Formed in 2000, Eastern Star Gas has been diligently working in its PEL 238 permit in the Gunnedah Basin of inland northern NSW for most of this decade, managing director David Casey told the Excellence in Oil & Gas Conference in Sydney this morning.

The company operates PEL 238 and holds a 65% stake in it in partnership with Canadian explorer Gastar Exploration (35%).

Eastern Star developed the first conventional gas reserves in NSW in that permit and built its own power station, Wilga Park, near the town of Narrabri.

But the company is now a CSM specialist with agreements to develop major resources for major power generators while using gas from its production pilots to underpin an expansion of its operations at Wilga Park.

Eastern Star has spun off its conventional oil and gas assets into Orion Petroleum, in which Eastern Star retains a 23% interest, and it has farmed-in to three frontier CSM permits held by Sapex in South Australia's Arckaringa Basin.

But the jewel in the crown remains its PEL 238 coal seams.

"We signed major deals last year for the provision of coal seam gas from PEL 238," Casey said.

Eastern Star inked a memorandum of understanding with Macquarie Generation for the provision of up to 500 petajoules of gas over an unspecified period for a Hunter Valley power station, and another with Babcock & Brown for up to 40PJ per annum for a proposed northern NSW station.

Now the company is racing to prove up the reserves it needs to underpin these two major deals.

Eastern Star already has a good reserves base. In September last year, it received certification that its Bohena Project area contained 59 petajoules of proved and probable (2P) gas reserves, with 21PJ of this figure classified as proved (1P) reserves.

But the area covered by these reserves represents less than 1% of the area underlain by prospective coal measures in PEL 238, according to Eastern Star.

Given the company's active work program, a reserves upgrade seemed inevitable.

The area covered by the Bohena and Bibblewindi projects - still just a fraction of PEL 238 - has now been certified as having 1300PJ of 3P (proved, probable and possible) reserves and 185PJ of 2P reserves. 1P reserves remain unchanged at 21PJ.

Under the 2008 program, up to 20 coreholes will be drilled to expand on current reserves in the Bibblewindi and Bohena areas, as well as to evaluate the CSM potential across additional portions of PEL 238, which is lightly explored.

Eastern Star still has a big job ahead of it, but Casey says he is confident the reserves needed to underpin the Macquarie Generation and Babcock & Brown deals can be proved up. He argues that corporate restructuring and capital raisings last year have cleared the decks for action and the pace of change is actually likely to increase.

Eastern Star has been achieving good results from its two existing production pilots - Bohena and Bibblewindi - but it believes it can do better.

"As we get more and more data from our operations, modelling is showing that horizontal in-seam drilling is the way to go with our wells," Casey said.

"In 2008, we aim to trial multi-lateral wells, with multiple horizontal in-seam holes intersecting a common vertical well. We will compare these wells' performance against the vertical, fracture-stimulated wells that have been used in the existing production pilots."

The company also plans to develop four more production pilots this year in various parts of PEL 238, further fine-tuning its completion techniques and proving up more reserves.

Last week, the company announced it had signed an agreement with Clarke Energy Australia for the staged installation of a new gas-fuelled power station alongside its existing Wilga Park Power Station.

The new power station is to incorporate up to 10 3MW Jenbacher gas engine-driven generators. These will be installed progressively as coal seam methane production ramps up during 2008-09, Eastern Star said.

In addition, the existing power station would be expanded to 10MW, giving a total 40MW of gas-fuelled generating capacity across the two power stations.

According to Eastern Star, the total gas requirement for the two stations would be about 11 terajoules per day.

Casey said the new power station would allow monetisation of CSM from existing and proposed production pilots at Bohena, Bibblewindi and Dewhurst.

"Wilga Park was built to monetise gas from our conventional gas field, Coonarah, but it is underutilised so it makes sense to use the gas from our pilots productively," Casey said.

Meanwhile, drilling has begun and early results have been positive, Casey said.

Following its recent reserves upgrade, Eastern Star has 1300 petajoules of 3P reserves.

Proving up these reserves will take plenty of cash, but Eastern Star says this won't be a problem.

Eastern Star's first capital raising in 2007 was a $25.85 million placement through Patersons Securities. Its second was a $22.47 million share purchase plan for existing shareholders, clients of underwriter Commonwealth Securities and energy generator and retailer TRUenergy.

TRUenergy now holds more than 5% of Eastern Star's issued shares, giving the explorer a strong relationship with a third major energy generation company in addition to Macquarie Generation and Babcock & Brown Power.

"We have the customers, and we know we have plenty of gaseous, permeable coal in our acreage," Casey said.

"Now all we have to do is complete the transition from gas explorer to gas producer."