Gulf Coast Ultra Deep Royalty (GULTU) Risk Analysis

The threat of climate change continues to attract considerable attention globally. In response to findings 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 recently-adopted methane emissions guidelines for existing oil and gas sources. 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. In addition to this direct regulation of oil and gas sources, the EPA has recently proposed rules to implement the mandatory Waste Emissions Charge under the Inflation Reduction Act of 2022, which will charge a fee based on the methane emissions from applicable facilities in the oil and gas sector starting in 2024. 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 limiting 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, in December 2023 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 further emissions reductions 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 2022 included new Clean Air Act section 136(c) directing the EPA to collect the Waste Emissions Charge 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 the EPA's new or existing source methane requirements. The EPA proposed new rules to implement the Waste Emissions Charge program in January 2024. Additionally, 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 have to date 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. In addition, from time to time Congress has considered adopting legislation to reduce emissions of greenhouse gases. Any one of these climate change regulatory and legislative initiatives could have a material adverse effect on HOGA's 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, HOGA's equipment and operations could require HOGA to incur costs to reduce emissions of GHGs associated with its operations or could adversely affect demand for the natural gas it produces. Legislation or regulations that may be adopted to address climate change could also affect the markets for HOGA's 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, HOGA's 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, HOGA's products may become less desirable in the market with more stringent limitations on greenhouse gas emissions. HOGA cannot predict with any certainty at this time how these possibilities may affect its operations. In addition, new and emerging regulatory initiatives in the U.S. related to climate change could adversely affect the Royalty Trust. On March 6, 2024, the SEC issued a final rule regarding the enhancement and standardization of mandatory climate-related disclosures for investors. The final rule mandates extensive disclosure of climate-related data, risks, and opportunities, including financial impacts, physical and transition risks, related governance and strategy and greenhouse gas emissions, for certain public companies. Compliance with the final rule may result in increased legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place strain on the personnel, systems and resources of HOGA or the Royalty Trust or both. 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 HOGA's assets and operations and cause HOGA 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.

Natural gas prices fluctuate widely in response to relatively minor changes in supply, market uncertainty and a variety of additional factors that are beyond the control of HOGA and the Royalty Trust. These factors include, among others: - regional, domestic and foreign supply of, and demand for, natural gas, as well as perceptions of supply of, and demand for, natural gas;- U.S. and worldwide political and economic conditions;- the armed conflicts between Russia and Ukraine and between Israel and Hamas and the potential destabilizing effects such conflicts may pose for the global natural gas markets;- the occurrence or threat of epidemic or pandemic diseases, such as the COVID-19 pandemic, or any government response to such occurrence or threat;- weather conditions and seasonal trends;- anticipated future prices of natural gas, alternative fuels and other commodities;- technological advances affecting energy consumption and energy supply;- the proximity, capacity, cost and availability of pipeline infrastructure, treating, transportation and refining capacity;- natural disasters and other acts of force majeure;- domestic and foreign governmental regulations and taxation;- energy conservation and environmental measures; and - the price and availability of alternative fuels. These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas price movements with any certainty. Commodity prices displayed dramatic volatility in 2020, when the COVID-19 pandemic and various governmental actions taken to mitigate the impact of COVID-19 resulted in an unprecedented decline in demand for oil and natural gas. The effects of the economic disruption caused by the governmental responses to the COVID-19 pandemic continued to be felt through 2023, in the form of lingering supply chain disruptions, higher inflation and higher interest rates, which affected supply and demand for oil and natural gas. Meanwhile, as strains or variants of COVID-19 resurge, or if other epidemic or pandemic diseases or other public health event were to occur, the negative impact to global demand for natural gas could be material. During 2023, the New York Mercantile Exchange (NYMEX) natural gas price fluctuated from a low of $1.74 per MMBtu to a high of $3.78 per MMBtu. On March 7, 2024, the NYMEX natural gas price was $1.57 per MMBtu. Royalties that the Royalty Trust receives from its share of production will be reduced as a result of lower natural gas prices. As a result, future distributions from the Royalty Trust to its unitholders could be reduced or discontinued. In addition, lower oil and natural gas prices reduce the likelihood that the subject interests will be developed or that any oil or natural gas discovered will be economic to produce. The volatility of energy prices reduces the accuracy of estimates of future cash distributions to the Royalty Trust unitholders and could affect the value of the Royalty Trust units.

Each of the Trustee, HOGA and McMoRan depend heavily upon information technology systems and networks in connection with their respective business activities as they relate to the Royalty Trust. Despite any security measures implemented, events such as the loss or theft of back-up tapes or other data storage media could occur, and computer systems could be subject to physical and electronic break-ins, cyber-attacks and similar disruptions from unauthorized tampering, including threats that may come from external factors, such as governments, organized crime, hackers and third parties to whom certain functions are outsourced, or may originate internally from within the respective companies. If a cybersecurity incident were to occur, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, the computer systems and networks of the respective companies, or otherwise cause interruptions or malfunctions in the operations of the Royalty Trust, which could result in litigation, increased costs and regulatory penalties. Despite any steps taken by the respective companies to prevent and detect such attacks, it is possible that a cyber incident will not be discovered for some time after it occurs, which could increase exposure to these consequences.

At December 31, 2023, the Royalty Trust had 230,172,696 Royalty Trust units outstanding. In connection with the Highlander Sale on February 5, 2019, McMoRan assigned 31,143,150 Royalty Trust units to HOGA and retained 31,143,149 Royalty Trust units. FCX and HOGA each hold 13.5% of the outstanding Royalty Trust units. FCX or HOGA may sell Royalty Trust units in the public or private markets. Any such sales may have a material adverse effect on the trading price of the Royalty Trust units. A small number of other Royalty Trust unitholders also hold significant percentages of the outstanding Royalty Trust units, and sales by such holders also may have a material adverse effect on the trading price of the Royalty Trust units. See Part III, Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Royalty Trust Unitholder Matters" of this Form 10-K.

These risks include: - tropical storms and hurricanes, which are particularly common in South Louisiana during the summer and early fall of each year, and which can damage or completely destroy drilling, production and treatment facilities, which can result in the interruption or permanent cessation of production from associated wells;- flooding caused by heavy rain, which can result in the interruption or permanent cessation of production from associated wells;- extensive governmental regulation (including regulations that may, in certain circumstances, impose strict liability for pollution damage); and - interruption or termination of operations by governmental authorities based on environmental, safety or other considerations, including those relating to other operators and/or other geographical areas. These exposures onshore in South Louisiana could have a material adverse effect on the onshore Highlander subject interest, on the Royalty Trust's results of operations and financial condition, and on the market price of the Royalty Trust units.