Should Woodside scrap its Israel gas deal?

It has been exactly 10 months since Woodside Petroleum (ASX: WPL) announced it would enter into a new gas joint venture in Israel. However, almost since day one the deal has been plagued by reports of problems and setbacks.

If completed, the agreement will give Woodside a 30% stake in Israel’s Leviathan gas field, which is estimated to hold around 17 trillion cubic feet (tcf) of natural gas. But one of the biggest problems so far has been to simply figure out how much gas is allowed to be exported out of the country.

In June Israel’s government elected to keep 60% of the country’s gas production for domestic use, limiting the volume available for export. However this was challenged and is currently under review by the country’s High Court.

A second, and potentially more challenging, issue is the conflicting expectations of the partners involved in the deal. According to The Australian, Delek Drilling LP, which owns a combined 46% stake in the deal, is investigating options to export the raw gas to Greece or Turkey, or send it to Egypt for processing. These options would prevent Woodside from acting as the project’s operator tasked with turning the natural gas into LNG. It may also create an additional challenge for Woodside if it wants to target the growing Asian gas market.

So should Woodside scrap the deal and invest elsewhere? Despite the challenges, it should be remembered that the Leviathan deal is a greenfield operation. That is, it is brand new for both Israel and the discovery site itself. Any new project will need to be set up from scratch and will take a lot longer than if Israel had existing LNG infrastructure.

CEO Peter Coleman has called the deal a ‘once-in-a-decade opportunity’ and Woodside’s sizable stake has the potential to return significant value to shareholders over the long-term.

Foolish takeaway

Investors seeing companies like Santos (ASX: STO) and Oil Search (ASX: OSH) near completion of big new projects should not feel anxious. Greenfield LNG projects have long lead times and Woodside is equipped to deal with challenges along the way.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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