The Structure and Contributions of Relational Contracts: Theory and Evidence from Oil and Gas Unit Operating Agreements

"This paper provides new theoretical clarification and empirical evidence about relational contracts written for the exploitation of oil and gas reservoirs in the United States and Canada. To mitigate common pool losses, oil fields often are developed under unit operating agreements. These agreements are classical relational contracts: They are long term (often 20 years or more), include many parties (typically ten or more firms), involve considerable uncertainty about geological and economic conditions, address site-specific investments, and align the incentives of the oil-producing firms over the life of the contract to maximize the economic value of the reservoir without repeated re contracting. The paper presents a theoretical framework describing the essential elements necessary for unit operating agreements to be successful as relational contracts. It examines 60 unit operating agreements to determine whether the theoretical provisions are found empirically."