Drywall – re-tape when replacing drywall sheet

Option 3 is the sanest IMHO. You can get a bucket of drywall mud for $15 and do a "skim coat" over the panels to create a flat surface. No need to sand first; this stuff will stick to anything! Once the mud is dry, you can sand it to get a smooth look, or texture it. Texturing can be done with cans of spray-on texture you get at big box stores, or using a texture sprayer gun. A pro will be able to do the texture part much better than a novice, so if you want a textured wall, I recommend hiring that part out for $100 or so. With the right equipment and an operator of moderate skill, it's a 30 minute job. If you've already got an air compressor, you can have a go yourself with a sprayer attachment that has a hopper.

But whatever you do, match the texture or lack thereof to any drywall that abuts the paneled wall. Nothing screams "I used to be wood paneling!!!!!" like strange, awkward texture on a few walls that, upon further investigation, have more give to them when pushed on.

This is the approach I took on my wood paneled walls and today you'd never know the difference.

I think the question you're asking is whether the joint compound will crack around the plugs if you don't tape the joint.

Probably.

But that depends on:

1. How well you replace the plugs. If you don't center them perfectly, leaving uniform gaps, the joint compound has nowhere to go in the tight spots and you're left with a paper-thin skin on the surface that's sure to crack.

2. How well you press mud into the gap. Same reason.

3. Your climate. Extremes of temperature and humidity will probably crack untaped joints.

4. How you use the lath. If you use just one the plugs can move more and will probably crack. If you use two, well spaced, and 8 screws, probably not.

What I'd do:

Since it's only 17 plugs, run a strip of tape down one side, and a strip down the other, covering as much joint as possible with the two. The remaining untaped joint segments will be short enough that they're not likely to crack. This will take very little time. A 12" or larger knife will allow you to make a nice wide second coat over everything and end up with a finish that will require very little sanding.