Net value royalties: Practical tool or economist's illusion?

The petroleum industry has traditionally generated substantial revenues for governments. Where governmental power is divided, as in federations like Canada and Australia, a junior level of government normally collects royalties while the senior level levies a variety of imposts (income tax, export duties, excises on production). The combination of recent sharp reductions in prices, more price volatility and an era of freer markets has subjected existing tax and royalty systems to severe strain and has shifted attention to the design of fiscal systems that are more profit- sensitive. For the royalty element, interest focuses on net value royalties (NVRs). This paper deals with the nature and problems of NVRs. It proceeds by looking first at the application of resource rent royalties in Australia. It then focuses on recent megaproject royalty arrangements in Alberta and evaluates the degree to which Alberta's current royalty system is profit- sensitive. Problems associated with NVRs are discussed in the fourth section; concluding remarks are made in the last section.