Eastern Star Gas Is in Talks to Gain Further Sales

By Angela Macdonald-Smith and Catherine Yang

Nov. 4 (Bloomberg) -- Eastern Star Gas Ltd., the Australian developer of coal-seam gas reserves in New South Wales state, said it's in talks on potential fuel sales agreements to add to two existing accords.

The Sydney-based company is seeking to benefit from the additional 350 megawatts a year of power generation capacity that Australia's most-populous state needs to add to meet demand, Managing Director David Casey said today in an interview.

The coal-seam gas industry is at an earlier stage of development in New South Wales than in Queensland, where companies including ConocoPhillips and BG Group Plc are planning to use the fuel for liquefied natural gas export projects. Eastern Star has accords to supply gas extracted from coal seams to Macquarie Generation and a unit of Babcock & Brown Ltd. for use in power stations.

``It is a state that has enormous potential, and which hasn't realized the potential of its gas resources to date,'' Casey said. ``In the first instance you're looking at delivering into power generation projects. LNG options will come in time.''

Eastern Star gained 8 percent to 47.5 cents in Sydney trading.

The company has 185 petajoules, about 174 billion cubic feet, of proven and probable reserves and is seeking to increase that sevenfold to 1,300 petajoules by the end of next year. That will enable Eastern Star to firm up its gas sales accords into contracts, Casey said.

Add to Valuation

``Successful delineation of gas reserves and the conversion of the MOUs to gas sales agreements would add significantly to our valuation of Eastern Star Gas,'' ABN Amro Morgans Ltd. said in an Oct. 13 report. The securities firm values the stock at 57 cents.

Santos Ltd., Australia's third-biggest oil and gas company, Molopo Australia Ltd., Metgasco Ltd. and AJ Lucas Group Ltd. are among other companies with coal-seam gas exploration projects in New South Wales.

``There will be a train of new projects coming on stream,'' Casey said.

Coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced, usually after water is removed. LNG is natural gas that has been chilled to liquid form, reducing it to one-six- hundredth of its original volume for transportation by ship to destinations not connected by pipeline.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net; Catherine Yang in Hong Kong at cyyang@bloomberg.net