Shell, PetroChina bid $3 billion for Arrow

PERTH (Reuters) - Royal Dutch Shell and PetroChina <0857.HK> <601857.SS> made a joint bid for Australia's Arrow Energy in a deal worth at least $3 billion, marking a Chinese firm's first foray in the country's burgeoning coal seam gas sector.

Arrow said on Monday that the non-binding, conditional bid from a company jointly owned by Shell and PetroChina would give shareholders A$4.45 in cash per share, plus a share in a new entity comprised of Arrow's international business.

Shell confirmed it was in discussions to acquire Arrow's domestic business, but declined to say more.

The deal could come under scrutiny as Australia has had an uneasy relationship with Chinese investments after Rio Tinto scrapped a $19.5 billion deal with Chinalco last year and regulators said they preferred state-owned companies to keep their stakes in Australia's top resource firms to no more than 15 percent.

The relationship was further strained after China arrested four Rio Tinto staff last year on charges of bribery and stealing business secrets.

The bid is the latest move by major energy firms into Australia's coal seam gas sector, after energy majors such as BG Group , ConocoPhillips and Petronas , already poured in about A$20 billion since 2008, looking to convert the abundant gas resource into higher-valued liquefied natural gas (LNG) for export into Asia.

Coal seam gas is natural gas trapped in seams of coal.

Surging gas prices are increasingly drawing investors to this new underutilized energy source that analysts say could meet a sizeable part of Asia's gas needs in coming years.

Pengana Capital portfolio manager Tim Schroeders said the Shell/PetroChina bid was far from a done deal, especially as it involves the Chinese, and other bidders could come in.

"It's an opportunistic bid and good for Arrow shareholders," said Schroeders. "The problem is under the indicative proposal, it's difficult to value." Pengana does not own Arrow shares.

Shareholders' views would depend on how bullish they are on Arrow's Asian business, which it was considering floating.

"It's not a small part of Arrow's total value," Schroeders said.

Shares in Arrow surged more than 47 percent to a record high A$5.13. Trading volume topped 30 million shares, 10 times the 90-day average.

Arrow's board recommended shareholders take no action on the offer and appointed Citi and UBS as financial advisers.

The bid was likely sparked by Arrow's decision last month to acquire full ownership of its A$2.2 billion Fisherman's Landing LNG project, which will be fed by coal seam gas, the Australian Financial Review reported on Monday.

In particular, a potential sell-down of Arrow's stake in its domestic coal-seam gas acreage, estimated to be over 34,000 petajoules, to help fund the cost of the project was believed to have concerned Shell, the paper said.

"Shell depends on these assets ... so this was not much of a surprise," said Constellation Capital analyst Peter Chilton.

A more than 40 percent increase in Arrow's gas reserves since last year to feed its Fisherman's Landing project may have also given Shell more confidence in Arrow's assets, analysts said.

Shell already holds a 30 percent stake in Arrow's domestic coal seam gas assets as well as a 10 percent share in its international business.

The Anglo-Dutch major also submitted plans last year to build an LNG plant fed by Arrow's coal seam gas in the northeastern state of Queensland.

(Additional reporting by Sonali Paul and Narayanan Somasundaram)

(Editing by Ian Geoghegan)

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