FORMER coal seam gas company Metgasco will loan up to $7.8 million to Melbourne-based Byron Energy to help the company further develop its South Marsh Island block 71 project, in the Gulf of Mexico, through to completion.

In return, Byron will issue 10 million unlisted options to Metgasco with an exercise price of 25 cents per share and a term of three years.

Byron has also given Metgasco farm-in rights – but not obligations – for a 10% working interest in its Bivouac Peak Littoral Louisiana project, which covers roughly 971 hectares onshore Louisiana.

Should it exercise this farm-in, Metgasco would reimburse 10% of Byron’s past costs, estimated at US$64,000, and pay 13.3% of the costs of the first well, Metgasco said in an announcement.

“In summary, this agreement will deploy approximately 27% of Metgasco’s financial resources into a transaction that the Board is confident will deliver attractive risk-adjusted returns for shareholders with strong underlying security,” Metgasco said.

The 10% farm-in stake on offer will come out of Byron’s 45% working interest in the permit, assuming Otto Energy exercises its option to acquire a 45% working interest out of its existing 90% stake.

Byron and Metgasco will also enter into a farm-out agreement should Metgasco exercise the option.

Byron chief executive Maynard Smith said he was pleased to secure Metgasco as a funding partner and potential joint venture partner.

“The financing provided by Metgasco will be used primarily to fund Byron’s 50% share of the costs to be incurred in bringing the South Marsh Island block 71 (SM71) project into production, following the successful drilling of the SM 71 1 well in April and May,” he said.

“The SM 71 oil project will be jointly developed with Otto Energy, our 50/50 joint venture partner in the SM 71 project, targeting production startup in the first half of 2017.”