Under the agreement, ERM Gas, a wholly owned subsidiary of ERM Power, will fund up to 9 wells across three permits and pay Red Sky up to A$2.7 million on achievement of milestones.
ERM will also act as the operator for the permits.
In return, Red Sky will place 150 million shares to an ERM entity, giving ERM a 9.5% interest in the company.
"This is an important step forward for the company. We have spent a lot of money and effort on our Clarence Moreton permits and it is pleasing to see a company of the calibre and standing of ERM Gas place a significant value on them," Red Sky managing director Rohan Gillespie said.
ERM Gas will initially be assigned a 10% interest in PEL 479 and PEL 457 by paying Red Sky A$700,000, leaving Red Sky with a 20% interest in the 2 permits.
The remaining interests will be assigned from the other partner in the permits, Clarence Moreton Resources, in return for cash payments to them.
ERM can earn up to 80% in PEL 478, 60% in PEL 479 and 60% in PEL 457 by funding between 6-9 wells on the three permits in the Clarence Moreton Basin.
It will also pay Red Sky $1 million upon renewal of PEL 479 and an additional $1 million upon renewal of PEL 457.
Red Sky will set aside 70% of the funds, or about $1.89 million to fund its 20% share of expenditure on work programs in PEL 479 and PEL 457.
ERM Gas will also have the option over the next three years to purchase Red Sky's in the two permits for A$5 million each.
The agreement with ERM Gas and Clarence Moreton Resources replaces Red Sky's original farm-in agreement with CMR, which allowed Red Sky to secure up to 70% stakes in PEL 479 and PEL 457 in 4 stages.
Red Sky has already earned a 30% stake in the 2 permits through its previous activities.
Red Sky had in May secured New South Wales Government approval to drill the Talma pilot production well in PEL 457 to test the tight gas discovery made by the Talma-1 well in August last year.
Talma-1 had intersected a 83 metre gross gas column from an interval of between 480 metres and 563 metres and had flowed gas at a rate of 28,000 cubic feet per day during drill stem testing of a 10 metre interval from 545 metres to 555 metres.
Core analysis had revealed the sands were primarily made of quartz and had generally low permeability with reasonable porosity.
No upper seal or structure was identified leading the company to say that further drilling was required to determine if the discovery represented an unconventional resource that extended over a large area with a potential gross gas charged column of about 200 metres.
Discovery of an unconventional resource could hang Red Sky and now ERM Gas a potentially large play in their hands as the Kangaroo Creek Sandstone covers 324 square kilometres within PEL 457 and PEL 479.
Kangaroo Creek could hold between 3 petajoules (2.83 billion cubic feet) and 6.5 petajoules of in-place gas for every square kilometre, giving a potential in-place resource of 972 petajoules to 2106 petajoules, or between 0.9 and 2 trillion cubic feet of gas.
Besides the Talma Pilot, Red Sky had previously mapped out a program of 4 other wells aimed at increasing the current proved, probable reserves of 114 petajoules in the Walloon Coals; demonstrate productive potential of Kangaroo Creek; and firm up the feasibility of generating local power.
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