Australia's Arrow Energy said on Tuesday it was in active discussions with Royal Dutch Shell and PetroChina <0857.HK> over their joint $3 billion takeover offer, prompting analyst talk of a sweetened deal.

Arrow's statement followed reports a day earlier that it was set to reject the bid as too low. Shell confirmed the talks but declined to comment further.

It's positive that there's been no outright rejection from Arrow, because it means there's room for negotiation, said Nik Burns, senior oil and gas analyst at RBS Morgans. One could infer that the discussions at this stage are centered around improved numbers.

Shell and PetroChina made a non-binding and conditional offer for Arrow which would give shareholders A$4.45 in cash per share, plus a share in a new entity comprising Arrow's international business.

Speaking at Shell's strategy review, where Australian projects were highlighted as key growth areas for the oil major, Chief Financial Officer Simon Henry said Shell and PetroChina wanted to build a true joint venture which would bring gas into China.

RBS said the new Arrow International business is probably worth about A$400 million, which would equate to another 55 cents a share for Arrow shareholders, valuing the offer at around A$5 per Arrow share, or A$3.7 billion ($3.4 billion).

Analysts' estimates on Arrow's offshore business range between 15-74 cents a share, putting the total value of the bid at as high as A$3.85 billion.

Although Arrow holds the largest coal-seam gas acreage in Australia, analysts doubt its gas molecules would match up with some of the top numbers paid in 2008.

Arrow's acreage in the Bowen Basin is of lower quality and would be more expensive to extract, said John Young, an energy analyst at Wilson HTM Investment Group.

Malaysia's Petronas
paid A$1.65 to Australia's Santos Ltd for each gigajoule of proven, probable and possible gas reserves, while Origin Energy received A$0.88 for 3P reserves in its deal with ConocoPhillips .

Arrow gave no further details about the ongoing discussions and its board is yet to offer an opinion on the deal, which would mark PetroChina's first foray into Australia's burgeoning coal-seam gas sector.

It would be in Shell/PetroChina's interest to pursue a friendly deal as it would be far too easy for an independent assessor to judge the offer as too low based on the gas valuation metrics, Burns said.

Arrow shares were down 0.6 percent at A$5.22 at 0450 GMT in a flat benchmark index <.AXJO>.


Arrow's proposed takeover has put Liquefied Natural Gas Ltd's Fisherman's Landing gas project into jeopardy as Arrow had earlier agreed to supply it with gas and buy the project.

LNG Ltd halted work on the plant on Friday and said it would hold out until there was more clarity over Arrow's future.

To soothe LNG's fears, Arrow agreed to extend until June 30 the deadline to purchase Fisherman's Landing and agreed to allow LNG Ltd to explore all gas supply opportunities and project structure options with other parties.

But with LNG Ltd valued at around A$115 million, analysts said it would be an enormous challenge for the junior to raise the A$2 billion needed to build the LNG project.

Analysts said if the Shell/PetroChina bid succeeds, they would likely abandon Fisherman's Landing to direct gas at Shell's own, larger LNG facility in the area.

The Fisherman's Landing project is the smallest of five proposed LNG developments in Queensland state's Gladstone port. It will have annual capacity of 1.5 million metric tons when it starts output in 2012.

(Editing by Ian Geoghegan and Antonia van de Velde)