The offer, which needs approval from Australian regulators and Arrow shareholders, highlights the growing importance of coal seam gas (CSG) as a key source of energy in the United States and a major target for multinationals in Australia since 2008.
In addition to A$4.70 a share in cash, Arrow investors will retain ownership of some domestic and international assets which will be spun out into a new entity to be called Dart Energy.
The Shell-Petrochina joint venture will integrate Arrow's Australian assets with Shell's existing CSG assets and Shell's site for a planned Liquefied Natural Gas (LNG) plant on Curtis Island, Queensland, the companies said on Monday.
Shell and PetroChina will each own 50 percent of the gas produced by the LNG plant and the Anglo-Dutch oil major said it was likely to sell its gas to China.
Analysts said it made strategic sense for Shell to boost its Australian coal seam gas assets, as it has said such assets are key to its growth plans. The price offered for Arrow was also below what some analysts expected the jv would have to pay.
However, with Shell declining to say how much each side was contributing to the bid, or what valuation would be attached to Shell's assets, analysts said it was unclear exactly how good a deal it was for Europe's largest oil company by market value.
Arrow's agreement followed two weeks of talks after Shell and PetroChina made an initial offer that investors considered too low. I can tell you, it was not an easy discussion, Shell's local chairman, Russell Caplan, told reporters.
Shell's London-listed A shares traded down 0.9 percent at 0936 GMT, while the sector <.SXEP> was down 1.3 percent.
The deal needs approval from Australia's Foreign Investment Review Board, which is likely to scrutinize it closely after regulators said they wanted to cap state-owned companies' stakes in Australia's top resource firms to 15 percent.
The fresh offer came as four employees of mining group Rio Tinto stood trial in China, in a case that has strained Sino-Australian relations in recent months.
Arrow Energy shares fell 3.6 percent, their biggest daily fall in month.
The bid was pitched at a 35 percent premium to Arrow's last trade ahead of March 8, when the first offer of A$4.45 a share for the Australian assets was announced. But it was not as high as the A$5 a share that some analysts had expected.
Fund managers said it would have been tough for Arrow to press for much more or look for a white knight, because Shell already owns 30 percent of Arrow's Australian assets.
The difficulty ... is that there probably aren't any other bidders, so Shell aren't compelled to pay the highest prices that people have seen for similar assets in the market over the past 12 months, said Tim Schroeders, a portfolio manager at Pengana Capital, which does not own Arrow shares.
Arrow Energy Managing Director Nick Davies told reporters he was reasonably confident shareholders would approve the revised offer.
Shell's Caplan said he was pretty confident of winning Australian approval for the deal, adding circumstances were very different from when the government blocked Shell's bid for Woodside Petroleum in 2001.
The bidders' plug for the deal is that it brings financial clout, top technology and a secure market to back a multibillion dollar LNG project that will create jobs, all of which should be a pretty compelling story for the authorities, Caplan said.
Arrow's biggest shareholder, New Hope Corp , with a 17 percent stake, had no immediate comment on the bid.
For investors who wanted cash upfront, mostly hedge funds who piled in expecting a bigger offer, the deal was disappointing. But at the end of the day, this is a better offer than the increase in cash would suggest, Macquarie analyst Adrian Wood said.
Rather than getting much more for its Australian reserves, Arrow extracted more for the international spin-off by making Shell give up its rights to a 50 percent stake in the offshore arm and securing A$45 million in funds for the business.
Dart Energy will hold Arrow's international coal seam gas exploration assets in China, Indonesia, India and Vietnam as well as its stakes in BOW Energy , Apollo Gas and LNG Ltd .
Arrow previously valued the international exploration assets at 55 cents a share. At that price, the new offer would be worth A$5.25 a share in total.
In a nutshell, we believe this creates value now and value for the future, Chairman John Reynolds told reporters.
Coal seam gas, or natural gas trapped in coal beds, has attracted global energy companies to Australia looking to export supplies to energy-hungry Asian countries, such as China.
Arrow was advised by UBS and Citi. Shell and PetroChina were advised by Rothschild and Morgan Stanley.
(Additional reporting by Tom Bergin in London; Editing by Balazs Koranyi and David Holmes)