By Ross Kelly
SYDNEY-- Woodside Petroleum Ltd. abandoned plans to buy part of
a large natural-gas discovery offshore Israel for up to US$2.5
billion, raising fresh concerns about its ability to increase
production following several big setbacks in Australia.
Woodside's decision to walk away followed more than a year of
talks with the owners of the gas discovery, known as Leviathan,
which include Noble Energy Inc. and Delek Drilling LP. A deal was
initially held up while the Israeli government drew up a policy for
gas exports, and delayed further while the Leviathan companies
overhauled plans to develop a field estimated to contain 18.9
trillion cubic feet of natural gas.
Leviathan--one of the world's biggest deep water gas discoveries
in a decade--could transform Israel, a country largely dependent on
energy imports, and give it a new economic advantage over neighbors
in the Middle East. Planned to come online in 2017, Leviathan's
development comes as Europe debates the security of its energy
supply in the wake of geopolitical tensions involving Russia and
Ukraine.
To Woodside, the purchase of a minority stake in Leviathan also
had the potential to be transformational. The company is heavily
reliant on exports of oil and natural gas from Australia, but has
few options to lift its output there. Hopes of expanding the Pluto
LNG terminal in Australia were dashed when Woodside failed to find
enough gas, while a decision to build another gas-export project
nearby--Browse--has been delayed by a minimum of two years.
The Leviathan deal was to be the biggest among a string of
overseas acquisitions by Woodside in countries ranging from Myanmar
to Ireland, as Chief Executive Peter Coleman looked to find new
reserves of oil and gas to offset its challenges in Australia.
Woodside, Australia's second-biggest oil producer behind BHP
Billiton Ltd., initially agreed to take a 30% stake in Leviathan,
but the terms of the deal were changed in February after a new
estimate of the field's size. It agreed then to take a 25% stake
for $850 million, followed by milestone payments that hinged on the
development of the resource.
Early ideas for development included a gas-export facility in
Cyprus, giving Woodside an opportunity to use its expertise in
producing liquefied natural gas, or LNG, for export at large
refrigeration terminals that typically cost tens of billions of
dollars to build.
Israel, however, is exploring the option of piping Leviathan gas
to neighbors including Jordan after its government approved the
export of up to 40% of the field's reserves. Noble has also
advocated piping it under the sea to Turkey, rather than investing
in a costly LNG plant.
"The plans for development of the Leviathan discovery have
significantly changed since we began the search for a partner
approximately two years ago," Charles D. Davidson, Noble's chairman
and chief executive said.
Woodside said negotiations didn't reach a commercially
acceptable outcome, but didn't elaborate.
Mr. Coleman must now decide whether to return surplus cash to
shareholders, or use it to buy another asset. Analysts at broker
Macquarie Group last week warned that Woodside's earnings could
fall by 35% over the balance of the decade if it doesn't commit to
building new projects, or make an acquisition.
"They need to look at a combination of a capital return to
shareholders, like a special dividend, and an acquisition," said
Brad King, portfolio manager at fund manager Armytage Private.
Deals are complicated by rising global share markets, which make
potential acquisition targets more expensive than a few years ago,
Mr. King said. "They may have to look at the smaller end of the
market for bolt-ons, perhaps in Australia's Cooper Basin or in the
U.S."
Australian fund manager Equity Trustees last week sold all the
Woodside stock in its growth fund, because it couldn't see a
catalyst to rev up earnings. It now only owns Woodside shares in
its income fund.
"When its payout ratio became 80%--twice its global peers--we
saw very limited opportunity for growth of earnings," said George
Boubouras, Equity Trustees's chief investment officer.
Write to Ross Kelly at ross.kelly@wsj.com
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