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Woodside Scraps $2.6 Billion Israeli Gas Deal as Talks Fail

Woodside Petroleum Ltd. CEO Peter Coleman
Woodside Petroleum Ltd. Chief Executive Officer Peter Coleman. Photographer: Brendon Thorne/Bloomberg

Woodside Petroleum Ltd., Australia’s second-biggest oil and gas producer, scrapped an agreement to buy a quarter of Israel’s largest natural gas field for as much as $2.6 billion after talks to complete the deal collapsed.

“Negotiations between the parties failed to reach a commercially acceptable outcome,” the Perth-based company said today in a statement. Woodside had been in talks with a group including Noble Energy Inc. to invest in the Leviathan venture.

A deal would have put Woodside in the middle of Israel’s nascent natural gas industry as the company’s proposed projects in Australia face delays. Woodside last year ditched plans to build an onshore processing plant in Western Australia to exploit its Browse gas resources. The company estimated that proposal would have cost more than A$80 billion ($74 billion).

“Leviathan felt like Browse,” Evan Lucas, a market strategist at IG Ltd. in Melbourne, said today by phone. “It was going to be hugely costly for a very low rate of return.”

Woodside rose 0.8 percent to close at A$41.23 in Sydney trading, while the benchmark index climbed 0.1 percent.

Woodside will probably look for acquisitions to boost production as the world’s biggest oil and gas producers sell assets, Nik Burns, a Melbourne-based analyst at UBS AG, said today in a note. The company also may consider giving back $1 billion that it would have set aside for Leviathan this year to shareholders through a special dividend, he said.

Oil Search

The company faces growing pressure to make an acquisition to provide growth, according to a Macquarie Group Ltd. report last week. While a bid for rival Oil Search Ltd. can’t be ruled out, Woodside will probably look at smaller acquisitions, Macquarie analysts wrote in the May 14 report.

Oil Search, Exxon Mobil Corp.’s partner in a natural gas project in Papua New Guinea, rose 1.4 percent to A$9.14.

“Woodside has made it clear they are looking for offshore overseas assets,” IG’s Lucas said. “They want to diversify their portfolio away from Australia and Oil Search is a clear standout.”

The move to pull out of the Leviathan agreement comes 17 months after Woodside signed an initial accord to acquire part of the project. The discussions dragged on amid concerns over possible changes in Israeli tax and regulatory policies, while the focus of Leviathan shifted from production of liquefied natural gas, Woodside’s specialty, to pipeline shipments.

Moving Ahead

Noble is moving ahead with plans to develop Leviathan, the Houston-based company said in a separate statement. The emergence of regional markets accessible by pipeline “has pushed the need for LNG into a later phase of development versus our earlier plans,” Chief Executive Officer Charles Davidson said. Issac Tshuva, the controlling shareholder of Delek Group Ltd., a partner in the field via its units Delek Drilling-LP and Avner Oil Exploration LLP, said today development continues as planned.

Delek Group shares dropped as much as 1.4 percent today following the news and were trading 0.8 percent lower at 5:04 p.m in Tel Aviv. The shares of Ratio Oil Exploration 1992 LP, also a partner in the field, fell 4.1 percent, the most since Feb. 3. Nobel Energy rose 0.7 percent in New York trading.

The shekel weakened 0.2 percent to 3.4891 versus the dollar as the deal was supposed to bring in a cash flow of dollars, Tal Zohar Avda, the chief executive officer of the Tel Aviv branch of FXCM Inc. U.S. said today by phone.

Earlier Deal

Woodside earlier this year agreed to pay the Leviathan partners, including Delek Drilling LP, Avner Oil Exploration LLP and Ratio Oil Exploration LP, an initial $850 million. The 25 percent stake it sought to acquire is smaller than the 30 percent negotiated in the December 2012 deal.

“After many months of negotiations it is time to acknowledge we will not get there under the current proposal,” CEO Peter Coleman said in the statement.

For the development of Browse, Woodside now is proceeding with plans to liquefy the gas on giant ships offshore, using Royal Dutch Shell Plc’s technology. A decision on whether to go ahead with that proposal is expected in the second half of 2015.

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