The Gas Gambit: Optimizing Iran's Natural Gas Exports Through Risk Minimization

Abstract

Iran, despite possessing vast natural gas reserves, faces significant export constraints due to geopolitical isolation, sanctions, and infrastructure limitations. This thesis examines Iran’s optimal natural gas export strategy and aims to mitigate risk through the optimal exports of natural gas via pipeline and liquefied natural gas (LNG). In this paper, risk is defined as political and dyadic risk, which measure the risk associated with a country and the risk associated with the relationship between two countries, respectively. A comparison with Oman, a more politically stable LNG-focused exporter, provides another means for assessing Iran’s optimal exports. Using an optimization model based on portfolio theory, we minimize export risk while accounting for capacity constraints, export commitments, profit targets, transportation costs, and trade limitations. Analysis of different scenarios assesses Iran’s export allocation under a lack of export commitments, increased sanctions, and infrastructure investments, with Oman serving as a benchmark. Results show that export commitments (especially with high-risk countries) and sanctions increase risk, while diversifying and expanding the overall capacity decrease risk. Oman’s strategy highlights the advantages of export flexibility, contracts with low-risk countries, and LNG. These findings suggest that Iran’s reliance on pipelines heightens geopolitical vulnerabilities, while LNG expansion could enhance trade resilience. More broadly, the study con- tributes to understanding how geopolitical circumstances, infrastructure investments, and trade policies shape global natural gas markets.