Will a Geopolitical Conflict Accelerate Energy Transition in Oil-Importing Countries? A Case Study of the Philippines from a Real Options Perspective

Abstract

Geopolitical conflicts, involving a major player in the world market, affect the prices of oil and commodities, particularly in oil-importing countries. Consequently, the unprecedented changes in oil prices impact investments in energy transition projects. This study aims to analyze the dynamics of investment decisions in energy transition under uncertainties in geopolitical risks. This research applies the Black-Scholes-based real options valuation to value the flexibility in postponing energy transition investments considering the repercussions of the Russia-Ukraine war. Applying the proposed model to the case of the Philippines, the valuation result with a net present value of USD 231 million for a 1 GW capacity shows that energy transition is a viable project when the cost savings from using fossil fuels to renewables are considered. On the other hand, real options valuation finds a higher flexibility value of USD 990 million, which implies a better decision to postpone the project. The uncertainty in geopolitical conflicts further increases this value causing a longer waiting period to implement the energy transition project. Sensitivity analysis shows that the results are robust to changes in the explanatory variables. Results provide policy implications on making an oil-importing country energy self-sufficient and robust from economic and geopolitical shocks.