Production testing at Talon’s Gurvantes XXXV coal seam gas project in Mongolia’s South Gobi Basin has been underway for barely a week and gas has already flowed to surface in the first pilot well.

While it is still too early in the production testing process to draw any conclusions, the ability of the Lucky Fox-1 pilot well to flow gas for three hours from build-up in the casing is very encouraging indeed, as well as providing valuable data.

Importantly for Talon Energy (ASX:TPD) and its operating partner TMK Energy (ASX:TMK), it also proves that the targeted gassy coal seams at the project are capable of producing gas.

This is especially true when combined with all three pilot wells being fully operational and flowing water at a combined rate of about 500 barrels per day, a clear sign that the dewatering process required for CSG wells to produce gas in significant – possibly commercial – quantities is progressing as planned.

“We are pleased to announce the positive results from the extended production test and the promising early signs from the performance of the three pilot wells and we look forward to updating the market further,” managing director Colby Hauser said.

“We are especially pleased at the pace at which our partner is progressing activities on site.”

Extended production test

Talon noted that since commissioning was completed about one week ago, all three wells have been continuously on pump and over that period, the pump speeds have gradually been increased in order to slowly reduce the fluid levels in the wells and therefore hydrostatic pressure in the reservoir.

Over the coming weeks, the pump speeds will continue to be gradually increased, and as the fluid levels decrease, the reservoir begins to depressurise after which more substantive and continuous gas desorption from the coals is expected to commence.

This process could take several weeks or months before sustained gas flows are achieved.

Production testing will assist in the assessment of the overall commerciality of the best estimate (2C) Contingent Resource of 1.2 trillion cubic feet.

Gas resources valued

Separately, the company noted that it had received an unsolicited, confidential non-binding indicative proposal from Strike Energy (ASX:STX) last week, which proposed that Talon demerge its Mongolian assets to existing shareholders before Strike acquired its shares by way of a scheme of arrangement.

While the proposal was subsequently withdrawn by Strike – despite Talon noting that it would carry out an evaluation – Strike’s offer of 0.4586 STX shares for every TPD share provides a hint of how much it valued the company.

Had this proposal gone forward, it would have valued Talon at $125.17m (using STX’s share price of 43.5c as at 19 July 2023), or a 14% premium over its market cap of $109.8m at that time.

Even excluding the value brought by Gurvantes XXXV, the offer is significantly lower than the price target of 36c estimated by broker Euroz in June this year.

However, it does highlight just how much demand there is for established gas resources.

This article was developed in collaboration with Talon Energy, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.