The effective royalty rate is defined as the minimum share of revenue (or production) that the host government might expect to receive in any given accounting period from royalties and its share of profit oil.

The ERR normally excludes the effects of government participation. If the contract or concession agreement has no cost recovery limit and no royalty, the host government may receive nothing in a given accounting period. This can happen even with profitable fields in the early years of production when exploration and development costs are being recovered.

The world average ERR for concessionary systems is around 10 percent, whilst for PSCs it is closer to 30 percent net present value per barrel of oil equivalent (Johnston 2003).

Considering the combination of royalties and cost recovery limits the average ‘guaranteed’
government share is around 20% in 2010. This ‘guarantee’ is what is often referred to as the ‘effective royalty rate’ (ERR)

It is also an excellent measure of how “front-end” loaded a
system is (i.e. mostly a function of the non-profits-based rent extraction mechanisms).

This indicator allows companies to compare investments around the world, irrespectively of the size of the project