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PERTH, Nov 15 AAP

November 15 2012, 2:51PM

Fortescue Metals Group will take an 18 per cent stake in oil and gas explorer Oil Basins Limited as it looks to diversify following volatility in the iron ore price.

Fortescue's relatively small $4.2 million investment in Oil Basins comes as interest intensifies over massive unconventional gas reserves in the Canning Basin in Western Australia.

Oil Basins, which has a portfolio of conventional and unconventional gas, has a project in the Canning Basin in the Kimberley region between Port Hedland and Broome.

Fortescue's share placement is priced at 3.5 cents per share, representing a 40 per cent premium to Oil Basin's recent seven day volume weighted average price.

"The funds raised by the placement will support future funding requirements in the Oil Basin's Canning Basin assets and assist in further expanding its portfolio within its existing core areas of interest," Oil Basin said in a statement.

Fortescue's cornerstone stake could expand further under options attached to the deal.

Oil Basins said it was the first investment by Fortescue in the upstream energy sector and Fortescue's first investment outside its iron ore mining business.

Under the agreement Oil Basins will offer Fortescue the right to appoint one senior representative to the Oil Basins board.

Oil Basin said it seeks to "rapidly become the new third force in exploring and developing Canning Basin unconventional gas".

It comes a week after oil and gas producer Buru Energy and Mitsubishi Corporation struck a deal to develop massive unconventional gas reserves and build a pipeline in the Canning Basin.

Last week BHP's Petroleum boss Mike Yeager said the Canning Basin in Western Australia was the most likely region where BHP's American shale operations could be deployed in Australia.

Fortescue recently shelved $US1.6 billion ($A1.57 billion) of spending and cut about 1,000 jobs, as it downgrades expansion plans.

At 1430 AEDT Fortescue shares were 3.5 cents lower at $3.96, while Oil Basin's shares were 0.9 cents higher at four cents.