Optimizing final investment decision with real options valuation: A case study of offshore natural gas development project in Indonesia

Prodia Nur Kemala and Dzikri Firmansyah Hakam

Energy, 2025, vol. 316, issue C

Abstract: Over the past decade, more than 50 % discoveries in Indonesia have been dominated by natural gas. Serving as a cleaner alternative to other fossil fuels, natural gas plays an important role as bridge to low carbon future during energy transition. Although the Indonesian government has set ambitious target of achieving 12 BCFD of gas production by 2030, actual gas production was only 5.6 BCFD in 2023. This research evaluates an offshore natural gas development plan for a major oil and gas Production Sharing Contract (PSC) in Indonesia, one of the country's top ten gas producer. Given the domestic gas market is heavily shaped by government policies, uncertainties will persist. In such circumstances, the Discounted Cash Flow (DCF) method alone is insufficient for valuing natural gas projects, as it relies on static and single point input without accounting for volatility and uncertainty. Hence, this research employs an enhanced approach to the DCF method, Real Options Valuation (ROV), which effectively incorporates volatility and uncertainty into project valuation. Specifically, ROV delivers Expanded Net Present Value (ENPV) for the base, optimized trajectory and extended reach trajectory scenarios for 370.0 MM$, 369.6 MM$, and 371.2 MM$ respectively; surpassing the Net Present Value (NPV) of 166.7 MM$, 214.73 MM$ and 182.3 MM$ for the same scenarios. While ROV offers valuable method for the best scenario selection, we argue that ROV analysis alone is insufficient. This research is the first to apply ROV in the context of Final Investment Decisions (FID) for offshore natural gas development in Indonesia. Unlike previous research, this research uniquely integrates and quantifies the interrelationship among three critical variables such as volatility factor, gas price and Take or Pay (TOP) through robustness check and advanced sensitivity analysis. This research explores how fluctuations in these variables affect project stability and scenario ranking, providing novel insights for PSC to optimize gas sales agreement negotiation under varying market conditions. Furthermore, the finding of this research reveals that the best scenario may drop to second or third ranking under two specific conditions: (1) both volatility and implementation cost increase; and (2) volatility increase while gas price and TOP decrease. This research contributes to the theoretical framework by advancing the application of ROV and offering practical tools for investment decision making in energy projects, with relevance to the Indonesian case study.

Keywords: Gas project valuation; Real options; Final investment decision; Energy transition; Take or pay; Robustness check (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:316:y:2025:i:c:s0360544225000052

DOI: 10.1016/j.energy.2025.134363

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