Opportunism in the First Generation of Buy-back Contracts

The study of oil and gas contracts require coherent theoretical framework that links different disciplines. Transaction cost economics present an interdisciplinary approach for analyzing contractual issues. Since 1995 three generations of buy-back contracts implemented in Iran. This study for analyzing opportunism, one of TCE behavioral assumptions, focused on the first generation contracts. Opportunism is interest seeking without considering principles and consciences that do not maximize common interest. The buy-back contract parties have different interests that are not aligned with each other. The contract is incomplete; there is asymmetry in information and investment structure, so opportunism is possible. Some forms of Shirking of obligations, enforcing to renegotiation and inflexibility under new circumstances in buy-back contract, are examples of ex-post opportunism. Because of the vulnerability of the parties due to their specific investment in the project, monitoring mechanisms in the buy-back contract is not able to prevent from opportunism. Incentives alignment is another solution for opportunistic behavior that occurred in test period, but not in cost minimization and using more efficient technologies.