Arrow Energy international arm Arrow Global CBM Pty Ltd (Arrow 50%) has signed a Letter of Understanding with leading Indonesian energy company PT Medco E&P Indonesia for broad-ranging cooperation in coal bed methane in South Sumatra, Indonesia.

Medco is Indonesia's leading independent oil and gas company with daily production of more than 80,000 barrels of oil equivalent and a market capitalisation of more than US$1.2 billion. Medco is also the owner of a number of oil and gas tenements in the South Sumatra Basin in an area that is also highly prospective for coal bed methane. Medco, in conjunction with the government research organisation Lemigas, is already conducting a coal bed methane pilot in this area.

Under the terms of the Letter of Understanding, an area of approximately 1200sqkm in South Sumatra is defined for mutual cooperation; the companies will perform a joint commercial and technical due diligence study of the area; pending the results of the study, Arrow and Medco will finalise a commercial arrangement between the two companies to monetise coal bed methane resources in the target area; and the companies intend to complete the studies and sign a joint venture arrangement by the end of next month.

Consultant studies have estimated that the coal resources of the South Sumatra Basin contain up to 120 trillion cubic feet of coal bed methane. This agreement complements the agreement with PT Sugico Graha in the same basin, announced late last year.

It is planned that the AGCBM portfolio together with the existing Arrow India assets will form part of the proposed partial IPO of Arrow International later this year.

The deal follows Arrow's recent announcement concerning the farm in to two blocks in China and last year's winning of three Indian exploration blocks, as part of Arrow's Asian expansion.

Arrow Energy NL is one of Australia's leading coal seam gas companies, focusing on the exploration and development of coal seam gas resources in south and central Queensland and northern New South Wales. The company will be supplying Queensland with 25% of its daily gas needs by the end of 2007 and is exploring business development opportunities in China, India, Indonesia and Vietnam.