This 600bn-tonne discovery has the makings of a remarkable story

Tom Bulford looks at a process for exploiting prevously uneconomic coal reserves. Potentially one of the most exciting energy stories of the next few years.

Coal gets a lot of bad press. It's dirty. It's dangerous to mine. And it can seriously disrupt the climate in vulnerable parts of the world. So when the World Energy Council recently announced that it was lifting its estimates of global coal reserves from 900 million to 1.5 billion tonnes, not everyone was thrilled.

But here's the thing. The World Energy Council had not just stumbled upon a vast new coal seam. It has known all along that there is more coal. There has just never been a way to exploit it.

That has all changed with coal gasification. This is a process that could unlock vast quantities of unexploited coal in the next few years. And all that can be done without the environmental headaches that plague traditional coal mining.

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I think this will be one of the most exciting energy stories of the next few years. And I've been eyeing a few ways to play it. More on that later.

The year that coal gasification goes mainstream

I think the prospects for underground coal gasification (UGC) are very bright this year. According to PricewaterhouseCoopers, a firm of accountants and consultants not given to hyperbole, this new technology has brought this process to the "transition point for mainstream commercial implementation". The view is echoed elsewhere. The boss of one company seeking to exploit this new technology talks of a "tipping point in terms of commercialisation and market understanding". Another expert talks of "unlocking vast new coal seams unavailable via conventional mining".

As long ago as 1868, Sir William Siemens suggested "underground gasification of waste and slack coal in the mine". His work was followed up by the Russian chemist Dmitri Mendeleyev and by the Glaswegian Sir William Ramsey, who wanted to conduct trials in the coal fields of Durham. In recent years Russians have been moving ahead with UCG projects at a fierce rate. And they have been followed by Australia, China and Canada.

Here's how it works: instead of sending men underground to haul lumps of coal to be burnt on the surface, the coal is burnt where it lies underground. In fact, it is not exactly burnt underground - rather it is heated in a way that turns it into gas. This gas can simply escape up a pipe where, once at the surface, it can be cleaned up and used either to power electricity generators, turned into clean liquid fuel or used as a chemical feedstock.

Why is the World Energy Council suddenly so excited?

But while the concept is easy enough, a few things have prevented serious commercial consideration of UCG. Sure, there are some environmental concerns, not least subsidence as the ground collapses upon the newly void underground space, as well as contamination of the water table. But while these seem to be containable, the real stumbling block has been cost. While it is possible to produce energy in this way it simply has not been economic to do so. So here is why UCG is at a 'tipping point.'

Thanks to the same technique that has transformed the production of gas from shale directional drilling - it is now possible for UCG to exploit much larger seams of coal. By drilling downwards and then horizontally through the coal seam, it is possible to turn a much greater quantity of coal into gas. This is turning a fascinating but previously uneconomic brainwave into a genuine commercial prospect just as it did with shale gas across the US.

On the UK stock market Europa Oil & Gas (EOG) includes an underground coal gasification project on the east coast of England amongst its many ventures. But in this month's issue of Red Hot Penny Shares I have described a company that is absolutely focused upon UCG. And I think it's one whose fortunes could be utterly transformed by the UCG revolution. It's a stock I'm very excited about. In fact I chose it to lead off my 100th issue of Red Hot Penny Shares.

If you'd like to find out more about this company, I'd love to send you my brand new issue to review. You'll be able to read my full analysis, get the ticker symbol and find out why I'm predicting this stock price could rise by 193% in the next 12 months. And there are two other great penny shares plays I've written about in the issue. Put your name down now and I'll even send you a free report on my "Five shares to buy for 2012": To get this now, just click through on this link.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you've bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.