Woodside’s Israel venture on rocky ground

Woodside Petroleum’s (ASX: WPL) 30% stake in a huge offshore Israeli gas discovery is reported to be on increasingly rocky ground after Israel’s government elected to set a limit the percentage of LNG to be made available for export.

The Associated Press has reported that Woodside is holding back on a payment of $767 million (US$696 million) for its share of the deal in response to the passing of legislation by the Israeli government which could reduce Woodside’s potential return on investment.

Israel’s parliament last month voted to keep 60% of gas production from the state’s Leviathan gas field to supply domestic requirements, leaving only 40% available to be exported to meet the rising demand for clean energy, particularly throughout Asia.

The lower-than-anticipated export quota, as well as the large recent decline in the Australian dollar are likely causes for Woodside to re-check its initial expectations according to the Associated Press. A decline in the Australian dollar means higher relative costs for Woodside for a project set to be facilitated in US dollars.

Woodside has been investigating a number of new investment opportunities since the completion of its Pluto LNG production facility in Western Australia last year. While many energy companies are undertaking significant projects to capitalize on Australia’s vast energy resources, like Santos (ASX: STO) GLNG project and Origin Energy’s (ASX: ORG) stake in the billion dollar APLNG project, Woodside has been looking further offshore. In addition to the Israel deal the company last month announced it had taken up a share in several blocks off Ireland.

It is possible, however, that the delay in payment for the Israel venture is simply the result of due diligence being conducted, with all parties involved taking the time to finalize details of the significant deal.

Foolish takeaway

Should investors be worried? Rather than being concerned about the project’s fate, investors should view the caution being taken by Woodside as a signal the company will not be pressured into making a rushed decision. There are many changing factors involved in the Leviathan deal and it is important that Woodside takes the time to complete thorough due diligence.

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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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