Woodside Petroleum Limited’s Israel deal – what investors need to know

After months of speculation and uncertainty Woodside Petroleum Limited (ASX: WPL) last week confirmed that it has signed a multi-billion dollar memorandum of understanding (MOU) to enter into the giant Leviathan gas joint venture off the coast of Israel.

Woodside will take a 25% stake in the project which will give the company access to the estimated 18.9 trillion cubic feet (tcf) of natural gas. This is an 11% increase on the initial estimate of 17 tcf in 2012 when Woodside first announced its interest in the project.

The cost

The deal involves spending big money. To start, Woodside will have to stump up US$850 million on completion of the arrangement. US$350 million more will be paid when a final investment decision on the type of development is made.

Once production is up and running Woodside will pay 5.75% of export gas revenue (after at least two tcf have been exported) capped at US$1.3 billion. There is also an additional 2.5% royalty on commercial oil production and a US$50 million one-off payment if the gas reserves are revealed to be over 20 tcf.

The final cost however may depend on the development option selected for production.

The comparison

That certainly feels like a lot of cost! So how does it compare to Woodside’s most recent project Pluto LNG? At a high level the deal looks favourable.

Woodside spent just under $15 billion on Pluto LNG of which it owns a 90% stake. According to Woodside’s website the Greater Pluto fields are estimated to contain 5.5 tcf of proved plus possible dry gas reserves and an additional 680 billion cubic feet of contingent resources – so around 6.2 tcf altogether.

Woodside’s 25% stake of the 18.9 tcf natural gas reserves would give it theoretical rights to around 4.725 tcf. Using that comparison, and at an estimated cost of up to US$2.55 billion, it looks like an attractive deal.

Foolish takeaway

The signing of a deal is a positive step for Woodside and should come as welcome news for investors. However with the delay of Woodside’s Browse Basin project and the long lead times associated with new LNG projects (early estimates put first delivery from the Leviathan project in 2017), investors wanting to cash in on the deal will need to have a particularly long-term focus.

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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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