BG Group Makes Small Investment In Australian Shale Gas

BG Group PLC (BG.LN) has dipped its toes into Australia's largely dormant shale gas sector, in a small bet that longer term demand for gas will make the unconventional fuel's development more cost competitive.

Shale gas is popular in the U.S. but Australia has some of the world's lowest gas prices. A vast supply of conventional and coal seam gas have proven cheaper to produce, limiting the appeal of shale gas.

BG said it has formed a joint venture with minnow Drillsearch Energy Ltd. (DLS.AU) to investigate the potential of a vast shale gas deposit locked in central Australia's Cooper Basin. Shale gas is trapped in dense rock formations and can be extracted with drills that emit high-pressure bursts of water, sand or chemicals.

The British group will take a 60% stake in some exploration permits and be issued Drillsearch shares to take a 9.9% stake in the company at a strike price of 62 cents a share. It has agreed to a five-year, A$130 million exploration and pilot production program, with BG to fund A$90 million of the first A$100 million, Drillsearch said.

Drillsearch shares are up 7.5 cents, or 14.2%, at 60.5 cents on news of the deal.

Australian company Beach Energy Ltd. (BPT.AU) is also investigating the commercial potential of Cooper Basin shale gas. It is currently assessing two completed exploration wells and intends to drill a pilot production well next year.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; [e-mail]