Optimal investment strategy for natural hydrogen exploration and production considering dual price uncertainties: A real options approach

Abstract

This study develops a real options framework to assess the economic viability of natural hydrogen exploration and production. Unlike conventional oil and gas projects, natural hydrogen faces dual uncertainties in electricity and Renewable Energy Certificate (REC) prices, highlighting the importance of managerial flexibility in investment decisions. Drawing on global average oil and gas data as a proxy, the model evaluates optimal timing to invest, defer, or abandon until the license expiration. Results show that power generation efficiency is the most influential factor, followed by REC- and electricity-related parameters. Compared to scenarios without incentives, the presence of REC subsidies significantly boosts both the likelihood and value of investment. Sensitivity analyses further underscore how field size, price volatility, and policy frameworks (e.g., license duration, subsidy structures) shape project outcomes. These findings highlight the need to integrate geological, economic, and policy dimensions to fully unlock the commercial potential of natural hydrogen, offering valuable insights for policymakers and industry stakeholders.