Sydney Gas, long an underperformer, said the transaction would give it “access to leading management, personnel, and drilling resources in the coal seam methane gas industry with transparent alignment of interests through equity investment and performance-based incentives.”

AJ Lucas is recognised as a leader in CSM drilling technology and already has a partnership with Molopo Australia in developing prospects in the Gloucester Basin near Newcastle, New South Wales.

In addition to the appointment of Andy Lukas as Sydney Gas' chief executive, the CSM producer will make AJ Lucas executive chairman Allan Campbell non-executive director. Lukas will become a non-executive director of AJ Lucas.

In the next few months, AJ Lucas will subscribe for a placement of 52.5 million Sydney Gas shares (equivalent to 15% of the SGL shares currently on issue) at 38c per share, raising $20 million for Sydney Gas this year.

Further tranches of options exercisable in two years time and three years time will raise another $27.2 million if exercised and would give AJ Lucas about 25% in Sydney Gas.

The companies are also close to sealing technical services and drilling services agreements that would oblige Lucas to make available drilling and technical resources as required by Sydney Gas.

“Such resources include, but are not limited to, two fully manned rigs for a period of up to two years, experienced drilling personnel to operate the rigs, and specialist coal seam gas expertise to assist in evaluating and developing the gas assets,” Sydney Gas said.

Sydney Gas and AGL already have one rig operating at their Camden project, so this arrangement would bring the total number of rigs under operation to three.

The heads of agreement announced this morning must be approved by Sydney Gas shareholders in March.