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Canadian Investment in Iranian Natural Gas

Primary Contributor: Graham Volk, Hailey Hazel

Team Leader: Ashley Audette

5/12/2016

          As Canada and the international community ease sanctions placed upon Iran in response to the state’s nuclear program and involvement in the proliferation of nuclear and ballistic missiles, the economic opportunities within the energy sector are increasing. Iran is home to 17% of the worlds natural gas reserves; the largest in the world, and the fourth-largest reserves of oil worldwide.[1] Iran is expected to significantly increase output of these resources within the next few years, considering most of its natural gas reserves are undeveloped. With plans to broaden natural gas exports to regional states as well as Europe and Asia, foreign investment will be key to revamping this sector and creating a prospering Iran.[2]

          Canada and Iran have had an extremely tense relationship. Canada has sanctioned Iran in the past because of failures to comply with international covenants, Iran's support for the Assad regime and possible threats to Canadian national security.[3] With severely damaged ties between the two states, embassies in both Canada and Iran have been forced to close, blocking communication between countries. However, under Justin Trudeau, Canada has pledged to restore ties.[4]

          Due to the absence of formal diplomatic relations between Canada and Iran, investors must be cautious. Those who are looking to invest in Iranian natural gas are encouraged to take independent legal actions to ensure that Canadian laws are not being violated when entering this market. Investors can receive support from the Trade Commissioner Service through the Consulate General of Canada if obstacles arise.[5] Additionally, several banking institutions have re-entered the area. Forty-four foreign banks now maintain representative offices in Iran as well as 28 insurance firms.[6] As more foreign institutions rekindle ties with the country, the natural gas industry will be easier to access for Canadian investors.

          The potential for significant growth within the natural gas industry is the primary driver of Canadian interest in the region. With the easing of international sanctions and a rehabilitating Canadian-Iranian relationship, opportunities for investment in Iranian natural gas have greatly increased to match an increase in production. February 2016 marked that greatest monthly increase of production in approximately twenty years; with an increase of 187,800 b/d to 3.13 million b/d.[7] Production is expected to continue to grow as the industry further develops. Additionally, Iran has an extremely high success rate regarding the exploration of natural gas, which is estimated at 79% compared to the rest of the world, which sits near 30-35%.[8]

          Iran sits in an extremely favourable location within the Middle East. It has 27 oil and gas reserves that are shared with neighbouring countries, which collectively comprise of nearly 300 million inhabitants.[9] This extremely large market will be attractive to investors because of its accessibility for cross-continental trade and diverse economies that are present within the region. 

          Iran is also home to a sizeable population; nearing 80 million people, with a large percentage of educated, unemployed youth.[10] This population can be hired to perform skilled labour at competitive wages. This large pool of talented workers is appealing to foreign investors within the natural gas industry.

          Political instability within Iran has been in decline.[11] As sanctions begin to ease, the international community, including Canada have reconsidered their isolationist approach to the nation and are in early stages of increased communication with Iran. With a stronger and more internationally legitimate government, corporations are more willing to enter the Iranian market and develop sectors such as the natural gas industry.

          Looking ahead to the 2017 Iranian elections, there are some potential challenges. The incumbent, Hassan Rouhani, has been generally more receptive to foreign governments and globalized trade than previous administrations. Rouhani is the favourite to win re-election,[12] and is concurrently the preferred candidate from the perspective of Canadian investors.

          Rouhani’s likelihood of winning re-election is strong for a number of reasons. The disunity amongst conservative factions seen since the 2013 presidential elections has continued up to this point[13] - and the likelihood that they are able to dampen Rouhani’s reformist momentum in time for the election is slim. For some historical context, every president since Ali Khamenei in 1981 has won a second term[14] – a reflection of the outsized influence of institutional controls over the democratic process. With that said, in the event of a conservative upset victory the likelihood of continued progress in the realm of economic liberalization is slim[15]. While this outcome is unlikely, the risk assessment for Canadian investors will become worse should the conservatives gain ground in the coming months.

          Lastly, the election of Donald J. Trump as President of the United States has added further uncertainty to the future of Canadian investment in Iran. The most notable way that Trump’s administration might impact the future of the Canadian-Iranian relations surrounds his view on the Iranian nuclear deal. Trump’s rhetoric with respect to the insufficiency of the nuclear deal has little chance of substantively changing the agreement itself. With that said, should Trump act to either eliminate or add elements to the agreement, the most likely outcome is a military strike, as European states who were critical to the previous sanctions will not likely be amenable to returning to those sanctions. While the balance of probabilities suggests that no substantive change will ultimately occur with respect to the nuclear deal – the likelihood of furthering Canadian investment in any facet of the Iranian economy, should Trump try to modify the agreement, is very slim.