Britain’s nascent underground coal gasification (UCG) industry has great potential, according to natural resources veteran Algy Cluff.
The new technology, which unlocks the hydrocarbons stored held within coal, is the first building block in the former mining executive’s new venture into the hydrocarbon business, Cluff Natural Resources (LON:CLNR).
It has been issued new licences to develop UCG projects - one in Carmarthenshire in Wales, and one in the Dee Estuary which is on the borders of Merseyside and Northern Wales.
Cluff says the new licences represent a low cost entry into the UCG business.
“The essence of UCG is that it is a proven new technology, but and [unlike windpower] it does not require a government subsidy, it is not expensive and it is not an eyesore,” Cluff told Proactive Investors.
It works by oxidising the coal though a concealed underground process, which produces a man-made hydrocarbon called syngas. Given the UK’s vast remaining coal deposits - which can’t be mined economically anymore - Cluff believes this is a significant opportunity.
“When you think that in 1919 there were well over a thousand mines producing coal in Britain, and now there are just three.
“The potential for gasifiying coal underneath the sea, eventually underneath the North Sea, is very attractive for this directional drilling.
“And we think this is something that could evolve into a big business in this country, but having said that the entry cost is pretty low at the moment.”
Indeed, for the first twelve months CNR’s focus will be on securing the necessary planning permissions to start drilling.
This is not the kind of first project that most investors following CNR had been expecting. But today’s move into UK coal gasification is ‘entirely consistent’ within the strategy the group set out when it listed on AIM last year, according to Cluff.
The group, which prior to today’s deal was effectively a cash shell, joined the AIM market in May following a £3.75mln funding. The group’s first acquisition, a potential exploration venture, was expected to follow shortly after.
Now, however, Algy Cluff says that the UK portfolio is more likely to be developed through new licence applications rather than acquisitions.
Cluff revealed a slight change in the group’s approach to building the portfolio.
“We looked at two [potential] deals but neither of them worked for us.
While this first project is targeting unconventional hydrocarbons, Cluff doesn’t plan to confine the group to the emerging unconventional technologies, and future deals are likely to feature regular oil and gas project - in either the UK or Africa.
It is expected that the next addition to the portfolio will come from Africa, and it will be an exploration venture.
In the meantime the company, and investors, now have a tangible project to focus on. The first priority will be to apply for relevant planning and environmental permits to develop the projects, though this is not expected to be a significant draw on cash reserves.
Investors have already welcomed the development with CNR shares advancing over 20% today, to trade at 4.37p a share.
In a note to clients today City broker Shore Capital analyst Craig Howie said: “we are pleased to see this entry into UCG, which benefits from proven extraction technology and has the potential to play an important role in addressing the UK’s energy needs.”