Talisman Energy Inc. has struck a $1.05-billion deal with South African petrochemicals giant Sasol Ltd. that could eventually lead to the development of some of northern British Columbia's unconventional gas fields without the companies getting hit by languishing natural gas prices.

Talisman plans to sell 50% of its Farrell Creek shale gas assets to Sasol, which will pay the Calgary-based company $260- million when the deal closes and then cover $790-million of its expenses at Farrell Creek.

The joint venture could transform into more than a natural gas exploration and production project. Sasol and Talisman, which had broadcast that it was looking for a partner for some of its projects, will conduct a feasibility study to determine if it makes sense to build a natural gas-to-liquids (GTL) facility.

GTL is like a refinery for natural gas. It converts natural gas into products such as jet fuel and diesel, giving the partners products to sell if natural gas prices remain weak.

"A key consideration [when choosing Sasol] was the option value of gas-to-liquids,' Paul Smith, Talisman's executive vice- president of the company's North American operations, said in an interview.'There continues to be a large disconnect between gas and oil prices, where gas-to-liquids could play a very big role in the North American market.'

Eoin Treacy's view Unconventional natural gas resources continue to transform the energy sector; offering a new abundant source of supply in politically stable regions and in close proximity to large target markets. With such huge increases in available supply, North American natural gas prices have been under pressure which has taken the oil/natural gas ratio to impressive heights. At some point new sources of demand will be appear to avail of relatively cheap energy but in the meantime the advantages for gas-to-liquids companies are obvious.

The oil/natural gas ratio sustained a progression of higher major reaction lows since at least 2009 and found support in the last month near 20. A sustained move below 15 would be required to question continued medium-term oil demand dominance.

Sasol remains the best pure play on gas-to-liquids and coal-to-liquids. It ranged mostly below ZAR32,000 from late 2008 and broke upwards in October. It consolidated above its base for the last couple of months and is now testing the upper side of the range. A sustained move below ZAR32,000 would be required to begin to question medium-term upside potential. (Also see Comment of the Day on November 10th).

The US traded ADR broke upwards yesterday, aided by the comparative weakness of the US Dollar against the Rand. A sustained move below the 200-day MA, currently near $43 would be required to question medium-term upside potential.

In the interests of full disclosure, I have a spread-bet long in the Sasol ADR.