Aug. 20 (Bloomberg) -- Queensland Gas Co., one of five companies proposing a liquefied natural gas project in northeast Australia, agreed to buy Sunshine Gas Ltd. for at least A$837 million ($730 million), boosting reserves by almost a quarter.

The offer values the coal-seam gas company at A$2.70 a share, or A$2.88, depending on whether shareholders accept all stock or a mix of cash and stock, the Brisbane-based bidder said today in a statement. That's at least 23 percent higher than yesterday's close for Sunshine Gas.

Queensland, Australia's third-biggest fuel-consuming state, will be the major contributor to demand growth and is set to become the biggest energy user by 2012, the government's commodities forecaster said in December. Queensland Gas said it will primarily use Sunshine's reserves to meet rising local demand, as well as to bolster a planned fuel-export project.

``It's a long overdue consolidation of the coal-seam gas space up there in Queensland,'' said Gavin Wendt, senior resources analyst at Fat Prophets Funds Management in Sydney. ``The more immediate upside from the deal will be supplying the Queensland gas market and potentially down into northern New South Wales. Longer term, they can use the resources potentially for the LNG export project.''

Queensland Gas yesterday closed at A$4.32 in Sydney, while Sunshine Gas, also based in Brisbane, settled at A$2.20. Both stocks were halted from trading today pending the announcement. Queensland Gas is being advised by Austock Corporate Finance, while Wilson HTM Corporate Finance Ltd. is advising Sunshine.

Power Plants

Sunshine Gas owns all of the Lacerta coal-seam gas project near Roma in southeastern Queensland as well as other coal seam gas and conventional gas ventures. Its 469 petajoules of proven and probable reserves will boost Queensland Gas's so-called 2P reserves by 24 percent. Queensland Gas's proven, probable and possible reserves will rise by 19 percent to 6,827 petajoules.

``These additional reserves can add powerful momentum to QGC's strategy to develop, own and operate state-of-the-art cleaner gas-fired power stations in Australia,'' Queensland Gas Managing Director Richard Cottee said in the statement, sent to the Australian stock exchange.

Taking into account Sunshine Gas's cash in hand, and tax effects, the offer values the target's 3P reserves at between 50 Australian cents and 70 cents a gigajoule, in line with BG Group Plc's offer for Origin Energy Ltd., Cottee said on a conference call. Sydney-based Origin, Australia's biggest coal-seam gas producer, is arguing BG's offer undervalues its resources.

Sojitz Left Out

Queensland Gas and Reading, England-based BG are partners in a planned A$8 billion LNG export project in Gladstone, on the Queensland coast. Sunshine's accord with Japan's Sojitz Corp. for a smaller LNG plant won't go ahead should the takeover succeed.

``We will talk to Sojitz after this announcement and see whether or not there is some way that relationship can be kept alive,'' Cottee said.

Santos Ltd. and Malaysia's Petroliam Nasional Bhd. are also planning an LNG project near Gladstone, while Royal Dutch Shell Plc in June joined Arrow Energy Ltd. for a coal-seam gas venture.

Queensland Gas is offering five shares for every eight Sunshine Gas shares, or A$1.65 in cash a share plus two shares for every seven shares in Sunshine, which is recommending the offer to shareholders. It has already secured a 15 percent stake from Sunshine's largest shareholder, Saad Investments Co., leaving it with about 6 percent, Cottee said on a conference call. It is ``difficult'' to see a matching bid, he said.

The all-scrip offer values the target at A$2.70 a share, while the cash and scrip offer values it at A$2.88.

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. On arrival, it's turned back into gas for distribution to power plants, factories and households.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

Last Updated: August 20, 2008 03:43 EDT