European Gas acquires French firm for $42m

West Perth-based hydrocarbon developer European Gas Ltd will acquire French coal mine methane production company Gazonor SA for around $42 million, the company has announced.

The acquisition, through a tender process, will see European take control of the Nord-Pas de Calais gas production infrastructure and fields - comprising a total area of 578.6 sqkm with a 187.5 sqkm permit under application.

The full text of a company announcement is pasted below

HIGHLIGHTS
 Successful tender for Gazonor S.A. ("Gazonor")
 Gazonor owns coal mine methane production assets and associated surface infrastructure in northern France.
 Sale and Purchase Agreement entered into with Filianor S.A. (a wholly owned subsidiary of the French Government).
 Agreement is subject to statutory approvals.

TENDER

European Gas Limited ("European Gas" or "the Company") is pleased to announce that it has been successful in the tender to acquire 100% of the issued capital of Gazonor S.A. (a company incorporated in France ("Gazonor")) and has entered into a Sale and Purchase Agreement ("SPA") with Filianor S.A.

Filianor S.A. is a wholly owned subsidiary of Charbonnages de France, the French state owned coal mining corporation.

Completion and settlement of the purchase is expected to occur in November 2007 following completion of the statutory approval process provided for in the SPA including ministerial approval as advised by the Conseil Général des Mines, the supervisory authority with regards to mining matters in France.

The purchase price for the Gazonor shares is €26.2 million (approximately A$42.0 million).

GAZONOR S.A.

Gazonor is the owner of the Nord - Pas de Calais coal mine methane ("CMM") production field and associated infrastructure situated in northern France (See Figure 1.).

History

For a period of 25 years and since 1992, Gazonor holds the gas exploitation rights over the Poissonnière and Désirée permits situated in the districts of Nord - Pas de Calais in the north west of France, comprising a total area of 578.6 km2 with an extension of the Poissonnière permit of 187.5 km2 under application.

Coal has been mined in these districts since 1820 and termination of mining activities commenced in about 1950 and the extraction of coal CMM from the permits commenced for industrial use in 1979. The last coal mines were closed in 1992, whilst CMM extraction continued from three main processing sites, Avion and Divion in the Poissonnière permit and Désirée in the Désirée permit.

Until the end of 2006, 2,090 million cubic metres (Mm3) (74 billion cubic feet ("Bcf")) of gas has been extracted with an average methane content of approximately 54%. In the last five reported years to the end of 2006, gas production has averaged 81.2 Mm3 per year (2.9 Bcf) with an average methane content of 54%. For 2006, the average methane sale price for Gazonor was €21.70 per MWh.

Reserves

An independent report prepared by Deutsche Montan Technologie GmbH of Essen, Germany ("DMT") on behalf of European Gas estimated the 1P remaining recoverable reserves of 865 Mm3 (30.6 Bcf) of methane, producible over the next 20 years. After drilling additional boreholes, the recoverable reserves may be increased to 950 Mm3 (33.6 Bcf) of methane.

The project also has significant potential for coal bed methane ("CBM").

Process Description

Typically, CMM is extracted under very low mine pressure through degasification wells drilled into the old underground workings, gathered and transported to the central processing facilities at Avion, Divion, and Désirée where it is filtered, compressed, dehydrated, odorised and measured for quality and quantity under gas sales agreements.

At the Avion site the gas is compressed to about 6,700 kPag for supply of gas under a sales agreement with Total Gas and Power. At the Divion and Désirée sites the gas is compressed to between 300 and 350 kPag for supply of gas under sales agreements with Société Artésienne de Vinyle and Surchiste through buried steel gas pipelines. A total compression horsepower of about 4,000 KW has been installed at the processing sites which are all controlled locally.

Asset Development

Subject to the outcome of a detailed feasibility study, European Gas intends to refurbish the gas processing facilities at the Avion site and to redevelop the Divion and Désirée sites to generate electricity as CMM has been classified in France as a gas to be recovered with priority to minimize its contribution to the greenhouse effect ("energie de recuperation"). Electricity generated from CMM will therefore enjoy a tariff in line with that generated from renewable energies attracting higher sales prices.

European Gas intends to optimise the recoverable CMM reserves by drilling additional boreholes and by undertaking further CMM reservoir studies.

In addition to the further development and exploitation of the CMM reserves, European Gas intends to explore the CBM potential of the permits. Only a small part of the coal basin has been exploited by mining and large quantities of coal remain, which contain potentially significant volumes of CBM. The exploration program will comprise of a detailed structural analysis, including reservoir modeling and drilling of at least two stratigraphic wells. If successful, this may be followed up by an expanded program prior to full development drilling and commercialisation of CBM.

The directors believe that the purchase of Gazonor, will be a substantial development for the company and further enhances its position in the European energy markets.

Funding Agreement

As announced on 2 July 2007, European Gas has entered into a Funding Agreement with a substantial European group ("Group"). This financing is for the acquisition of Gazonor and for working capital purposes.

Under the agreement, the Group will subscribe €36,375,000 (approximately A$58.4 million) for convertible notes in the Company subject to statutory approvals for the completion of the acquisition of Gazonor and other approvals as detailed in the announcement of 2 July 2007.