* Leviathan partners say development on schedule for 2017
* Woodside open to future talks on different terms
* Focus shifted to regional exports rather than LNG
By Sonali Paul and Ari Rabinovitch
MELBOURNE/JERUSALEM, May 21 Australia's Woodside Petroleum pulled out of an agreement to take a stake worth up to $2.7 billion in Israel's flagship Leviathan gas project on Wednesday, as the group developing the field shifted focus to regional markets.
The deal's collapse more than a year after negotiations began will not affect development, the Leviathan partners said, and first production is still expected in late 2017.
Leviathan was discovered in 2010 in the eastern Mediterranean and was world's the largest offshore gas find of the decade. It holds an estimated 540 billion cubic meters of gas, most of which is earmarked to be sold abroad.
The U.S.-Israeli group developing the field first tapped Woodside, an expert in liquefied natural gas (LNG), in December 2012 to gain access to distant Asian markets.
Agreement on most issues was reached in the drawn-out negotiations, officials said, but talks hit a surprise snag in March when Woodside executives did not show up at the formal signing ceremony in Israel.
The delay was over a tax dispute. Talks between Woodside and Israeli authorities ensued, though analysts said relations soured with the Leviathan partners, which in the meantime pursued export agreements in neighbouring countries.
"All parties have worked very hard to secure an outcome which would be commercially acceptable, but after many months of negotiations it is time to acknowledge we will not get there under the current proposal," said Woodside CEO Peter Coleman.
Leviathan's operator, Texas-based Noble Energy, said development would stay on schedule but noted a change in plans since the search for a new partner began about two years ago.
"Perhaps the most dramatic changes have been associated with the growth in the regional markets. The emergence of these regional markets, which are accessible through pipeline outlet, has pushed the need for LNG into a later phase of development versus our earlier plans," said CEO Charles Davidson.
Woodside left the door open to renegotiation with the project stakeholders - Noble and Israel's Delek Drilling , Avner Oil and Ratio Oil - if there were "material changes" to the investment conditions.
The decision to pass on a 25 percent stake in Leviathan, located in a region fraught with geopolitical risk and a country that has never developed such a large gas field, was welcomed by investors and Woodside's shares were up as much as 1.4 percent.
"You would have wanted a very high hurdle rate for investment in Israel given the uncertainties that surround it," said Credit Suisse analyst Mark Samter.
In Israel, analysts said Woodside's departure was not a surprise and its effect would not be dramatic.
"The main impact on company stocks will be seen with progress in signing export deals, funding agreements and progress in the field's development," said Noam Pinko, an analyst at Psagot brokerage. "The question is, at what price will a new partner enter?"
The Leviathan partners have shown in recent months a strong preference for exporting via pipeline to neighbouring markets over liquefying the gas themselves, at least as a first phase.
In January they signed a deal to sell gas to the Palestinians. They have since put in a bid to supply gas to Cyprus, and Turkish fuel retailer Turcas said it had begun non-binding talks to procure gas from Leviathan. Selling to companies in Egypt has also been explored, experts said.
Earlier this month Delek Drilling and Avner raised $2 billion in an international bond offering to fund Leviathan's development, and the companies said at the time the demand of $13.5 billion was the largest ever for an Israeli enterprise. (Editing by Richard Pullin and Mark Potter)