Arrow Energy Ltd. (AOE.AU) said Monday that its directors have agreed to sell the bulk of the company's Australian coal seam gas assets to Royal Dutch Shell PLC (RDSB) and PetroChina Co. (PTR) for A$3.44 billion.

The transaction, which still needs shareholder and regulatory approval, is set to add to a flurry of deal activity in the world's unconventional gas resources and is further evidence that China remains hungry for offshore natural resources to feed its powerhouse economy.

Pressure for big oil to invest in unconventional fuels is being driven by much of the world's remaining oil and gas reserves being owned by states often in politically unstable environments that are hostile to foreign investment. And gas is gaining favor as a cleaner alternative to coal that's cheaper to produce than renewable energy sources like wind power.

The deal to buy Brisbane-based Arrow also shows that big oil companies like Shell are banking on continued strong demand for energy from Asia.

Shell and PetroChina, which have bid for the assets in an equal joint venture, said in a joint press release Monday that they intend to sanction a big liquefied natural gas export project in Queensland state using Arrow's gas as feedstock by 2012. Shell has said previously it would like to ship LNG from Queensland by 2014 or 2015.

Doubts about unconventional gas's significance as a future contributor to the world's energy needs were put to bed in December when Exxon Mobil Corp. (XOM) sunk US$31 billion into U.S.-based shale gas producer XTO Energy.

In Queensland, over A$20 billion has been spent on coal seam gas acreage by companies including Shell, ConocoPhillips and BG Group that have various LNG projects in the works at the port town of Gladstone.

Arrow, meanwhile, said Monday that it will keep its international operations, which include coal seam gas acreage in China, Indonesia, Vietnam and India, and its holdings in small Australian companies Apollo Gas Ltd. (AZO.AU), Bow Energy Ltd. (BOW.AU) and Liquefied Natural Gas Ltd. (LNG.AU). These assets will be listed separately on the Australian stock exchange through a new entity called Dart Energy Ltd., it said.

Shell and PetroChina's offer of A$4.70 cash per Arrow share is 25 cents higher than a previous bid put to Arrow's board that was made public two weeks ago.

Although the new offer is significantly higher, it's below some analysts' expectations and could disappoint investors, who will no doubt be keen to get a better idea of the value of Arrow's international business before approving the deal.

Arrow on Monday didn't provide a value of the assets that will be kept in Dart Energy. Analysts valuations on the global assets have ranged between 15 cents and 74 cents per Arrow share, depending on the broker.

Arrow shareholders are set to vote on the deal in "mid-July", Arrow said.

The involvement of China in the bid may invite extra scrutiny from Australian regulators amid ongoing public concern about state-backed entities taking large stakes in Australia's natural resources.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; ross.kelly@dowjones.com
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