The company signed a non-binding term sheet to undertake due diligence investigations to farm into the project in central South Australia owned by Marathon’s largest shareholder, private Australian company ARP TriEnergy.

The Leigh Creek energy project (LCEP) – located over and around an existing coalfield contained within the newly released petroleum exploration license 650 (which, in itself, is within the PEL application 647) – represents Marathon’s first investment since it ceased all work at the Flinders Ranges uranium project.

The proposed LCEP intends to develop an in-situ gasification (ISG) process at depth (400-1500m) using “standard oil industry drilling techniques”.

Facilities for ISG – a proven technology that has been operated commercially in Russia for more than half a century – operate by drilling two opposite sides of an underground coal seam.

One well injects air or oxygen into the coal seam to initiate the gasification reaction. The other well is used to return syngas to the surface where it can be processed further for power, gas, and chemical purposes.

Marathon pointed out that ISG did not involve coal mining, handling or transportation and that there were fewer environmental impacts than associated with coal mining as the process included pollutant capture, and no landfill disposal was required.

“Leigh Creek has excellent existing infrastructure including a rail line, sealed main regional road access, high voltage power, water, airfield and other services associated with the adjoining townships of Leigh Creek and Copley,” Marathon said.

The South Australian government effectively froze Marathon out of its Arkaroola uranium project in 2011 when mining and exploration was banned in the area, but subsequently compensated the company with a payment of about $5 million in 2012.

The term sheet will see Marathon receive an exclusive right to do due diligence on TriEnergy’s tenements until December 31 in return for spending $400,000 on exploration.

TriEnergy will provide consulting services to Marathon for a range of projects Marathon is currently considering, in return for fees that won’t exceed $160,000 in respect of the tenements.

Marathon will also earn a 10% undivided interest in the tenements for spending $600,000 on exploration as part of the JV; and will be granted an option over all TriEnergy’s issued capital, exercisable during the 18-month period following the date Marathon’s shareholders approve the grant of the option.

On exercise of the option, Marathon will, issue 138 million new ordinary shares to TriEnergy shareholders (which, based on the current share structure of Marathon, will represent 60% of the total expanded capital base).

Simultaneously with the issue of the new shares, Marathon will cancel TriEnergy's current 19.99% shareholding, so TriEnergy’s shareholders will ultimately hold 65.16% of Marathon shares on issue, with existing Marathon shareholders holding the balance 34.84%.

“The Marathon board has looked at many opportunities in Australia and overseas but now believes it has met the chosen criteria of providing low risk and low cost appraisal drilling, a project managed by credible people and an entry price which was reasonable,” the company said yesterday.

“The board considers the LCEP an outstanding low-risk opportunity and one which is fairly priced.”

Regarding risk, Marathon said its proposed farm-in was designed to be a “relatively short and cost-effective process” to improve the resource standard. A significant amount of work has already been done defining aresource at the LCEP.

Alinta Energy owns the present Leigh Creek coal mine, with the coal transported by rail to the coal-fired power station at Port Augusta.

“The LCEP project is complementary to the current operations by Alinta Energy Limited and importantly adds jobs to further support the Leigh Creek community,” Marathon said.

“Marathon believes the due diligence and exploration program (including drilling) contemplated for the next six months can establish considerable resources to required disclosure standards.”

The project will target the east coast gas markets, as planned LNG exports will require additional gas sources for extension and expansion of existing project; while some domestic demand is yet to be fully contracted.

Marathon said that situation had been exacerbated by existing gas shortages and the doubts over supply of coal seam gas from New South Wales resources.

“Such factors all combine to make the LCEP an attractive opportunity to supply gas to domestic markets and industrial consumers in Australia,” the company said.

TriEnergy became a major shareholder in Marathon on October 4, with 19.99% of issued capital acquired at that time.