and undeveloped reserves was calculated by subtracting estimated future development costs, future production costs and other operating expenses from estimated net future cash flows from our developed and undeveloped reserves.

Our standardized measure of discounted future net cash flows or “PV-10” at December 31, 2024, of our reserves was estimated to be $4,394,986. This figure was calculated by subtracting our estimated future income tax expense from the net reserve value of proved developed and undeveloped reserves, and by further applying a 10% annual discount for estimated timing of cash flows. PV-10 is the present value of estimated future revenues, discounted at 10% annually, to be generated from the production of proved reserves determined in accordance with the SEC guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to (i) non-property related expenses such as general and administrative expenses, debt service, and future income tax expense, and (ii) depreciation, depletion and amortization. A calculation of our standardized measure of discounted future net cash flow is contained in Note 17 to our Financial Statements, Supplemental Information about Oil and Gas Producing Activities (Unaudited) – Changes in Standardized Measure of Discounted Future Net Cash Flow from Proved Reserve Quantities.

Royale reported a gain on turnkey drilling in connection with the drilling of wells on a “turnkey contract” basis in the amount of $1,607,677 for the year ended December 31, 2024. For the year ended December 31, 2023, Royale reported a gain on turnkey drilling in the amount of $2,107,500. We cannot assure that gains of this type will occur in 2025 or if they do, they will be of similar magnitude.

In addition to Royale’s own staff, Royale hires independent contractors to drill, test, complete and equip the wells that it drills. Approximately 97% of Royale’s total revenue for the year ended December 31, 2024, came from sales of oil and natural gas from production of its wells in the amount of $2,164,241. In 2023, this amount was $2,114,026, which represented 98% of Royale’s total revenues for the respective periods presented. See Note 2 to our Financial Statements.

Plan of Business

Royale acquires interests in oil and natural gas reserves and sponsors private working interest participations. Royale believes that its stockholders are better served by diversification of its investments among individual drilling prospects. Through its private placement sale of working interest in certain oil and gas properties, Royale can acquire interests and develop oil and natural gas properties with greater diversification of risk and still receive an interest in the revenues and reserves produced from these properties. By selling some of its working interest in most projects, Royale decreases the amount of its investment required in the projects and diversifies its oil and gas property holdings, to reduce the risk of concentrating a large amount of its capital in a few projects that may not be successful.

After acquiring the leases or lease participation, Royale drills or participates in the drilling of development and exploratory oil and natural gas wells on a property. Royale pays its proportionate share of the actual cost of drilling, testing, and completing the wells to the extent that it retains all or any portion of the working interest.

Royale also sells fractional working interests in undeveloped wells to finance part of the drilling cost. A drilling contract that calls for a company to drill a well, for a fixed price, to a specified depth or geological formation is called a “turnkey contract.” When Royale sells fractional working interests in undeveloped property to raise capital to drill oil and natural gas wells, generally it agrees to drill these wells on a turnkey contract basis, so that the holders of the fractional interests prepay a fixed amount for the drilling and completion of a specified number of wells. Under a turnkey contract, Royale may record a gain if total funds received to drill a well were more than the actual cost to drill those wells including costs incurred on behalf of the participants and costs incurred for its own account.

Although Royale does not usually address whether investors have a right to participate in subsequent wells in the same area of interest as a proposed well, it is the Company’s policy to typically offer to investors in a successful well the right to participate in subsequent wells at the same percentage level as their working interest investment in the prior successful well.

Our policy for turnkey drilling agreements is to recognize a gain on turnkey drilling programs after our obligations have been fulfilled, and a gain is only recorded when funds received from participants are in excess of all costs we incur during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account. See Note 1 to our Financial Statements, at page F-8.

Once commenced, drilling is generally completed within 10-30 days. Royale maintains internal records of the expenditure of each investor’s funds for drilling projects.

Royale generally operates the wells it completes. As operator, we receive fees set in line with industry standards from the owners of fractional interests in the wells as well as expense reimbursements. For the year ended December 31, 2024, Royale charged overhead from the operation of the wells in the amount of $430,680, which were an offset to general and administrative expenses. In 2023, such amount was $401,233. At December 31, 2024, Royale operated wells in California and Texas. Royale also has non-operating interests in wells in California, Texas, and Oklahoma.

Royale currently sells most of its California natural gas production through Pacific Gas & Electric (“PG&E”) pipelines to independent customers on a monthly contract basis, while some gas is delivered through privately owned pipelines to independent customers. Since many users are willing to make such purchase arrangements, we believe the loss of any one customer would not affect our overall sales operations.

All oil and natural gas properties are depleting assets in which production naturally decreases over time as the finite amount of existing reserves are produced and sold. It is Royale’s business as an oil and natural gas exploration and production company to continually search for new development properties. The Company’s success will ultimately depend on its ability to continue locating and developing new oil and natural gas resources. Oil demand is subject to global demand and prices can fluctuate widely. The future market is likely to be subject to continued price dynamics. Natural gas demand and the prices paid for gas are seasonal. In recent years, natural gas demand and prices in Northern California have fluctuated unpredictably throughout the year.

Competition, Markets and Regulation

Competition

The exploration and production of oil and natural gas is an intensely competitive industry. The sale of interests in oil and gas projects, like those Royale sells, is also very competitive. Royale encounters competition from other oil and natural gas producers, as well as from other entities that invest in oil and gas for their own account or for others, and many of these companies are substantially larger than Royale.

Markets

Market factors affect the quantities of oil and natural gas production and the price Royale can obtain for the production from its oil and natural gas properties. Such factors include: the extent of domestic production; the level of imports of foreign oil and natural gas; the general level of market demand on a regional, national and worldwide basis; domestic and foreign economic conditions that determine levels of industrial production; political events in foreign oil-producing regions; and variations in governmental regulations including environmental, energy conservation, and tax laws or the imposition of new regulatory requirements upon the oil and natural gas industry.

Regulation

Federal and state laws and regulations affect, to some degree, the production, transportation, and sale of oil and natural gas from Royale’s operations. States in which Royale operates have statutory provisions regulating the production and sale of oil and natural gas, including provisions regarding deliverability. These statutes, along with the regulations interpreting them, generally are intended to prevent waste of oil and natural gas and to protect correlative rights to produce oil and natural gas by assigning allowable rates of production to each well or proration unit.

On September 16, 2022, California Governor Gavin Newsom signed Senate Bill No. 1137 (SB 1137) into law, prohibiting the issuance of well permits and the construction and operation of new production facilities within a “health protection zone” of 3,200 feet from certain sensitive receptors, such as homes, schools, nursing homes, or hospitals. This law also imposed additional health, safety, and environmental requirements on existing wells within these zones. We and our industry partner, RMX Resources, LLC (RMX), operate wells, production facilities, and future drilling locations within these health protection zones.

In December 2022, proponents of a voter referendum initiated a challenge to SB 1137 (the “Referendum”) and collected the requisite signatures to place SB 1137 on the November 2024 ballot. On February 3, 2023, the California Secretary of State certified that the requisite number of signatures had been submitted and validated for the Referendum to become duly qualified for the November 2024 ballot. By law, the effectiveness of a statute challenged in its entirety by a duly validated Referendum is stayed until it has been approved by the voters at the required election. Thus, the implementation of SB 1137’s provisions was stayed as of February 3, 2023, until the Referendum challenge could be resolved by a vote of the California electorate on November 5, 2024.

However, on June 27, 2024, the oil industry withdrew its referendum challenging SB 1137, allowing the law to take effect immediately. This development means that the restrictions and requirements outlined in SB 1137 are now in force, impacting our operations within the designated health protection zones. Consequently, certain undeveloped drilling locations are now restricted, and our participation in future drilling efforts with RMX within these zones is significantly deterred. Additionally, we cannot predict any future actions the State of California or other parties may take that could further limit our ability to drill in certain areas.

In September 2024, Governor Newsom signed additional laws aimed at reducing oil and gas pollution near neighborhoods, further increasing the regulatory burden affecting our operations in California.

Availability of Public Filings

You may obtain a copy of any materials filed by Royale with the Securities and Exchange Commission (“SEC”) at http://www.sec.gov. Royale also provides access to its SEC reports and other public announcements on its website, http://www.royl.com. The information on our website is not part of this Annual Report on Form 10-K.