AZO Apollogas Fpo

Arrow Energy Ltd. (AOE.AU) said Monday that it has agreed to sell Australian coal seam gas assets to Royal Dutch Shell PLC (RDSB) and PetroChina Co. (PTR) for A$3.44 billion, advancing Shell's plan to be at the forefront of Australia's emergence as a global gas export giant.

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 reserves 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 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 also has a 25% stake in the proposed Chevron Corp.-operated (CVX) Gorgon liquefied natural gas project in Western Australia state, wants to develop its Prelude gas field nearby through floating LNG technology and has stakes in the planned Woodside Petroleum Ltd.-operated (WPL.AU) Browse and Sunrise LNG projects.

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 made public two weeks ago.

Shell and PetroChina, which are equal joint bidders for Arrow's assets, said in a release Monday that they intend to start constructing a big LNG export project in Queensland state using Arrow's gas as feed stock by 2012. Shell has said previously it would like to ship LNG from Queensland by 2014 or 2015.

Russell Caplan, chairman of Shell's Australian operations, confirmed to reporters that PetroChina will be the plant's biggest customer. He tentatively stuck to the 2014 or 2015 development timetable, despite LNG projects typically taking about five years to build, although he added that "being absolutely specific about due dates is probably a little bit rich at the moment".

Doubts about unconventional gas' significance as a future contributor to the world's energy needs were put to bed in December when Exxon Mobil Corp. (XOM) agreed to sink 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 (COP), Petronas and BG Group PLC (BG.LN) that have four LNG projects in the works at the port town of Gladstone.

Caplan said "time will tell" if Shell needs to make more acquisitions to support a four train, 16 million metric ton a year LNG development at Gladstone, or if it will consolidate with rival LNG plants there. He said he's "completely confident" that Arrow will have enough gas to underpin the project's 7 million-8 million ton a year foundation stage.

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.

Arrow's announcement comes on the same day that four executives from Anglo-Australian miner Rio Tinto Ltd. (RTP) went on trial in China charged with bribery and stealing commercial secrets.

Arrow Chief Executive Nick Davies said Shell and PetroChina have already held initial discussions with Australia's Foreign Investment Review Board, or FIRB. "We have a reasonable confidence that things will go ahead there," Davies said. "It's a good deal in terms of having the world's leading LNG company and one of the world's top LNG buyers to help develop Queensland resources."

A spokesman for Australian Treasurer Wayne Swan declined to comment on whether an application has been lodged with FIRB, or the likely outcome of any such application.

Arrow 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 some small Australian companies including Apollo Gas Ltd. (AZO.AU). These assets will be listed separately on the Australian stock exchange through a new entity called Dart Energy Ltd., it said.

Although Shell and PetroChina have sweetened their offer for the Australian assets, the A$4.70 a share bid is below some analysts' expectations and could disappoint investors.

"We are reasonably confident that people will support this," Davies said. He said Arrow will keep confidential an internal valuation of its international assets and would only say that the average analysts' estimate is about 55 cents a share.

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

New Hope Corp. (NHC.AU) Chairman Robert Millner said the company plans to make a statement on its plans for its 16.8% interest in Arrow Tuesday. Arrow directors and executives hold about 3.2% of Arrow.

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

(Alex Wilson in Melbourne and Rachel Pannett in Canberra contributed to this article)

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