* Adds private firm to region dominated by national players
* Woodside wants to use LNG expertise outside home market
* Production target is 2016 for Israeli gas market
By Jane Wardell and Ari Rabinovitch
SYDNEY/JERUSALEM, Dec 3 (Reuters) - Australia's Woodside Petroleum said it would buy a 30 percent stake in Israel's Leviathan natural gas field, dealing a blow to Gazprom's ambitions to cement its position as Europe's dominant supplier and expand in the liquefied natural gas market.
Woodside, Australia's biggest oil and gas firm, will take a 30 percent stake in Leviathan in a deal that could be worth $2.5 billion and adds a major player to the LNG market in Europe, the Middle East and Africa.
Gazprom, Russia's gas export monopoly, which supplies around a third of Europe's natural gas demand, had also bid for the project, which is expected to eventually export LNG to Europe and Asia. Other bidders included France's Total and China's National Offshore Oil Corporation , sources said.
Initial production for Israel's domestic gas market is targeted for 2016, Woodside said
Analysts say the project could export LNG overseas by the end of the decade and that it is ideally situated to serve both Europe's and Asia's growing LNG markets due to its location near the Suez Canal and major gas markets such as Italy.
"The Leviathan partners wanted someone with expertise in upstream and LNG marketing. This is an area where Gazprom has some but limited experience," said Catherine Hunter, energy analyst at IHS Global Insight.
Woodside's entry into the region will also add a private player to a market largely dominated by national suppliers such as Russia's Gazprom, Norway's Statoil and Algeria's Sonatrach.
"Strategic issues are likely to have featured in this decision, given that Gazprom is already Europe's primary gas supplier. It may have seemed more attractive to award the stake to a new entrant which also has marketing expertise in Asia," Hunter said.
The Leviathan gas field is located 130 km (80 miles) off the Mediterranean port of Haifa and has estimated gas reserves of 17 trillion cubic feet (481 billion cubic metres), which is equivalent to almost a year's worth of European gas demand and enough to cover Israel's gas needs for generations.
Until now, Texas-based Noble Energy was the main foreign operator in Israel's energy market.
"The entry of Woodside will bring additional international diversity to the Eastern Mediterranean area," Noble Chairman and CEO Charles Davidson said in a statement.
Leviathan's reserves could redraw the global gas supply map, and the Israeli government is keen to attract energy majors to invest.
"We intend to continue to encourage the entry of giant international corporations into Israel's energy industry in order to realize the potential buried off the country's shores," Israeli Energy Minister Uzi Landau said in a statement.
"The acquisition price is attractive compared with recent similar transactions, although geopolitical risks are higher," Bernstein Research said in a note.
The Leviathan gas field is not the only big recent finding in the eastern Mediterranean. Some analysts estimate total offshore gas reserves in the region are in excess of 100 tcf, prompting interest in exploration in countries including Egypt and Turkey.
Despite the interest, experts say that developing the region's gas fields will be complicated because of border disputes and political conflicts.
For Woodside, the deal offers a welcome alternative to its domestic LNG projects, which have been dogged by spiralling costs.
Australia has some of the highest marginal costs in the world at around $10 per million British thermal units (mmBtu).
"With rampant cost inflation in the face of an increasingly price-sensitive customer base, these large-scale, expensive projects look cumbersome and outdated in the context of intensifying global competition," French Bank Societe Generale said in a recent research note.
Woodside Chief Executive Peter Coleman said the Leviathan deal was a significant step towards realising an ambition to secure world-class growth opportunities.
In May, Woodside was one of 15 companies, including majors such as Total, to bid on nine offshore gas blocks in Cyprus, which is jointly developing its gas exploration with Israel.
The agreement also allows Woodside to participate in further exploration opportunities in the 349-Rachel and 350-Amit Israeli offshore petroleum licences, the company said.
Ratio Oil Exploration, a partner in the U.S.-Israeli consortium currently developing the field, told the Tel Aviv Stock Exchange the deal with Woodside could be worth up to about $2.5 billion.
"It's tough to overstate the significant effects this move will have on the Israeli energy sector and the economy in general," Ratio Chief Executive Yigal Landau said in a statement.
In the deal, Noble Energy, which will remain the upstream operator, will sell 9.66 percent of its 39.66 percent share in the field. Delek Drilling and Avner Oil Exploration will each give up 7.67 percent of their 22.67 percent stakes. Ratio will sell 5 percent of its 15 percent stake.