Key Petroleum (ASX:KEY) shares have gone crazy after the minnow struck a major gas processing deal with heavyweights Santos (ASX:STO) and Beach Energy (ASX:BPT).

Shares shot up 50 per cent on Monday to an intra-day peak of 0.9c, with nearly 21 million shares worth $170,232 having changed hands in 86 trades just after 2pm AEDT.

That is a massive increase in trading volume for Key.

While the deal is only at the MoU stage right now, it paves the way for negotiations to potentially strike a formal processing and transportation agreement.

This would see gas from Key’s Tanbar project in Queensland’s Cooper Basin processed at Santos and Beach Energy facilities in South Australia.

Key managing director Kane Marshall says the MoU demonstrates a “clear pathway” to commercialising future gas discoveries within its Tanbar project, subject to final binding terms being agreed.

“Importantly, there is flexibility for financing of future developments whereby capex intensive gas processing infrastructure may not be required if it can be processed and transported via Santos-operated infrastructure in the manner contemplated by this MoU,” he said.

Key Petroleum (ASX:KEY) shares are on a tear over today's news.
Key Petroleum (ASX:KEY) shares are on a tear over today’s news.

Key’s Tanbar project currently hosts unrisked prospective resources — that is, the total estimated amount of gas in the ground that could be brought to the surface — of 150 billion cubic feet (Bcf) (low estimate), 500 Bcf (best estimate) and 950 Bcf (high estimate).

A formal deal with Santos and Beach Energy would allow Key to sell its gas into the currently constrained east coast Australian gas market.

According to the Australian Energy Market Operator, the continued gas shortage has seen prices soar over $10 per gigajoule in Sydney and between $9 and $10 per gigajoule in Victoria and Brisbane.

This is expected to drive more gas exploration projects on the east coast.