Shell and PetroChina make move on Arrow Energy

Royal Dutch Shell and PetroChina are making a joint bid for the Australian gas group Arrow Energy valued at nearly £2bn.

The indicative proposal received by Arrow yesterday offers A$4.45 per share in cash, totalling about A$3.3bn (£1.99bn). Arrow shareholders are also being offered a stake in the new group, which could be worth between A$400m and A$500m, according to estimates.

But the management of the company, which has the largest coal-seam gas reserves in Queensland, is expected to hold out to push up the price. "At this stage the Arrow board recommends shareholders take no action in relation to their Arrow shares," the company said yesterday.

If successful, the takeover will be China's first move into the Australian coal-seam gas market. Chinese natural resources groups are expanding rapidly around the world in an effort to secure sufficient supplies to feed the country's booming economic growth.

Australia's vast coal-seam gas reserves are central to the vast liquefied natural gas (LNG) industry supplying the rapidly growing Asian market. Arrow Energy's Queensland facilities alone are scheduled to produce 16 million tonnes of LNG per year once they are up and running.

The coal-seam gas sector has been the subject of a scramble by international majors in the last 18 months. BG Group paid A$1bn for Pure Energy Resources and another A$2bn for Queensland Gas Company last year. ConocoPhillips was so keen for Origin Energy that it intervened in BG's hostile approach with an offer twice as high.

Shell is already closely involved with Arrow. Last February, the Anglo-Dutch giant spent A$776m buying a 30 per cent stake in Arrow's Queensland assets, plus another 10 per cent of its international assets.

Shell is also part of the massive Gorgon LNG programme in Western Australia. Once Gorgon starts producing gas in 2014, it will be the focus of the region's rapidly expanding LNG market. Shell, Chevron and Exxon have all pre-sold large chunks of the future output, in Shell's case with PetroChina.

LNG could change the dynamic of the entire global gas market. Ballooning supplies were a factor in last year's slump in wholesale prices, which touched a two-year low in the UK and a seven-year low in the US as recession depressed Asian demand and freed-up LNG cargoes glutted the market.