Impact of Political Stability and Property Rights Protection on Oil and Gas Investments: - A Cross-Country Analysis

This paper documents a strong negative relationship between political risk and investments in the petroleum industry. Our unique data set, released for the purpose of this study only, allows us to study the timing of investments in individual oil and gas fields around the world. We find that oil and gas firms invest faster in countries that are politically stable and have solid protection of property rights. In the investigation, we employ risk measures of a host country's legal system, expropriation risk and government stability as well as risks of internal and external conflicts. We find that they consistently indicate negative causality from political risk to investment decisions. We also examine variation across company types and document significant differences in sensitivity to political risks between major multinational companies and national oil companies. We find majors to be more concerned with all risks investigated. In addition, we provide evidence that companies with higher relative valuation (Tobin's Q) and companies with lower debt invest faster