Transaction cost and host country’s opportunistic behavior in oil E

The purpose of this paper is to understand why a host country (HC) shows ex post opportunistic behaviors in E&P projects and frequently forces international oil companies (IOCs) to renegotiate previously signed contracts. This research employs the concept of asset specificity and hold-up problem in transaction cost economics (TCE). It then examines the unique characteristics of E&P projects, HC’s opportunistic behaviors, and IOCs’ safeguards. For a case study analyzing the implications between the economic theory and HC’s ex post opportunism in oil E&P project, I have selected Kazakhstan. The result is that HC’s ex post opportunism can be explained by a hold-up problem resulting from IOCs’ sunk investments and the unique characteristics of the oil E&P industry. When IOCs’ important capital assets become sunk investments and the price of oil increases rapidly, HC has a strong incentive to appropriate IOCs’ profits through ex post opportunism. Yet at the same time, HC must consider the damage to its reputation when deciding the extent and ways of its ex post opportunistic behaviors in oil E&P projects.