Woodside to take smaller stake in Israeli project

Woodside Petroleum is set to take a 25 per cent stake in the Leviathan gas project off the coast of Israel, under a conditional deal that involves up-front payments of $US1.2 billion.

Woodside and the participants in the project, including US-based Noble Energy, have agreed to convert a 14-month-old in-principle agreement into a non-binding memorandum of understanding.

They are aiming to negotiate a fully-termed agreement by March 27 2014.

The Leviathan field holds an estimated 18.9 trillion cubic feet of natural gas and 3.4 million barrels of condensate.

Woodside would be the operator of any liquefied natural gas (LNG) development, while Noble would remain upstream operator.

The Israeli investment fits with Woodside chief executive Peter Coleman’s strategy of leveraging the company’s operational expertise in the LNG sector.

The MoU contemplates supply of domestic gas to Israel along with LNG exports and supply to neighbouring countries.

The project has faced a number of hurdles, including a legal challenge to the Israeli government’s natural gas export policy. That was dismissed last October by the Israeli High Court, which upheld the government's 50 per cent gas reservation policy.

Woodside believes the government policy provides sufficient export volumes to underpin a viable project.

The project participants are also awaiting final details of the Israeli government’s tax policy for gas export projects; this is due in the first half of this year.

The original in-principle agreement, announced in December 2012, envisaged Woodside taking a 30 per cent stake in the project.

At that time, it was estimated that the gas field had an estimated 2C resource of 17 Tcf.

Under the new MoU, Woodside will pay $US850 million upon completion of the transaction under a fully-termed agreement.

A further $US350 million will be paid upon on a final investment decision for an LNG development, or payments of up to $US350 million on predetermined export project milestones.

Woodside will pay 5.75 per cent of its well head export gas revenue - capped at $US1.3 billion - after at least 2 Tcf have been exported from the Leviathan field.

A royalty of 2.5 per cent will be paid on commercial oil production after payback of development costs.

A one-off payment of $US50 million will be paid if, after production of 4 Tcf, the estimated total gas resource is assessed to be at least 20 Tcf.

Under the December 2012 agreement, Woodside planned up-front payments of $US896 million and a further $US350 million on FID.

Shares in Woodside closed 4 cents lower at $37.58.