The agreement covers overlapping portions of MetroCoal’s EPC 1166 and EPC 1251 coal tenements and the gas tenements held by Arrow and Shell.

MetroCoal chief executive Mike O’Brien said the agreement allowed both the coal party and the gas party to pursue their separate business plans in the knowledge that their respective applications for production leases would be supported by the other party.

“It is also a clear demonstration that coal seam gas and coal mining companies are willing and able to work together, delivering the best outcome for Queensland,” he said.

MetroCoal has awarded Depco Drilling the contract for a 30-hole program in its Surat Basin portfolio, while setting an exploration target of 2.5-3.5 billion tonnes by December 2011.

The next wave of drilling will centre on MetroCoal’s Bundi, Miles North and Miles East projects in Queensland.

These areas are considered highly prospective for underground coal mining and are close to planned rail infrastructure.

MetroCoal was trading down 2.38% mid-morning today at A20.5c.