Oil exploration and institutions : do oil companies prefer to drill in democracies?

Abstract

In this master thesis, I investigate the impact institutional quality has on exploration and drilling activities in the oil and gas industry. I use ordinary least square regressions (OLS) and two stage least square regressions (2SLS) to perform a cross-sectional analysis on a sample of 86 countries. The analysis examines the impact institutional quality, measured by the Polity IV index, has on three different variables; new field wildcat wells (NFW), the number of days spent drilling in a country and the success rate from new field wildcats. The findings indicate a positive and significant relationship between institutional quality and drilling activity when measured by NFW wells drilled and the number of drilling days. This supports the theory that oil companies are risk adverse and prefer to drill in countries where there is low political risk and stable institutions. When looking at the discovery rate, it turns out that the probability of finding oil is negatively correlated with institutional quality. A possible explanation could be that oil companies only chose unstable countries when the likelihood of finding oil is very high. The strong consistency in the results, even to large changes in the dataset, suggests that institutional quality is a determinant of oil exploration.