Sustainable Carbon Capture and Storage (CCS) Investments in Oil and Gas: Real Options Analysis Under Energy Transition and Government Incentives

Achieving Indonesia's net zero emission (NZE) target by 2060 requires a comprehensive strategy encompassing renewable energy expansion, energy efficiency improvements, electrification of transportation, and the adoption of low‐carbon technologies. Beyond these measures, carbon capture and storage (CCS) plays a critical role in addressing emissions from hard‐to‐abate sectors, such as oil and gas. However, CCS implementation in Indonesia is still in its early stages and faces significant challenges due to uncertainties in policies and carbon pricing. This article evaluates the financial feasibility of CCS project in oil and gas sector in Indonesia. In addition to employing the discounted cash flow (DCF) method, the study utilizes real options valuation (ROV) to better account four uncertainties in resource prices. A binomial tree approach is adopted within the ROV framework. Four scenarios are developed to simulate varying resource prices and incentive schemes: base scenario, zero‐assistance scenario, incentive‐dependent scenario, and optimal scenario. Using the DCF method, all scenarios yield positive net present values (NPVs). However, when evaluated through the real options approach, only the incentive‐dependent and optimal scenarios are deemed viable for immediate investment. Government incentives are shown to significantly reduce the financial burden and mitigate risks, enhancing the viability of CCS projects. Specifically, investment credit plays a pivotal role in lowering the critical carbon price. Without investment credit, the critical carbon price is $80/tCO2e under low oil price conditions and $60/tCO2e under high oil price conditions. With sufficient investment credit, the required carbon price drops to as low as $2/tCO2e. The findings provide practical insights for investors by identifying optimal conditions for CCS project investment under market volatility. For policymakers, the results highlight the need to design stronger fiscal incentives and maintain a predictable carbon price floor to accelerate CCS deployment. Strengthening coordination between the government and oil and gas industry is crucial to ensure project bankability and long‐term emission reduction outcomes. In conclusion, a combination of enhanced government incentives and a robust carbon price floor is essential to drive CCS implementation effectively and ensure its contribution to achieving Indonesia's NZE target. 2025 Society of Chemical Industry and John Wiley & Sons, Ltd.