Energy explorer L&M Energy says it will soon start drilling for coal-seam gas near Dunedin.
The listed company will drill a 515-metre test well in the Kaitangata coalfield, 60 kilometres south of Dunedin, in mid-October.
Commercial manager Chris McKeown says it's early days but the site appears to have high permeability and gas content that has the potential to generate commercially viable quantities of gas.
He says the location would be ideal for supplying the South Island's second largest city with gas, either for generating electricity or bottled for use as CNG.
L&M's share price rose 4c to 12c on Tuesday.