Under the deal, Santos will earn operatorship and a 25% interest in each of PELs 1 and 12 in the Gunnedah Basin, in return for spending $10 million on a mutually agreed work program.

In addition, the Adelaide-based company has the option to spend a further $30 million on the licences for which it would earn a further 40% stake.

In a statement to the market, Carbon Minerals said the two tenements, which cover 7000 square kilometres, contained extensive coal deposits and were prospective for both CSM and conventional petroleum.

Carbon Minerals described the Santos deal as a "significant development" for both the company and NSW.

"Santos is not only Australia’s second-largest petroleum exploration and production company but also the country’s largest coal seam gas producer," it said.

"The venture constitutes an important step in the quest for sustainable and more environmentally friendly energy resources."