Origin Energy rejected a $13 billion (£6.55 billion) bid from BG Group yesterday, urging its shareholders to hold out for better value for the Australian company's coal seam gas resource.

Origin said that it would pursue separate deals with joint venture partners to generate value from its coal seam gas, including partnerships with liquefied natural gas companies.

The Australian group, which in May retreated from negotiations with BG over an agreed takeover, rejected suggestions by BG Group that its coal seam gas reserves were overvalued and said that an independent expert had certified the proven, probable and possible reserves to be 10,122 petajoules, equal to 31.6 million cubic metres of gas.

Despite Origin's withdrawal, BG launched a cash offer of A$15.50 per share on June 24 and the British company said that the offer was a substantial premium to Origin's undisturbed share price.

The Origin share price has risen by 50 per cent since BG's overtures were first disclosed at the end of April. The Australian company's shares closed at A$16.15 in Sydney yesterday.

The argument between the two companies centres on the latent value of the methane lying in a coal bed over which Origin has rights in Australia. Investor interest in coal seam gas has increased greatly with rising international oil and gas prices.

Origin's rethink over the BG deal was prompted by a $2.5 billion purchase in May by Petronas, the Malaysian state oil company, of a 40 per cent share in Gladstone LNG, a liquefied natural gas project to be developed by Santos, an Australian gas company.

Petronas will get a third of Santos's coal seam gas reserves and will build a pipeline to an LNG plant in Queensland.

Kevin McCann, Origin's chairman, said that the Petronas partnership with Santos and Shell's decision to invest in Australian coal seam gas had set a new valuation benchmark.

He said: “It is the board's belief that accelerating the monetisation of Origin's CSG reserves through a formal process of inviting proposals from suitably qualified and experienced parties will enable Origin to test the value of its CSG assets through a competitive process.”

BG Group yesterday denied suggestions by some analysts that the company needed Origin's coal seam gas to meet its Asian LNG export commitments.

Frank Chapman, BG's chief executive, said that Origin had failed to address the risks in its alternative proposals to generate value from its coal seam gas reserves.

He said: “It remains the case that Origin must spend a significant amount of time and money to prove up its coal seam gas potential. Origin continues to lag its competitors in the exploration and appraisal of its CSG acreage.”

The debate over the size of Origin's resource could excite general interest in the potential for Australian coal seam gas as energy companies scout for new gas reserves in a rising market for the fuel.

BG Group hopes to use Origin's gas resource to supply an LNG plant that it intends to build with Queensland Gas Company, another coal seam operator. In February BG agreed an alliance with Queensland, agreeing to buy a 9per cent stake in the company and a fifth of its gas reserves for £299 million.

Once a deadly hazard, now a valuable resource

Coal seam gas, or coal bed methane, has for centuries been an explosive hazard for miners. Methane, the main fuel in natural gas, is trapped in tiny pores on the surface of coal, held in place by geological pressure and water trapped in coal seams.

The gas can be recovered from deep coal seams by drilling wells into the coal bed. Water is pumped from the seam, which reduces pessure and unlocks the gas, which then rises to the surface.

The coal seam gas reserves in Eastern Australia are vast and energy companies see an opportunity to liquefy and export the gas to energy-hungry Asian nations. Individual coal seam wells are cheaper to drill than conventional natural gas wells but the volume of drilling required is huge. In a conventional gasfield, less than a dozen wells could provide sufficient volumes of gas to supply a gas liquefaction plant, but from coal beds, five thousand wells might be needed.

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