Is Woodside Petroleum right for your portfolio?

For the second time in a week, the future prospects of Australia’s second largest oil and gas producer, Woodside Petroleum (ASX:WPL), have hit a political snag that may throw uncertainty on the company’s long-term earnings.

But does this make Woodside a more risky investment, or are these political issues just inherent business risks faced by all oil and gas companies?

Governments are always going to be tricky beasts to tackle, especially when it comes to a nation’s energy reserves, which can be huge sources of a wealth at both a state and national level. We saw this last week when Western Australia Premier Colin Barnett threatened to revoke Woodside’s state retention lease for the Browse Basin if it followed through with plans for floating LNG (FLNG) production. This was because it would require the state to forego billions of dollars in benefits and royalties.

Now Woodside’s US$696 million investment in Israel’s Leviathan gas field Joint Venture faces uncertainty after the Israeli government elected to keep 60% of its natural gas reserves for domestic use, leaving just 40% available to export.

The Leviathan gas field sits on an estimated 17 trillion cubic feet of gas according to Woodside, making it one of the largest recent natural gas finds in the world and an incredible opportunity for the gas producer. Under the agreement, Woodside would be the operator of any LNG development in the field; however, a cap on potential exports could limit the return on offer for Woodside.

Woodside has agreed to pay US$200 million once laws permitting exports from Israel are in force, and according to the Times of Israel, was close to pulling the plug on the deal if laws were not passed by the end of June. The law was to be brought before cabinet for final approval on Sunday.

The political speed bumps should not be thought of as a lingering concern for investors considering Woodside as an addition to their long-term portfolio. Instead they should be thought of as a necessary evil of the large scale production that Woodside operates on. They are the same issues as have affected successful oil giants like BHP Billiton (ASX: BHP), Exxon Mobil and BP for decades.

Foolish takeaway

Government negotiations will be an inevitable part of any large-scale growth opportunities Woodside. There will be delays and there will be conflicts. Investors in Woodside’s can have faith in the company’s management, who have proven experience with international production from as far away as the Gulf of Mexico, Brazil and Peru.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article. 

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