The Sydney Gas Company (SGC), which listed as specialist opal explorer Desertstone NL in July 1996, has undertaken a significant change in direction which has resulted in its shares spiking to more than $1.20 in the last few weeks.This has come from encouraging results of its latest project on the South Sydney Basin coal fields, where the Perth-based company has completed a five-hole programme located six kilometres south of the town of Camden, and west of Sydney.Last year the company acquired three coal bed methane (CBM) permits in the area and commenced drilling holes in clusters of five in February this year.The plan is to tap methane gas resources contained in the coal seams within sequences in the Basin.Encouraging gas flows would see these holes interconnected and the gas delivered either to the local gas market through existing infrastructure or to a power station for generation.A company spokesman said each of the five holes had intersected the three coal seams of Bulli, Balgownie and Cape Horn.SGC secretary Mark Maine said initial field observations and slimline logging indicate the quality is better than expected, incorporating a higher vitrinite content and lower densities than expected.The five wells are being prepared for fracturing and placing on production to confirm gas potential. Gas flow rates will be tested over a period of 60-90 days.In the meantime, SGC is preparing to launch in July phase two of its exploration programme by drilling and production testing of a further 25 wells, scheduled for completion by December 1999.If phase two is successful, and an adequate off take agreement — currently being negotiated with potential gas purchasers — has been entered into, a further 125 wells are planned beginning early 2000.Stockbroker D&D Tolhurst Ltd analyst Sharif Oussa said, should the testing and fracing programme prove successful, development would result in cash flows being established from the sale of the gas to NSW distributors.He said the greatest risk surrounding the project is the ‘resource risk’, which reflects how much methane gas is contained within the coal resources and whether it is commercially viable to tap into.“Because of the good understanding of the Bulli seam, this risk is probably quite low,” he said.Another risk associated with the project is that gas deliverability is dependent on the presence of not only gas in the coal, but also the ability to artificially stimulate production by fracing.“Previous work on the Illawarra coal measures – which contain the Bulli seams – recently undertaken by SGC indicated that a significant gas resource is available.“It should be noted that there is a considerable variation in gas content, composition, saturation and permeability of the seams within SGC’s three permit areas,” Mr Oussa said.He estimated that at an average flow of 300 gigajoules per day for each well, a thirty well programme could have a total revenue return of $8 million, with an earnings per share of 4 cents, giving a yield of about 6.5 per cent. This figures increases by the number of wells drilled.SGC spokesman John Towner said it is possible that coal gas could be flowing into the gas distribution system within the next three months.
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